Xceed Mortgage Reports Fiscal 2008 Financial Results



    
    -   Cash flow from operations positive for the 2008 fourth quarter and
        for the year
    -   Reports positive net earnings for fourth quarter; achieved
        profitability in three of four quarters for the year
    -   Level of mortgage defaults remains within expectations
    -   At year-end, company had completed sale of all of its uninsured
        mortgages to securitization vehicles
    -   Assets under administration at $2.1 billion
    -   Continues to expect implementation of ABCP restructuring plan will
        positively affect company's future results, including reversal of
        significant amount of previous write-off, and improved margins and
        cash flow
    -   Conference call at 10:00 a.m. (EDT) today (Thursday)
    

    TORONTO, Jan. 15 /CNW/ - Xceed Mortgage Corporation (TSX: XMC), a
Canadian provider of insured mortgages, today announced its financial results
for the fiscal 2008 year and fourth-quarter ended October 31, 2008. All
references to quarters or years are for the fiscal periods and all currency
amounts are in Canadian dollars unless otherwise noted.
    "Viewed in the context of both the dramatic developments in the Canadian
and international capital markets and the plans and objectives that our
management team established a year ago, we are generally pleased with Xceed's
performance in our 2008 fiscal year," said Ivan Wahl, Chairman and Chief
Executive Officer.
    "When we entered our fiscal 2008 year in November 2007, it had been just
about 10 weeks since the Canadian capital markets had suffered the severe jolt
of the collapse of the asset-backed commercial paper (ABCP) market in
mid-August. At that time, the duration and depths of the impact of this were
unknown and impossible to estimate. The situation was no doubt worsened by the
profound roiling of capital markets internationally," he said.
    "Acting out of both necessity and foresight, our management team acted
swiftly to begin transitioning our business. We stated at the outset of 2008
that our task was to continue to manage our business through the turmoil
around us to maximize our performance.
    "Market conditions continued to deteriorate markedly in the following
months," he continued. "At our annual meeting in April, I emphasized that
Xceed's focus had become to employ strategies to enable us to maximize value
for our shareholders by protecting the company's liquidity. That included the
preservation of the residual interest cash flows from securitization vehicles
as well as those cash inflows that result from the sale of previously
originated mortgages.
    "We met these objectives in 2008 and while carrying out a major
transitioning of our business, we were able to report positive net income for
three of the four quarters of the year, as well as positive cash flow from
operations for 2008, and the level of mortgage defaults for Xceed remained
fairly constant and within the expected levels.
    "At the end of the first quarter, we signed a master mortgage purchase
agreement with Residential Mortgage Funding Trust, a conduit that is an
aggregator of insured mortgages destined for sale to the Canada Mortgage Bond
Program. This allowed the company to fund new insured originations by selling
them into the trust," Mr. Wahl said.
    "Then, in the second quarter, we completed the transition of our business
with the full cessation of originating non-traditional, uninsured mortgages,
which had been the mainstay of our business through fiscal 2007. Instead, we
shifted to originating and renewing only insurable mortgages that qualify for
sale the Canada Mortgage Bond Program. Coupled with this, in the second
quarter, we implemented a series of cost-reduction measures, which included
reducing our staffing by approximately 100 people, including four senior
executives, to a total of 42 at the end of the year, as well as eliminating
excess office space, equipment, and other expenses," Mr. Wahl said.
    "There were a number of other important accomplishments during the year.
In particular, in a very difficult market, we were successful in being able to
refinance $295 million of term notes maturing in Xceed Mortgage Trust in the
second quarter. We also took steps to reduce the amounts of our committed
warehouse and other securitization program facilities from $650 million at the
outset of the year to $359.5 million at year-end, thereby achieving a
significant reduction in standby fees, while maintaining sufficient funding to
support the expected short- and medium-term levels of our business," Mr. Wahl
said.

