Xceed Mortgage Reports Fiscal 2011 Year End Financial Results

• Reports net loss of $1.3 million for the year
• Assets under administration at $1.2 billion

TORONTO, Jan. 12, 2012 /CNW/ - Xceed Mortgage Corporation [TSX: XMC], a Canadian provider of residential mortgages, today announced its financial results for the fiscal 2011 year ended October 31, 2011.  All references to quarters or years are for the fiscal periods and all currency amounts are in Canadian dollars unless otherwise noted.

"We began the year," said Michael Jones, Chief Executive Officer, "focusing on three primary objectives.  Firstly, protecting shareholder value by ensuring that qualifying mortgage loans that were originally financed in an ABCP conduit (or related vehicle), were offered renewal terms thereby avoiding an unnecessary default at maturity."

"Secondly, managing the company's investments in its legacy portfolio (notes, cash collateral accounts, whole mortgages etc), so as to ensure those investments would be ultimately returned to the company in the form of cash."

"Thirdly, exploring financing opportunities in the insured and uninsured residential mortgage lines of business, that would allow us to originate and service mortgage loans at a profit."

"To these ends", Mr. Jones continued, "management undertook a series of initiatives that have had the effect of minimizing defaults and losses, and turning hitherto illiquid assets into cash and more liquid assets."

"In December 2010, we exercised a clean-up call option for Xceed Mortgage Trust Series 2006 T-1 repaying existing note holders and thereby closing out one of the trust transactions.  This transaction resulted in the company taking back $3.0 million of outstanding mortgages, $2.8 million of which have since been repaid, or refinanced in full; one mortgage for $0.2 million outstanding at year-end."

"In January 2011, the company suspended broker origination activities. During the following 6 months, sales and underwriting teams were reorganized, and new insured products designed and made available to renewal customers. In the fourth quarter, we renewed our broker origination activities on a limited scale, with a small set of mortgage brokers," continued Mr. Jones

"In March 2011, the company refinanced the assets owned by Okanagan Funding Trust (a trust to which the company had sold mortgages, and took back notes from in the past), with a Canadian financial institution. The primary goal of this initiative was to convert an illiquid $21.9 million subordinated investment in the trust owned by the company, into a combination of notes and whole mortgages, most of which were at or past maturity. As a result of this transaction, a $21.9 million illiquid note was transformed into $13.5 million of cash, a $3.9 million participation note and $5.8 million of mortgages by the end of fiscal 2011, including fair value changes."

Mr. Jones also noted, "In August 2011, the company settled its outstanding litigation with HSBC Financial Corporation Limited ("HSBC") for $1.7 million without admitting any liability or wrongdoing.  This provided the company with an opportunity to eliminate a material uncertainty, based on the size of the initial claim of $18.0 million."

"In August 2011, in conjunction with other parties, the company resolved a number of outstanding issues related to QSPE-XCD Trust, that resulted from the Montreal Accord settlement in 2009. This resolution enabled the company to convert an $8.3 million cash balance held in escrow, and a further $2.3 million of cash held on its balance sheet into a senior subordinated note investment in the trust. This had the result of generating additional yield and providing additional certainty as to the timing of repayment, and conversion into cash, of escrow balances administered by a third party."

"These and other initiatives have improved the company's liquidity and balance sheet strength, such that as at October 31^st 2011, cash and cash equivalents , now stand at $12.0 million, compared to $6.0 million at the end of fiscal 2010.  Additionally, the company has commenced utilizing additional cash to offer short-term renewals to customers with insured and uninsured mortgages on a limited basis."

"The company continues to seek new funding sources to support both insured and uninsured mortgage originations.  This continues to remain the company's primary challenge and focus."

Mr. Jones also announced that "the company recorded a net loss after tax of $1.3 million for fiscal 2011.   Most of this loss was attributable to the $1.7 settlement (pre-tax) of the litigation noted earlier."

"The basic and diluted loss per share for 2011 was $0.05, compared with a basic and diluted loss per share of $0.64 in 2010."

Mr. Jones highlighted "that for fiscal 2012, continuing on from 2011, our primary focus will be to continue to maximize value for our shareholders by completing the orderly exit from the company's legacy portfolio of securitized mortgages, continuing to service and manage the existing mortgage portfolios by provide refinancing offers to qualifying customers in a manner that will generate an acceptable return to the company, and continuing to investigate other business opportunities and strategies in the markets that we understand, and that can produce attractive returns."

