Management Discussion and Analysis September 30, 2013

Transcription

1 Management Discussion and Analysis September 30, 2013

2 The following management discussion and analysis ( MD&A ) provides information management believes is relevant to an assessment and understanding of the consolidated financial condition and consolidated results of operations of Element Financial Corporation (the Company or Element ) as at and for the three and nine-month periods ended September 30, 2013 and should be read in conjunction with the Company s unaudited condensed consolidated interim financial statements as at and for the ninemonth period ended September 30, 2013, and the audited consolidated financial statements and MD&A as at and for the year ended December 31, Additional information relating to the Company is available on SEDAR at and on the Company s website at CAUTIONARY STATEMENT THIS ANALYSIS HAS BEEN PREPARED TAKING INTO CONSIDERATION INFORMATION AVAILABLE TO NOVEMBER 13, CERTAIN STATEMENTS CONTAINED IN THIS REPORT CONSTITUTE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORDS MAY, WOULD, COULD, WILL, INTEND, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, EXPECT, AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY, OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO INHERENT RISKS, UNCERTAINTIES AND NUMEROUS ASSUMPTIONS, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC CONDITIONS, RELIANCE ON DEBT FINANCING, DEPENDENCE ON BORROWERS, INABILITY TO SUSTAIN RECEIVABLES, COMPETITION, INTEREST RATES, REGULATION, INSURANCE, FAILURE OF KEY SYSTEMS, DEBT SERVICE, FUTURE CAPITAL NEEDS AND SUCH OTHER RISKS OR FACTORS DESCRIBED FROM TIME TO TIME IN REPORTS OF ELEMENT. BY THEIR NATURE, FORWARD LOOKING STATEMENTS INVOLVE NUMEROUS ASSUMPTIONS, KNOWN AND UNKNOWN, RISKS AND UNCERTAINTIES, BOTH GENERAL AND SPECIFIC, WHICH CONTRIBUTE TO THE POSSIBILITY THAT PREDICTIONS, FORECASTS, PROJECTIONS AND OTHER FORMS OF FORWARD LOOKING INFORMATION MAY NOT BE ACHIEVED. MANY FACTORS COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT MAY BE EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS AND READERS ARE CAUTIONED THAT THE LIST OF FACTORS IN THE FOREGOING PARAGRAPH IS NOT EXHAUSTIVE. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ASSUMPTIONS UNDERLYING THE FORWARD LOOKING STATEMENTS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS INTENDED, PLANNED, ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. ACCORDINGLY, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD LOOKING STATEMENTS OR INTERPRET OR REGARD FORWARD-LOOKING STATEMENTS AS GUARANTEES OF FUTURE OUTCOMES. EXCEPT AS MAY BE REQUIRED BY APPLICABLE CANADIAN SECURITIES LAWS, WE DO NOT INTEND, AND DISCLAIM ANY OBLIGATION TO UPDATE OR REWRITE ANY FORWARD LOOKING STATEMENTS WHETHER ORAL OR WRITTEN AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 1

3 Overview Element is an independent financial services company that originates, co-invests in and manages assetbased financings with operations in both Canada and the United States ( U.S. ). Element originates the financing of a broad range of equipment and capital assets by way of secured loans, financial leases and conditional sales contracts. Element originates the vast majority of its equipment financings through its employee sales force, which focuses on both equipment vendors and direct equipment users. Element distinguishes itself from traditional lenders such as banks and finance companies in that it: offers select, asset-based financing services rather than providing full-service lending; originates primarily through its own vendor and direct end user relationships; and funds its activities through commitments from institutional investors rather than accepting deposits from the public. The Company has assembled a deep and experienced leadership team that has capitalized, and is poised to continue to capitalize, on the continuing recovery of the North American equipment finance industry. Through its legacy and recently acquired businesses, the Company has established strong platforms across multiple lines of business in the asset and equipment finance market place. The Company plans to continue to grow its business organically, but will also continue to capitalize new opportunities for business acquisitions where the Company believes it is beneficial and accretive to earnings, either through tuck-in opportunities or entering into new market verticals. Further, as the Company continues to grow organically and through acquisitions, it will continue to capitalize on increasing economies of scale allowing it to reduce overall operating costs while increasing and diversifying its funding sources throughout Canada and the U.S. The equipment financing industry is the second largest provider of debt financing to business customers and consumers after banks and credit unions. In general, the Canadian equipment finance industry is served by three main industry participants: independent lease finance companies like Element (including subsidiaries of U.S. based commercial leasing companies), captive finance companies owned by the manufacturers and distributers, Canadian banks and credit unions. The Company s revenue consists primarily of finance income earned on originated asset-based financings ( finance receivables ) net of amortization of lease origination costs. Direct costs consist mainly of interest on secured borrowings including amortization of deferred financing costs. Deferred financing costs are costs incurred by the Company to secure financing for the transactions. These costs are capitalized, deferred and expensed over the life of the underlying secured borrowing facility. Operating expenses consist of salaries, wages and benefits, general and administrative expenses, and share-based compensation. 2

