Xceed Reports Fiscal 2008 First Quarter



    
    -   Financial results and operations continue to be affected by capital
        markets turmoil
    -   Accepting only business that meets the underwriting guidelines of
        mortgage insurers
    -   First-quarter 2008 net income of $1.5 million; assets under
        administration at $2.5 billion
    -   Conference call at 10:00 a.m. (EDT) today
    

    TORONTO, March 17 /CNW/ - Xceed Mortgage Corporation (TSX: XMC) today
announced its financial results for its fiscal 2008 first quarter ended
January 31, 2008. All references to quarters or years are for the fiscal
periods and all currency amounts are in Canadian dollars unless otherwise
noted.
    "The capital markets turmoil that began last summer has proven more
severe and protracted than most anticipated. It was hoped that a greater level
of stability and normalcy would have returned to the markets by now or at
least clearly be on the horizon. This, however, is not the case and the
financial condition of Xceed's business, as well as our financial results and
operations have been, and continue to be, materially and adversely affected by
ongoing market disruption," said Ivan Wahl, Chairman and Chief Executive
Officer.
    "Management will continue their ongoing efforts to maximize value for the
company's shareholders, both in the short and long term. An area of focus has
been the protection of the company's ongoing liquidity, including the
preservation of its residual interest cash flows from securitization vehicles
as well those cash inflows that result from the sale of previously originated
mortgages. Given the serious liquidity challenges associated with being able
to source capital required to fund new originations and the protracted period
over which this disruption has already extended, as well as market
expectations that these conditions will persist into the foreseeable future,
the company's board and management may decide to curtail originations further
in order to preserve capital resources," he said.
    Xceed reported that it has made concerted efforts to shift its
origination efforts away from non-conforming mortgages and to insure portions
of its new and existing mortgage portfolio with a view to ultimately rendering
those mortgages saleable to the Canada Mortgage Bond Program.
    During the 2008 first quarter, the company insured approximately
$85.5 million of its previously originated uninsured portfolio. Subsequently,
by March 2008, the vast majority of Xceed's application pipeline represented
insured mortgage originations.
    "Our management has decided to accept only business that meets the
underwriting guidelines of mortgage insurers," Mr. Wahl said.
    "Since August 2007, when the asset-backed commercial paper (ABCP) market
essentially collapsed, Xceed has reduced new origination demand for its
non-traditional products by raising mortgage rates and eliminating certain
products. We also focused on originating less profitable insured mortgages to
be able to access available funding sources related to these," said Mr. Wahl.
    "Xceed's management will continue to control origination volumes in order
to preserve capital resources. This is necessary as a result of the serious
liquidity challenges associated with being able to source the capital required
to fund new originations and the protracted period over which this disruption
has already extended, as well as market expectations that these conditions
will persist into the foreseeable future," he said.
    Xceed's origination business and the sale of originated mortgages to
third parties have historically generated the vast majority of the company's
revenue.
    In February of 2008, Xceed announced the implementation of cost-reduction
measures and the resizing of its infrastructure, including the severance of
approximately 18% of its workforce. The company is continually assessing its
future infrastructure and workforce needs in order to ensure that these are
aligned with expected origination volumes.
    One of the challenges facing Xceed concerns Xceed Mortgage Trust ("XMT").
During the second quarter of fiscal 2007, Xceed, as financial services agent
and the promoter of Xceed Mortgage Trust, announced that XMT had completed a
$447.3 million offering of mortgage-backed term notes, with varying
maturities. This transaction followed a similar offering in the 2006 second
quarter that had raised $360.4 million. Completion of these offerings in the
public term note market effectively resulted in the diversification of Xceed's
funding activities, which were previously focused on the short-term commercial
paper market.
    Some of the term notes issued by XMT are maturing in March and April
2008. To repay the maturing notes, mortgage collections are accumulated within
XMT in a cash accumulation account. At the time that the transactions were
underwritten, it was contemplated that, if amounts accumulating in the
accumulation account are not sufficient to repay the maturing notes, XMT would
raise additional funding by issuing commercial paper.
    The company has successfully negotiated the funding of the first tranche
of maturing notes, which mature in March 2008. Xceed has determined that the
amount of net funding required to retire the notes in April 2008 is
approximately $85 million. However, given the current uncertainty in the ABCP
market, there is no certainty that XMT will be able to raise the required
funding necessary for those notes maturing in April 2008. Management expects
that continued illiquidity in the capital markets will result in substantially
increased interest costs related to these fundings, which are likely to cause
Xceed to take a further after-tax write-down of its deferred mortgage interest
receivable from the XMT vehicle of approximately $2 million, to be recorded
during its second quarter ended April 30, 2008.
    In the event that XMT is unable to repay the notes, XMT would be placed
into amortization, which would alter the timing of the company's receipt of
the cash flows it would otherwise earn from this vehicle, by delaying receipt
of these until the vehicle's noteholders were paid in priority.
    Xceed continues to fulfill all of its funding obligations and to honor
the previous commitments made to its customers.

