Chesswood Group Limited, a North American specialty finance company, its results for its year and the fourth-quarter ended Dec. 31, 2022.

"2022 was a strong year for Chesswood Group. Our diversified portfolio generated record earnings and free cash flow. Our newly acquired automotive subsidiary, RIFCO, achieved strong first year results, complementing our equipment finance businesses in North America. Chesswood Capital Management continued to grow throughout the year with the launch of a new private credit fund in Canada as well as the recent announcement with Värde Partners,” said Ryan Marr, Chesswood's President and CEO.

"The economic environment throughout 2022 was impacted by central bank rate considerations, both the predictions and then the decisions in the second half of the year. We have begun to see the early signs of economic pressure resulting from these increases, primarily in origination volumes and delinquency statistics. The impact, however, has not been homogenous across Chesswood's portfolio. We believe the diversifications strategy undertaken, along with a preference for prime credit, will provide ballast to the portfolio should economic conditions worsen. We have begun to see opportunities to price credit more aggressively, taking advantage of a pullback in capital availability in certain markets. Historically, periods of turbulence offer the best risk/reward for Chesswood's operating groups," Marr said.

Fourth Quarter Highlights

• Strong origination volumes of $367.9 million in the equipment finance segment and $36.3 million in the automotive finance segment
• Earnings of $6.8 million and free cash flow generation of $8.81 million

Q4 2022
The company reported consolidated net income of $6.8 million for the three months ended Dec. 31, 2022, compared to $7.9 million in the same period of 2021, a decrease of $1.1 million in the same quarter year-over-year. The decrease was caused by greater net charge offs and provision rates in 2022 due to market uncertainties, higher cost of funds, and increased personnel and operating expenses due to higher originations, partially offset by increased revenues from portfolio growth.

The U.S. Equipment Financing Segment's interest revenue on leases and loans in the three-month period totaled $34.8 million, an increase of $7.1 million year-over-year, as a result of a 31 percent increase in average net investment in finance receivables (before allowance for ECL), an increase of US$233.2 million (to US$992.6 million) in the three months compared to the same period in the prior year. This was partially offset by a 0.9 percent decrease in the average yield earned compared to the same period in prior year. The decrease in overall yield was due to the continuing growth of the Tandem portfolio, which has a slightly lower yield.

The Canadian Equipment Financing Segment generated revenue of $23.4 million during the three months ended December 31, 2022, an increase of $10.2 million from the same period in the prior year. The Canadian Equipment Financing Segment's average net investment in finance receivables (before allowance for ECL) increased approximately $363.3 million in the three months ended December 31, 2022, compared to the same period in the prior year. The Canadian Equipment Financing Segment interest revenue yield was 10.8 percent in the fourth quarter of 2022 compared to 11.1 percent achieved in the same period last year. The decline in net income was due to increased provision for credit losses, interest, and other expenses partially offset by higher revenue levels.

The Canadian Auto Financing Segment contributed interest revenue on leases and loans in the quarter of $10.8 million and ancillary and other income of $0.5 million.

The company recognized a provision for credit losses of $10.3 million, a $9.9 million increase compared to the same period in the prior year. The increase was primarily related to higher net charge offs in the quarter as well as higher provision rates to reflect pessimistic market expectations.

Free cash flow for the period was $8.8 million, down $2.7 million from Q4 2021. The decrease in free cash flow was a result of increased interest and other operating expenses during the quarter.

2022 Full Year

The company reported consolidated net income of $30.4 million in the year ended December 31, 2022, compared to a net income of $31.2 million in 2021, a decrease of $0.8 million.

The U.S. Equipment Finance Segment generated revenue of $150.9 million ($130.4 million interest revenue and $20.5 million ancillary finance and other fee income) during the year ended December 31, 2022, compared to $105.3 million ($94.2 million interest revenue and $11.1 million ancillary finance and other fee income) in the prior year, an increase of $45.6 million year-over-year. The increase in interest revenue of $36.1 million was caused by a US$311.3 million increase in the average net investment in finance receivables (before allowance for expected credit losses (ECL)) and continuously growing originations since 2021. The impact of the portfolio growth was offset by a 1.2 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 10.6 percent in the year ended December 31, 2022, compared to 11.8 percent in the prior year, reflecting the continuing growth of the Tandem portfolio, which has a slightly lower yield.

The Canadian Equipment Financing Segment generated revenue of $74.3 million ($62.0 million interest revenue and $12.3 million ancillary finance and other fee income) during the year ended December 31, 2022, compared to $32.8 million ($25.9 million interest revenue and $6.9 million ancillary finance and other fee income) in the prior year, an increase of $41.5 million, or 126 percent. The Canadian Equipment Financing Segment's average net investment in finance receivables (before allowance for ECL) increased approximately $333.6 million in the year ended December 31, 2022, compared to the prior year, largely due to Vault Credit's continued expansion in the Canadian equipment leasing market. In addition, the average number of finance receivable contracts outstanding increased by 10,812 in the year ended December 31, 2022, and the segment's interest revenue yield increased from 10.2 percent to 10.5 percent year-over-year.

The Canadian Auto Financing Segment, Rifco, reported interest revenue on leases and loans in the year of $40.3 million and ancillary and other income of $1.6 million.

A $41.7 million increase in interest expense, year-over-year was driven primarily by an increase in average debt outstanding throughout the year and a higher cost of funds as a result of rising interest rates. Personnel expenses increased $27.2 million, to $63.0 million, due to higher staff counts arising from the acquisition of Rifco, as well as direct personnel costs related to processing the increased originations as a result of the growth in both the U.S. and Canadian Segments.

The Company recognized a provision for credit losses of $44.3 million, a $44.1 million increase compared to the prior year. The increase was primarily related to the acquisition of Rifco, higher net charge offs and an increase in the allowance for ECL given market uncertainties.

Outlook

Chesswood has undergone substantial transformation when comparing its scale, sources of funding and diversity of asset exposures to levels three years ago. The operating teams have demonstrated their ability to grow profitably without sacrificing credit standards and operational processes. To ensure we can continue along this path, core technology systems are being upgraded to improve efficiency and provide better risk management across the organization.

We see a long runway to continue building value across our operational platforms. The medium-term objective for our team is to achieve a total portfolio size between $4 billion and $6 billion over the next several years. Current origination levels support this objective, and therefore time is the primary variable for us to achieve success.

As we progress further into 2023, the economy is showing signs of distress. While macro economic headlines appear stable, it is evident in the performance of loan portfolios across a variety of industries that delinquencies are trending higher. We too are seeing this in our portfolio, and have been increasing provisions as well as ramping up our collections teams.

As pressure on short-term rates abate, we have focused on repricing our different products to reflect new market realities. This has taken time and lagged the speed of rising rates. Curve inversion has offered some relief on securitizations, but we will require another quarter before our adjustments to pricing are fully reflected. We expect to see gradual margin improvements as we progress throughout the year, and will adjust pricing further if necessary.

We are excited to announce a new institutional funding arrangement – Värde Partners - at the start of 2023. Värde Partners is a leading global alternative investment firm specializing in credit and credit-related assets. This second forward flow arrangement for Chesswood further validates the appetite for receivables originated by Chesswood operating entities, and represents continued progress on our asset management objectives. As part of the agreement, Värde will provide us with additional off balance sheet funding for our U.S Equipment receivables to support the growth of our overall loan portfolio while diversifying our income sources.

See the full release here (PDF).