4 The Company funds the acquisition of finance receivables using its senior revolving credit facility, secured borrowing facilities and cash flow from operating activities. Element currently operates in two distinct verticals of the North American asset-based finance market: (i) commercial finance and (ii) corporate finance. To serve these market verticals, Element has organized its activities and operations around four core business units: (i) Element Finance; (ii) Element Capital; (iii) Element Fleet; and (iv) Element Services. Element Finance Element Finance is the Corporation s business unit servicing the commercial finance market and focuses on the mid-ticket finance segment of the equipment finance industry. The mid-ticket finance segment of the equipment finance industry involves financing for the acquisition of equipment ranging in value from approximately $10,000 to approximately $5,000,000. Element Finance originates its equipment finance assets in specific segments of the equipment finance market, with a current focus on the commercial, industrial, transportation, construction, healthcare, golf equipment, technology, office products, and franchise finance equipment market verticals. To assure the quality of its equipment finance assets, Element Finance emphasizes the creditworthiness of the end-user or borrower, the value of the financed assets and the creditworthiness of the vendor. On November 30, 2012, the Company acquired all the outstanding shares of CoActiv Capital Partners, Inc. ( CoActiv ), a U.S. vendor finance company, with Canadian operations. Element believes that the CoActiv transaction was an important step in Element s growth strategy and provided a platform which allows Element to serve the sales financing needs of equipment manufacturers that are active on both sides of the Canada-U.S. border. As in Canada, Element s principal competitors in the commercial finance segment of the U.S. market include banks, captive finance companies and independent finance companies. On January 18, 2013, the Company acquired all of the outstanding shares of Nexcap Finance Corporation, a Canadian vendor finance company based in Burlington, Ontario. The Nexcap acquisition was a tuckin acquisition that provided Element with supplemental origination volumes derived from various vendor finance relationships with leading Canadian technology and transportation equipment manufacturers in Canada. The Nexcap acquisition is expected to strengthen Element s direct financing and vendor financing support to equipment dealers, distributors and manufacturers in the Canadian market and provide a portfolio with a particular focus on technology and transportation equipment. Element Capital Element Capital competes in the corporate finance segment of the asset-based finance market, which is characterized by transactions that are generally of a higher value, longer duration and more complex in their structure, underwriting, funding and management than transactions originated in the commercial finance segment of the market. 3

5 Element Capital originates large equipment financing and leasing transactions that range in size from $5 million to $150 million or more with a duration ranging from 36 to 120 months. These transactions typically apply to the financing of a single high-value asset, such as a corporate jet, but may also extend to the financing of a group of mid-value assets, such as various pieces of construction machinery operated by a single obligor, that, in aggregate, move the transaction size into the range noted above. Element Capital originates these larger, longer-duration asset and equipment financing transactions through its teams of knowledgeable equipment industry finance specialists who have established networks of contacts with both manufacturers and end users of various types of assets and equipment. These teams have expertise in sectors that include civil aviation (both fixed-wing and rotary), road and rail transportation, mining, construction and energy. Element Fleet Element Fleet s core business is providing vehicle fleet leasing and management solutions and related service programs to Canadian companies, including service cards, remarketing, maintenance management and accident services. Element Fleet was established as a new business unit following the completion of the acquisition of TLS Holdings Inc. ( TLSI ), the holding company of Transportaction Lease Systems Inc. ( TLS ) on June 29, At the time of the TLS acquisition, the acquired company was Canada s fourth largest fleet leasing company and provided Element with a portfolio of more than $430 million of lease assets. The acquisition accelerated Element s growth through the addition of its established origination platform and through the creation of extensive cross-selling opportunities for Element s existing clients. Element Fleet enhances the diversification of Element's operations by providing a lowrisk earnings stream that is complemented by significant fee based revenue, including cost management and fleet optimization services. On June 28, 2013, the Company acquired the assets of GE Capital s Canadian fleet portfolio ( GE Portfolio ) and its related operational resources. At the time of acquisition the GE Portfolio provided Element with a portfolio of more than $480 million of lease and loan assets. In addition, the Company entered into Strategic Alliance Agreement (the Strategic Alliance ) with GE Capital Fleet Services. Under the Strategic Alliance, the two companies will collaborate primarily on the pursuit of Canada/U.S. cross-border fleet management opportunities. As a result of this acquisition, Element Fleet now manages close to $1 billion in finance assets and is now the largest fleet business company in Canada. The vehicle fleet leasing industry is traditionally characterized by a number of attractive industry fundamentals. Traditionally, there has been a high barrier to entry, as a broad vendor network is difficult to replicate while the value-added service offerings help reinforce strong customer relationships. Furthermore, as the recent economic downturn has caused customers to keep their fleet vehicles for longer periods of time, a significant growth opportunity is expected to emerge as customers replace and upgrade their aging fleets. 4