    
    Financial Highlights for Year-end and Fourth Quarter

    -   Although Xceed recorded net income for three of the four quarters in
        2008, the company incurred a net loss for the year of $12.0 million,
        compared with a net loss for 2007 of $4.5 million. The 2008 net loss
        is mainly attributable to certain one-time charges that the company
        took in the second quarter of the year. The charges were related to
        the company's transitioning of its business and restructuring of its
        operations to the size needed to focus solely on originating insured
        mortgages and servicing its existing portfolio.

        As previously reported, these unusual charges included a pre-tax
        provision of $10.2 million related to cost-reduction measures
        consisting of severance and terminations costs for approximately 100
        employees, including four members of the senior executive team (the
        actual expense for the year amounted to $9.9 million pre-tax and $6.5
        million after-tax) and a write-down of fixed assets and lease costs.
        The measures taken are expected to result in annualized after-tax
        savings of about $10-13 million and the company realized the initial
        benefits of these in the second half of the year. Also, during the
        2008 second quarter, Xceed dealt with $295 million of maturing notes
        issued by Xceed Mortgage Trust (XMT). As the interest costs of the
        refinancing of a portion of these notes was substantially higher than
        when the notes were originally sold, Xceed was required to take a
        $2.7 million pre-tax ($1.8 million after-tax) write-down of its
        deferred net interest mortgage receivable from the XMT vehicle. In
        2008, the company had a provision of $7.3 million for the recovery of
        income taxes, compared with a provision of $1.9 million for the
        recovery of taxes in 2007.

        The net loss for the corresponding period of 2007 was mainly
        attributable to a fourth-quarter pre-tax valuation write-down of
        $28.1 million ($18.5 million after-tax) related to the increased
        spreads for the extension of the part of the company's mortgage
        portfolio funded by extendible ABCP. Excluding the one-time charges,
        the net loss for 2008 would have been $5.0 million, compared with net
        income in 2007 of $14.0 million.

        Net income for the 2008 fourth quarter amounted to $1.6 million,
        compared with a net loss of $22.5 million for the 2007 period, which
        included the valuation write-down that related to the increased
        spreads for the extension of the part of the company's mortgage
        portfolio funded by extendible ABCP. Excluding the effects of
        one-time items, net income for the 2008 fourth quarter was $0.3
        million, compared with a net loss of $4.0 million for the 2007
        period.

        The basic and diluted loss per share for 2008 was $0.43, compared
        with a basic and diluted loss per share for 2007 of $0.17 and $0.16,
        respectively. The unusual items in 2008 caused an increase of $0.24
        and $0.23 in the basic and diluted loss per share, respectively. For
        the fourth quarter, the 2008 earnings per basic and diluted share
        amounted to $0.06, compared with a basic and diluted loss per share
        in the 2007 period of $0.81 and $0.79, respectively.

        In 2008, the company sold mortgages valued at $508.6 million to
        securitization and other vehicles (of which $392.5 million were
        insured mortgages sold on a whole-loan basis with upfront premium
        proceeds of $17.8 million and $116.1 million were uninsured
        mortgages), compared with $1.1 billion of mortgages sold during 2007
        (all of which were uninsured mortgages sold to off-balance sheet
        securitization vehicles). As at the end of 2008, the company had
        completed the sale of all of its remaining uninsured mortgages to an
        off-balance sheet securitization entity.

        For the 2008 fourth quarter, Xceed sold $125.1 million of mortgages
        to securitization and other vehicles (including $66.3 million of
        insured mortgages with premium proceeds of $2.3 million), compared
        with sales of $218.3 million in the 2007 fourth quarter, all of which
        were uninsured mortgages. The company recorded gains on its mortgage
        sales of $14.0 million and $5.3 million for 2008 and in the 2008
        fourth quarter, respectively. The 2008 fourth-quarter gain included
        an adjustment for the reversal of $2.0 million in servicing
        liabilities, which the company recorded during the year on whole-loan
        sales. In 2007, the company realized a net gain on the sale of
        mortgages of $35.6 million for the year and a loss of $0.7 million
        for the fourth quarter.

