Xceed Mortgage Reports Fiscal 2010 Year-End Financial Results

  • Reports net loss of $17.6 million for the year reflecting difficult market conditions and write downs related to securitization trusts
  • Assets under administration at $1.6 billion
  • In current environment, company suspends efforts to originate insured mortgages through its network of external brokers; Xceed will focus on servicing and managing current assets, offering renewals and refinancing to qualifying borrowers, and origination services for third parties
  • Michael Jones appointed President and CEO, joined Board of Directors effective January 12, 2011; Ivan Wahl continues as Chairman and officer of the company responsible for strategic corporate development
  • Conference call at 10:00 a.m. (EDT) today (Thursday)

TORONTO, Jan. 13 /CNW/ - Xceed Mortgage Corporation [TSX: XMC], a Canadian provider of insured mortgages, today announced its financial results for the fiscal 2010 year ended October 31, 2010.  All references to quarters or years are for the fiscal periods and all currency amounts are in Canadian dollars unless otherwise noted.

"We began our fiscal 2010 year," said Ivan Wahl, Chairman, "somewhat encouraged by signs of an apparently strengthening economy in Canada, including the housing market.  As intended, we focused during the year on winding down our legacy portfolio of securitized mortgages and originating and selling insured mortgages to the Canada Mortgage Bond program.

"At the same time, we also noted a year ago that the outlook for credit markets remained less stable and certain.  In particular, last January, we expressed our concern about the availability of credit at reasonable costs for new mortgages and mortgage refinancing.  As it turned out, the tightness of the credit markets, the cost of financing new mortgages and renewals, and intense competition in originating insured mortgages through the insured mortgage broker channel increasingly affected us throughout the year and particularly in our fourth quarter," Mr. Wahl continued. 

"As the result of the difficult market conditions, the spreads available on insured mortgage originations through the broker channel have significantly tightened and the company has seen declines in its mortgage volume.  We also have seen a reduction in the number of mortgage aggregators in the market who are willing to purchase mortgages at competitive rates.    As this has taken place, we reduced our origination activity during the second half of the year.  Our originations in the 2010 fourth quarter amounted to $51.1 million, down from $93.1 million in the third quarter and compared with $130.3 million in the 2009 fourth quarter.

"Our principal guiding objective always has been and continues to be to manage Xceed's business and our strategies to create the maximum possible value for our shareholders.  In doing this, we have had to deal with profound changes to the economy and capital markets, causing us to make difficult decisions to change our core business model," he said.

"In view of the current market conditions, effective January 14, we will suspend the origination of insured mortgages through our network of external brokers.  We will continue to manage our $1.6 billion of mortgage and other assets under administration, and will continue to offer renewals and refinancing through our internal sales group.  We will also continue to look for other revenue- and profit-generating opportunities," Mr. Wahl said.

The origination of mortgages through external brokers totaled $228.4 million in 2010, as compared with $374.2 million in 2009 and contributed negative $1.0 million in net revenues before expenses in 2010, as compared with a positive $2.7 million in net revenues before expenses in 2009.

"The decision to suspend originating mortgages through external brokers will not result in any further write downs.  We expect to take a provision in our 2011 first quarter for some related reductions that we will make in our staffing.

"Going forward, our primary focus will be to maximize value for our shareholders by continuing with the orderly exit from the company's legacy portfolio of securitized mortgages with the goal of converting these positions into cash; continuing to service and manage the existing mortgage portfolios to provide refinancing offers to qualifying customers in a manner that will generate an acceptable return to Xceed; and continuing to investigate other business opportunities and strategies in the markets that we understand and that can produce attractive returns.  As we previously announced, we requested that the Office of the Superintendent of Financial Institutions (OSFI) place on hold our application to become a regulated financial institution.  For the time being, our application to become a bank will remain on hold as we manage our current business and asses the direction of the economy and capital markets," Mr. Wahl said.

"I also am pleased to announce that, effective January 12, 2011, Michael Jones, our President and Chief Operating Officer, was appointed President and Chief Executive Officer and also joined our Board.  I will remain as Chairman and as an officer of the company, responsible for strategic corporate development," Mr. Wahl said.

