Chesswood Group Limited reported its results for the three months ended June 30. The company reported earnings of $9.7 million and record free cash flow generation of $15.71 million in the second quarter. That compared with earnings of $7.8 million and free cash flow generation of $8.1 million in the second quarter a year ago.

Q2 2022 Highlights

• Successful acquisition on May 25, of Waypoint Investment Partners Inc., an integrated platform to structure and distribute private credit solutions to Canadian investors.
• Strong origination volumes of $467.7 million in the equipment finance segment and $35.4 million in the automotive finance segment, resulting in record gross finance receivables of $2.5 billion as of June 30, 2022.
• Utilized off balance sheet funding with a third-party institutional investor for US$97.4 million of net investment in finance receivables under the asset management segment's first forward flow arrangement, which provides Chesswood with origination, management and servicing fees.

Chesswood is specialty finance company providing commercial equipment leases and loans, automotive loans, home improvement financing, and asset management.

"Chesswood generated strong earnings and free cash flow in the second quarter of 2022. On a consolidated basis, our businesses achieved record levels of free cash flow, driven by our diversified portfolio of more than $2 billion of commercial and consumer net finance receivables," said Ryan Marr, Chesswood's President & CEO. "Origination levels were strong throughout the quarter, driven in particular by growth in our vendor channel in addition to our unique full credit spectrum underwriting capability."

"The second quarter included results from our first asset management flow agreement with an institutional investor. Our team delivered approximately US$97.4 million of U.S. Equipment Financing Segment net investment in finance receivables under this program, with the expectation to continue delivering at a similar pace into year end," said Marr. "It was also the first complete reporting quarter of Rifco following the acquisition of the business in January 2022 and we are very excited with how this segment has integrated into our operations" added Marr.

"We are adjusting our pricing to adapt to the rising interest rate environment. Our teams are working hard to help customers face this new reality, while at the same time ensuring we have a well-diversified portfolio. Our team anticipates volumes will slow as we progress throughout the year, albeit still at levels supporting net growth. Our focus on growing fee-based earnings streams brings us closer to our goals of enhancing earnings predictability and growth and reducing balance sheet risk," he said.

Summary of Q2 Results

The company reported consolidated net income of $9.7 million in the three months ended June 30, 2022, compared to net income of $7.8 million in the same period in 2021, an increase of $1.9 million. The increase was primarily the result of the addition of Rifco National Auto Finance Corporation, which was acquired in January 2022, which contributed $2.6 million in the three months ended June 30.

The U.S. Equipment Financing Segment reported interest revenue on leases and loans in the quarter of $32.5 million and ancillary and other income of $5.3 million, a total increase of $14.2 million compared to the same period in the prior year. The increase is the result of the growing finance receivables portfolio.

The Canadian Equipment Financing Segment reported interest revenue on leases and loans in the quarter of $14.0 million and ancillary and other income of $2.9 million, a total increase of $10.1 million compared to the same period in the prior year. The increase reflects the expansion of the Canadian Equipment Financing Segment as a result of the merger with Vault Credit Corporation in Q2 2021 and the tremendous portfolio receivables growth since then. The Canadian Equipment Financing Segment had record breaking originations in Q2 2022 of $203.4 million.

The Canadian Auto Financing Segment reported interest revenue on leases and loans in the quarter of $10.6 million and ancillary and other income of $0.4 million.

Overall operating costs were up $14.3 million compared to the same period in the prior year, to $27.6 million. A majority of the increase relates to costs associated with personnel, collections, marketing, and other operating costs.

Other expenses from the equipment financing segments were up $3.8 million compared to the same period in the prior year, mainly consisting of costs attributable to originations as a result of scaling the businesses. In addition, the growth of the equipment financing segments and their originations required a 57% increase in the number of employees from the same period in the prior year, increasing personnel costs by $4.6 million.

Free cash flow for the period was $15.7 million, up $7.6 million from Q2 2021. The increase in free cash flow is the result of growing revenues and the acquisition of Rifco.

Outlook

Following quarter end, Pawnee announced another ABS transaction for USD$346.6 million. The transaction is expected to close in early August. For the second half of 2022, our team is prioritizing balance sheet liquidity. Economists predict that chances for a recession are building as central banks continue to tighten monetary policy. “We therefore believe a defensive approach is warranted in the current environment.”

See the full release here.