Mr. Ryan Marr reports

CHESSWOOD ANNOUNCES FISCAL YEAR 2023 RESULTS

Chesswood Group Ltd. today released its results for the three months and year-ended Dec. 31, 2023.

Year-end highlights

• Total originations of $1.2-billion for the year-ended Dec. 31, 2023, a decrease of 31.4 per cent (from $1.7-billion) from the prior year due to tightened credit standards and higher loan pricing.
• During the year-ended Dec. 31, 2023, the company continued entering into new agreements with investment managers and financial institutions for the non-recourse sale of leases and loans in exchange for fees. During the year-ended Dec. 31, 2023, $454.9-million of United States and Canadian finance receivables were sold under such arrangements (year ended Dec. 31, 2022 -- $270.1-million).
• Chesswood and Wafra Inc. formed a joint venture company to invest in equipment leases and loans originated by the United States equipment financing segment, targeting $1-billion in total acquisitions.
• Positive 2023 free cash flow of $3.8-million. Elevated general and administrative expenses occurred in the fourth quarter of 2023 due to the Wafra transaction closure.

"Like many other financial services companies, 2023 has been a challenging year for Chesswood. Despite this difficult environment, Chesswood generated $3.8-million in free cash flow," said Ryan Marr, Chesswood's president and chief executive officer. "We remain focused on managing liquidity in the context of the current market environment and ensuring our teams are focused on servicing and collecting our loan portfolios.

"A closer look at Chesswood's receivables portfolios reveals that much of the stress experienced in 2023 was from our 2022 loan vintage. This is similar to the experience of other lenders and coincides with the rise in interest rates that began in the second half of that year. Our accelerated pace of originations in this period, as we launched new programs with vendors, further added to this exposure," added Mr. Marr.

"As we enter 2024, we are excited to announce that we have begun selling receivables to our new joint venture company with Wafra. Wafra significantly impacted our off-balance sheet program and provides Chesswood with visibility for substantial increases in scale as well as the ability to evaluate new business opportunities. Along with many of our peers, Chesswood had been looking for its partner to help facilitate growth and take advantage of new funding paradigms impacting the specialty finance industry," said Mr. Marr.

On Jan. 22, 2024, Chesswood's board of directors announced a review of strategic alternatives to maximize value for Chesswood's shareholders. A special committee of the board has been formed to undertake this review and RBC has been hired as advisers to the committee.

Summary of fourth quarter and year-end results

2023 full year

The company reported a consolidated net loss of $32.8-million for the year-ended Dec. 31, 2023, compared with consolidated net income of $30.4-million recorded in the prior year, a decrease of $63.2-million. The decrease is mainly the result of the recognition of impairment losses on intangible assets and goodwill. In addition, there were increases in interest expenses and higher provisions for credit losses, both due to current economic conditions, as well as increases in general and administrative expenses. These factors were partially offset by increased revenues and lower personnel expenses.

Interest expense increased by $50.5-million for the year-ended Dec. 31, 2023, compared with the prior year due to a rise in interest rates and the average debt outstanding, which increased by $308.1-million. Net chargeoffs increased by $55.0-million (to $72.5-million) as customers continue to be impacted by current market conditions. The change in allowance for expected credit losses (ECL) compared with the prior year decreased by $12.1-million (to $14.6-million), which slightly offset net chargeoffs as the expectation of a poor 2023 economic period was mainly captured in the 2022 allowance for ECL model. The allowance for ECL was further increased in 2023 to reflect a more conservative outlook in the ECL model due to continued market uncertainties. Over all, the provision for credit losses increased by $42.8-million. In addition, there was an increase in general and administrative expenses of $8.0-million, mainly due to greater recovery costs that were incurred collecting on the higher net chargeoffs, IT related expenses and costs related to servicing a larger portfolio. Finally, there was recognition of impairment losses on goodwill and intangible assets mainly incurred on the U.S. equipment financing segment during the fourth quarter as the result of increased costs of funding -- which has affected the general business climate and levels of economic activity.

