Xceed Mortgage Reports Fiscal 2010 First-Quarter Financial Results

    -   Achieves 44% increase in originations, underwriting $125 million of
        insurable mortgages compared with $87 million in the 2009 first
    -   Reports net loss mainly resulting from negative fair-value
        adjustments of $8.1 million on the deferred net mortgage interest
        receivable related to remaining legacy portfolio of $0.8 billion of
        uninsurable mortgages
    -   Assets under administration at $1.852 billion
    -   Mortgage default ratio remains stable
    -   Application to convert to federally chartered deposit-taking bank
        (Bank Xceed/Xceed Banque) continues under review by federal
    -   Conference call at 10:00 a.m. (EDT) today (Thursday)

TORONTO, March 11 /CNW/ - Xceed Mortgage Corporation (TSX: XMC), a Canadian provider of insured mortgages, today announced its financial results for the fiscal 2010 first quarter ended January 31, 2010. All references to quarters or years are for the fiscal periods and all currency amounts are in Canadian dollars unless otherwise noted.

"The net loss that we are reporting for our first quarter is not indicative of the progress that Xceed is continuing to make in transitioning our business and in building a platform for what we expect will be future growth and the creation of value for our shareholders," said Ivan Wahl, Chairman and Chief Executive Officer.

"Perhaps the best indicator of our progress is that we achieved a nearly 44% increase in the volume of new mortgage originations during the quarter, underwriting $125 million worth compared with $87 million a year earlier. That is consistent with the rate of increase that we reported for all of 2009, when our originations were up more than 46%. Further, although the first quarter is historically a seasonally weaker period, our level of originations was nearly equal to the total in the 2009 fourth quarter.

"As all of the originations of new mortgages are insured products, which now are our principal focus, it means that we are accomplishing this rate of growth in a very competitive environment where we are successfully competing for business against banks and other competitors that are far bigger than us in their size and reach. We are winning this business by charging mortgage rates that are comparable to those across the industry. Our success is confirmation of the progress that we have made working with our network of brokers across Canada. During the past two years, we have worked hard with our brokers network in the transition from seeking to originate alternative, uninsurable mortgages to our focus on the insured market," Mr. Wahl said.

"Although it appears that an economic recovery is underway in Canada, the effects of the capital markets turmoil of the past two years are still being felt, particularly with respect to the lack of availability of funding at an acceptable cost for previously underwritten uninsurable mortgages.

"Xceed spent most of our fiscal 2008 transitioning away from underwriting uninsurable mortgages to focus solely on offering mortgages that could be sold to the Canada Mortgage Bond Program," he continued. "However, we still have a sizeable legacy portfolio of uninsurable mortgages amounting to about $0.8 billion. The main impact of the continued turmoil has been to create increased risk of refinancing of the uninsured mortgages at maturity, resulting in expected losses in cases where they cannot be refinanced. The situation regarding refinancing uninsured mortgages at maturity is being further affected by changes announced in February 2010 by the Federal Minister of Finance. In the current environment, the liquidity in the mortgage market continues to be available only for insured mortgages.

"Accordingly, our legacy business continued to impact our financial results in the first quarter with respect to the residual securitization income and the fair-value adjustments that we deemed to be necessary. As a result of the impact of the discontinued business line of uninsured mortgages, we recorded a negative fair-value adjustment resulting in writing down substantially all of the remaining deferred net mortgage interest receivable which assists us to put these legacy operations behind us. This write-down amounted to $8.1 million ($11.9 million pre-tax), which has been reported under the item 'Realized and unrealized losses from financial instruments' on the income statement. As at January 31, 2010, the company has a fair value of $1.2 million for the deferred net mortgage interest receivable. This relates to the gain on sale of mortgages which were renewed into one of our securitization trusts starting fiscal 2009," Mr. Wahl said.

Financial Highlights

    -   Xceed recorded a net loss for the 2010 first quarter of
        $11.8 million, compared with net income of $3.3 million in the 2009
        period. The 2010 first-quarter net loss is mainly attributable to the
        fair-value adjustment write-down of $8.1 million ($11.9 million
        pre-tax) taken with respect to the deferred net mortgage interest
        receivable due to the shortfalls in excess spreads resulting in
        negative residual securitization income (RSI). RSI is the difference
        between monthly spread income and the amortization of the deferred
        net mortgage interest receivable. The shortfalls and hence negative
        RSI for the first quarter of fiscal 2010 were primarily caused by
        actual credit losses crystallized inside the securitization trusts
        that were in excess of the credit loss assumptions used in the
        establishment of the deferred net mortgage interest receivable. This
        in turn was caused by the inability of some mortgagors to refinance
        their mortgage at maturity, resulting in higher costs to realize on
        the value of collateral through foreclosure, and delayed timing. In
        response to these worse-than-expected credit losses, Xceed made the
        fair-value adjustment to the deferred net mortgage interest

