Chesswood Group Limited, a publicly traded North American specialty finance company, reported its results for its year ended Dec. 31, 2021.
"2021 was a transformational year for Chesswood Group. We set the objective at the beginning of the year to diversify Chesswood's balance sheet both with regards to underwritten assets and funding sources. We accomplished our goal through the launch of Vault Home as well as the acquisition of Rifco. In addition, we formed a new revolver syndicate, successfully completed our largest marketed ABS offering through our subsidiary, Pawnee Leasing Corporation, and formed Chesswood Capital Management to manage off balance sheet funding relationships. We expect these initiatives to further enhance shareholder value by growing profitability across a diverse set of assets, reducing volatility in our operating results and ultimately increasing returns for investors."
"The economic environment throughout 2021 was particularly favorable for specialty finance companies. A combination of loan demand recovery following declines in 2020 brought on by COVID-19 and low interest rates produced exceptional opportunities for growth. Furthermore, government subsidies provided to individuals and businesses resulted in low charge-off and delinquency rates throughout the year. Practically speaking, it is likely we will begin to see the market normalize in 2022 and would point to rising rates as an indication that this is in fact occurring. That said, the groundwork our team laid in 2021 has created a platform for continued growth throughout the year as we leverage Chesswood's scale to the benefit of all of our operating subsidiaries." said Ryan Marr, Chesswood's President and CEO.
2021 Year
The company reported consolidated net income of $31.2 million in the year ended Dec. 31, 2021, compared to a net loss of $8.5 million in 2020, an increase of $39.7 million.
The U.S. Equipment Finance Segment's interest revenue on leases and loans totaled $94.2 million, an increase of $2.7 million year-over-year. The increase was caused by a US$118.0 million increase in the average portfolio size and continuously growing originations since the last quarter of 2020. The impact of the portfolio growth was offset by a 7 percent decrease in foreign exchange year-over-year and a 1 percent decrease in the interest revenue yield during the year. The average annualized interest revenue yield earned on U.S. based net finance receivables was 12 percent in the year ended Dec. 31, 2021, compared to 13 percent in the prior year, reflecting an increase in the overall percentage of prime receivables.
The Canadian Equipment Financing Segment generated revenue of $32.8 million during the year ended December 31, 2021, compared to $15.2 million in the prior year, an increase of $17.6 million, or 116 percent. The Canadian Equipment Financing Segment's average net investment in finance receivables (before allowance for credit losses (ACL)) increased approximately $114.6 million in the year ended December 31, 2021, compared to the prior year, largely due to the Blue Chip and Vault Credit merger and Vault Credit's continued expansion in the Canadian equipment leasing market. In addition, the average number of finance receivable contracts outstanding increased by 4,979 in the year ended December 31, 2021, compared to the prior year. In the year ended December 31, 2021, the interest revenue yield of 10 percent earned on the Canadian Equipment Financing Segment 's net finance receivables has increased from 8 percent in 2020.
A $3.1 million increase in the interest expense, year-over-year, is driven primarily by an increase in average debt outstanding throughout the year. Personnel expenses increased $13.1 million, to $32.3 million, due to higher staff counts arising from the merger with Vault Credit, and for processing the increase in originations as a result of the growth in both the U.S. and Canadian Segments.
The Company recognized a provision for credit losses of $0.2 million, a $25.5 million decrease compared to the prior year. The decrease is primarily related to provision releases as a result of a consistently better performing portfolio, especially as COVID-19 uncertainties lessen, as well as continued strong collection efforts.
Q4 2021
The Company reported consolidated net income of $7.9 million for the three months ended December 31, 2021, compared to $0.1 million in the same period of 2020, an increase of $7.8 million in the same quarter year-over-year. Net income was impacted by a one-time restricted share unit grant which reduced net income by $2.3 million in the quarter.
The U.S. Equipment Financing Segment's interest revenue on leases and loans totaled $27.7 million, an increase of $7.8 million year-over-year in the three-month period, as a result of a 55 percent increase in average net investment in finance receivables (before ACL), an increase of US$270.4 million to US$759.4 million in the three months ended December 31, 2021 compared to the same period in the prior year. This was partially offset by the decrease in the average yield earned during the period (11.7 percent compared to 12.2 percent in the prior year). The decrease in overall yield percentage is due to the continuing growth in the prime segment of the portfolio.
The Canadian Equipment Financing Segment generated revenue of $13.1 million during the three months ended December 31, 2021, an increase of $9.6 million from the same period in the prior year. The Canadian Equipment Financing Segment's average net investment in finance receivables (before ACL) increased approximately $245.5 million in the three months ended December 31, 2021 compared to the same period in the prior year. The average annualized interest revenue yield earned on the Canadian Equipment Financing Segment's net finance receivables increased by 3 percent (to 11 percent), during the period compared to the same period in the prior year.
The Company recognized a provision for credit losses of $0.4 million, a $1.5 million decrease compared to the same period in prior year. The decrease is primarily related to provision releases as a result of a better performing portfolio, one year further away from COVID-19 uncertainties, as well as continued strong collection efforts. This was partially offset by the growing loan portfolio book.
Outlook
Chesswood exited 2021 with record originations and the largest receivables portfolio in the Company's history. The company expects this momentum to continue throughout 2022 with the added benefit of contributions from its newly acquired automobile finance entity, Rifco.
“The equipment finance subsidiaries continue to see strong origination volumes in both Canada and the United States. Changes in the general interest rate environment are expected to impact pricing for prime credits as the industry passes through increases in funding cost. Historically, we have been successful in maintaining credit spreads in a rising rate environment. Any negative impact from rising rates will likely be seen in weaker industry wide origination volumes.”
“Portfolio losses and recoveries throughout 2021 were the strongest in Chesswood's history due to several economic factors. For 2022, we expect these metrics to begin normalizing towards levels more consistent with our underwriting expectations. Furthermore, the addition of near-prime receivables from our Rifco acquisition will increase overall portfolio provisioning and losses. On a net basis, we expect to maintain strong credit margins, consistent with Chesswood's historical performance.”
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