U.S.

The U.S. equipment financing segment generated revenue of $152.1-million ($131.9-million interest revenue and $20.2-million ancillary finance and other fee income) during the year-ended Dec. 31, 2023, compared with $150.9-million ($130.4-million interest revenue and $20.5-million ancillary finance and other fee income) in the prior year, an increase of $1.2-million year over year. The increase in interest revenue of $1.5-million when compared with the prior year is because there was a 1.1-per-cent increase in the average net investment in finance receivables (before allowance for ECL) to $1.3-billion, an increase of $13.2-million. These increases were primarily due to the increase in the FX rate, as the average rate increased from $1.3013 to 1.3497. In the absence of FX, interest revenue in U.S. dollars decreased by $2.5-million (U.S.) (to $97.7-million (U.S.)) when compared with the prior year due to a decrease in the interest revenue yield of 0.1 per cent and a decrease in the size of the portfolio. This is because there was a 1.5-per-cent decrease in the average U.S. net investment in finance receivables (before allowance for ECL) to $932.1-million (U.S.), a decrease of $14.3-million (U.S.). The reduction in overall yield was due to the sale of current year higher-yielding originations to our off-balance sheet collaborators, managed by Chesswood Capital Management USA Inc., to generate recurring fee-based revenue.

Canada

During the year-ended Dec. 31, 2023, the Canadian equipment financing segment generated revenue of $95.3-million ($74.1-million interest revenue and $21.2-million ancillary finance and other fee income) compared with $72.8-million ($60.7-million interest revenue and $12.1-million ancillary finance and other fee income) during the prior year, an increase of $22.5-million, or 30.9 per cent. The Canadian equipment financing segment's average net investment in finance receivables (before allowance for ECL) increased by approximately $109.4-million for the year ended Dec. 31, 2023, compared with the prior year, largely due to its continued expansion in Canadian markets. During the year ended Dec. 31, 2023, the interest revenue yield earned on the Canadian equipment financing segment's net finance receivables was 10.8 per cent, which increased from 10.5 per cent from the prior year as the segment adjusts its products for increased costs of funding. The segment facilitated the sale of $268.7-million of finance receivables to VCOF SPV I Inc. during the year-ended Dec. 31, 2023. These sales earned $5.3-million for the year-ended Dec. 31, 2023, increasing ancillary finance and other fee income.

The Canadian consumer financing segment generated revenue of $6.6-million ($5.9-million interest revenue and $700,000 ancillary finance and other fee income) during the year ended Dec. 31, 2023, compared with $1.5-million ($1.3-million interest revenue, and $200,000 ancillary finance and other fee income) in the prior year, an increase of $5.1-million, or 340 per cent. The Canadian consumer financing segment's average net investment in finance receivables (before allowance for ECL) increased by approximately $45.4-million for the year ended Dec. 31, 2023, compared with the prior period, largely due to the segment's continued expansion in Canadian markets.

The Canadian auto financing segment generated revenue of $48.5-million ($45.3-million interest revenue and $3.2-million ancillary finance and other fee income) compared with $41.9-million ($40.3-million interest revenue and $1.6-million ancillary finance and other fee income) during the prior year, an increase of $6.6-million. This was due to an increase in the portfolio as the segment's average net investment in finance receivables (before allowance for ECL) of $35.3-million compared with the prior year was partially offset by a decrease in the interest yield. The annual interest revenue yield earned on the Canadian auto financing segment's net finance receivables during the year ended Dec. 31, 2023, was 17.4 per cent, a decrease of 0.5 per cent compared with 17.9 per cent during the prior year.

Q4 2023

The company reported consolidated net loss of $35.7-million for the three months ended Dec. 31, 2023, compared with net income of $6.8-million for the same period of the prior year, a decrease of $42.5-million. The decrease was caused by increased interest expenses and provisions for credit losses as well as decreased revenues and the impairment of intangible assets and goodwill.

Despite a $169.2-million decrease in average debt outstanding, rising interest rates resulted in a higher cost of funds which caused a $5.3-million increase in interest expense. The operating entities also had an increase in net chargeoffs of $16.6-million as a result of higher delinquencies due to market conditions. The change in allowance for ECL compared with the same period in the prior year increased by $4.8-million (to $6.6-million). The allowance for ECL was further increased during the fourth quarter of 2023 to reflect a more conservative outlook in the ECL model due to continued market uncertainties. As a result, the provision for credit losses increased by $21.4-million.

U.S.

The U.S. equipment financing segment generated revenue of $36.1-million ($31.8-million interest revenue and $4.3-million ancillary finance and other fee income) for the three months ended Dec. 31, 2023. Interest revenue decreased by $3.0-million when compared with the same period in the prior year due to a 14.2-per-cent decrease in average net investment in finance receivables (before allowance for ECL) to $1.2-billion as a result of continued off-balance sheet sales and lower originations.

Canada

During the three months ended Dec. 31, 2023, the Canadian equipment financing segment generated revenue of $22.8-million ($16.8-million interest revenue and $6.0-million ancillary finance and other fee income), an increase of $300,000 ($2.2-million decrease in interest revenue offset by a $2.5-million increase in ancillary finance and other fee income) when compared with the same period in the prior year. The Canadian equipment financing segment's average net investment in finance receivables (before allowance for ECL) decreased by approximately $75.2-million for the three months ended Dec. 31, 2023, compared with the same period in the prior year. The segment also facilitated the sale of $83.6-million of finance receivables to VCOF SPV I during the three months ended Dec. 31, 2023. The segment earned $1.8-million for the three months ended Dec. 31, 2023, related to these sales, increasing ancillary finance and other fee income.

The Canadian consumer financing segment generated revenue of $2.3-million ($2.1-million interest revenue and $200,000 ancillary finance and other fee income) during the three months ended Dec. 31, 2023, an increase of $1.5-million ($1.4-million increase in interest revenue and a $100,000 increase in ancillary finance and other fee income) from the same period in the prior year. The Canadian consumer financing segment's average net investment in finance receivables (before allowance for ECL) increased approximately $49.4-million for the three months ended Dec. 31, 2023, compared with the same period in the prior year

During the three months ended Dec. 31, 2023, the Canadian auto financing segment generated revenue of $12.5-million ($11.9-million interest revenue and $600,000 ancillary finance and other fee income) compared with $11.3-million ($10.8-million interest revenue and $500,000 ancillary finance and other fee income) during the same period in the prior year. The segment's average net investment in finance receivables (before allowance for ECL) was $269.9-million for the three months ended Dec. 31, 2023, compared with $237.0-million during the same period in the prior year, an increase of $32.9-million.

Outlook

U.S. credit conditions remained weak throughout the fourth quarter of 2023. The company has seen these same trends across its peers, who have experienced similar portfolio performance -- particularly in the transportation vertical. The first half of 2024 is likely to remain challenging as the company continues to work through the 2022 loan vintage. However, the company remains optimistic for the latter half of 2024 given the potential tailwinds that could come from lower interest rates and better portfolio performance.

Following year-end, the company completed its first sale of receivables to the joint venture company which Wafra created with us. This new structure allows Chesswood to allocate capital to the joint venture company, thereby earning returns on equity in addition to fees for assets managed. The company expects to continue scaling assets in this joint venture company to at least $1-billion (U.S.) over the next several years.

As a result of the company's continuing emphasis toward asset management, the company expects a substantial portion of its originated assets to be held in off-balance sheet structures going forward, thereby enabling the company to invest equity with partners or in new opportunities, all while the company's operating companies receive a steady fee stream.

While the company remains cautious on general economic conditions, it has taken the necessary steps to position the company to capitalize on future business opportunities.

About Chesswood Group Ltd.

Chesswood Group is a Toronto, Canada-based, holding company whose subsidiaries 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).

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