Xceed Mortgage Reports Fiscal 2008 Third Quarter



    
    -   Fiscal 2008 third quarter net income of $1.6 million
    -   Profitability reflects initial success of new business model and cost
        reductions
    -   Approval and implementation of third-party ABCP restructuring plan
        when it proceeds is expected to benefit Xceed
    -   Assets under administration at $2.3 billion
    -   Expects implementation of ABCP restructuring plan will positively
        affect company's 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
    

    TORONTO, Sept. 11 /CNW/ - Xceed Mortgage Corporation (TSX: XMC), a
Canadian provider of insured mortgages, today announced its financial results
for the fiscal 2008 third quarter ended July 31, 2008. All references to
quarters or years are for the fiscal periods and all currency amounts are in
Canadian dollars unless otherwise noted.
    "Our financial results for the 2008 third quarter reflect the initial
success of the measures we have taken to adapt our business to the turmoil and
change in Canada's financial services sector since our business was profoundly
affected in the 2007 fourth quarter by the collapse of the asset-backed
commercial paper (ABCP) market in August 2007," said Ivan Wahl, Chairman and
Chief Executive Officer.
    "As expected, Xceed was profitable in the third quarter with net income
of $1.6 million. As we have previously reported, in view of the changed
environment, Xceed revised our business model, entirely shifting away from
offering primarily non-traditional mortgage products to only originating
business that qualifies for insurance and sale to the Canada Mortgage Bond
Program. This has resulted in a significant reduction in our business volumes
and an effect on our profit levels as the margins on such mortgages are lower
than previously realized for non-traditional offerings.
    "In the third quarter, we began to see the benefits of the resizing that
we undertook of our operating infrastructure. These resizing measures included
a reduction in staffing from an average of 146 employees in the 2007 third
quarter to a current total staff of 38 people, the elimination of some office
space, and the reduction in size of the committed warehouse and other active
securitization facilities from $650 million to $492 million, a level that we
believe is adequate for the amount of mortgage originations that we anticipate
for the foreseeable future, thereby lowering the standby charges that we incur
for these," Mr. Wahl said.

    
    Financial Highlights for Third Quarter and Nine Months

    -   Third-quarter 2008 income was $1.6 million (earnings of $0.06 per
        share on a basic and diluted basis), compared with $6.5 million for
        the prior-year period ($0.24 per basic share and $0.22 per share on a
        diluted basis). Third-quarter net income includes the effect of a
        $0.9 million write-down for the fair value of financial instruments.
        The net loss for the 2008 nine-month period was $13.6 million (loss
        of $0.49 per basic share and $0.48 per diluted share), including the
        effect of an $8.4 million write-down for the fair value of financial
        instruments, compared with net income of $18.0 million for the first
        nine months of 2007 (earnings of $0.66 per basic share and $0.62 per
        share on a diluted basis).

        Xceed recorded in the 2008 second quarter unusual pre-tax charges of
        $10.2 million related to its cost-reduction measures comprising
        severance and terminations costs, a deferred charge write-down, 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 began to see the benefits of this in
        the 2008 third quarter. During the 2008 second quarter, Xceed
        succeeded in dealing 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 are substantially higher than when the
        notes were originally sold, Xceed was required to take a $1.8 million
        after-tax write-down of its deferred net mortgage interest receivable
        from the XMT vehicle. In the 2008 first nine months, the company had
        provisions of $7.9 million for the recovery of income taxes, compared
        with a provision of $9.8 million for taxes in the 2007 period.

        The company sold $174.1 million ($286.0 million in the 2007 third
        quarter) of mortgages to securitization and other vehicles in the
        2008 third quarter, of which $149.7 million were insured mortgages
        sold on a whole-loan basis (nil in the 2007 third quarter).

        The net gain on the sale of mortgages in the 2008 third quarter and
        nine months was $3.4 million and $8.7 million, respectively, compared
        with $9.5 million and $35.7 million in the 2007 periods.

        The decreases in the net gains as a percentage of sales in the 2008
        periods reflect changes in average sales mix trends between insured
        and uninsured mortgage product. Insured mortgages normally have
        borrowers with better credit profiles and are arranged on fixed-rate
        terms, entailing lower spread margins than previously enjoyed. These
        effects resulted in gains recognized in the 2008 third-quarter and
        first nine months of 2.0% and 2.3%, respectively of the amount of
        mortgages sold, compared with 3.3% and 3.9% for the corresponding
        prior-year periods. 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 the 2008 third quarter were $82.8 million, which
        compares with $323.5 million in the 2007 period. "The amount funded
        in the third quarter reflects our transitioning to offering only
        insurable mortgages, including establishing or changing our
        relationships with brokers. We are continuing to target originations
        in future quarters of between $40 million and $45 million of new and
        renewing insured mortgages a month that can be sold to the Canada
        Mortgage Bond Program," Mr. Wahl said.