    
    First-Quarter Financial Highlights

    -   First-quarter 2008 net income was $1.5 million, compared with
        $6.8 million a year earlier, a 77.6% decrease. The 2008 quarter's
        results were materially affected by Xceed's decision to reduce
        business volumes and its shift from originating non-conforming
        mortgages towards lower-margin insured business. Results were also
        materially affected by fluctuations in the fair value of financial
        instruments and an after-tax reduction of approximately $1.3 million
        in compensation-related accruals. Lastly, reported net income for the
        2008 first quarter was affected by changes in income tax rates
        affecting future years, which had the effect of reducing future
        income tax by $0.7 million. The 2007 first quarter results include a
        $0.7 million charge reflecting management's decision to take a one-
        time after tax write-off related to infrastructure and other
        expenditures from which the company no longer expects to benefit.

        The company sold mortgages to securitization vehicles in the 2008
        first quarter valued at $131.1 million, compared with $297.3 million
        in the 2007 period. The gain on sale of mortgages decreased to
        $3.1 million in the 2008 first quarter, compared with $13.0 million a
        year earlier. The decrease reflects changes in average sales mix
        trends toward better credit profile borrowers on mortgages that are
        insured and arranged on fixed-rate terms and therefore entailed lower
        mortgage spread margins than previously enjoyed. These effects
        resulted in a gain recognized in the first-quarter 2008 which was
        2.4% of the amount of mortgages sold, compared with 4.4% for the
        corresponding quarter of the prior year. Other factors affecting gain
        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 first quarter were $65.7 million, which
        compares with $340.0 million in the 2007 period.

    -   Basic and diluted earnings per share were $0.05 in the 2008 quarter,
        compared with $0.25 and $0.23, respectively, a year earlier.

    -   Given reduced originations and securitization sales, mortgages and
        other assets under administration declined 6.0% to $2.52 billion as
        at January 31, 2008 from $2.68 billion at October 31, 2007, but were
        higher than at the end of the 2007 first quarter when they amounted
        to $2.48 billion.

    -   Return on average shareholders' equity for the 2008 first quarter was
        6.4%, compared with 24.5% a year earlier.

    -   Revenues totaled $5.7 million in the 2008 first quarter, down from
        $17.5 million in the 2007 period. The company has derived its primary
        source of revenue from the gains it recognizes on the sale of its
        mortgages to Trusts and residual securitization income earned during
        the term that the mortgages reside within its portfolio. Pending
        sales to the Trusts, the company also earns interest income on
        mortgages that are on the company's balance sheet for the brief
        intervening period.

    -   Cash flow from operations for the first-quarter 2008 was $1.6 million
        or $0.06 per basic and diluted share, compared with $5.3 million
        ($0.19 per basic and $0.18 per diluted share) in the 2007 quarter.
        First-quarter-2008 cash securitization income was not materially
        different than that of the corresponding quarter of the prior year.
        However, unlike in the 2007 quarter, the majority of business funded
        during 2008 was insured business, which does not earn an application
        fee on origination. Lower cash flows can also be attributed to the
        $2.4 million in insurance premiums paid by Xceed during the quarter
        to insure a portion of its portfolio.
    