        As has been previously reported, one of the securitization vehicles
        of the company Xceed Mortgage Trust (XMT) went into early
        amortization during the 2009 second quarter. The amortization period
        for each XMT note series shall end when the principal amount
        outstanding for all notes in each note series is repaid. As at
        January 31, 2010, the Class A Senior Note for Series 2006-T1 was
        fully repaid, and $83.7 million (October 31, 2009 - $147.3 million)
        was outstanding for Series 2007-T2 Class A Senior Note. During the
        2010 first quarter, the company wrote-off approximately $0.9 million
        in excess funds ($1.3 million pre-tax) which were accumulated in the
        Series 2006-T1 cash collateral account in anticipation of the loan
        losses at maturity. This amount was included in the fair-value
        adjustment on the deferred net mortgage interest receivable.

        As at January 31, 2010, XMT holds $10.9 million (October 31, 2009 -
        $10.9 million) in cash collateral for hedge counterparty valuations,
        which do 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 January 31, 2010, XMT had total
        principal outstanding of $185.1 million (October 31, 2009 -
        $262.6 million), funded by the Series 2006-T1 and Series 2007-T2

        The company also took a $0.4 million write-down ($0.6 million
        pre-tax) for a negative fair-value adjustment on certain insured
        mortgages in the warehouse from the past that Xceed considers to be
        not readily saleable into the Canada Mortgage Bond Program as the
        quoted market price is lower than the carrying value of these

        Results for the 2009 first quarter were affected positively by the
        implementation of the third-party asset-backed commercial paper
        (ABCP) restructuring plan, as well as a number of related accounting
        and fair-value adjustments to the company's deferred net mortgage
        interest receivable. These items totalled $5.3 million ($8.0 million
        pre-tax) in favor of the company.

        The basic and diluted loss per share for the 2010 first quarter was
        $0.43 and $0.42, respectively. This compares with basic and diluted
        earnings per share of $0.12 for the 2009 first quarter.

    -   The origination of new mortgages amounted to $125.0 million in the
        2010 first quarter, a 43.7% increased from the $86.9 million of new
        underwriting done in the 2009 period. All new originations are
        insured mortgage products and funding is provided by the company's
        warehouse credit facility.

        Originations of new mortgages in the 2010 first quarter exceeded the
        company's sales of mortgages by 28.1%. During the quarter, Xceed sold
        mortgages valued at $97.6 million, compared with $86.0 million in the
        corresponding quarter of 2009. Of these sales, in the 2010 first
        quarter, $91.1 million were insured mortgages sold on a whole-loan
        basis with upfront premium proceeds, compared with $84.8 million for
        the corresponding quarter of the previous year. The sale of insured
        mortgages generated gross premium proceeds of $2.0 million and
        $5.0 million in the respective quarters. The decrease in premium
        proceeds is mainly due to the company's decision to keep the mortgage
        rates offered to its clients competitive with other lenders in the
        market. This has resulted in compressed spreads during the current

        During the 2010 first quarter, the company was also able to renew
        $6.5 million (2009 - $Nil million) of uninsured mortgages, with a
        gain on sale of $0.1 million (2009 - $Nil million). Further, the
        company received $0.3 million towards settlement from the sale of a
        mortgage pool comprising $1.3 million of defaulted mortgages, which
        had been sold in the second quarter of fiscal 2009 with proceeds of
        $1.0 million at that time.

        "We continue to seek ways to fund the renewal of our customers'
        mortgages that were uninsurable when we originated them in past
        years," said Mr. Wahl. "Unfortunately, finding the funding for this
        continues to be very difficult and the criteria are necessarily even
        more stringent than they were in the past. We currently are achieving
        renewal rates exceeding 50% of those mortgages coming due for

    -   Xceed's primary source of revenue is from the sale of pools of
        mortgages to off-balance sheet entities. The net gain of $1.7 million
        on the sale of mortgages in the 2010 first quarter was more than
        offset by an RSI loss of $3.5 million, resulting in a securitization
        loss of $1.8 million. Pending sales, the company earns interest
        income on mortgages that are on the company's balance sheet for the
        brief intervening period. Interest earned in the quarter amounted to
        $0.9 million. Net origination costs for the quarter were
        $1.8 million. Total first-quarter 2010 revenues were a negative
        $2.7 million.

        For the 2009 first quarter, the net gain on the sale of mortgages was
        $3.0 million and RSI amounted to $5.9 million (including $6.2 million
        related to the retroactive adjustment on funding costs and interest
        on the illiquid ABCP that the company received upon the closing of
        the third-party ABCP restructuring plan during the quarter) producing
        securitization income of $8.8 million. Interest earned was
        $1.1 million and the net origination costs were $1.4 million. Total
        revenues for the 2009 first quarter were $8.5 million.