Financial Highlights

• The company recorded a net loss for 2011 of $1.3 million, including a net loss of $0.4 million in the fourth quarter.  This compares with a net loss of $17.6 million in 2010 (net loss of $7.6 million in the fourth quarter).  The net loss for 2011 is mainly attributable to the settlement of law suit with HSBC for $1.7 million (pre-tax) in the fourth quarter.
• The company earned residual securitization income of $1.8 million for 2011 (2010 - loss of $2.7 million). The 2011 income was mainly due to the receipt of penalty interest payments from XMT-2, an off balance sheet trust to which the company sold mortgages.
• The basic and diluted loss per share for 2011 was $0.05, compared with a basic and diluted loss per share of $0.64 in 2010.  For the 2011 fourth quarter, the basic and diluted loss per share were both $0.01, compared with a basic and diluted loss per share of $0.28 for the 2010 period.
• The origination of new mortgages totaled $75.6 million in 2011, compared with $403.4 million in 2010.  For the 2011 fourth quarter, originations amounted to $24.8 million, compared with $51.1 million in the prior-year period.  All new originations were of insured mortgage products.  Reductions in origination volumes from the prior year are primarily the result of reduced broker volumes originated in 2011, caused by the suspension of new broker originations for approximately 7 months.
• The company's primary source of revenue comes from the sale of pools of insured mortgages to off-balance sheet entities.  In 2011, the company sold $107.5 million ($12.2 million in the fourth quarter) of insured mortgages, compared with $360.1 million in 2010 ($5.5 million in the fourth quarter).
• For 2011, the company reported a net gain on the sale of mortgages (gross gain on sale less hedging costs) of $1.7 million (including a net loss in the fourth quarter of $0.1 million).  In 2010, the net gain amounted to $7.8 million (including a loss of $0.4 million in the fourth quarter).
• Interest earned amounted to $3.4 million in 2011 ($1.0 million in the fourth quarter), compared with $3.0 million in 2010 ($0.8 million in the fourth quarter).
• Net origination costs for 2011 were $0.3 million, compared with $4.2 million in 2010 ($0.8 million in the fourth quarter).
• Total 2011 revenues were $7.6 million ($1.3 million in the fourth quarter), compared with $5.0 million in 2010 ( negative $0.4 million in the fourth quarter).
• Mortgages and other assets under administration were $1.175 billion at the end of 2011, down from $1.252 billion at the end of the 2011 third quarter, and down from $1.557 billion at the end of 2010.
• Return on average shareholders' equity for 2011 was negative 2.1%, compared with negative 25.1% for 2010.
• The company'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 negative $3.6 million in 2011 (negative $0.5 million for the fourth quarter), compared with negative $2.0 million in 2010 (negative $0.6 million for the fourth quarter).  On a basic and diluted basis, 2011 cash flow was a negative $0.13 per share (negative $0.02 per share for the fourth quarter).  This compares with basic and diluted negative cash flow per share of $0.07 for 2010 (negative $0.02 in the fourth quarter).
  Cash securitization income was $4.0 million in 2011 ($0.7 million in the fourth quarter), compared with $9.2 million in 2010 ($0.6 million in the fourth quarter).  Cash-based revenues in 2011 were $7.4 million ($1.7 million in the fourth quarter), compared with $12.2 million a year earlier ($1.4 million in the fourth quarter). Net origination costs and other cash-based expenses in 2011 were $10.9 million ($2.2 million in the fourth quarter), compared with $14.2 million in 2010 ($2.0 million in the fourth quarter).
• In 2011, the company employed an average of 31 full-time employees, compared with an average of 52 people in 2010.  The company's core workforce was comprised of 27 employees at the fiscal year ended October 31, 2011.
• As at October 31, 2011, the company had cash and cash equivalents of $12.0 million, compared with $6.0 million at October 31, 2010.  The company believes that cash and funding resources will be sufficient to meet its short-term and long-term requirements.

