Propel Holdings Inc.

Good morning, everyone. Welcome to the Propel Holdings fourth quarter and year end 2022 financial results conference call. As a reminder, this conference call is being recorded on March 22nd, 2023. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time for research analysts to queue up for questions. I will now turn the call over to Devin Galani. Please go ahead, Devin.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. Propel's fourth quarter and year-end 2022 financial results were released this morning. The press release, financial statements, and MD&A are available on CDAR, as well as the company's website, propelholdings.com. Before we begin, I would like to remind all participants that our statements and comments today may include forward-looking statements within the meaning of applicable securities laws Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions in the management's plans for future operations, or similar matters which are subject to certain risks and uncertainties. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. The company's actual results could differ materially from those projected or suggested in the forward-looking statements due to several important factors or assumptions, many of which are beyond the company's control, including those risks and uncertainties described in our annual information form for the year ended December 31, 2022, filed on CDR today. Any forward-looking statements we make today are only as of today's date. Except as required by political securities laws, we undertake no obligation to publicly update or review any forward-looking statements. Additionally, during the call, we may refer to non-IFRS measures. Participants are advised to review the section entitled Non-IFRS Financial Measures and Industry Metrics in the Company's Management Discussion and Analysis for the quarter and year ended December 31, 2022, the definitions of our non-IFRS measures, and the reconciliation of these measures to the most comparable IFRS measure. I am joined on call today by Clive Kinross, Founder and Chief Executive Officer, and Sheldon Sadikoski, Founder and Chief Financial Officer. I will now pass the call over to Clive.

Thank you, Devin, and welcome, everyone, to our Q4 and year-ended 2022 conference call. I'd like to begin today's call with a brief overview of how we have continued to navigate the challenging macroeconomic landscape, as well as what we are observing with consumers amidst that backdrop. I will then provide an overview of our record results and turn the call over to Sheldon for a more detailed look at our financials. Before we open up the call for questions, I'll provide an update on Propel's recent strategic initiatives and discuss our operating and financial targets for 2023. In the midst of the current macroeconomic environment characterized by a strong employment market, despite higher interest rates and elevated inflation, our business continued to experience robust, profitable growth in Q4, resulting in a very strong 2022. We saw strong consumer demand for credits, and our data tells a story of an incredible resilience amongst the underserved consumer population. On both sides of the border, we witnessed positive wage growth and a strong job market with the unemployment rate in both the U.S. and Canada remaining at near 50-year lows. Furthermore, the latest job report indicates that the U.S. and Canada added 311,000 and 22,000 jobs respectively last month. Industry data continues to paint a picture of resiliency with underserved consumers managing their budgets appropriately. Furthermore, non-prime consumers continue to have elevated savings from the pandemic even when adjusting for inflation. All of this is to say that we continue to observe strong credit performance in the non-prime consumer segments that we and our bank partners operate. We are incredibly proud of what our team accomplished in 2022. As we communicated on our Q3 earnings call, we entered Q4 with the same proactive, tightened, underwriting, and conservative credit policies that we and our bank partners implemented starting in Q1 of last year. In light of the ongoing macroeconomic headwinds, including high interest rates and elevated inflation, we and our bank partners felt that this was the most prudent approach to managing the business. These measures continue to result in excellent quality new customer applications with higher credit risk scores and income levels. We also benefited from the ongoing tightening of credit throughout the credit supply chain that we have mentioned previously. Consumers who at one time would have qualified for a loan at a traditional bank may no longer have that credit access due to a more conservative and risk-averse credit posture being taken across the financial services sector. This plan continues to be a driver for new and higher credit quality originations. The higher quality loan portfolio, coupled with the resilience we've observed in the consumer market, has led to continued improvement in delinquency and mispayment rates through the end of the year and into Q1 of 2023. We also expect that this higher quality loan portfolio will better position the company to withstand any further macroeconomic headwinds, should there be any. In addition, as we have discussed in previous calls, underserved consumers tend to perform well from a credit perspective during times of economic uncertainty. As our industry has seen during periods of economic stress over the past 25 years, delinquency rates for non-prime consumers typically increase less than those for prime consumers. And in some cases, our industry has seen subprime delinquency rates decline during these periods. Some of the reasons for this include the ability for the non-prime consumer to manage their budget in times of stress and the ability to replace lost income faster. Furthermore, the general tightening of lending standards during these times across the financial services sector benefits companies like Propel who ultimately provide access to higher credit quality consumers who have been turned away from traditional banks. Finally, our business model has a meaningful variable cost component that allows us to be more agile and perfect, if needed, with market dynamics. Sitting behind everything we do is our AR-powered underwriting platform and our proprietary technology. We are very fortunate that we have more than 11 years of data and have issued almost a million loans and lines of credit that have all contributed to our ability to navigate through the last several months with the urgency required to properly operate our growing business. Now onto some highlights for the year. Propel delivered record results for fiscal year 2022. As compared to 2021, total originations funded increased by 71% to over $386 million, bringing our total originations since inception to more than $1 billion. Furthermore, ending combined loan and advance balances increased by 84% to more than $247 million, and revenue increased by 75% to a record of $227 million. Propel also delivered record adjusted EBITDA in 2022 of more than $40 million, which is a 61% increase over fiscal 2021. record net income of more than $15 million, which is a 131% increase over fiscal 2021, and record adjusted net income of more than $20 million, which is a 58% increase over fiscal 2021. These records were a result of our significant growth, prudent risk management, and continued margin expansion through cost discipline, improving operational processes, and increasing automation through technology across our platforms. The growth we experienced over the course of 2022 was driven by, first of all, the growth and expansion of the bank programs, including new geographies. Secondly, strong consumer demand for credits. Third, the expansion of originations through growth with key marketing partners and channels. Fourth, the continued successful performance of graduation and variable pricing capabilities and And fifth, on a macro level, the continued focus on online lending versus traditional brick-and-mortar solutions of several of our peers, as well as the tightening of credit criteria across the financial sector, which has resulted in a broader, higher credit quality consumer base seeking credit across our platform. With that, I will now pass the call over to Shelton.