Financial Highlights

  • Xceed recorded a net loss for 2010 of $17.6 million, including a net loss of $7.6 million in the fourth quarter.  This compared with a net loss of $3.3 million in 2009 (net income of $0.8 million in the fourth quarter).  In general, the net loss for 2010 is attributable to the difficult market conditions that persisted, notably the tightness of the credit markets, the cost of financing new mortgages and renewals, and intense competition in the underwriting business.  The loss also reflects several significant negative fair-value adjustments related to its securitization trusts.

    As at the 2010 year-end, Okanagan Funding Trust (OFT) went into amortization as a result of triggers to default ratios.  The primary impact of OFT going into amortization is that all collections within the trust from the date of amortization are used to pay down note holders in order of seniority delaying any potential receipt of excess spread to the company. In anticipation that an amortization event may occur, the company had commenced discussions earlier in the fourth quarter to look at alternatives to restructure OFT and repay the senior note holders. As OFT has since inception been funded with an uncommitted funding line, the senior note holder maintains the right to call the funding line at any point, thereby requiring a liquidation of the mortgage collateral.

    Subsequent to year-end, in December 2010, Xceed entered into a preliminary agreement with a Canadian regulated financial institution to refinance the approximate remaining $75.0 million mortgage pool in OFT. The transaction contemplated does not provide assurances that the senior note holder will not in any event choose to exercise its rights to sell the underlying mortgage portfolio on terms that could be more disadvantageous to the company thereby triggering additional write-downs to the B-Note interest in OFT.

    As a result of the discussions to refinance OFT, it became evident that there was a further impairment of the company's B-Note interest in OFT. At the 2010 year-end,  Xceed recorded a $6.0 million impairment in fair value (in the form of a $2.0 million write down of cash collateral receivable and $4.0 million reduction in the fair value of B notes). 

    At the 2010 year-end, Xceed determined that QSPE-XCD was likely going to experience an amortization event closely following the company's year end.  QSPE-XCD actually went into amortization as at November 30, 2010.  When the trust is in amortization, the company loses its ability to offer clients renewal of mortgages and this also results in all collections being applied to repay note holders in order of seniority.

    As a result, Xceed recorded a $13.4 million reduction in fair value of its deferred net mortgage interest receivable for the full 2010 year, bringing the ending deferred net mortgage interest receivable from this trust to $nil as at October 31, 2010. 

    During 2010, the company remitted $7.2 million to QSPE-XCD to subscribe to A-Notes as part of its rights to offer renewals on mortgages in the trust. This amount, along with $1.1 million of excess collections which were held back by the trust in fiscal 2009, is currently being held in escrow by the trust's administrator. The company now is in discussions with the administrator and the other note holders with a view to converting this cash into notes issued by the trust, or to return it to the company.  This amount of cash is currently reflected on the balance sheet as a subscription to A-Note in the amount equal to the cash remitted to the trust. 

    As financial services agent of Xceed Mortgage Trust (XMT), Xceed announced during the 2009 second quarter the occurrence of an amortization event for XMT's Series 2007-T2 and Series 2006-T1 Notes on March 17, 2009 and April 17, 2009, respectively.  Since the commencement of the amortization period and the maturing of offsetting swaps, funding costs for XMT's Series 2007-T2 have increased by more than 400 basis points approximately resulting in negative excess spreads in the trust.  Difficult credit conditions also gave rise to an increase in defaults at maturity.  The majority of these defaulted loans were with quality customers with good payment records that were not yet insurable and lacked available financing alternatives. 

    The amortization period for each XMT note series will end when the principal amount outstanding for all notes in each note series is repaid.  As at October 31, 2010, the Class A Senior Note for Series 2006-T1 was fully repaid, and $29.3 million (2009 - $147.3 million) was outstanding for Series 2007-T2 Class A Senior Note.  Approximately $2.0 million in excess funds were accumulated in the Series 2006-T1 cash collateral account, while a deficit of $6.5 million existed in the Series 2007-T2 cash collateral account.  As at October 31, 2010, XMT holds $11.2 million (2009 - $11.7 million) in cash collateral for hedge counterparty valuations, which does not provide credit support to the program.  After the last note matures in XMT, the company expects to receive the cash collateral for hedge counterparty valuations in full after settling all its hedge obligations.  As at October 31, 2010, XMT had total principal of $100.4 million outstanding funded by the Series 2006-T1 and Series 2007-T2 Notes.  During the amortization period, principal and interest collections from the underlying asset pool of the note series will continue unchanged. The residual cash collected from the underlying asset pool of the note series, after the final interest and principal distributions to all subordinated notes, will be paid to the residual interest holder (Xceed).