        In the first nine months of 2008, fundings amounted to
        $273.8 million, compared with $944.7 million in the first nine months
        of 2007.

    -   Reflecting the securitization sales and reduced level of
        originations, mortgages and other assets under administration
        declined 3.4% to $2.3 billion as at July 31, 2008 from $2.4 billion
        at April 30, 2008, and were down 16.5%, compared with $2.7 billion as
        at July 31, 2007.

    -   Return on average shareholders' equity for the 2008 third quarter was
        a 7.9%, compared with 22.5% a year earlier. For the first nine months
        of 2008, it was a negative 20.9%, compared with 21.4% in the 2007
        period.

    -   Revenues totaled $7.5 million in the 2008 third quarter, down from
        $16.7 million in the 2007 period, reflecting the reduced level of
        mortgage sales and lower securitization income of $5.1 million,
        compared with $12.1 million in the 2007 quarter. 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 the 2008 third quarter was $3.0 million, up from
        $2.7 million in the third-quarter 2007. For the first nine months of
        2008, total revenues were $15.9 million, down from $50.6 million in
        the nine-month 2007 period. Securitization income declined to
        $9.7 million from $38.5 million a year earlier, while interest earned
        increased to $9.3 million from $7.1 million in the 2007 period.

    -   Cash flow from operations for the third-quarter 2008 was $7.1 million
        ($0.26 per basic and diluted share), up from $0.02 million ($0.01 per
        basic and diluted share) in the 2008 second quarter, and compared
        with $9.7 million ($0.35 per basic and $0.33 per diluted share) in
        the 2007 quarter. Third-quarter 2008 cash securitization income was
        $11.6 million, compared with $12.7 million in the 2007 quarter. For
        the first nine months of 2008, cash flow from operations amounted to
        $8.9 million ($0.32 per basic and diluted share), compared with
        $20.5 million in the 2007 period ($0.75 per basic and $0.71 per
        diluted share).

        Nine-month 2008 cash securitization income amounted to $30.3 million,
        compared with $32.6 million in the 2007 period. Cash flow in the 2008
        periods includes the effects of the higher costs in trust vehicles
        resulting from the disruption of the ABCP market. The impact of this
        to cash securitization income was partially offset by receipt of
        premium proceeds of $5.9 million in the 2008 third quarter and
        $15.5 million for the first nine months of year as the result of the
        company's whole-loan sale transactions.

        Net origination costs were $0.5 million for the 2008 third quarter
        (2007 - income of $1.9 million). For the nine-month 2008 period, net
        origination costs were $3.2 million, compared with income of
        $5.0 million for the corresponding 2007 period. These compare
        negatively to the 2007 results as a result of product mix. Uninsured
        mortgages, which represent the majority of 2007 volume, earned
        additional fees offsetting the cost of originating the mortgage.
        Insured products, however, do not earn these additional fees due to
        the competitive market place.

        Other cash-based expenses also resulted in lower cash flows. The
        increase in other cash-based expenses is attributable to increased
        hedging cost paid by Xceed as a result of declining market swap
        rates. Xceed hedges its pipeline of mortgage commitments and funded
        mortgages prior to selling the assets. Further, Xceed paid
        $1.0 million (2007 - nil) in insurance premiums during the third
        quarter, and $3.6 million (2007 - nil) for the nine month period, in
        order to insure a portion of its uninsured portfolio.
    

    In the 2008 third quarter, Xceed employed an average of 44 full-time
staff, compared with an average of 99 in the 2008 second quarter and 146 a
year ago. Xceed subsequently has reduced its employment to its plan of
approximately 38 employees. The company's productivity index was 45.2% for the
2008 quarter and 46.1% in the 2007 period. 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 3.58% in
third-quarter 2008, up slightly from 3.53% in the 2008 second quarter, and
compared with 2.53% in the 2007 period. As expected, the increase in the 2008
level 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