        In 2008, the net gain amounted to 2.8% of the sales for the year and
        4.3% for the fourth quarter. This compared with 3.1% for all of 2007
        and a negative 0.3% for the 2007 fourth quarter. The differences in
        the net gains as a percentage of sales reflect changes in average
        sales mix trends between insured and uninsured mortgage products.
        Insured mortgages normally have borrowers with better credit profiles
        and are arranged on fixed-rate terms, entailing lower spread margins
        than previously enjoyed. Other factors affecting the gains as a
        percentage of sales relate to the overall mix of business
        securitized, including the length of the average mortgage duration,
        the average risk profile, and the costs of the respective credit
        enhancement or collateralization levels required.

    -   Mortgage fundings in 2008 amounted to $358.3 million, which compares
        with $1.139 billion in 2007. Mortgage fundings in the 2008 and 2007
        fourth quarters amounted to $83.9 million and $194.3 million,
        respectively. "The level of fundings in the 2008 fourth quarter
        significantly lagged the target that we have established. This
        reflects both the weakening economy in Canada and the fact that we
        are still developing our relationships with mortgage brokers across
        the country based on our transition to focusing solely on insured
        mortgage products," Mr. Wahl stated.

    -   Reflecting the securitization sales and reduced level of
        originations, mortgages and other assets under administration
        declined 23.4% to $2.1 billion at the 2008 year-end from $2.7 billion
        at the end of 2007, and were down 8.7%, compared with $2.3 billion as
        at July 31, 2008.

    -   Return on average shareholders' equity for 2008 and for the fourth
        quarter of the year was negative 14.0% and positive 7.8%,
        respectively, compared with a negative 4.1% and negative 20.6% in the
        comparative 2007 periods.

    -   Revenue totaled $22.3 million in 2008 and $7.1 million in the year's
        fourth quarter. In the comparative 2007 periods, revenue amounted to
        $55.9 million and $5.3 million, respectively. The decline in revenue
        for the full 2008 year compared with 2007 is attributable to the fact
        that mortgage sales in 2008 were about one-half the level of the
        prior year, contributing to a lower net gain on the sale of mortgages
        and reduced residual securitization income ($1.5 million, down from
        $3.4 million in 2007). Pending sales, the company also earns interest
        income on mortgages that are on the company's balance sheet for the
        brief intervening period. Interest earned in 2008 was $11.2 million,
        compared with $12.1 million in 2007. The company also incurred net
        origination costs of $3.8 million in 2008, compared with net
        origination income of $5.5 million in 2007.

        For the fourth quarter of 2008, the company recorded a net gain on
        the sale of mortgages of $5.3 million, compared with a net loss in
        the 2007 period of $0.7 million. Residual securitization income
        declined to negative $0.2 million from positive $0.5 million a year
        earlier, while interest earned decreased to $2.0 million from $5.0
        million in the 2007 period. The net origination costs for the 2008
        fourth quarter were $0.6 million, compared with net origination
        income of $0.4 million in the 2007 period. The origination costs for
        all of 2008 and the fourth quarter compared with origination income
        in the 2007 periods reflects the fact that the company no longer
        earns application fee income since it ceased originating uninsured
        mortgages. It does not charge an application fee on insured
        mortgages.

    -   Cash flow from operations for 2008 was $10.9 million ($0.39 per basic
        and diluted share), down from $26.3 million ($0.96 per basic and
        $0.91 per diluted share) in 2007. For the 2008 fourth quarter, cash
        flow from operations amounted to $2.4 million ($0.09 per basic and
        diluted share), compared with $5.5 million ($0.20 per basic and $0.19
        per diluted share) in the 2007 period. Cash securitization income was
        $38.5 million and $8.2 million for 2008 and in the fourth quarter,
        respectively, compared with $42.9 million and $10.4 million in the
        comparable 2007 period. As previously noted, net origination income
        declined in the 2008 periods compared with a year earlier. Interest
        earned amounted to $11.2 million for 2008 and $2.0 million for the
        fourth quarter, compared with $12.1 million and $5.0 million in the
        comparative 2007 periods.