    On December 17, 2010, the company exercised its option to do a clean-up call in XMT Series 2006 T-1 and bought back the remaining mortgage pool of approximately $3.0 million. With this, all note holders in this tranche were paid back their principal in full. The subordinated E-note holder was also paid back its principal amount of $10.5 million in full. 

    During the 2010 first quarter, in anticipation of an increase in loan losses at maturity, the company had written-down $1.3 million ($0.9 million after-tax) in excess funds which were accumulated in the XMT Series 2006-T1 cash collateral account to $nil. As at October 31, 2010, the amount of excess funds accumulated in this account had grown to $2.0 million. Simultaneously, the pool balance has decreased to $3.8 million. Based on estimates of projected net interest spread and expected credit losses within XMT Series 2006 T-1, Xceed expects to receive $1.8 million of the excess spread after the pool matures and as a result, recorded a positive fair-value adjustment to XMT Series 2006 T-1 cash collateral to increase its carrying value to $1.8 million.

    Xceed incurred a residual securitization loss of $1.6 million for 2010 (2009 - loss of $2.9 million). The 2010 loss was largely caused by foreclosure losses crystallized inside the securitization trusts during the year.

    In the 2010 fourth quarter, as the result of its decision to put on hold its application to OSFI to convert to a bank, the company also took a write down of approximately $1.1 million related to legal and professional fees included in intangibles.

    The 2009 after-tax net loss of $3.3 million was primarily attributable to the fair-value adjustment on the deferred net mortgage interest receivable for XMT, negative residual securitization income caused by foreclosure losses crystallized inside the securitization trusts, and increased funding costs.  These were offset by the benefits resulting from the successful implementation of the third-party asset-backed commercial paper (ABCP) Restructuring Plan.

    The basic and diluted loss per share for 2010 were $0.64, compared with a basic and diluted loss per share of $0.12 in 2009.  For the 2010 fourth quarter, the basic and diluted loss per share were $0.28, compared with a basic and diluted earnings per share of $0.03 for the 2009 period.

  • The origination of new mortgages amounted to $403.4 million in 2010, compared with $524.1 million in 2009.  For the 2010 fourth quarter, originations amounted to $51.1 million, compared with $130.3 million in the prior-year period.  All new originations are insured mortgage products.

    Xceed renewed $85.5 million of uninsured mortgages in 2010, but did no significant renewals in the fourth quarter.  This compares with renewals of $34.7 million in 2009, including $11.7 million in the fourth quarter.

    Xceed's primary source of revenue is from the sale of pools of insured mortgages to off-balance sheet entities.  In 2010, the company sold $360.1 million ($5.5 million in the fourth quarter) of insured and uninsured mortgages, compared with $532.8 million in 2009 ($185.2 million in the fourth quarter).  Separating these amounts by insured and uninsured mortgages, the 2010 sales were $274.6 million and $5.2 million of insured mortgages for the year and fourth quarter, respectively, with gross upfront premium proceeds of $5.5 million and $0.2 million, respectively.  Deferred premium proceeds amounted to $0.6 million for the year and $nil for the fourth quarter.  In 2009, gross upfront premium proceeds were $15.5 million for the year and $4.2 million for the fourth quarter, with no deferred proceeds.  The decrease in premium proceeds in the 2010 periods is mainly due to reduced volumes caused by a decision on the company's part not to match rates posted by the competition.

    For 2010, the company reported a net gain on the sale of mortgages (gross gain on sale less hedging costs) of $7.8 million (including a net loss in the fourth quarter of $0.4 million).  In 2009, the net gain amounted to $14.9 million (including a gain of $4.3 million in the fourth quarter).

    In 2010, the company incurred a residual securitization loss of $1.6 million (including a loss of $0.02 million in the fourth quarter), compared with a loss of $2.9 million in 2009 (including $1.9 million in the fourth quarter).  Securitization income amounted to $6.2 million for 2010 (a loss of $0.4 million in the fourth quarter), compared with $12.0 million in 2009 ($2.4 million in the fourth quarter).

