Chesswood Group Limited, a publicly traded North American specialty finance company providing commercial equipment leases and loans, automotive loans, home improvement financing and asset management, reported its results for the third quarter ended Sept. 30.

Q3 2022 Highlights

• Strong origination volumes of $379.9 million in the equipment finance segment and $33.1 million in the automotive finance segment, resulting in record gross finance receivables of $2.7 billion.(All numbers in Canadian currency except where indicated.)
• Utilized off balance sheet funding with a third-party institutional investor for U.S. $66.9 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.
• Earnings of $12.3 million and free cash flow generation of $12.01 million
• Return on equity for the quarter of 22.6 percent.

"Chesswood generated strong earnings and free cash flow in the third quarter of 2022.  Each of our operating companies maintained strong origination volumes despite pricing increases that occurred during the quarter to offset the impact of rising interest rates" said Ryan Marr, Chesswood's President and CEO. "Our teams remain conservative with their underwriting, as evidenced by the strong credit performance in the quarter."

"Our asset management group continues to work with investment partners to sell U.S. Equipment Finance Segment receivables. In the quarter, we observed increased concern by investors regarding the future economic environment. We are, therefore, particularly pleased with the performance of our receivables assets, as they continue to be some of the best performing within the specialty finance industry," said Marr. "We continue to expand conversations with new partners to further scale our off-balance sheet programs at Chesswood."

"As we draw closer to the end of 2022, our teams can celebrate the tremendous success we have had throughout 2022. With our portfolios having experienced tremendous growth this year, we believe it is prudent to shift our focus towards enhancing liquidity in response to the changing economic environment," said Marr.

Summary of Q3 Results

The Company reported consolidated net income of $12.3 million in the three months ended September 30. compared to net income of $9.1 million in the same period in 2021, an increase of $3.2 million compared to the same period in the prior year. The increase was primarily the result of the addition of Rifco National Auto Finance Corporation, which was acquired in January 2022 and which contributed $1.5 million in the three months ended Sept. 30, 2022.

The U.S. Equipment Financing Segment reported aggregate interest revenue and ancillary and other income on leases and loans in the quarter of $38.4 million ($32.4 million interest revenue and $6.0 million of ancillary and other income), a total increase of $11.1 million compared to the same period in the prior year.  The increase is the result of the growing finance receivables portfolio and off balance sheet funding.

The Canadian Equipment Financing Segment reported aggregate interest revenue and ancillary and other income on leases and loans in the quarter of $19.6 million ($17.2 million interest revenue and $2.4 million ancillary and other income), a total increase of $10.0 million compared to the same period in the prior year. The increase reflects the expansion of the Canadian Equipment Financing Segment.

The Canadian Auto Financing Segment reported interest revenue on leases and loans in the quarter of $10.5 million and ancillary and other income of $0.4 million.

Overall operating costs were up $13.4 million compared to the same period in the prior year, to $30.1 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 $3.3 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 an 36 percent increase in the number of employees since Sept. 30, 2021, increasing personnel costs by $4.9 million.

Free cash flow for the period was $12.0 million, up $1.8 million from Q3 2021. The increase in free cash flow is the result of growing revenues (including revenues from Rifco, which was acquired earlier in 2022).

Outlook

“Our teams are working diligently to adjust pricing to reflect the impact of rising interest rates. At the current levels of inflation, it is difficult to determine when the interest rate hiking cycle will end. We are therefore fixing funding costs along with new originations to manage profitability.

“If history is any gauge, a recession is almost certain to occur as central banks continue to increase interest rates. Our teams have considerable experience navigating these difficult environments successfully. First, our average portfolio term is short, thereby producing significant cash flow during periods where origination volumes decline. Second, most of our funding is fixed, reducing the overall impact of rising rates. Lastly, our portfolio of receivables is largely made up of prime borrowers with strong credit profiles.”

“Based on previous cycles, we expect that funding markets will become progressively more challenging as evidenced by recent activity.  We therefore believe the decisions made during the third quarter position our businesses to capitalize on opportunities going forward.”

See the full release here.