6 Element Services Element Services is the administrative unit of Element responsible for managing the capital structure of Element and its various funding programs with banks and institutional investors/lenders, and for providing cost-effective growth, control and support services such as credit and risk management, customer services, financial reporting and information technology support to the Element Finance, Element Capital, and Element Fleet business units. Element Services is divided into five principal operating units: Treasury The Treasury group is led by the Corporation s Treasurer and is responsible for ensuring the Corporation s liquidity and access to capital at attractive pricing as well as managing relationships with bank and institutional lenders. Treasury also manages certain financial risks generated in the normal course of business, such as interest rate and currency risks. Credit and Risk Management The Credit and Risk Management group is led by the Corporation s Chief Credit Officer and is responsible for prudent and proper underwriting and portfolio management of Element s credit risk. Financial Management The Financial Management group is led by the Corporation s Chief Financial Officer and is responsible for administration and financial reporting, tax and audit and documentation system services to Element s business units. Information Technology The Information Technology group is led by the Corporation s Chief Technology Officer and provides information technology application support to Element s operations while also being responsible for security, archiving, infrastructure, communication, disaster recovery and office support management. Legal The Legal group is led by the Corporation s Vice President & General Counsel and provides legal services to support Element s business units and day-to-day corporate operations and compliance. 5

7 Market Trends According to the Canadian Finance & Leasing Association (the CFLA ), the Canadian equipment finance industry s portfolio of owned and managed equipment finance assets was approximately $40 billion in 2010 ($40.7 billion 2009), with approximately $16 billion of new business written in 2010 ($13.5 billion 2009). Historically, approximately 20% of all equipment sold in Canada is financed by leasing, with approximately 60% of the industry s customers being small and medium-sized businesses. The 2008 global credit crisis severely impacted the Canadian equipment finance industry. From 1999 to 2006, capital expenditures on Canadian machinery and equipment grew steadily with volumes reaching $109.6 billion. Leasing market penetration rates also peaked in 2006 at 22%, representing new lease volumes of $24.1 billion. Between 2007 and 2009, the market experienced a reduction in both capital expenditures and leasing market penetration. Specifically, capital expenditures dropped from $114.4 billion to $101.2 billion, with leasing market penetration rates also falling from 20.8% to 13.0%, representing new lease volumes of $23.8 billion and $13.2 billion, respectively. However, in 2010 both capital expenditures and leasing market penetration began to recover with capital expenditures increasing to $103.0 billion and leasing market penetration rates increasing to 15.13%, representing new lease volumes of $16.0 billion. Statistics Canada reported machinery and equipment capital expenditures to be $105.1 billion in 2011, demonstrating continued recovery from the lows experienced during the global credit crisis. Additionally, the CFLA has projected leasing penetration and new lease volumes to also recover from 2009 levels, reaching 15.5% and $16.8 billion in 2011, respectively. Statistics Canada has reported preliminary actual capital expenditures of $110.6 billion for 2012 and capital expenditure intentions of $114.6 billion for In terms of the competitive landscape, the Company believes that the 2008 global credit crisis resulted in a number of U.S.-based participants exiting or curtailing activities in the Canadian market. Since 2008, there has been a reduction in the number of participants overall within the Canadian market. This includes both subsidiaries of large-cap U.S.-based equipment finance companies that scaled back operations in order to refocus on core operations and independent domestic participants that were unable to access new capital given tightened funding terms and conditions. During the 2008 global credit crisis, certain Canadian financial institutions seized upon the industry disruption to expand their equipment finance capabilities by acquiring independent Canadian equipment finance companies which further consolidated the industry. Recent examples of this trend include: the acquisition by Royal Bank of Canada ( RBC ) of the leasing business of MCAP Commercial LP, Leasing Business, a Canadian equipment financing provider; Canadian Western Bank s acquisition of National Leasing Group Inc., which specialized in equipment leasing for small to mid-sized transactions and had a Canada-wide platform; RBC s acquisition of ABN AMRO Bank N.V. s Canadian equipment finance business; and the acquisition by RoyNat Inc. a subsidiary of the Bank of Nova Scotia, of Irwin Commercial Finance Canada, Irwin Financial Corporation s small-ticket equipment leasing business in Canada, to create RoyNat Lease Finance. The Company expects consolidation within the industry to continue as larger participants attempt to build market share by using economies of scale, acquiring marginal participants and providing equipment financing to companies seeking to outsource their captive finance operations. Financial service participants are also strategically interested in acquiring or partnering with equipment finance platforms as a means of portfolio diversification, obtaining attractive 6

8 yields and accessing cross-selling opportunities. These market conditions have narrowed the range of alternatives available to many small and medium-sized businesses for the financing and acquisition of business-essential equipment and left equipment manufacturers, dealers and distributors in need of reliable customer financing sources. The 2008 global credit crisis also seriously impacted the U.S. equipment finance industry resulting in the withdrawal of many competitors, particularly in the small and mid-ticket leasing segments which have seen significant decreases in market participants. Since the credit crisis, many banks and other traditional financing sources have been unable or unwilling to create the systems and business processes that are essential to effectively serve the equipment financing needs of small and medium-sized businesses and, in the absence of these resources, appear to no longer have the risk tolerance for the liabilities associated with equipment financing. In addition, many small businesses experienced constraints on their ability to access other capital sources, such as home equity lines of credit and credit cards, to fund their equipment purchases. As a result, small and medium-sized businesses have become even more reliant on lease financing to acquire needed equipment and there is significant unfulfilled demand for equipment financing within these segments. The Equipment Leasing and Finance Association has reported new business volumes in the U.S. have increased 16.5% in 2011 and 16.4% in 2012 after experiencing significant declines in 2009 (-30.3%) and a weak recovery in 2010 (+3.9%). The Company believes that it is well positioned to realize opportunities for increased profitability and to capture market share due to these improving market trends. 7

9 Key Performance Indicators Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include new origination volume, net investment in finance receivables, financial revenues, average yields, interest expense, interest cost of debt, net finance income, adjusted operating expenses and net income. We evaluate our performance on these metrics by comparing our actual results and normalized results to management budgets, forecasts and prior period performance. Key Initiatives 2011 and 2012 were transformational years for Element. During the nine-month period ended December 31, 2011, the Company secured an industry leading and experienced management team, built a capital structure and secured an infrastructure capable of executing on its growth plan as a result of the acquisition of Alter Moneta. The Company increased its funding capacities and started trading on the TSX on December 16, On January 30, 2012, the Company announced the formation of the Element Capital vertical that is dedicated to large equipment financing and leasing transactions, including energy related assets, corporate aircraft, rail and road equipment, as well as mining and large-scale construction equipment. On May 31, 2012, the Company issued on a private placement basis, 16,595,900 special warrants at a price of $5.25 per special warrant for gross proceeds of $87.1 million. Each special warrant was exercised, without payment of any additional consideration, into one common share of the Company on August 14, 2012 upon receipt for the final short form prospectus from the Ontario Securities Commission. On June , the Company acquired all of the outstanding shares of TLS Holdings Inc., the holding company of Transportaction Lease Systems Inc. The core business of TLS is providing vehicle fleet leasing and management solutions and related service programs to Canadian companies, including service cards, remarketing, maintenance management and accident services. The Company completed the transaction for cash consideration of $527.6 million. The purchase was satisfied through a combination of $127.6 million in available cash and from $400.0 million resulting from the proceeds of a financing transaction whereby the Company sold to a special purpose entity a total of $439.6 million in lease assets it acquired as part of the acquisition. On June 29, 2012, and in conjunction with the acquisition of TLS, the Company increased its warehouse funding facility from $25 million to $75 million. As a result, and together with the establishment of a new $400 million secured borrowing financing facility to finance the lease assets of TLS, the Company increased its available third-party funding capacity from $315 million at December 31, 2011 to $831 million at June 30,

10 On September 6, 2012, the Company increased its secured borrowing facility previously set-up to finance the assets of TLS from $400.0 million to $435.0 million to accommodate the growth in the origination activities of this business. On November 23, 2012, the Company issued on a private placement bought deal basis, 19,500,000 special warrants at a price of $5.65 per special warrant for gross proceeds of $110.2 million. Each special warrant was exercised, without payment of any additional consideration, into one common share of the Company on February 6, 2013 upon receipt of the final short form prospectus by the Ontario Securities Commission. On November 30, 2012, the Company acquired all the outstanding shares of CoActiv Capital Partners, Inc., a U.S. vendor finance company, with Canadian operations. CoActiv has expertise in delivering manufacturer supported equipment financing programs. The Company completed the transaction for cash consideration of $298.3 million. The purchase was satisfied through a combination of $99.0 million in cash and $199.3 million of secured borrowings, whereby the Company sold to special purpose entities a total of $247.8 million in lease assets it acquired as part of the acquisition. In conjunction with the acquisition of CoActiv, the Company also received a new committed term debt facility, in the aggregate amount of approximately $300 million. On December 27, 2012, the Company entered into a definitive agreement to acquire Nexcap Finance Corporation ( Nexcap ). This business acquisition was completed on January 18, The Company completed this transaction for net cash consideration of $17.6 million and the assumption of $77.9 million of debt financing. Nexcap increased the Company s total assets by $104.9 million of which approximately $84.3 million were finance receivables and $3.0 million was goodwill. The Nexcap acquisition advanced the Company s Canadian vendor finance growth strategy. On March 12, 2013, the Company issued, through a public offering, 22,310,000 common shares at a price of $7.75 per common share for gross proceeds of $172.9 million. On June 18, 2013, the Company issued on a private placement bought deal basis 29,612,500 special warrants at a price of $10.15 per special warrant for gross proceeds of $300.6 million. Each special warrant was exercised, without payment of any additional consideration, into one common share of the Company on August 15, 2013 upon receipt for the final short form prospectus by the Ontario Securities Commission. On June 28, 2013, the Company entered into an asset purchase agreement with General Electric Capital Canada to acquire GE Capital s Canadian fleet portfolio and its operational resources (the GE Portfolio ). The Company completed this transaction for net cash consideration of $559.2 million. This transaction increased the Company s total assets by $561.7 million of which approximately $488.7 million was finance receivables and $73.0 million was goodwill and intangible assets. The Company is in the process of assessing the fair value of the assets acquired and as a result the value of the reported goodwill may be subject to adjustments pending the completion of final valuations and post-closing adjustments. The acquired portfolio and operational resources have been combined with the operations of TLS, re-branded under Element Fleet Management and will further advance the Company s Canadian 9

11 Fleet services growth strategy. The Company also entered into a Strategic Alliance Agreement (the Strategic Alliance ) between Element and GE Capital Fleet Services. Under the Strategic Alliance, the two companies will collaborate primarily on the pursuit of Canada/U.S. cross-border fleet management opportunities. In conjunction with the acquisition, the Company also increased the capacity of an existing revolving floating rate facility by $500 million to support the acquisition as well as the ongoing originations from the acquired operations. On August 26, 2013, the Company established a $585.0 million revolving syndicated senior credit facility to fund the Company s planned origination activity into On September 16, 2013, the Company acquired a select portfolio of existing finance receivable assets and origination platforms of Bush Truck Leasing, Inc. ( BTL ). 10

12 Description of Non-IFRS Measures Our unaudited condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and accounting policies we adopted in accordance with IFRS. These unaudited condensed consolidated interim financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at September 30, 2013, the results of operations, comprehensive income for the three and nine months ended September 30, 2013, and cash flows for the nine months ended September 30, Management uses both IFRS and Non-IFRS Measures to monitor and assess the operating performance of the Company s operations. Throughout this MD&A, management uses the following terms and ratios which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other organizations: Adjusted operating expenses Adjusted operating expenses are equal to Salaries, wages and benefits and, General and administration expenses. Adjusted operating expenses provide an indication of the cash settled expenses of the Company during the period. Adjusted operating income Adjusted operating income reflects Income before income taxes, Business acquisition costs and Sharebased compensation. Management believes that this measure is the most appropriate operating measure of the Company s performance as it excludes business acquisition costs and non-cash items related to sharebased compensation which do not relate to maintaining operating activities and which would have been previously capitalized under Canadian GAAP. Adjusted operating expense ratio Adjusted operating expense ratio is calculated as the adjusted operating expenses divided by average finance receivables outstanding throughout the period. The adjusted operating expense ratio is used by the Company to assess the efficiency of the management of the Company s finance receivables portfolio. Adjusted operating income on average finance receivables Adjusted operating income on average finance receivables is the adjusted operating income for the period divided by the average finance receivables outstanding throughout the period, presented on an annualized basis. 11

13 Adjusted operating income on average shareholders equity Adjusted operating income on average shareholders equity is the adjusted operating income for the period divided by the average shareholders equity outstanding throughout the period, presented on an annualized basis. After-tax adjusted operating income After-tax adjusted operating income reflects the adjusted operating income after the application of the Company s statutory tax rates. After-tax adjusted operating income per share After-tax adjusted operating income per share reflects the after tax adjusted operating income divided by the weighted average number of shares outstanding during the period. After-tax adjusted operating income on average finance receivables After-tax adjusted operating income on average finance receivables is the after-tax adjusted operating income for the period divided by average finance receivables outstanding throughout the period, presented on an annualized basis. After-tax adjusted operating income on average shareholders equity After-tax adjusted operating income on average shareholders equity is the after-tax adjusted operating income for the period divided by average shareholders equity outstanding throughout the period, presented on an annualized basis. Allowance for credit losses as a percentage of finance receivables Allowance for credit losses as a percentage of finance receivables is the allowance for credit losses at the end of the period divided by the finance receivables (net of the allowance for credit losses) at the end of the period. Annualized loss rate The annualized loss rate is equal to the Charge-offs, net of recoveries recorded through the allowance for credit losses during the period divided by the average finance receivables outstanding throughout the period, presented on an annualized basis. The annualized loss rate is used by the Company to assess the percentage of the finance receivables portfolio that incurred losses during the period. In addition, the Company utilizes the annualized loss rate as an alternative measure to the provision for credit losses as it excludes the effect of provisions for (reductions in) the allowance for credit losses during the period which may not coincide with the actual timing of write-offs and recoveries. 12

14 Annualized credit loss provision as a percentage of average finance receivables The annualized credit loss provision as a percentage of average finance receivables is the Provision for credit losses during the period as recorded on the statements of operations divided the average finance receivables outstanding throughout the period, presented on an annualized basis. Average cost of borrowing Average cost of borrowing is equal to interest expense divided by the average debt outstanding during the period and is presented on an annualized basis. The average cost of borrowing provides an indication of the average interest rate that the Company pays on debt financing. Average debt outstanding Average debt outstanding is calculated as the daily weighted average borrowings outstanding under all of the Company s secured borrowings facilities throughout the period. Average net financial margin yield Average net financial margin yield is the net financial income divided by average finance receivables outstanding during the period provided on an annualized basis. Average net financial margin yield provides an indication of the effective net yield generated on the finance receivables portfolio before deductions for all other operating expenses and of the net margin generated on the portfolio of finance receivables. Average portfolio yield Average portfolio yield is financial revenue divided by average finance receivables in the period. Average portfolio yield provides an indication of the effective yield generated on the finance receivables portfolio before deductions for financial, operating, transaction costs and income tax expenses. Average outstanding finance receivables or average finance receivables Average outstanding finance receivables or average finance receivable is the average gross finance receivable balance outstanding during the period and is calculated at the lowest denominator available for each type of assets. Financial leverage or financial leverage ratio Financial leverage or financial leverage ratio is calculated as total debt excluding trade payable and accrued liabilities outstanding at the end of the period, divided by shareholders equity outstanding at the end of the period. Financial leverage refers to the use of debt to acquire/finance additional finance receivables and provides an indication of future potential ability to increase the level of debt when compared to specific industry-standard and or existing debt covenants. 13

15 Gross average yield Gross average yield is equal to financial revenues before provision for credit losses divided by average finance receivables outstanding throughout the period, and is presented on an annualized basis. Gross average yield provides an indication of the yield earned on finance receivables before consideration of credit losses. Gross interest expense Gross interest expense is equal to interest expense before amortization of deferred financing costs as reported for the period. Gross interest income Gross interest income is equal to interest income before amortization of lease origination costs as reported for the period. Net interest income before provisions for credit losses Net interest income before provisions for credit losses is equal to total interest income less total interest expense and excludes provisions for credit losses as reported for the period. Net interest income before provisions for credit losses provides an indication of the of the interest spread earned on finance receivables over the cost of debt, before consideration of credit losses. Operating expense ratio The operating expense ratio is calculated as total operating expenses divided by average finance receivables outstanding throughout the period. The operating expense ratio is used by the Company to assess the efficiency of the management of the Company s finance receivables portfolio. Other revenue items Other revenue items consist of syndication fees, fees and other income and gains/losses on foreign exchange. Portfolio average remaining life (in months) Portfolio average remaining life (in months), is the average remaining life in months of the outstanding finance receivables at the end of the period. 14

16 Total revenue or Financial revenue Total revenue or financial revenue is equal to total interest income, net of amortization of origination costs, deferred subsidies and deferred upfront fees, and other revenue items less provision for credit losses. Total revenue provides an indication of revenue generated by the Company before consideration of all expenses. 15

17 The following table provides a reconciliation of non-ifrs to IFRS measures related to the Company: $ thousands (except % and per share amounts) Reported and adjusted income measures Net income (loss) Adjustments: Share-based compensation Amortization of intangible assets from acquisitions Integration costs Transaction costs Provision (recovery) of income taxes Adjusted operating income Provision for taxes applicable to adjusted operating income After tax adjusted operating income Selected statement of financial position amounts Finance receivables, before allowance for credit losses Allowance for credit losses Finance receivables, net September 30, 2013 June 30, 2013 September 30, 2012 September 30, 2013 September 30, 2012 A 7,825 (13,882) 3,012 (1,372) (3,044) 3,467 2, ,737 2, , ,000 5,000 11,000 2,750 20,500 20,500 6,300 3,722 (282) 1,337 6,007 (309) B 18,362 14,497 5,374 44,902 8,214 (4,814) (4,046) (1,431) (12,259) (2,187) C 13,548 10,451 3,943 32,643 6,027 D 2,264,570 2,154, ,427 2,264, ,427 E 11,384 10,973 4,129 11,384 4,129 F 2,253,186 2,143, ,298 2,253, ,298 Average finance receivables, net G 2,163,841 1,546, ,130 1,704, ,173 Secured borrowings H 1,713,973 1,539, ,297 1,713, ,297 Average Secured Borrowings I 1,586,258 1,093, ,717 1,257, ,123 Total shareholders' equity J 889, , , , ,187 Average shareholders' equity K 882, , , , ,583 Key annualized operating ratios Financial leverage ratio Allowance for credit losses as a percentage of finance receivables Adjusted operating income on average shareholders equity Adjusted operating income on average finance receivables After-tax adjusted operating income on average shareholders equity After-tax adjusted operating income on average finance receivables Per share information Number of shares outstanding (including special warrants) Weighted average number of shares outstanding [basic] Weighted average number of shares outstanding [diluted] H/J E/D 0.50% 0.51% 0.44% 0.50% 0.44% B/K 8.32% 9.13% 6.84% 9.05% 4.02% B/G 3.39% 3.75% 2.54% 3.51% 2.25% C/K 6.14% 6.58% 5.02% 6.58% 2.95% C/G 2.50% 2.70% 1.86% 2.55% 1.65% L 155, ,116 83, ,399 83,015 M 155, ,362 83, ,973 73,779 N 159, ,362 84, ,973 73,779 Net income (loss) per share [basic] A/M 0.05 (0.11) 0.04 (0.01) (0.04) Net income (loss) per share [diluted] A/N 0.05 (0.11) 0.04 (0.01) (0.04) Book value per share After-tax adjusted operating income per share [basic] As at and for the three months ended As at and for the nine months ended J/L C/M

18 Selected Financial Information and Financial Ratios The following table summarizes key financial data to be read in conjunction with the unaudited condensed consolidated financial statements of the Company as at and for three-month and nine-month periods ended September 30, Such financial statements are prepared in accordance with IFRS and are reported in Canadian dollars. As at and for the three months ended As at and for the nine months ended (in $000 s for stated values, except ratios and per share amounts) After tax adjusted operating income (loss) per share (basic) (1) September 30, June 30, September 30, September 30, September 30, $ $ $ $ $ Financial revenue (1) 46,374 33,960 18, ,172 31,102 Adjusted operating income (1) 18,362 14,497 5,374 44,902 8,214 After tax adjusted operating income (1) 13,548 10,451 3,943 32,643 6,027 Income/(loss) before taxes 11,547 (14,164) 4,349 4,635 (3,353) Net income/(loss) 7,825 (13,882) 3,012 (1,372) (3,044) Total assets 2,725,955 2,533,370 1,109,653 2,725,955 1,109,653 Finance Receivables, net 2,253,186 2,143, ,298 2,253, ,298 New originations 410, , ,690 1,104, ,702 Loan acquisitions 488, , ,824 Secured borrowings 1,713,973 1,539, ,297 1,713, ,297 Average finance receivables (1) 2,163,841 1,546, ,130 1,704, ,173 Average debt outstanding (1) 1,586,258 1,093, ,717 1,257, ,123 Number of Shares outstanding (including special warrants) 155, ,116 83, ,399 83,015 Weighted average number of shares outstanding (including special warrants) 155, ,362 83, ,973 73,779 Total Shareholders equity 889, , , , ,187 Average shareholders equity 882, , , , ,583 Net income (loss) per share [basic and diluted] 0.05 (0.11) 0.04 (0.01) (0.04) (1) For additional information, see Description of Non-IFRS Measures section. 17

19 The following table summarizes key operating ratios to be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company as at and for the three-month and nine-month periods ended September 30, 2013: As at and for the three-month periods ended As at and for the nine months ended September 30, June 30, September 30, September 30, September 30, Ratios Financial leverage ratio (2) 1.93:1 1.75:1 2.28:1 1.93:1 2.28:1 Allowance for credit losses as a percentage of finance receivables (2) 0.50% 0.51% 0.44% 0.50% 0.44% Annualized credit loss provision as a percentage of average finance receivables (2) 0.31% 0.28% 0.30% 0.34% 0.27% Portfolio average remaining life (in months) (2) Adjusted operating income on average shareholders equity (2) 8.32% 9.13% 6.84% 9.05% 4.02% Adjusted operating income on average finance receivables (2) 3.39% 3.75% 2.54% 3.51% 2.25% After-tax adjusted operating income on shareholders equity (2) 6.14% 6.58% 5.02% 6.58% 2.95% After-tax adjusted operating income on average finance receivables (2) 2.50% 2.70% 1.86% 2.55% 1.65% Book value per share (2) $5.72 $5.67 $3.81 $5.72 $3.81 (1) All are ratios presented on an annualized basis. (2) For additional information, see Description of Non-IFRS Measures section. 18

20 The following table summarizes the total origination by vertical for the three-month and nine-month periods ended: For the three months ended For the nine months ended September 30, June 30, September 30, September 30, September 30, (in $000 s) $ $ $ $ $ Element Finance Element Finance Canada 166, ,660 86, , ,265 Element Finance USA 94,210 64, , , ,892 86, , ,265 Element Capital 91,553 86,648 82, , ,511 Element Fleet 58,338 80,356 50, ,806 50, , , ,690 1,104, ,702 Three-Month Period Ended September 30, % 23.2% Three-Month Period Ended September 30, 2012 Element Finance 39.4% Element Finance 22.3% Element Capital Element Capital 63.5% Element Fleet Management Element Fleet Management 37.4% Three-Month Period Ended June 30, % Element Finance 21.8% 58.0% Element Capital Element Fleet Management 17.9% Nine-Month Period Ended September 30, 2013 Nine-Month Period Ended September 30, % Element Finance Element Finance 20.8% 61.3% Element Capital Element Fleet Management 38.5% 50.3% Element Capital Element Fleet Management 19