Thank you, Clive, and good morning, everyone. As Clive discussed, we entered and operated through Q4 with a more prudent and tighter underwriting policy with our bank partners. This intentional tighter underwriting posture ultimately resulted in the following two dynamics. Firstly, more of the originations were to existing versus new customers. And as a reminder, generally speaking, existing customers are better performing from a default perspective and use a lower cost of credit product versus new customers. And secondly, we and our bank partners tighten the higher risk portion of the loan portfolio disproportionately. In Q4, we placed a real emphasis on further improving the quality of our loan book heading into 2023, and consequently, we and our bank partners tightened more than originally planned. Together with our bank partners, we believe that this was the best way to manage the business, and at the same time, this has meaningfully upgraded the credit quality of the loan portfolio. Notwithstanding the tightening, we delivered record C-Lab and the ending balance for 2022 of $247.5 million was higher than we had expected at the start of Q4. The higher C-Lab was driven by three factors. First, the previously mentioned tightening that resulted in originations for higher quality customers. These higher credit quality consumers typically qualified for higher loan amounts, so the shift to better consumers contributed to an overall higher average loan amount and, consequently, a higher loan book. Second, we implemented an accounting estimate change in our charge-off timing from roughly 90 to 120 days past due. We made this change to better align with our internal operational processes, the significant collections and recoveries that are realized beyond 90 days in arrears, and to be more consistent with our financial industry peers and providers of open-ended credit products, such as credit cards and lines of credit. And third, Q4 was a particularly strong period for customer graduation. The graduation program enables those customers that exhibit positive repayment behavior access to higher credit limits as well as lower cost of credit products. These factors also resulted in an annualized revenue yield of 109% in Q4, a decline from 141% in the prior year. the annualized revenue yield for fiscal 2022 decreased to 121% from 148% for fiscal 2021. This change in yield is consistent with our strategy of moving up the credit spectrum to facilitate access to credit for more underserved consumers with lower credit risk profiles. We expect the revenue yield to decline more slowly going forward. Furthermore, we expect that it will continue to be matched with a corresponding decrease in portfolio loss rates moving forward as the portfolio continues shifting to a higher credit quality mix. From a revenue perspective, Propel delivered record revenue in Q4 2022 of $62.5 million. representing 52% growth over the prior year, and $226.9 million for fiscal 2022, representing 75% growth over last year. The revenue growth is the result of record-ending C-Lab and record total originations funded, which were driven by the factors that we outlined earlier. I would also note that given the short duration from the launch of our FORA credit product in Canada to the end of the year, FORA contributed a nominal amount to the company's overall revenue in 2022. Turning to provisioning and charge-offs, you can see that the provision for loan losses as a percentage of revenue has decreased quarter over quarter from a high point of 58% in Q2 to 54% in Q3 and to 53% in Q4. Improving credit performance that we started to see in late Q2 continued through the end of Q4. Furthermore, this improving credit performance in the portfolio is being achieved during a seasonal period where we would otherwise typically see a slight deterioration in quality due to the elevated demand for credit driven by normalized seasonal factors, as well as during a time of heightened macroeconomic uncertainty. Finally, I would note that 53% is in line with our target margins for profitability and indicative of strong unit economics in a more normalized growth environment. With respect to net charge-offs as a percentage of total funded, we experienced an increase to 22% in Q4-22 as compared to 16% for the same period last year, and an increase to 24% for fiscal 22 as compared to 18% for the prior year. Despite the year-over-year increases, the percentage remains below pre-COVID levels. While the provision for loan losses is a current and forward indicator, net charge-offs tends to be a lagging measure. We observe the lagging nature of net charge-offs in Q3 and Q4 as a large portion of the charge-offs experience related to originations and the uptick in delinquencies earlier in the year. Given these dynamics, the net charge-offs as a percentage of total funded may not be the most representative measure to reflect the portfolio's actual credit performance, given that the charge-offs for the period are mostly related to originations from past periods. The increase in net charge-offs was also partially offset by the change in estimates relating to the timing of charge-offs that I previously mentioned. Comparing the 2021 results is challenging as 2021 had uncharacteristically lower charge-offs. The comparative period was impacted by the pandemic, with U.S. customers benefiting from the economic impact payments that were issued in the early part of 2021, and the demand for credit was relatively lower given the continued economic restrictions. This dynamic drove lower customer spending and demand, as well as exceptional credit performance, particularly with lower levels of delinquencies in the first half of 2021, which ultimately translated to lower net charge-offs in Q3 and Q4 of 2021. In 2022, on the other hand, we experienced a return to more normalized credit environment and observed higher demand for credit from our consumer base driven by the post-pandemic opening up of the economy and the shifting macroeconomic conditions. Over the course of Q4, we continue to experience strong credit performance. Our overall missed payment rates and delinquencies have continued to decrease from their high points experienced in Q2 of 2022. This performance is a reflection of the continued prudent underwriting and credit management approach by us and our partners, operating effectiveness including the application of our AI and machine learning capabilities, and the improving credit quality of consumers across the portfolio. As noted earlier, this is evident through the higher and continually increasing average net incomes and credit scores we are observing in relation to prior periods. Finally, as Clive stated, consumers in our segment of the market are more resilient as our industry has seen in prior business cycles. We believe that they have been adjusting their budgets and spending behaviors in light of the elevated inflationary pressures and macroeconomic conditions. In Q4 2022, our net income increased to $5 million from a loss of $2.2 million in Q4 2021. while fiscal 2022 net income increased to a record 15.1 million from 6.6 million in 2021. On an adjusted net income basis, we increased to 6.7 million in Q4 2022 from 1 million in Q4 last year, and we generated a record 20.4 million in fiscal 2022 versus 12.9 million in 2021. Finally, our adjusted EBITDA increased to 13.8 million in Q4 2022 from 2.6 million in Q4 2021, an increase to a record 40.8 million in fiscal 22 from 25.4 million in 2021. The increase in earnings is attributable to several factors, including record revenue, efficiencies in acquisition and data costs, reflecting both originations being more heavily weighted towards existing customers and to lower costs in general relating to new customer originations, and our variable cost structure and disciplined expense management. These factors were offset by higher upfront costs and provisions for loan losses related to the significant growth, additional operating expenses as we transition to a public company, costs related to the build-out of our two new significant growth initiatives, PathWord and FORA, that have yet to generate material revenue, and higher interest costs on our credit facilities due to increasing interest rates. With respect to the costs incurred related to PathWord and FORA, we spent approximately $800,000 in Q4 and approximately $2.5 million for all of 2022. These costs primarily relate to salaries, wages, and benefits that were allocated to these programs. Adjusting for these expenses would have resulted in even higher earnings for the corporation. Before I pass the call back to Clive, I'll provide an overview of Propel's financial position. At the end of the year, we remained well-funded to continue executing on our growth plan. As of December 31st, we had approximately $50 million of undrawn capacity under our credit facilities, including the recently established credit facility to support FORA in Canada. Our debt capacity was further enhanced last month with the closing of a new facility for our CreditFresh brand, increasing the capacity of that facility from $160 million to $250 million. We had originally anticipated a better overall cost of debt with the new facility. However, the cost of borrowing ended up being higher than expected, driven by the Fed increases. It should be noted that despite the higher interest rates caused by these Fed increases, the rates are otherwise an improvement over the prior facility. The new syndicate included both existing and new lenders. Our ability to close such a large facility with new partners, given the current market environment, is a testament to our track record, reputation as best-in-class operators, as well as the quality of our loan portfolio. This increase in interest rates further drove our overall cost of debt to 12.4% in Q4 from 9.7% in the prior year. Our debt-to-equity ratio was approximately 1.8 times as of the year end. Given the structuring of our credit facilities, which provides us the capacity for over four times leverage, we continue to have ample debt capacity to execute on our strategy. We are confident that our strong financial position and significant cash flow generating capability will be able to secure our existing business, the recent launch of FORA, the soon-to-be launch Pathward Initiative, and to support our dividend. I will now pass the call back over to Clive.