    In the 2008 first quarter, Xceed employed an average of 145 full-time
staff, compared with an average of 132 employed a year ago. The company's
productivity index was 146.9% for the 2008 quarter and 41.7% 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 3.33% in
first-quarter 2008, compared with 2.49% in the 2007 period and 2.62% in the
2007 fourth quarter. 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 also can occur
as a result of a reduction in portfolio size when this is not accompanied by a
commensurate reduction in defaulted mortgages, as well as slowness of
defaulted mortgage property sales in the winter months, which occurs due to
the seasonality of the real estate markets.
    Xceed also reported a change in the warehouse facility provided through
Xceed Asset Trust (XAT). XAT is a special purpose entity established by the
company on October 31, 2006 to facilitate a warehouse credit facility arranged
with the Canadian branch of Deutsche Bank AG. During the 2008 first quarter,
Deutsche agreed to renew the facility as part of the normal process. However,
given reduced origination volumes and a desire to reduce standby charges
associated with undrawn portions of the committed limit, Xceed and Deutsche
agreed to reduce the committed amount of this facility to $250 million from
the previous $350 million. Pursuant to the terms of renewal, the interest rate
and the amount of collateral required when funding mortgages on this warehouse
facility may change from time to time based on fluctuations in mortgage
portfolio market values. Xceed will continue to use its warehouse as it funds
those mortgages that it originates or renews. It also intends to use the
Okanagan Funding Trust (OFT) securitization facility, a $300 million entity
with which it established a relationship in October 2007, as well as its
relationship with an insured mortgage aggregator to effect securitization
sales in order to remove those mortgages from its warehouse.

    Further Outlook Comments

    "Since Xceed is unable to predict if, or when, the balance between supply
and demand in the Canadian ABCP market will be restored, we also are unable to
predict whether ABCP spreads and liquidity will return to historic levels. We
continue to believe that the recent spread-widening for the ABCP issued by our
conduits is a consequence of the liquidity issues facing the Canadian ABCP
market rather than concerns with the quality of Xceed-originated assets," said
Ivan Wahl.
    "It is important to note that the Canadian housing market remains
healthy. Canadian mortgage markets have performed significantly better than
their United States counterparts, with defaults and losses that are a fraction
of those found within the U.S. subprime market. At origination, Xceed's
securitized mortgage loan-to-values have averaged at approximately 84%, which,
of course, does not take into consideration real estate market appreciation
since origination. Mortgages originated and administered within our portfolios
have, in specific, performed within the expectations communicated to investors
when these were sold to the Trusts, and, as such, continue to be rated in
accordance with the R-1(high) rating provided by DBRS based on its analysis in
rating those assets. These mortgages are all first-charge residential
mortgages," he said.
    Xceed also noted that mortgage payments collected by the commercial paper
securitization vehicle which holds $1.1 billion of Xceed-originated mortgages
are accumulated in that Trust's collection account. The Trust also holds cash
in a cash collateral account intended to provide security and
collateralization to the structure. A combined $36.7 million of the cash
proceeds otherwise held in the collection and cash collateral accounts has
been invested in ABCP issued by other securitization trusts, which are also
affected by the current market turbulence. As a result of the market
disruption, any affect on the value of these investments when they are
ultimately liquidated entails a risk that Xceed's retained interest may
eventually be disrupted or impaired.
    Xceed has filed its fiscal 2008 first-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)
    -------------------------------------------------------------------------
                                                     January 31,  October 31,
                                                           2008         2007
    -------------------------------------------------------------------------

    ASSETS

    Cash and cash equivalents                            12,601        8,925
    Investment in notes                                  25,635       25,536
    Cash collateral and other deposits
     receivable from Trusts                              11,767       11,434
    Deferred net mortgage interest receivable            55,476       56,306
    Mortgages                                           115,105      115,190
    Accounts receivable                                   6,543        7,073
    Derivative instruments                                  102          190
    Mortgage commitments                                    133           54
    Deferred charges                                      5,964        6,410
    Fixed assets, net                                     1,971        2,110
    -------------------------------------------------------------------------
                                                        235,297      233,228
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY

    Liabilities
    Credit facilities                                   105,474       91,903
    Accounts payable and accrued liabilities             17,192       24,882
    Derivative instruments                                  592        1,137
    Future and other income taxes                        15,880       20,369
    -------------------------------------------------------------------------
    Total liabilities                                   139,138      138,291
    -------------------------------------------------------------------------