    "Our objective continues to be to protect the company's ongoing
liquidity, preserving the residual interest cash flows from securitization
vehicles and those cash inflows resulting from the sale of previously
originated mortgages," Mr. Wahl said.
    At the end of the 2008 third quarter, Xceed had cash, short-term
deposits, and temporary investment resources of $12.0 million. Another
$12.6 million was invested in cash deposits, as per trust requirements, and
$0.5 million is in the form of deposits with hedge and other counterparties.
Cash invested in mortgages not sold to trusts totaled $109.5 million, funded
by the securitized mortgages warehouse line of credit.
    "We believe that, based on our current origination activities and the
reduced size of our organization and costs, the cash flow from our operations
and existing resources will enable us to meet our short- and longer-term
requirements, and our objectives to maximize value for Xceed's shareholders.
The residual interest from our $2.2 billion portfolio of previously originated
mortgages currently is valued at $35.7 million," he said.
    "As you would expect, we have been closely watching the progress of the
restructuring plan for third-party ABCP. We are pleased that the plan was
approved by the Court of Appeal and hope that the process continues to move
toward successful completion.
    "Earlier this week, we announced that implementation of the plan likely
would positively affect Xceed Mortgage in a number of ways. First, we expect
that the plan will result in an improvement in the cost of funds for about
$0.9 billion of the approximately $2.2 billion of 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. The plan also should provide more certainty in
the capital markets and therefore in our future financial performance," Mr.
Wahl said.
    "Second, assuming the plan is implemented as proposed, we expect to be
able to reverse a material amount of the $28.1 million pre-tax write-off
($18.5 million after-tax) that we took in the 2007 fourth quarter to reflect
the new valuation of our deferred net mortgage interest receivable on our
balance sheet. Our current estimate is that the reversal likely will be
$12-$13 million on a pre-tax basis (about $8.7 million after-tax), and this
would be reflected in our 2008 fourth quarter results with a positive impact
on our cash flow beginning in the fourth quarter of about $2.4 million in the
first month and about $0.5-$0.6 million per month thereafter," Mr. Wahl said.
    "Implementation of the plan does not mean, however, that Xceed will be
able to resume offering uninsured, high-ratio mortgages for at least some
time, if ever. Sufficient financing for securitizing these at an economic cost
is still not available. Accordingly, for at least the foreseeable future,
Xceed will continue to focus on originating only mortgages that qualify for
insurance and sale to the Canada Mortgage Bond Program," Mr. Wahl said.
    Xceed has filed its 2008 third-quarter financial statements and
management's discussion and analysis with SEDAR and they will be posted on the
company's website.


    
    XCEED MORTGAGE CORPORATION
    INTERIM CONSOLIDATED BALANCE SHEETS
    (unaudited)

    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                          As at        As at
                                                        July 31,  October 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    Assets
    Cash and cash equivalents                            12,007        8,925
    Investment in notes (note 3 and 6)                   23,508       25,536
    Cash collateral and other deposits receivable
     from Trusts (note 3)                                13,061       11,434
    Deferred net mortgage interest receivable
     (note 3 and 6)                                      35,735       56,306
    Mortgages (notes 4 and 6)                           109,538      115,190
    Accounts receivable                                   6,556        7,073
    Derivative instruments (note 6)                           -          190
    Mortgage commitments (note 6)                            82           54
    Deferred charges                                        334        6,410
    Fixed assets, net                                       223        2,110
    -------------------------------------------------------------------------
                                                        201,044      233,228
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Liabilities
    Credit facilities (note 5 and 6)                     99,653       91,903
    Accounts payable and accrued liabilities (note 3)    10,574       24,882
    Derivative instruments (note 6)                         379        1,137
    Future and other income taxes                         9,515       20,369
    -------------------------------------------------------------------------
    Total liabilities                                   120,121      138,291
    -------------------------------------------------------------------------
    Shareholders' equity
    Capital stock (note 7)                               57,274       57,274
    Contributed surplus (note 8)                            999        1,452
    Retained earnings                                    22,650       36,211
    -------------------------------------------------------------------------
    Total shareholders' equity                           80,923       94,937
    -------------------------------------------------------------------------
                                                        201,044      233,228
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    XCEED MORTGAGE CORPORATION
    INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
    (unaudited)

    (in thousands of dollars, except per share amounts)
    -------------------------------------------------------------------------
                                      Three months ended   Nine months ended
                                       July 31,  July 31,  July 31,  July 31,
                                          2008      2007      2008      2007
                                             $         $         $         $
    -------------------------------------------------------------------------

    Revenues
    Securitization income (note 3)       5,050    12,109     9,743    38,484
    Interest earned                      2,982     2,649     9,267     7,091
    -------------------------------------------------------------------------
                                         8,032    14,758    19,010    45,575
    Add: Net origination income (costs)   (535)    1,929    (3,156)    5,024
    -------------------------------------------------------------------------
                                         7,497    16,687    15,854    50,599
    -------------------------------------------------------------------------