Thank you, Sheldon. We remain very excited about our recently announced growth initiatives. As you know, we entered the Canadian market last November with Fora Credit, launching initially in Ontario and Alberta, and now also in British Columbia. While we are still in the early days of this program, Fora has been performing ahead of our expectations. We are experiencing strong growth in the loan book, but we still expect FORA will be a drag on earnings in 2023 due to the upfront infrastructure costs that Sheldon discussed, as well as the marketing costs and IFRS provisioning required during the ramp-up phase. We will continue rolling FORA out to additional provinces this year, and we anticipate the program to have a more meaningful impact from Q4 2023 onwards. We are extremely optimistic about the market opportunity in Canada and that we will be able to successfully leverage our proprietary AI and machine learning capabilities and world-class operations to fulfill a need for online access to credit for underserved consumers across Canada. As you will recall, in Q4 2022, we announced our five-year lending as a service partnership with PathWorks. The initiative is going well. We have in very short order completed the significant task of having all required processes and integrations in place, and we are currently in the final stages of onboarding the initial program purchases. We expect that the program will formally launch in the first half of this year. Similar to FORA, we do not expect significant financial impact from the program in year one, even though the program will be accretive to net income from the outset, given the fee-income nature of the partnership. In line with our growth strategy, this partnership will more propel entrance into the sub-36% APR market in the U.S. and allow the company to facilitate access to credits to an even larger number of consumers. Additional details regarding formal program launch timing will be provided in a future announcement. Turning to our outlook, we are introducing an updated set of 2023 operational and financial targets. As discussed previously, we entered 2023 with a continued tightened underwriting posture with our bank partners. So far in Q1, our core business is experiencing a more normalized environment insofar as we are seeing a more normal tax season for the first time in several years. Consumers are receiving tax refunds and are reacting in line with our expectations by paying down their debt balances. We are also observing tempered demand and strong credit and collections performance. Despite the continued underlying posture with our bank partners, we expect the growth rate for our ending combined loan and advance balances this year to be 45% to 55%. This growth will be achieved through the continued expansion of our addressable markets through additional variable pricing and graduation programs with our bank partners, onboarding new marketing partners, and expanding existing channels, the continued shift towards online lending, and the ongoing rollout of fora. Our 2023 revenue target range of $315 million to $345 million represents a growth rate of roughly 40% to 52% over 2022. It's driven mainly by our C-Lab growth and offset slightly by the expected compression in revenue yield covered by Sheldon earlier. I think it's important to reiterate that the slowly declining revenue yield is consistent with Propel's mission of facilitating credit inclusion by providing lower-cost credit products and higher loan amounts to existing and new customers who have stronger credit risk profiles. Also, as mentioned previously, we do not anticipate Pathwork to contribute meaningfully to 2023 revenue, but would expect the financial impact to be more significant starting in 2024. The adjusted EBITDA margin range for 2023 of 23% to 28% represents an improvement over 2022 and reflects a higher level of operating leverage inherent in our business model as costs are expected to continue decreasing as a percentage of revenue. Furthermore, the maturing of the loan portfolio should result in lower loss rates in the future, resulting in additional margin expansions. The 2023 net income target range of 8.5% to 12.5% is an improvement from the 2022 margin of 7%, and the 2023 adjusted net income target range of 11% to 15% is improvement from the 2022 margin of 9%. The drivers for net income and adjusted net income margin are largely the same as those impacting adjusted EBITDA. However, these targets are also largely impacted by higher interest expense on our credit facilities. As a reminder, our credit facilities include a floating rate component, and the rapid increase in interest rates by the U.S. Federal Reserve since the beginning of 2022 has been greater than expected. In addition to the growth strategies outlined that will drive our 2023 targets, we continue to evaluate additional growth opportunities, whether those include new geographies, new partners, or adjacent products built organically or through acquisitions. We have a robust pipeline of additional business and corporate development initiatives that form part of the company strategy, and I do want to note that the financial and operating targets that we have provided today do not include any of these future opportunities and growth initiatives. In closing, we are very excited about our future. We have more initiatives and growth drivers than ever before and are well capitalized to execute on our growth strategies. We've been a profitable company since 2015. In 2021, the year we went public, we delivered $130 million in revenues and $7 million in net income. In 2022, we grew revenue by 75% and more than doubled our net income. The midpoint of our 2023 guidance represents revenue growth of 45% to $330 million, and we anticipate another year of more than doubling our net income. The business development pipeline is full, the team is more energized than ever, and we remain steadfast in our commitment to delivering profitable growth and executing on our strategic plan with an eye to becoming a global industry leader. That concludes our prepared remarks. Operator, you may now open the line for questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Andrew Scott with Roth MKM. Please go ahead.