The company has filed its 2011 Annual Report including the financial statements and management's discussion and analysis for 2011 with SEDAR and they will be posted on the company's website.  These filings provide additional details on the above noted items along with additional information regarding results for the quarter and cautions regarding forward-looking statements.  The materials can be accessed by clicking here

XCEED MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

	October 31, 2011	October 31, 2010
	$	$
ASSETS
Cash and cash equivalents	12,005	5,952
Investment in notes	19,787	39,215
Cash collateral and other deposits receivable from Trusts	4,751	13,266
Mortgages	39,450	74,482
Accounts receivable	3,299	3,177
Current taxes receivable, net	1,083	5,375
Derivative instruments	—	148
Intangible assets, net	195	614
Future tax asset, net	201	60
Fixed assets, net	127	191
	80,898	142,480
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Credit facilities	14,342	76,427
Accounts payable and accrued liabilities	5,629	4,074
Mortgage commitments	—	1
Derivative instruments	97	—
Total liabilities	20,068	80,502
Shareholders' equity
Capital stock	56,365	56,767
Contributed surplus	2,508	1,944
Retained earnings	1,957	3,267
Total shareholders' equity	60,830	61,978
	80,898	142,480

XCEED MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS

(in thousands of dollars, except per share amounts)

Years ended	October 31, 2011	October 31, 2010
	$	$
REVENUE
Securitization income	3,583	5,073
Interest	3,401	2,998
Other income	962	1,126
	7,946	9,197
Less: Net origination costs	(317)	(4,226)
	7,629	4,971
EXPENSES
Compensation and benefits	3,797	5,636
Interest	1,257	1,622
Amortization and write down of intangible assets	159	1,360
Settlement of law suit	1,700	—
Other operating	3,928	3,675
	10,841	12,293
Realized and unrealized gains (losses) on financial instruments	2,022	(18,539)
Loss before income taxes	(1,190)	(25,861)
Restructuring expenses	542	—
Recovery of income taxes	(422)	(8,227)
Net loss for the year	(1,310)	(17,634)
Retained earnings, beginning of year	3,267	20,901
Retained earnings, end of year	1,957	3,267
Loss per share
Basic	$(0.05)	$(0.64)
Diluted	$(0.05)	$(0.64)

XCEED MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

Years ended		October 31, 2011	October 31, 2010
		$	$
OPERATING ACTIVITIES
	Net loss for the year	(1,310)	(17,634)
Items not affecting operating cash:
	Non-cash net loss (gain) on sale of mortgages	328	(2,504)
	Amortization of deferred net mortgage interest receivable	—	4,991
	Amortization of servicing liability	(1,030)	(1,023)
	Amortization of fixed assets	86	106
	Amortization and write down of intangible assets	159	1,360
	Unrealized losses from financial instruments	(2,321)	15,072
	Net future income taxes	(141)	(3,941)
	Restructuring expenses	542	—
	Net change in securitization income accrual	129	1,564
		(3,558)	(2,009)
Other changes in non cash net assets		73,752	(40,109)
		70,194	(42,118)
INVESTING ACTIVITIES
	Sale of notes	3,944	503
	Purchase of notes	(7,431)	(9,417)
	Net increase in intangible assets	260	(1,302)
	Purchase of fixed assets	(23)	(162)
		(3,250)	(10,378)
FINANCING ACTIVITIES
	Net increase (decrease) in credit facilities	(61,052)	52,489
	Share buyback	(151)	—
	Contributed surplus related to issuance of options	312	228
		(60,891)	52,717
Net increase in cash and cash equivalents		6,053	221
	Cash and cash equivalents, beginning of year	5,952	5,731
Cash and cash equivalents, end of year		12,005	5,952
Supplemental cash flow information
	Interest paid	1,021	1,465
	Income taxes paid	440	2,250

Investor Inquiries

Michael Jones, President and Chief Executive Officer, and Jeff Bouganim, Chief Financial Officer will be available from Thursday, January 12, 2012 onwards to respond to investor inquiries regarding these results.

About Xceed Mortgage

Xceed Mortgage Corporation, based in Toronto, is a Canadian provider of residential mortgages that it originates in Canada.  The company has approximately $1.2 billion of mortgages and other assets under administration.  The company'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 the company to continue to execute its growth and development strategy, and the reliance of the company on key personnel.  The company and the company's management assume 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 the company's regulatory filings available on its website and at www.sedar.com. 

 

Michael Jones can be reached at:

Jeff Bouganim can be reached at: