Mr. Ryan Marr reports

CHESSWOOD ANNOUNCES FIRST QUARTER 2024 RESULTS

Chesswood Group Ltd. has released its results for the three months ended March 31, 2024.

First quarter highlights

• The company continued entering into new agreements with mutual funds or partnerships managed by its affiliates for the non-recourse sale of leases and loans in exchange for fees. During the three months ended March 31, 2024, $341.9-million of the United States and Canadian finance receivables were sold under such arrangements (three months ended March 31, 2023 -- $106.0-million).
• On Jan. 31, 2024, the U.S. financing segment closed the first sale of finance receivables to Bishop Holdings LLC, an entity owned by certain funds managed by Wafra Inc. and the company's subsidiary, Pawnee Leasing Corp.

"Chesswood reported an adjusted net loss of $5.2-million in the first quarter of 2024, reflecting the ongoing challenges associated with our lease and loan portfolios performance. Expense management remained a priority in the quarter. General and administrative expenses were higher than expected due to rising collection costs associated with charged off leases and loans. Although we expect these costs to remain elevated, it is these costs which allow our collections teams to utilize the many tools at their disposal to recover on delinquent or impaired loans," said Ryan Marr, Chesswood's president and chief executive officer.

"The highlight of the quarter was certainly the initial success of our joint venture with Wafra through Bishop Holdings LLC. We successfully sold $196.8-million of assets to this joint venture, in which Chesswood has 10-per-cent ownership," said Mr. Marr. "This joint venture provides us with strong visibility on capital to support origination levels, grow our recurring fee streams as well as participate in portfolio performance. While it is paramount that we strike a balance between on and off balance sheet sources of earnings, we remain committed to our asset management model to augment volatility associated with credit performance.

"Our team continues to make progress in resizing our U.S. equipment leasing business to match the realities of capital availability, loan demand and portfolio performance. We have made good progress adjusting our lending mix, targeting a 14- to 16-per-cent average yield on new originations. At quarter-end, the average life of the U.S. receivables portfolio was approximately 33 months. Therefore, we roll off approximately one-third of the portfolio each year, freeing up equity for new originations," added Mr. Marr.

Summary of first quarter results

A larger volume of off balance sheet sales occurred in Q1 2024, further progressing Chesswood's alternative asset management business. For the three months ended March 31, 2024, the company sold $341.9-million of finance receivables to mutual funds or partnerships managed by its affiliates (Q1 2023 -- $106.0-million). As a result, the average finance receivables (after allowance for expected credit losses (ECL)) decreased by $476.5-million period over period, decreasing interest revenue by $12.8-million. Lower interest revenues were slightly offset by a $400,000 increase in ancillary finance and other fee income due to greater reoccurring fee revenue streams. In addition, a non-cash unrealized loss of $1.7-million was recorded on the mark-to-market value of the warrants issued to an affiliate of Wafra Funds as part of the joint venture arrangement with Wafra Inc.; however, this was offset by lower interest expenses and personnel expenses.

Average debt outstanding decreased by $425.7-million, resulting in a decrease in interest expense of $2.0-million compared with the same period in the prior year. The change in allowance for ECL compared with the same period in the prior year decreased by $18.4-million, offset by an increase in net charge-offs of $16.0-million when compared with the same period of the prior year. Lower ECL provisions in the quarter resulted from lower average finance receivable balances and a reduction in stage one loss reserves associated with expected improvements in portfolio performance going forward. General and administrative expenses were $1.3-million higher compared with the same period in prior year, driven by expenses associated with lease and loan recovery costs, offset by reductions in personnel expenses of $3.2-million.

U.S.

The U.S. equipment financing segment generated revenue of $31.1-million ($26.6-million interest revenue and $4.5-million ancillary finance and other fee income) for the three months ended March 31, 2024, compared with revenue of $41.3-million ($35.4-million interest revenue and $5.9-million ancillary finance and other fee income) during the same period of the prior year, a decrease of $10.2-million. Interest revenue decreased by $8.8-million when compared with the same period in the prior year due to a 26.2-per-cent decrease in average net investment in finance receivables (before allowance for ECL) to $1.0-billion as a result of continued off-balance sheet sales and lower on balance sheet originations. The average yield earned during the three months ended March 31, 2024, increased by 0.1 per cent (to 10.6 per cent) compared with the same period in the prior year. The overall yield increased as the segment adjusted its products for increased costs of funding, partially offset by the sale of current year higher-yielding originations to mutual funds and partnerships managed by Chesswood Capital Management USA Inc. to generate recurring fee-based revenue.

Canada

During the three months ended March 31, 2024, the Canadian equipment financing segment generated revenue of $20.4-million ($14.4-million interest revenue and $6.0-million ancillary finance and other fee income), a decrease of $4.0-million ($5.6-million decrease in interest revenue offset by a $1.6-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 $167.8-million for the three months ended March 31, 2024, compared with the same period in the prior year. During the three months ended March 31, 2024, the interest revenue yield earned on the Canadian equipment financing segment's net finance receivables was 10.2 per cent, a decrease from 10.9 per cent compared with the same period in the prior year. This is due to the sale of current year's higher-yielding originations through off-balance sheet conduits to generate recurring fee-based revenue.

The Canadian consumer financing segment generated revenue of $1.9-million ($1.6-million interest revenue and $300,000 ancillary finance and other fee income) during the three months ended March 31, 2024, an increase of $800,000 ($600,000 increase in interest revenue and a $200,000 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 by approximately $19.5-million for the three months ended March 31, 2024, compared with the same period in the prior year as a result of the continued growth of this segment. The interest revenue yield earned on the Canadian consumer financing segment's average net finance receivables (before allowance for ECL) increased to 10.7 per cent (from 9.6 per cent) as the Canadian consumer financing segment adjusts its products for increased costs of funding.

During the three months ended March 31, 2024, the Canadian auto financing segment generated revenue of $12.3-million ($11.7-million interest revenue and $600,000 ancillary finance and other fee income) compared with $11.6-million ($10.9-million interest revenue and $700,000 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 $273.3-million for the three months ended March 31, 2024, compared with $248.5-million during the same period in the prior year, an increase of $24.8-million. The interest revenue yield earned on the Canadian auto financing segment's net finance receivables was 17.1 per cent during the period, a decrease of 0.5 per cent compared with the same period in the prior year.

Outlook

First quarter macroeconomic data have impacted the timing of expectations for interest rate reductions in the United States. Data have generally come in stronger than expected, accompanied by higher inflation readings on core metrics. Sentiment around interest rate reductions has shifted, and markets are now pricing in fewer (if any) cuts to rates in the back half of the year in the United States.

In contrast, the Canadian market appears to be under pressure from the increase in front-end rates. This is evident in several indicators around economic activity, inflation and employment gauges. The Canadian dollar has been reflecting this potential policy differential, having depreciated versus the U.S. dollar.

A reduction in interest rates would have a meaningful impact on Chesswood's profitability, so these variables are relevant to the company's operating results. In a declining rate environment, pricing will likely be more stable, allowing for margin expansion upon rate adjustments. In the near term, the company plans to continue reducing leverage where appropriate and redeploy any excess liquidity into higher-margin loans.

With a more stable macro environment, the company expects results to improve in the back half of the year, albeit slowly given liquidity constraints.

Chesswood's board continues to evaluate different business options through its special committee and strategic review process. The committee will provide updates on this review when appropriate.

About Chesswood Group Ltd.

Based in Toronto, Canada, Chesswood Group is a 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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