Good morning and thank you for taking my questions. The first one for me is to do, you guys have reported you know, exceptional profitability in what's normally a seasonally slow quarter for profitability and very strong operating margins. You touched on it on the prepared remarks, but can you just kind of break out how you manage expenses so well and maybe touch more on the cost for origination funded? You saw a meaningful decline in that in the quarter as well.

Yeah, thanks a lot for the question, Andrew.

You know, I think firstly what I would say is that, you know, there is a lot of operating leverage in our business model, and I think we've said that all along. So as you see, the rate of growth in our revenues, our costs generally start representing a lower percentage of those revenues, therefore expanding our margins. I think, you know, in Q4 in particular, as we noted in our prepared remarks, we entered the quarter with tightened underwriting. We continued to manage the credit side of things very prudently. And to that end, our new originations funded relative to our total originations funded dropped as a proportion. And as we've discussed before, the majority of our acquisition and data costs we incur on new customer originations rather than existing. So as the portfolio matures and there's more and more credit provided to existing consumers, that cost per funded loan will continue to go down. Now, with that said, in 2023, given the growth targets that we're outlining over here, there will be a lot of new customer growth. So the cost per acquisition, the cost per funded acquisition won't be dropping so steeply as we head into 2023. But I think what we saw in Q4 is probably reasonable to assume on a go-forward basis. In terms of all of our other operating costs, You know, we've built out a lot of the infrastructure for this business to enable us to continue growing at the rates that we're growing to launch these new initiatives. So the incremental costs associated with this level of growth are not as substantial. So back to my original point, that's why we expect to continue to see the enhancement of our operating margins. But we're doing a great job with containing costs and managing expenses in general.