    Expenses
    Compensation and benefits            1,225     3,420     6,100    10,948
    Interest                             1,987     1,403     6,236     3,871
    Deferred charge amortization            21       559     1,208     1,650
    Other operating                      1,038     1,599     5,268     8,338
    -------------------------------------------------------------------------
                                         4,271     6,981    18,812    24,807
    -------------------------------------------------------------------------

    Realized and unrealized gains
     (losses) on financial instruments
     (note 6)                             (937)      364    (8,381)    1,948

    -------------------------------------------------------------------------
    Income (loss) before unusual
     items and income taxes              2,289    10,070   (11,339)   27,740
    -------------------------------------------------------------------------

    Unusual items (note 9)                  77         -   (10,093)        -

    Provision for (recovery of)
     income taxes                          779     3,598    (7,866)    9,759
    -------------------------------------------------------------------------

    Net income (loss) for the period     1,587     6,472   (13,566)   17,981

    -------------------------------------------------------------------------
    Retained earnings, beginning
     of period                          21,063    54,760    36,211    43,823
    Add:  Transition adjustment on
          adoption of financial
          instruments standards
          (note 2)                           -         -         -     4,775
    Less: Dividends declared                 -    (2,497)        -    (6,593)
    Less: Shares purchased for
          cancellation (note 7)              -         -         5    (1,251)
    -------------------------------------------------------------------------
    Retained earnings, end of period    22,650    58,735    22,650    58,735
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings (loss) per share
    Basic                                 0.06      0.24     (0.49)     0.66
    Diluted                               0.06      0.22     (0.48)     0.62



    XCEED MORTGAGE CORPORATION
    INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
    (unaudited)

    (in thousands of dollars)
    -------------------------------------------------------------------------
                                      Three months ended   Nine months ended
                                       July 31,  July 31,  July 31,  July 31,
                                          2008      2007      2008      2007
                                             $         $         $         $
    -------------------------------------------------------------------------
    Operating activities
    Net income (loss) for the period     1,587     6,472   (13,566)   17,981
    Items not affecting operating cash:
      Non-cash net loss (gain) on
       sale of mortgages                 1,511    (9,513)    3,476   (35,697)
      Amortization of deferred net
       mortgage interest receivable      6,117    11,194    20,330    32,698
      Amortization of servicing fee     (1,073)   (1,054)   (3,257)   (2,916)
      Amortization of fixed assets          45       215       452       610
      Amortization of deferred charges      21       559     1,208     1,650
      Unrealized loss (gain) from
       financial instruments               691     2,773      (431)    2,086
      Net future income taxes           (1,779)     (976)   (9,064)    1,876
      Non-cash unusual items                 -         -     7,907         -
    -------------------------------------------------------------------------
                                         7,120     9,670     7,055    18,288
    Other changes in non-cash
     net assets                         60,121   (38,888)  (10,976)  (53,898)
    -------------------------------------------------------------------------
                                        67,241   (29,218)   (3,921)  (35,610)
    -------------------------------------------------------------------------
    Investing activities
    Sale of notes                        3,836       391    12,167    15,726
    Purchase of notes                   (3,582)   (5,391)  (12,308)  (30,726)
    Net decrease (increase) in
     deferred charges                       72      (563)     (529)       82
    Purchase of fixed assets                (9)     (425)     (713)     (721)
    -------------------------------------------------------------------------
                                           317    (5,988)   (1,383)  (15,639)
    -------------------------------------------------------------------------
    Financing activities
    Credit facilities, net of
     repayments                        (60,549)   40,103     8,381    59,467
    Share buyback                            -         -         5    (1,813)
    Proceeds from treasury shares            -       747         -       747
    Dividends paid                           -    (2,174)        -    (5,742)
    -------------------------------------------------------------------------
                                       (60,549)   38,676     8,386    52,659
    -------------------------------------------------------------------------
    Net increase in cash and cash
     equivalents                         7,009     3,470     3,082     1,410
    Cash and cash equivalents,
     beginning of period                 4,998     7,883     8,925     9,943
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                      12,007    11,353    12,007    11,353
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow information
    Interest paid                        1,928     1,117     6,024     3,242
    Income taxes paid                        -     2,504     4,053     7,648


         See accompanying notes to the interim consolidated financial
                      statements filed on www.sedar.com
    

    Conference Call and Webcast

    Xceed will hold a conference call for analysts and investors to discuss
its third quarter results on September 11, 2008 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 416-644-3420 or 1-800-732-9307 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 21281768 followed by the number sign) from noon on
September 11 to 11:59 p.m. on September 18. 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 $2.3 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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