    Interest earned amounted to $3.0 million in 2010 ($0.8 million in the fourth quarter), compared with $4.1 million in 2009 ($1.0 million in the fourth quarter).

    Net origination costs for 2010 were $4.2 million ($0.8 million in the fourth quarter), compared with $6.7 million in 2009 ($1.3 million in the fourth quarter).

    Total 2010 revenues were $5.0 million (a negative $0.4 million in the fourth quarter), compared with $9.4 million in 2009 ($2.1 million in the fourth quarter).

    For 2010, the net gain on the sales recognized was 2.2% (a negative 7.6% in the fourth quarter) of the amount of mortgages sold.  In 2009, the net gain on the sales recognized was 2.8% (2.3% in the fourth quarter). Factors affecting gain as percentage of sales relate to the overall mix of business securitized and market interest rate spreads. For uninsured mortgages, additional factors such as mortgage duration, risk profile, and cost of credit enhancement, impact the gain on sale as well.

  • The average mortgage default level remained in the expected range at 3.5% for 2010, compared with 3.5% in 2009 and 3.6% in 2008.

  • Mortgages and other assets under administration were $1.557 billion at the end of 2010, down from $1.668 billion at the end of the 2010 third quarter, and down from $1.913 billion at the end of 2009.

  • Return on average shareholders' equity for 2010 was negative 25.1%, compared with negative 4.0% for 2009.

  • Xceed believes that cash flow from operations, while a non-GAAP (generally accepted accounting principles) measure, is a useful indicator of the performance of its business.  Xceed defines cash flow from operations as the cash generated by its operating activities, before taking into consideration the net change in other non-cash net asset balances which are related to operating activities. This can be calculated by removing the effects of amortization and other items not affecting operating cash from net income. However, this also can be calculated by subtracting expenses that are operating cash outflows from the revenues that generate operating cash inflows.

    On that basis, cash flow from operations was negative $2.0 million in 2010 (negative $0.6 million for the fourth quarter), compared with positive $14.0 million in 2009 (positive $2.1 million for the fourth quarter).  On a basic and diluted basis, 2010 cash flow was a negative $0.07 per share (negative $0.02 per share for the fourth quarter).  This compares with basic and diluted cash flow per share of $0.51 for 2009 ($0.08 in the fourth quarter).

    Cash securitization income was $9.2 million in 2010 ($0.6 million in the fourth quarter), compared with $31.0 million in 2009 ($4.4 million in the fourth quarter).  Cash-based revenues in 2010 were $12.2 million ($1.4 million in the fourth quarter), compared with $35.1 million a year earlier ($5.4 million in the fourth quarter). Net origination costs and other cash-based expenses in 2010 were $14.2 million ($2.0 million in the fourth quarter), compared with $21.0 million in 2009 ($3.2 million in the fourth quarter). 

In 2010, Xceed employed an average of 52 full-time employees, compared with an average of 46 people in 2009.  Approximately 50 employees comprised the core workforce of Xceed at the fiscal year end October 31, 2010. 

As at October 31, 2010, Xceed had cash and cash equivalents of $6.0 million, compared with $5.7 million at October 31, 2009.  The company believes that cash and funding resources will be sufficient to meet its short-term and long-term requirements.

Xceed has filed its financial statements and management's discussion and analysis for 2010 with SEDAR and they will be posted on the company's website.

XCEED MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

     
  October 31,
2010
October 31,
2009
  $ $
     
ASSETS    
     
Cash and cash equivalents 5,952 5,731
Investment in notes [notes 3d) and 7] 39,215 33,230
Cash collateral and other deposits receivable from Trusts [note 3d)] 13,266 15,738
Deferred net mortgage interest receivable [note 3c)] 14,005
Mortgages [note 4] 74,482 39,485
Accounts receivable [note 3d)] 3,177 4,418
Current taxes receivable, net [note 9] 5,375
Derivative instruments [notes 12 ,13 and 14] 148
Mortgage commitments [note 12] 12
Intangible assets, net [note 5] 614 672
Future tax asset, net [note 9] 60
Fixed assets, net [note 6] 191 134
     
  142,480 113,425
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
     
Liabilities    
Credit facilities [notes 7 and 12] 76,427 24,016
Accounts payable and accrued liabilities [note 3a)] 4,074 4,886
Mortgage commitments [note 12] 1
Derivative instruments [notes 12 ,13 and 14] 91
Future and other income tax liabilities, net [note 9] 5,048
     