        The net gain on the sale of mortgages in the 2010 first quarter was
        1.8% of the amount of mortgages sold, compared with 2.3% for the
        immediately preceding quarter, and 3.4% in the first quarter of 2009.
        Factors affecting the 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 also impact
        the gain on sale. Insured mortgages normally have borrowers with
        better credit profiles and are arranged on fixed-rate terms,
        entailing lower-spread margins than previously enjoyed.

    -   Mortgages and other assets under administration were $1.852 billion
        at the end of the 2010 first quarter, down 3.2% from $1.914 billion
        at the end of 2009 and down 11.1% from the 2009 first quarter.

    -   Return on average shareholders' equity for the 2010 first quarter was
        a negative 15.8%, compared with a positive 4.0% for the corresponding
        2009 period.

    -   Xceed's management 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. The company
        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 $0.6 million ($0.02 per
        basic and diluted share) for the 2010 first quarter, compared with
        $8.4 million ($0.30 per basic and diluted share) in the 2009 period.
        Cash securitization income was $3.6 million in the 2010 quarter and
        $16.6 million in 2009 period, including the $6.2 million received
        following the closing of the third-party ABCP restructuring plan. The
        company has also restated the 2009 first-quarter cash flow to exclude
        the effects of accruals on the securitized assets. Cash-based
        revenues in the 2010 first quarter were $4.6 million, compared with
        $17.6 million a year earlier.

In the 2010 first quarter, Xceed employed an average of 51 full-time employees, which compares to an average of 42 people in the 2009 period. At the end of the first-quarter 2010, the company employed 53 people. The productivity index (calculated by dividing compensation and other operating expenses and intangible asset amortization by securitization income) was a negative 135.3% for the 2010 quarter, compared with 26.0% a year earlier. A lower productivity index generally is associated with a more-efficient cost structure.

The average mortgage default ratio (over 90 days in arrears) on the company's combined securitized and non-securitized portfolio continued to be stable and within the company's expectations at 3.75% for the 2010 first quarter, which was the same as experienced in the fourth quarter of 2009, but was an increase from the 3.09% in the period a year earlier. The increase mainly reflects defaults in the uninsured portfolio and some seasonality.

At the end of the 2010 first quarter, Xceed had cash and cash equivalents of $9.0 million, compared with $5.7 million at the end of 2009. The company believes that cash flow from continuing operations and existing cash 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 the first quarter with SEDAR and they will be posted on the company's website.


    (in thousands of dollars)
                                                          As at        As at
                                                     January 31,  October 31,
                                                           2010         2009
                                                              $            $


    Cash and cash equivalents                             9,029        5,731
    Investment in notes (notes 3d) and 7)                34,067       33,230
    Cash collateral and other deposits receivable
     from Trusts (note 3d))                              14,326       15,738
    Deferred net mortgage interest receivable
     (note 3c))                                           1,167       14,005
    Mortgages (note 4)                                   61,588       39,485
    Accounts receivable (note 3d))                        6,793        4,418
    Mortgage commitments (note 7)                            35           12
    Intangible assets, net                                  991          672
    Fixed assets, net                                       108          134
    Future income tax asset                                 303            -
                                                     -----------  -----------

                                                        128,407      113,425
                                                     -----------  -----------
                                                     -----------  -----------


    Credit facilities (notes 5 and 7)                    56,459       24,016
    Accounts payable and accrued liabilities (note 3)     3,922        4,886
    Derivative instruments                                  428           91
    Future and other income tax liabilities                   -        5,048
                                                     -----------  -----------

    Total liabilities                                    60,809       34,041
                                                     -----------  -----------

    Shareholders' equity
    Capital stock (note 6)                               56,767       56,767
    Contributed surplus (note 6)                          1,746        1,716
    Retained earnings                                     9,085       20,901
                                                     -----------  -----------

    Total shareholders' equity                           67,598       79,384
                                                     -----------  -----------

                                                        128,407      113,425
                                                     -----------  -----------
                                                     -----------  -----------


    (in thousands of dollars, except per share amounts)
    Three months ended                               January 31,  January 31,
                                                           2010         2009
                                                              $            $

    Securitization income (loss) (note 3a))              (1,812)       8,846
    Interest                                                934        1,077
                                                     -----------  -----------

                                                           (878)       9,923
                                                     -----------  -----------

    Less: Net origination costs                          (1,837)      (1,411)
                                                     -----------  -----------

                                                         (2,715)       8,512
                                                     -----------  -----------