        Cash-based revenues declined in 2008 to $49.7 million from $55.0
        million for 2007; in the comparative fourth quarters, cash-based
        revenues were $10.1 million in 2008, down from $15.4 million a year
        earlier.
    

    In 2008, Xceed employed an average of 83 full-time staff, but this had
declined to an average of 43 in the fourth quarter and a total of 42 people at
year-end as the result of the reductions made during the year to bring the
size of the organization into line with its new business focus. The company
believes that it now is appropriately sized to meet its short- and medium-term
plans. In 2007, the company's average employment for the year was 141 people,
but it was 150 in the fourth quarter. The productivity index was not
applicable for the 2008 year as the result of the reported loss; it was 55.1%
for 2007. In the fourth quarter, the productivity index was 48.8%; it is not
applicable for in the 2007 period as the company reported a loss for that
quarter. A lower productivity index generally is associated with a
more-efficient cost structure.
    The average mortgage default ratio (90 or more days in arrears) on the
company's combined securitized and non-securitized portfolio was 3.75% for the
2008 fourth quarter, compared with 3.58% in the 2008 third quarter. For all of
2008, the default ratio was 3.55%, which compared with 2.59% in 2007. The
increase in the 2008 level was expected and primarily is due to the aging of
the portfolio, since defaults are less likely to occur in the early stages of
a mortgage term. An increase in the ratio can also occur as a result of a
reduction in portfolio size, due to principal prepayments, when this is not
accompanied by a commensurate reduction in defaulted mortgages.

    Outlook

    "The Canadian economy is in recession and the capital markets remain
weak, although there are some mildly encouraging signs of stabilization taking
place," Mr. Wahl said. "Xceed's revenues, operations, and profitability cannot
help but be affected by the prevailing conditions.
    "Nevertheless," he said "we believe that the progress that Xceed made
during the past year to reposition our business and size our operations to
suit this environment will enable us to withstand the forces buffeting our
markets. We are encouraged by the company's performance in the second half of
2008 and are hopeful that we can continue to operate profitably in 2009."
    At the end of 2008, Xceed had cash and cash equivalents of $9.9 million,
compared with $8.9 million at the end of 2007. Cash invested in mortgages not
sold to trusts totaled $63.2 million ($115.2 million at the end of 2007), of
which $49.0 million was funded by the warehouse credit facility. "The residual
interest from our $2.1 billion portfolio of previously originated mortgages
currently is valued at $34.9 million," he said.
    "As we announced last September, we reached agreement with the committee
restructuring the third-party ABCP as to the financial terms of Xceed's
affected securitization program. As a result of this agreement, when the plan
closes, it will have a positive impact on Xceed's financial results. The
closing of the plan was delayed, but now appears to be nearly done.
    "When the restructuring of the ABCP is carried out, we continue to expect
an improvement in the cost of funds for about $826.4 million of the mortgages
that Xceed has under administration. As we have previously indicated, Xceed's
profitability is directly affected by the size of the spread margins
associated with our mortgage product offerings. The cost to fund the portfolio
increased when the securitization agent had to extend the term of the
extendible ABCP. If the cost now declines, as it is expected to with this
restructuring, our margins and cash flow should improve," Mr. Wahl said.
    "Further, in our fiscal 2007 fourth quarter, we took a significant
write-off reflecting the new valuation of our deferred net mortgage interest
receivable on our balance sheet. That write-off was based on the then
necessary assumption that the increased cost of funds would continue for the
remaining term of the mortgages. Assuming the ABCP plan is implemented as
proposed, we expect to be able to reverse a material amount of this write-off.
    "In 2009," Mr. Wahl said, "we will focus on further positioning Xceed to
deliver strong growth in the future by pursuing the following initiatives:

    
        -  increasing market share and penetration by expanding volumes
           through a mix of new insured and conventional products;
        -  managing effectively the company's existing $2 billion portfolio,
           and successfully retaining mortgages at maturity;
        -  building strong loyalty programs and offering value-added training
           services to the mortgage broker network across Canada to assist
           them to grow their mortgage business; and
        -  pursuing strategic alliances and targeting business opportunities
           that will contribute positively to earnings."