And one more for me before I hop back in the queue. You guys mentioned in the prepared remarks kind of better than expected growth in the graduation program. So can you just kind of delve out what you saw there and whether this will be sustainable in 2023?

Yeah, thanks a lot, Andrew. I think that credit performance has been excellent, and generally speaking, when credit performance is excellent, that means more customers graduate, and insofar as that's concerned, that's why you saw the graduation. Over the course of 2023, as you know, Q4 is our highest volume period, not only for new originations, but for graduation as well, which is why you saw more of that happening in Q4. I think you'll continue to see graduation over the course of 2023. 2023, albeit at a slower rate, if you will, particularly in the first couple of quarters of the year. As you move towards the back end of the year, not dissimilar to 2022, you'll see more of that graduation towards the end of the year. But that said, we certainly expect the overall level of graduation to be slower than it was in 2022. And while we expect a little bit more compression over the course of the year in terms of the revenue yield for reasons that we mentioned over the course of the prepared remarks, we do expect there to be a gradual decline in the rate of compression of the revenue yield. By the way, all of that, as you can imagine, is translating to outstanding credit performance, not only into Q4 of last year, but more specifically into Q1 of this year, where we really are seeing very, very stellar credit performance, as well as collections performance, probably better than we've seen in the last several years as we move into, call it, a more normalized credit environment, as well as taxis.

Great. Well, thanks for the details, and I will hop back into queue.

Thanks, David. Thank you.

Your next question comes from Scott Chan with Canaccord Genuity. Please go ahead.

Yeah, thanks a lot, and good morning. Clive, just on fora, you talked about stronger than expected since the initial launch, and I think you referred to the loan book, but I was wondering if you're noticing anything on the credit side thus far.

Thanks a lot, Scott. Let me maybe take that from a couple of perspectives, and I'll obviously address your specific question about credit performance as well. Certainly, you know, we do lots of homework before we launch these initiatives at a macro perspective in trying to understand industry sizing, as well as speaking to several of the partners that we will be working or do work with to understand what we should expect and build our models from there. What we've noticed on the demand side is that the demand that we're experiencing is even stronger than we anticipated, which is obviously excellent. We went into the program also with our own customized underwriting, as you know, also based off of lots of work with our partners, and also, like everything in our business, took a tight underwriting posture. As a result of that, credit performance has been really strong. We did, however, notice an uptick mainly in January and February of this year with credit performance. It was still reasonable, by the way, but higher certainly than what we were experiencing in November and December. From our perspective, it was in line with expectations, notwithstanding the uptick. If you said to me, you know, do we have any reference point to say what it looked like relative to prior years in Canada, we don't because we weren't operational then. What we have heard anecdotally from other industry sources is there were quite elevated defaults in Canada in January and February relative to prior years. Again, because of our tightened underlining posture, we certainly didn't see anything that was overly concerning from our standpoint. I will say that as we've moved into March, that default performance has improved quite a bit. partially because of some of our learnings and changes that we made, and I suspect also partially because of some dynamic that was taking place in the Canadian market in January and February that appears to have corrected itself into March. Scott, I caveat all of those comments by saying that this is all happening from our perspective or from relatively low volumes, so take it for what it's worth.

No, no, no, that's helpful. And can you remind me of the APR of this – new installment product in Canada?

It's a line of credit. Let me correct that first of all, which we believe is the appropriate product for this segment of the population, not only better for them, but for us as lenders, also delivers better economics, and the APR is 46.9%. Got it.

Got it. And then in the U.S. market with what's going on with deposit runoffs and U.S. small regional banks, is there any effect, positive or negative, that you're seeing on Propel's U.S. business or not really?