Total liabilities 80,502 34,041
     
Shareholders' equity    
Capital stock [note 8] 56,767  56,767
Contributed surplus [notes 8 and 15] 1,944 1,716
Retained earnings 3,267 20,901
     
Total shareholders' equity 61,978 79,384
     
  142,480 113,425

XCEED MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS

(in thousands of dollars, except per share amounts)

     
Years ended October 31,
2010
October 31,
2009
  $ $
     
REVENUE    
Securitization income [note 3a)] 6,199 11,978
Interest     2,998 4,092
     
  9,197 16,070
     
Less: Net origination costs (4,226) (6,657)
     
  4,971 9,413
     
EXPENSES    
Compensation and benefits 5,636 5,785
Interest [note 7] 1,622 2,556
Amortization and write down of intangible assets [note 5] 1,360 155
Other operating 3,675 3,451
     
  12,293 11,947
     
Realized and unrealized losses on financial instruments [notes 3c), 4 and 12] (18,539) (2,575)
     
Loss before income taxes (25,861) (5,109)
     
Recovery of income taxes [note 9] (8,227) (1,766)
     
Net loss for the year (17,634) (3,343)
     
Retained earnings, beginning of year 20,901 24,244
     
Retained earnings, end of year 3,267 20,901
     
Loss per share [note 8]    
Basic $(0.64) $(0.12)
Diluted $(0.64) $(0.12)

XCEED MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

     
Years ended October 31,
2010
October 31,
2009
  $ $
OPERATING ACTIVITIES    
  Net loss for the year (17,634) (3,343)
     
Items not affecting operating cash:    
  Non-cash net loss (gain) on sale of mortgages (2,504) 114
  Amortization of deferred net mortgage interest receivable 4,991 20,094
  Amortization of servicing fee (1,023) (2,958)
  Amortization of fixed assets 106 131
  Amortization of intangible assets 1,360 155
  Unrealized losses from financial instruments [notes 3 and 12] 15,072 3,059
  Net future income taxes (3,941) (5,014)
  Net change in securitization income accrual 1,564 1,805
  (2,009) 14,043
     
  Other changes in non cash net assets [note 10] (40,109) 21,140
     
  (42,118) 35,183
     
INVESTING ACTIVITIES    
  Sale of notes 503 1,043
  Purchase of notes (9,417) (6,484)
  Net increase in intangible assets (1,302) (589)
  Purchase of fixed assets (162) (25)
     
  (10,378) (6,055)
     
FINANCING ACTIVITIES    
  Net increase (decrease) in credit facilities 52,489 (33,440)
  Share buyback (274)
        Contributed surplus related to issuance of options 228 375
     
  52,717 (33,339)
     
Net increase (decrease) in cash and cash equivalents 221 (4,211)
  Cash and cash equivalents, beginning of year 5,731 9,942
     
Cash and cash equivalents, end of year 5,952 5,731
     
Supplemental cash flow information    
  Interest paid 1,465 2,704
  Income taxes paid 2,250 2,348

Conference Call and Webcast

Xceed will hold a conference call for analysts and investors at 10:00 a.m. (Eastern) today (January 13) (Eastern).  Ivan Wahl, Chairman, Michael Jones, President and Chief Executive Officer, and Jeff Bouganim, Chief Financial Officer, will be available to answer questions during the call. 

To participate in the call, please dial 647-427-7450 or 1-888-231-8191 at least five minutes prior to the start of the call.

A live audio webcast of the conference call will be available at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=3355660 and www.xceedmortgage.com.

An archived recording of the call will be available at 416-849-0833 or 1-800-642-1687 (Passcode 34925665#) from noon on January 13 to 11:59 p.m. on January 20.  An archived recording of the webcast also will be available at Xceed's website.

About Xceed Mortgage

Xceed Mortgage Corporation, based in Toronto, is a Canadian provider of insured residential mortgages that it originates in Canada.  The company has approximately $1.6 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.

SOURCE Xceed Mortgage Corporation

For further information:

please contact Investor and Media Relations: 

Richard Wertheim
Wertheim + Company Inc.
(416) 594-1600 ext. 223 or (416-518-8479 cell)
Email: wertheim@wertheim.ca.

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