    Xceed has filed its 2008 year-end financial statements and management's
discussion and analysis with SEDAR and they will be posted on the company's
website.



    XCEED MORTGAGE CORPORATION
    CONSOLIDATED BALANCE SHEETS

    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                     October 31,  October 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    ASSETS

    Cash and cash equivalents                             9,942        8,925
    Investment in notes (notes 3 and 6)                  27,423       25,536
    Cash collateral and other deposits receivable
     from Trusts (note 3)                                13,773       11,434
    Deferred net mortgage interest receivable (note 3)   34,915       56,306
    Mortgages (note 4)                                   63,210      115,190
    Accounts receivable                                   7,302        7,073
    Derivative instruments (notes 11 and 12)                209          190
    Mortgage commitments (note 11)                           48           54
    Deferred charges (note 14)                              238        6,410
                                                    -------------------------
                                                        157,300      233,228
                                                    -------------------------
                                                    -------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Liabilities
    Credit facilities (note 6)                           57,382       91,903
    Accounts payable and accrued liabilities (note 3)     8,146       24,882
    Derivative instruments (notes 11 and 12)                108        1,137
    Future and other income tax liabilities (note 8)      9,038       20,369
                                                    -------------------------
    Total liabilities                                    74,674      138,291
                                                    -------------------------

    Shareholders' equity
    Capital stock (note 7)                               57,274       57,274
    Contributed surplus (note 13)                         1,108        1,452
    Retained earnings                                    24,244       36,211
                                                    -------------------------
    Total shareholders' equity                           82,626       94,937
                                                    -------------------------
                                                        157,300      233,228
                                                    -------------------------
                                                    -------------------------



    XCEED MORTGAGE CORPORATION
    CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS

    (in thousands of dollars, except per share amounts)
    -------------------------------------------------------------------------
    Years ended                                      October 31,  October 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------

    REVENUE
    Securitization income (note 3)                       14,836       38,371
    Interest                                             11,226       12,107
                                                    -------------------------

                                                         26,062       50,478
                                                    -------------------------

    Add: Net origination income (costs)                  (3,760)       5,469
                                                    -------------------------

                                                         22,302       55,947
                                                    -------------------------

    EXPENSES
    Compensation and benefits                             7,739       14,107
    Interest (note 6)                                     7,694        6,963
    Deferred charges amortization                         1,230        2,937
    Other operating                                       6,095       11,042
                                                    -------------------------

                                                         22,758       35,049
                                                    -------------------------

    Realized and unrealized losses on
     financial instruments (notes 3 and 11)              (8,985)     (27,383)
                                                    -------------------------

    Loss before unusual items and income taxes           (9,441)      (6,485)

    Unusual items (note 14)                               9,874            -

    Recovery of income taxes (note 8)                    (7,343)      (1,942)
                                                    -------------------------

    Net loss for the year                               (11,972)      (4,543)

    Retained earnings, beginning of year                 36,211       43,823
    Add: Transition adjustment on adoption of
     financial instruments standards (note 2)                 -        4,775
    Less: Dividends declared                                  -       (6,593)
    Less: Shares purchased for cancellation (note 7)          5       (1,251)
                                                    -------------------------

    Retained earnings, end of year                       24,244       36,211
                                                    -------------------------
                                                    -------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Loss per share (note 7)
    Basic                                                 (0.43)       (0.17)
    Diluted                                               (0.43)       (0.16)



