Chesswood Group Limited, a publicly traded North American specialty finance company providing commercial equipment leases and loans, business loans and home improvement financing, reported its results for its third quarter ended Sept. 30.
"The third quarter of 2021 once again demonstrates the momentum at Chesswood Group. Despite what is traditionally a seasonally slower quarter, we experienced net portfolio growth as a result of continued market share gains in Canada as well as continued execution by our vendor finance team in the United States, Tandem Finance," said Chesswood CEO Ryan Marr. "I am particularly pleased with Chesswood's shifting portfolio composition, increasing our exposure to high quality prime credits, whereby we can access more competitive financing in the Asset Backed Securitization markets. Subsequent to quarter end, Pawnee completed its third public securitization for $356 million with strong investor demand and industry leading pricing. The success of our recent ABS results in interest savings of over 100bps versus our current cost of funds."
"In addition, we completed the launch of our newly formed Canadian consumer business, Vault Home. Vault Home is managed by industry leaders John Stout and Kyle Wenn. We view the launch of Vault Home as a further example of Chesswood's expertise to partner with proven operators in niche lending channels. We continue to look for opportunities to expand into new verticals, further diversifying Chesswood's asset base," continued Marr.
Subsequent to quarter end, Chesswood announced the intended acquisition of RIFCO Auto Finance for $22.5 million, which will be financed using existing balance sheet liquidity.
"The proposed acquisition of RIFCO further positions Chesswood as a diversified specialty finance company." Noted Marr, "We believe that RIFCO's platform will benefit from Chesswood's scale in North America and further their market reach across Canada."
Summary of Third Quarter Results
The company reported consolidated International Financial Reporting Standards (IFRS) net income of $7.35 million in the three months ended Sept. 30, 2021, compared to net income of $7.87 million in the same period in 2020, a decrease of more than $500,000 year-over-year. Excluding the impact of provisions associated with COVID-19, net income was up $6.8 million year-over-year due to portfolio growth, lower charge-offs offset by higher operating costs.
On a constant currency basis to Q3 2020, net income would have been $2.0 million higher for the quarter.
The U.S. Equipment Finance segment (Pawnee Leasing and Tandem Finance) reported interest revenue on leases and loans of $19.5 million and ancillary and other income of $2.5 million, a total increase of $2.9 million period-over-period. The increase is a result of continued strong originations throughout the period resulting in net portfolio growth.
The Canadian Equipment Finance segment reported interest revenue on leases and loans of $5.6 million and ancillary and other income of $1.37 million, a total increase of $4.8 million period-over-period. The increase is a result of a larger portfolio of receivables in its Canadian operations and a full quarter of results following the merger of Blue Chip and Vault Credit. Net Income for the three months would have been higher by $800,000 excluding onetime costs associated with the merger.
Overall operating costs were up $5.7 million year-over-year to $13.5 million. Operating expenses were up primarily due to the previously announced merger as well as infrastructure supporting growth in the U.S. segment, resulting in an increase in average full-time employees for the period.
Outlook
Chesswood now originating in excess of $80.3 million per month of diversified, small ticket, commercial equipment leases and loans, and expect these strong origination volumes to continue into the end of the year. As a result of its successful ABS issue subsequent to quarter end, it is able to prefund a significant portion of its Prime volumes into year-end at favorable market interest rates.
In addition to its focus on expanding Chesswood's origination volumes, the company is continuously looking for opportunities to enhance its balance sheet and improve the quality of Chesswood's earnings. In Q4, it will officially launch Chesswood Capital Management (CCM). This new division of Chesswood will be led by Jeff Fields and will focus on providing private credit solutions to investors seeking exposure to loans originated by Chesswood subsidiaries.
Fields joined the Chesswood Group board as an independent director in September 2020, and previously spent 22 years at RBC Capital Markets as a senior executive managing businesses across RBC's equities and fixed income divisions, where Fields was also a member of RBC's Global Markets Operating Committee. Fields will continue to serve on the Chesswood Group board as an Executive Director.
Chesswood Capital Management will offer exposure to Chesswood's underlying assets through both CCM investment funds, as well as structured institutional vehicles. "CCM will provide private credit investors with access to Chesswood's differentiated and diversified loan portfolio in formats designed to offer attractive risk-adjusted returns," Fields.
The CCM business will introduce a new stream of management fee revenue for Chesswood that is recurring in nature and accretive to ROE, thus improving the quality of Chesswood's earnings over time.