Yeah, it's a great question, Scott. And certainly, you know, when we started learning about Silicon Valley Bank and Signature Bank and others, obviously we took a good hard look to see if and how we're impacted. looking at our bank partners, looking on the lender side to see if there's any stress over there, as well as on the customer side to see if there's any impact over there. Fortunately, from our perspective, we don't have any direct relationship with Silicon Valley Bank or any of the others, and consequently, we don't anticipate any direct nor indirect implications of what's going on in the regional banking segment. With that said, as you pointed out, Silicon Valley Bank are in the heart of Silicon Valley. We certainly had vendors and partners who had bank accounts with them, and there was a day or two there where they instructed us not to send any payments we owe them to Silicon Valley Bank. All of the vendors who had bank accounts with them said they have bank accounts elsewhere. And we needn't be concerned, even though we obviously were concerned. Fortunately, when the Fed stepped in, the situation with those vendors and Silicon Valley Bank was no longer an issue for us. What we have heard, Scott, anecdotally, is several of our competitors do have credit lines from Silicon Valley Bank, and obviously they were negatively impacted given these developments. From our perspective, we've also heard that a lot of them obviously had to pull back on their lending in light of the fact that they couldn't access these facilities. So we know anecdotally, for the time being, there's less competition in the market. But we certainly wouldn't be realistic for me to say to you that we've actually felt that. We've actually felt their departure from the market. But we know from vendors that they have pulled back. I do think, not dissimilar to what we saw in the 2008 global financial crisis, There's going to be even more tightening through the supply chain. There's going to be more of a kind of a risk-off approach from banks and other lenders who lend to kind of near-prime consumers. And ultimately, just as it was coming out of 2008, we actually expect this to be positive for our business as more and more of those consumers who would otherwise qualify for low-cost credit move into our segment of the market. The other thing I'll mention, Scott, is that even if something were to happen with Silicon Valley Bank, which, again, there's no relationship, we have redundancy in every point of our business, and not only do we have no single points of failure from an operational perspective, but we went to a painstaking effort to open up our credit facility to a syndicate of different lenders, just in case there was any single point of failure. And I suppose some of our competitors are now paying the price for only having one lender, be it Silicon Valley Bank or somebody else, where they now hold all down on those funds. We don't have that risk in our business.

And, Clive, with the two new growth initiatives, four and password, I get questions on, you know, which one of these initiatives could have higher profitability in 2024. Can you Maybe kind of talk about that, like is one much quicker than the other, or like how should people think about that? I'll feed it still very early on that.

I think, Scott, that both are tremendous. I think they're both tremendous initiatives. And obviously, you know, just speaking about 2024 specifically, FORA got started sooner, got started last year. So by the time we enter 2024, we'll be at a higher loan book. And as a result of that, there's more revenues, more operating leverage. and so on in 2024 relative to PathWord, which, as I mentioned, we expect to get going in Q2 of this year. And as that gets rolling, it will take some time to build up scale. So I think in the 2024 time horizon, both of them will certainly contribute to the top line, four or more so. We expect four also to contribute a little bit more to the bottom line, in 2024, then pay for it, and for them really to start contributing both to the top and bottom line in a very meaningful way in 2025. To put that into perspective, we expect FORA to deliver, and we're not giving formal guidance for 2024, by the way, other than to say you could get a sense You could get a sense from the numbers as to where our revenues will be at the end of 2023, just as these programs are kicking in. So you could imagine another year of exponential growth into 2024. You could imagine another year of more operating leverage, so even bigger margins heading into 2024. If I gave you the numbers, you wouldn't believe me anyway, so I'm not going to provide them to you. But what I will say about FORA as we move beyond 2024 into 2025, we think it's going to be delivering somewhere north of eight figures from a revenue perspective. and margins certainly in line with what we're expecting in the U.S. business. And certainly as Pathwood moves into the same timeline, 2025, it may actually surpass for not from a revenue standpoint, but certainly from a contributional profit standpoint.

Okay. Yeah, that makes sense. Thank you very much.

Thanks, Scott. Thanks, Scott.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one.

Your next question comes from Steven Bolin with Raymond James. Please go ahead.

Morning, guys. Sheldon, you mentioned existing customers better performing credit than the new customers. Can you talk a little bit about the new customer trends that you're seeing? In terms of like, you know, are they better quality as well? The number of apps that you're seeing now compared to maybe a year ago, I'm not sure how you track that. Just in terms of the demand, as you mentioned that, you know, the more traditional lenders are tightening.