    XCEED MORTGAGE CORPORATION
    CONSOLIDATED STATEMENTS OF CASH FLOWS

    (in thousands of dollars)
    -------------------------------------------------------------------------
    Years ended                                      October 31,  October 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    OPERATING ACTIVITIES
      Net loss for the year                             (11,972)      (4,543)

    Items not affecting operating cash:
      Non-cash net loss (gain) on sale of mortgages         399      (35,020)
      Amortization of deferred net mortgage
       interest receivable                               27,097       43,596
      Amortization of servicing fee                      (3,875)      (4,011)
      Amortization of fixed assets                          485          844
      Amortization of deferred charges                    1,230        2,937
      Unrealized losses (gains) from
       financial instruments (notes 3 and 11)            (3,433)      29,041
      Net future income taxes                            (8,350)     (10,822)
      Non-cash unusual items                              7,473            -
                                                    -------------------------
                                                          9,054       22,022

      Other changes in net assets (note 9)               33,622      (41,739)
                                                    -------------------------

                                                         42,676      (19,717)
                                                    -------------------------

    INVESTING ACTIVITIES
      Sale of notes                                      13,403       17,195
      Purchase of notes                                 (19,852)     (42,731)
      Net increase in deferred charges                     (538)      (1,909)
      Purchase of fixed assets                             (764)      (1,071)
                                                    -------------------------

                                                         (7,751)     (28,516)
                                                    -------------------------

    FINANCING ACTIVITIES
      Credit facilities, net of repayments              (33,913)      56,522
      Share buyback                                           5       (1,813)
      Proceeds from treasury shares                           -          747
      Dividends paid                                          -       (8,241)
                                                    -------------------------

                                                        (33,908)      47,215
                                                    -------------------------

    Net increase (decrease) in cash and
     cash equivalents                                     1,017       (1,018)
      Cash and cash equivalents, beginning of year        8,925        9,943
                                                    -------------------------

    Cash and cash equivalents, end of year                9,942        8,925
                                                    -------------------------
                                                    -------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental cash flow information
      Interest paid                                       8,086        5,338
      Income taxes paid                                   4,151        9,000
    

    Conference Call and Webcast

    Xceed will hold a conference call for analysts and investors to discuss
its year-end financial results on January 15, 2009 at 10:00 a.m. (Eastern).
    Ivan Wahl, Chairman and Chief Executive Officer, and Karen L. Martin,
President and Chief Financial Officer, will be available to answer questions
during the call.
    To participate in the call, please dial 416-644-3415 or 1-800-732-9303 at
least five minutes prior to the start of the call.
    A live audio webcast of the conference call will be available at
www.newswire.ca and www.xceedmortgage.com.
    An archived recording of the call will be available at 416-640-1917 or
1-877-289-8525 (Passcode 21293707 followed by the number sign) from noon on
January 15 to 11:59 p.m. on January 22. An archived recording of the webcast
also will be available at Xceed's website.

    About Xceed

    Xceed Mortgage Corporation, based in Toronto, is a Canadian provider of
insured residential mortgages that it originates in Canada. The company has
approximately $2.1 billion of mortgages and other assets under administration.
Xceed's shares are traded on the Toronto Stock Exchange (TSX: XMC). To find
out more about Xceed Mortgage Corporation, visit our website at
www.xceedmortgage.com.

    Forward-Looking Statements

    Forward-looking statements in this document are based on current
expectations that are subject to significant risks and uncertainties. Actual
results might differ materially due to various factors such as the competitive
nature of the mortgage industry, the ability of Xceed to continue to execute
its growth and development strategy, and the reliance of Xceed on key
personnel. Xceed assumes no obligation to update these forward-looking
statements, or to update the reasons why actual results could differ from
those reflected in these. Additional information identifying risks and
uncertainties is contained in Xceed's regulatory filings available on its
website and at www.sedar.com.





For further information:

For further information: Investor and Media Relations: Richard Wertheim,
Wertheim + Company Inc., (416) 594-1600 (bus.), or (416) 518-8479 (cell),
email: wertheim@wertheim.ca.

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