    Compensation and benefits                             1,561        1,335
    Interest (note 5)                                       450          775
    Amortization of intangible assets                        39           48
    Other operating                                         851          913
                                                     -----------  -----------

                                                          2,901        3,071
                                                     -----------  -----------
    Realized and unrealized losses on financial
     instruments (notes 3c), 4 and 7)                   (11,525)        (681)
                                                     -----------  -----------

    Income (loss) before income taxes                   (17,141)       4,760

    Provision for (recovery of) income taxes             (5,325)       1,419
                                                     -----------  -----------

    Net income (loss) for the period                    (11,816)       3,341

    Retained earnings, beginning of period               20,901       24,244
                                                     -----------  -----------

    Retained earnings, end of period                      9,085       27,585
                                                     -----------  -----------
                                                     -----------  -----------

    Earnings (loss) per share
    Basic                                                 (0.43)        0.12
    Diluted                                               (0.42)        0.12


    (in thousands of dollars)
    Three months ended                               January 31,  January 31,
                                                           2010         2009
                                                              $            $
      Net income (loss) for the period                  (11,816)       3,341

    Items not affecting operating cash:
      Non-cash net loss on sale of mortgages                233        1,920
      Amortization of deferred net mortgage
       interest receivable                                3,200        6,163
      Amortization of servicing fee                        (390)        (774)
      Amortization of fixed assets                           26           37
      Amortization of intangible assets                      39           48
      Unrealized losses (gains) from financial
       instruments                                       11,126         (747)
      Net future income taxes                            (4,182)      (1,985)
      Decrease in accrual from securitized assets         2,410          395
                                                     -----------  -----------
                                                            646        8,398

      Other changes in net assets                       (28,817)         281
                                                     -----------  -----------

                                                        (28,171)       8,679
                                                     -----------  -----------

      Sale of notes                                         132          229
      Purchase of notes                                    (732)      (2,548)
      Net increase in intangible assets                    (359)           -
      Purchase of fixed assets                                -           (8)
                                                     -----------  -----------

                                                           (959)      (2,327)
                                                     -----------  -----------

      Net increase (decrease) in credit facilities       32,399         (577)
      Contributed surplus related to issuance of
       options                                               29           78
                                                     -----------  -----------

                                                         32,428         (499)
                                                     -----------  -----------

    Net increase (decrease) in cash and cash
     equivalents                                          3,298        5,853
      Cash and cash equivalents, beginning of period      5,731        9,942
                                                     -----------  -----------

    Cash and cash equivalents, end of period              9,029       15,795
                                                     -----------  -----------
                                                     -----------  -----------

    Supplemental cash flow information
      Interest paid                                         436          880
      Income taxes paid                                   2,250            -


"With the financial adjustments that we took in the first quarter, we believe that we have fully addressed all of the known issues concerning our legacy portfolio of uninsurable mortgages. It is one reason why we view the balance of this fiscal year with optimism with respect to our financial performance," Mr. Wahl said.

"As to our operations, we have a solid team to which we have been gradually adding as we have been successful at significantly increasing our underwriting of insurable mortgages. We are pleased with the broker relationships that we have worked to establish and develop across Canada and will continue to focus on this.

"Of course, we continue to discuss with the federal regulators our application to become a federally regulated deposit-taking institution.

"Although there can be no guarantee that our application will be approved by the federal regulators, as Xceed Bank/Banque Xceed, we expect to be able to access stable capital at a reasonable cost and that should significantly increase our ability to underwrite mortgages. We believe that as a deposit-taking bank operating within the guidelines of the Office of the Superintendent of Financial Institutions (OFSI), we also will be able to improve our ability to provide financing options to some of the customers to whom we previously provided uninsurable mortgages and who now, despite having good payment records, are finding it difficult to secure alternative financing when their terms are expiring," Mr. Wahl said.

Conference Call and Webcast for Quarter and Annual General Meeting

Xceed will hold a conference call for analysts and investors at 10:00 a.m. (Eastern) today (March 11) (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 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=2988920 and www.xceedmortgage.com.

An archived recording of the call will be available at 416-849-0833 or 1-800-642-1687 (Passcode 60885796 followed by the number sign) from 1:00 p.m. on March 11 to 11:59 p.m. on March 18. An archived recording of the webcast also will be available at Xceed's website.

The company also will provide a live audio webcast of its Annual General Meeting of Shareholders on March 11, beginning at 2:00 p.m. (Eastern). The meeting will be held at The Gallery of the Broadcast Centre of the Toronto Stock Exchange, 130 King Street West, Toronto. Mr. Wahl will make a brief presentation on the company's performance, current operations, and outlook. The webcast will be available at http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2988700 and www.xceedmortgage.com.

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 $1.9 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: For further information: 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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