Mr. Ryan Marr reports

CHESSWOOD ANNOUNCES FIRST QUARTER 2023 RESULTS

Chesswood Group Ltd. has released its results for its quarter ended March 31, 2023.

First quarter highlights:

• The Canadian equipment financing segment and Canadian auto financing segment continued to experience strong volumes, with total originations of $145.2-million and $39.6-million, respectively. This resulted in increases of 12.9 per cent and 40.9 per cent from the same period in the prior year, respectively.
• During the quarter, Chesswood launched the Chesswood Canadian Asset Backed Credit Fund (CABCF), a fund that allows private investors access to Chesswood generated Canadian lease and loan receivables.
• During the three months ended March 31, 2023, $106.0-million of U.S. and Canadian finance receivables were sold through various off-balance sheet conduits.
• Chesswood generated free cash flow per diluted share of 28 cents.

"Net income was adversely impacted by an increase in our provision for expected credit losses associated with rising U.S. loan delinquency experienced at quarter-end. On a positive note, overall portfolio yields rose and ancillary revenue continued to benefit from the growth of our asset management division," said Ryan Marr, Chesswood's president and chief executive officer.

"The economic consequence of rapidly rising interest rates appears to be impacting U.S. borrowers after a nine-month lag. At the end of the quarter, we observed climbing delinquency levels in the U.S. along with declining loan applications," said Mr. Marr. "In contrast, operating results in the Canadian market showed relative strength (perhaps reflecting the less aggressive policy stance taken by monetary authorities). While volumes have come off the peak levels achieved in 2022, overall loan performance remains stable.

"Market conditions have weakened and therefore we are focusing on elements of the business we can control within the organization. Our collections teams are best in class and have refined their processes using what they learned during several past downturns. Our team has not lost sight of the scale and earnings power this business has achieved and will benefit from once economic conditions normalize," added Mr. Marr.

Summary of first quarter results

The company reported consolidated net income of $1.0-million for the three months ended March 31, 2023, compared with $1.7-million in the same period of 2022. The decrease was caused by greater net charge-offs and an increase in the allowance for expected credit losses (ECL) from higher delinquencies linked to current economic conditions, as well as a higher cost of funds. These factors were partially offset by increased revenues from portfolio growth and greater off-balance sheet sales.

The U.S. equipment financing segment generated revenue of $41.3-million ($35.4-million interest revenue and $5.9-million ancillary finance and other fee income) during the three-months ended March 31, 2023, an increase of $7.1-million compared with the same period of 2022. This was primarily because of a 12-per-cent increase in average net investment in finance receivables (before allowance for ECL), an increase of $110.4-million (U.S.) (to $995.6-million (U.S.)) in the three months compared with the same period in the prior year, partially offset by a 0.4-per-cent decrease in the average yield earned compared with the same period in the 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 $25.6-million ($21.0-million interest revenue and $4.6-million ancillary finance and other fee income) during the three months ended March 31, 2023, an increase of $11.2-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 $338.8-million in the three months ended March 31, 2023 (to $774.1-million), compared with the same period in the prior year. In addition, the Canadian equipment financing segment sold $46.0-million of leases and loans off-balance sheet, while the on-balance sheet portfolio reached an interest revenue yield of 10.8 per cent in the first quarter of 2023, compared with the 10.1 per cent achieved in the same period last year. The increase in net income was due to higher revenue levels, partially offset by increased interest and other expenses.

The Canadian auto financing segment generated revenue of $11.6-million ($10.9-million interest revenue and $700,000 ancillary finance and other fee income) during the three months ended March 31, 2023, an increase of $3.0-million compared with the same period in the prior year. The segment's average net investment in finance receivables (before allowance for ECL) increased by approximately $35.3-million in the three months ended March 31, 2023 (to $248.5-million), compared with the same period in the prior year. The annualized interest revenue yield earned on the Canadian auto financing segment's net finance receivables was 17.6 per cent during the period, an increase of 2.1 per cent compared with the same period in the prior year. Net income was reduced in the first quarter of 2022 as a result of the absence of the one-time day 2 provision of $9.3-million recognized on the acquisition of Rifco.

The company recognized a provision for credit losses of $18.0-million, a $1.3-million increase compared with 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 compared with the same period in the prior year to reflect pessimistic market expectations.

Free cash flow for the period was $5.7-million, down $9.5-million from Q1 2022. The decrease in free cash flow was a result of increased interest and other operating expenses during the quarter.

Outlook

U.S. credit conditions deteriorated in the first quarter of 2023, largely driven by monetary policy and regional banking issues that have percolated to the surface. While some of this performance is localized to the transportation vertical, there is mounting evidence that the weakness is broad based. The U.S. team has prepared for a difficult year by staffing up the company's collections teams and tightening credit standards for new approvals. The company has seen these same sentiments echoed by its peers that are seeing similar performance patterns across industry verticals. It is now seeing competitors pull away from the market and more rational pricing established for different credit profiles. As in previous such cycles, the company is likely seeing its best origination opportunities today.

The Canadian entities are performing well and credit performance appears to be diverging from the United States. While pleased with this result, the company is approaching this cautiously knowing that Canada is not immune to the broader macroeconomic weakness observed globally.

At this point, it is difficult to determine the severity of the credit weakness the company will see over the next few quarters. The combination of high interest rates and weakening credit creates a difficult environment for any financial services operator. The company believes, however, that the pressure of one of these two variables will dissipate before the year-end. The company's strategy remains unchanged as it continues focusing on maintaining liquidity, controlling costs, and applying discipline in its pricing and application review decisions in order to not only get through this uncertain environment but to take advantage of opportunities.

About Chesswood Group Ltd.

Based in Toronto, Canada, Chesswood is a holding company, the subsidiaries of which engage in the business of specialty finance (including equipment finance throughout North America, and vehicle finance and legal sector finance in Canada), as well as the origination and management of private credit alternatives for North American investors. The company's shares trade on the Toronto Stock Exchange (under the symbol CHW).