Chesswood Group, a publicly traded North American specialty finance company providing commercial equipment leases and loans, business loans and home improvement financing, reported its results for Q3/21.
The company recorded a company record of gross finance receivables at quarter end of $1.4 billion, up 16% from Q2/21. The company also achieved a company record of free cash flow generation of $10.2 million, or $0.55 per fully diluted share, up 22% from Q2/21. In addition, Chesswood reported fully diluted EPS of $0.45, up 12.5% from Q2/21, and launched Vault Home, a new division of Chesswood serving the home improvement finance sector.
“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,” Ryan Marr, CEO of Chesswood Group, said. “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 100 bps 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.”
Subsequent to quarter end, Chesswood announced the intended acquisition of RIFCO Auto Finance for $28 million, which will be financed using existing balance sheet liquidity.
“The proposed acquisition of RIFCO further positions Chesswood as a diversified specialty finance company,” Marr said. “We believe that RIFCO’s platform will benefit from Chesswood’s scale in North America and further their market reach across Canada.”
Summary of Q3/21 Results
Chesswood Group reported consolidated International Financial Reporting Standards (IFRS) net income of $9.1 million in the three months ended Sept. 30, 2021, compared with net income of $9.8 million in the same period in 2020, a decrease of $0.7 million year over year. Excluding the impact of provisions associated with the COVID-19 pandemic, net income was up $8.5 million year over year due to portfolio growth and lower charge-offs offset by higher operating costs. On a constant currency basis to Q3/20, net income would have been $2.5 million higher for the quarter (or $0.15 per share).
Chesswood’s U.S. equipment finance segment (Pawnee Leasing and Tandem Finance) reported interest revenue on leases and loans of $24.3 million and ancillary and other income of $3.1 million, a total increase of $3.6 million period over period. The increase was a result of continued originations throughout the period that resulted in net portfolio growth.
The company’s Canadian equipment finance segment reported interest revenue on leases and loans of $7.9 million and ancillary and other income of $1.7 million, a total increase of $6 million period over period. The increase is a result of a larger portfolio of receivables in Chesswood’s Canadian operations and a full quarter of results following the merger of Blue Chip Leasing and Vault Credit. Net Income for the three months would have been higher by $1 million excluding one-time costs associated with the merger.
Overall operating costs were up $7.1 million year over year to $16.8 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.
Free cash flow for the period was $10.2 million, up $5.6 million from Q3/20. The increase in free cash flow was the result of low charge-offs in the period compared with Q3/20 and a larger overall receivables portfolio. In addition to these items, on a constant currency basis to Q3/20, free cash flow would have been $2.1 million higher for the quarter.
Chesswood is now originating in excess of C$100 million ($80.32 million) per month of small-ticket commercial equipment leases and loans and expects these origination volumes to continue into the end of the year. As a result of the company’s ABS issuance subsequent to quarter end, Chesswood prefunded a significant portion of its prime volumes into year-end.
In Q4/21, Chesswood 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 of 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 said.
The CCM business will introduce a new stream of management fee revenue for Chesswood that is recurring in nature and accretive to ROE.
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