21 Overall Performance Highlights Total originations were a record $410.4 million during the three months ended September 30, 2013, an increase of 86.8% or $190.7 million over the originations for the three months ended September 30, 2012, and an increase of 3.2% or $12.5 million over the originations for the prior quarter ended June 30, Total originations were $1,104.6 million during the nine months ended September 30, 2013, an increase of 142.4% or $648.9 million over the comparative period in Total originations from the Company s mid-ticket Element Finance business was $260.5 million during the three months ended September 30, 2013, an increase of $173.9 million or 200.7% over the $86.6 million generated during the three months ended September 30, 2012, and an increase of $29.6 million or 12.8% over the prior quarter ended June 30, The acquisition of CoActiv on November 30, 2012 and Nexcap on January 18, 2013 contributed $102.2 million and $38.8 million, respectively, to the total origination of the mid-ticket business for three months ended September 30, For the nine months ended September 30, 2013, total originations from the Element Finance business was $677.4 million, an increase of $448.1 million or 195.5% over the $229.3 million generated during the nine months ended September 30, Total originations for the Element Fleet vertical initially acquired in June 2012 were $58.3 million during the three months ended September 30, 2013, a decrease of $22.1 million or 27.4% over the prior quarter and an increase of $7.4 or 14.6% over the same quarter in the prior year, and $197.8 million on a year to date basis or an increase of $146.9 or 288.4%. Volumes of Element Fleet have decreased quarter over quarter as a result of seasonality, availability of vehicles from manufacturers and the purchase cycle of existing Element Fleet customers offset by the new volumes generated from the GE Portfolio acquired on June 28, Management expects volume to increase as the Company enters a seasonally stronger fourth quarter and as the Company increases its ability to leverage the relative strengths of the TLS and GE Portfolio acquisitions. Total originations for the Company s large-ticket Element Capital business which was established in January 2012, were $91.6 million compared to $86.6 million in the immediately preceding quarter and $82.1 million in the comparative quarter in 2012, and $229.3 million for the nine months ended September 30, 2013, compared to $175.5 million for the nine months ended September 30, As management has reported in the past, this business unit will not report even volumes over accounting periods due to the nature of the business. Element Capital continues to have a strong pipeline which is in excess of $1.8 billion at September 30, 2013 and the Company expects record originations in the fourth quarter of The Company s finance receivables portfolio of leases and loans has grown substantially during the three months ended September 30, 2013 to $2,253.2 million from $2,143.1 million reported on June 30, 2013 and from $1,294.6 million reported at December 31, The growth over June 30, 2013 is primarily due to the combined effect of the total new originations for the three months ended in the amount of $410.4 million, net of repayments and syndication activities of $297.3 million. The growth over December 31, 2012 is primarily due to the combined effect of the total new originations for the nine months ended in the amount of $1,104.6 million, the $488.7 million acquired as part of the acquisition of 20

22 the GE Portfolio and $84.3 million acquired as part of the acquisitions of Nexcap, net of repayments and syndication activities for $711.5 million. The Company is reporting net income of $7.8 million for the three months ended September 30, 2013, compared to a net income of $3.0 million in the three months ended September 30, 2012 and net loss of $13.9 million for the immediately preceding quarter ended June 30, Net income per share was $0.05 for the three months ended September 30, 2013, compared to net income of $0.04 per share for the three months ended September 30, 2012 and a net loss per share of $0.11 for the immediately preceding quarter ended June 30, The large variances between periods are primarily the result of business acquisition and integration costs incurred on mergers and acquisition activities and are therefore not predictable. As indicated previously, management believes that adjusted operating income is the most appropriate operating measure of the Company s performance as it excludes non-cash items related to share-based compensation and business acquisition costs which do not relate to maintaining operating activities. The Company is reporting adjusted operating income of $18.4 million for the three months ended September 30, 2013, compared to $5.4 million for the three months ended September 30, 2012 and $14.5 million for the prior quarter ended June 30, 2013, and after tax adjusted operating income per share of $0.09 compared to $0.05 per share for the three months ended September 30, 2012 and $0.08 per share for the prior quarter ended June 30, For the nine months ended September 30, 2013, the Company is reporting adjusted operating income of $44.9 million and after tax adjusted operating income per share of $0.25, compared to $8.2 million in adjusted operating income or $0.08 in after tax operating income per share for the comparative nine-month period ended September 30,

23 Results of Operations Three-month periods ended September 30, 2013, June 30, 2013 and September 30, 2012 The following table sets forth a summary of the Company s results of operations for the three months ended September 30, 2013, June 30, 2013 and September 30, 2012: September 30, 2013 June 30, 2013 September 30, 2012 (in 000 s for stated values, except per unit amounts) $ $ $ Net Financial Income Interest income 37,011 28,916 15,589 Interest expense 14,525 9,212 5,635 Net interest income before provision for credit losses 22,486 19,704 9,954 Provision for credit losses 1,670 1, Net interest income 20,816 18,605 9,314 Other revenue items 11,033 6,143 3,175 Net financial income 31,849 24,748 12,489 Operating Expenses Salaries, wages and benefits 9,479 7,994 5,142 General and administration expenses 4,008 2,257 1,973 Share-based compensation 3,467 2, Business acquisition costs For the three-month periods ended 16,954 13,069 7,810 Amortization of intangibles from acquisition Integration costs 3,000 5,000 Transaction costs 20,500 3,348 25, Net income/(loss) before taxes 11,547 (14,164) 4,349 Tax expense/(recovery) 3,722 (282) 1,337 Net income/(loss) for the period 7,825 (13,882) 3,012 Net income (loss) per share [basic and diluted] $0.05 ($0.11) $