    Shareholders' equity
    Capital stock                                        57,274       57,274
    Contributed surplus                                   1,151        1,452
    Retained earnings                                    37,734       36,211
    -------------------------------------------------------------------------
    Total shareholders' equity                           96,159       94,937
    -------------------------------------------------------------------------
                                                        235,297      233,228
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    (in thousands of dollars, except per share amounts)
    -------------------------------------------------------------------------
                                                          Three Months Ended
                                                     January 31,  January 31,
                                                           2008         2007
    -------------------------------------------------------------------------

    REVENUES
    Securitization income                                 2,784       13,175
    Interest earned                                       3,373        2,038
    -------------------------------------------------------------------------
                                                          6,157       15,213

    Add: Net origination income (cost)                     (419)       2,330
    -------------------------------------------------------------------------

                                                          5,738       17,543
    -------------------------------------------------------------------------

    EXPENSES
    Compensation and benefits                             1,553        3,708
    Interest                                              2,057        1,093
    Deferred charge amortization                            695          529
    Other operating                                       1,841        2,424
    -------------------------------------------------------------------------

                                                          6,146        7,754
    -------------------------------------------------------------------------

    Realized and unrealized gains on financial
     instruments                                          1,449          643

    Income before income taxes                            1,041       10,432

    -------------------------------------------------------------------------
    Provision for (recovery of) income taxes               (477)       3,668
    -------------------------------------------------------------------------

    Net income for the period                             1,518        6,764

    -------------------------------------------------------------------------
    Retained earnings, beginning of period               36,211       43,823
    -------------------------------------------------------------------------
    Add:   Transition adjustment on adoption of
            financial instruments standards                   -        4,775
    Less:  Dividends declared                                 -       (1,921)
    Less:  Share buyback                                      5         (227)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Retained earnings, end of period                     37,734       53,214
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                          Three Months Ended
                                                     January 31,  January 31,
                                                           2008         2007
    -------------------------------------------------------------------------
    OPERATING ACTIVITIES
    Net income for the period                             1,518        6,764
    Items not affecting operating cash:
      Non-cash net gain on sale of mortgages                601      (13,204)
      Amortization of deferred net mortgage interest
       receivable                                         7,423       10,169
      Amortization of servicing fee                      (1,107)        (890)
      Amortization of fixed assets                          231          194
      Amortization of deferred charges                      695          529
      Unrealized gains from financial instruments        (7,200)        (786)
      Net future income taxes                              (531)       1,808
    -------------------------------------------------------------------------
                                                          1,630        4,584
    Other changes in non-cash net assets                (13,333)     (45,648)
    -------------------------------------------------------------------------
                                                        (11,703)     (41,064)
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Sale of notes                                         8,726        1,272
    Purchase of notes                                    (6,583)      (4,813)
    Net increase (decrease) in deferred charges            (249)       1,103
    Purchase of fixed assets                                (92)         (80)
    -------------------------------------------------------------------------
                                                          1,802       (2,518)
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Credit facilities, net of repayments                 13,572       40,547
    Share buyback                                             5         (331)
    Dividends paid                                            -       (1,647)
    -------------------------------------------------------------------------
                                                         13,577       38,569
    -------------------------------------------------------------------------

    Increase (decrease) in cash and cash equivalents      3,676       (5,013)
    Cash and cash equivalents, beginning of period        8,925        9,943
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period             12,601        4,930
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to 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 first quarter results on March 17, 2008 at 10:00 a.m. (Eastern).
    Ivan Wahl, Chairman and Chief Executive Officer, Michael Jones, President
and Chief Operating Officer, and John Ayanoglou, Vice President Finance and
Chief Financial Officer, will be available to answer questions during the
call.
    To participate in the call, please dial 416-644-3416 or 1-800-732-6179 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 21265702 followed by the number sign) from noon on
March 17 to 11:59 p.m. on March 24. An archived recording of the webcast will
also be available at Xceed's website.
    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: please contact Investor and Media Relations:
Richard Wertheim, Wertheim + Company Inc., (416) 594-1600,
wertheim@wertheim.ca

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