Yeah, thanks. Thanks a lot, Stephen.

You know, I think there's a couple things going on when we talk about tightening. I think, you know, number one is obviously doing a higher proportion of our originations to existing consumers. But also on the new consumer side, there's a couple of things. When we look at our different brands, the MoneyKey brand serves consumers with higher risk profiles. So there's a bigger proportion of originations going to the CreditFresh consumers who have lower credit risk profiles. And then within CreditFresh itself, we do variable risk pricing. So we're focusing the originations to the best quality consumers within that portfolio as well. And I'm talking about new consumers. So what that's resulting in is incredibly strong performance on new customer volumes as well. And the way we track that, I mean, in a number of ways, but it's really kind of coming from our first payment default rates that we're seeing on new vintages, new consumers that were originated through Q4 that are – you know, very, very strong, certainly the best over the entirety of 2022. Okay.

Maybe a second question.

Clyde, if you can just talk about, you know, I'm not sure on the conference calls you've really been able to talk about the strategy for FORA here in Canada. Maybe you can just talk about, you know, the marketing strategy The partners that you have, you can identify them, you know, is it going to be online? Is it through your, you know, your existing website? What's the, you know, what's the marketing angle for growth here in Canada?

Yeah, yeah, great question. First of all, obviously, the technology for fora as well as the AI and machine learning components have been built off of. the same infrastructure that we've been operating on for almost 12 years. Obviously, there's quite a lot of customization that went into the sites to accommodate the Canadian market, and lots of the partners that we're working with on the bank side or the market or the marketing side or the risk side, frankly, are discrete to Canada. So all of those integrations needed to take place. Let me start off, Stephen, by saying that we've been operating this business for almost 12 years in the U.S. When we started in the U.S., there were about 18,000 brick-and-mortar storefronts. that were providing access to unsecured smaller dollar loans. Today that number is close to 10 or 11,000 storefronts, and if you said to me, what's the reason for that? The main reason for that is a transition in the industry from brick and mortar to online. When we started, I think online was about 30% of the industry, and today I think it's somewhere north of 50% of the industry in the U.S., The dynamics in Canada are different to that, and the main reason they're different to that, I think, is because there hasn't really been a dominant online player who's been well-capitalized and entered the market in Canada. You know, I think it says law that says supply begets demand, and I certainly think that's what happened in the U.S. Online's preferred distribution channel compared to going and knocking on doors and standing in lines to get access to a product that ultimately is just data moving from one account to another. So going to a brick-and-mortar storefront actually seems unnecessary to me in that context. And to a large degree, I think the trend that we saw in the U.S. at a macro level will now start to happen in Canada, given our launch into this market. So let me kind of say that the outset, just the fact that we're here will change the dynamic. From a pure marketing standpoint, we're using all the normal techniques that we use stateside, and that includes organic marketing efforts, like PPC, like SEO through the likes of Google and Facebook and others. We're obviously very seasoned at direct mail campaigns, which are also part of our organic efforts. And then there's some tremendous marketing partners across Canada who've built outstanding businesses. The traffic that we're seeing from them is certainly higher from a volume standpoint than we thought it would be. And as I mentioned in my comments about credit performance to date, the defaults are coming in line with in coming in line with our expectations. So we're really pleased with how that's going. I will also mention that we only have a handful of our partners turned on at the moment as we continue to refine and grow our loan books. So there's many more weighing in the wings to fuel more growth, not only in the provinces that we're currently in today, but to work with us as we expand for credit across the country. Okay, that's helpful. All right, thanks, guys. Thanks so much. Thanks, Stephen.

Your next question comes from Phil Hardy with Scotiabank. Please go ahead. Hey, good morning. Morning, Phil. Morning.

So most of my questions have been answered here. So just one quick one for you. I wonder if you could talk about kind of what you would think about as the two to three kind of leading indicators really to help kind of inform risk appetite at this part of the cycle. And again, either kind of loosening or tightening credit underwriting from here.

Okay. I'll try to take a stab at that, Sheldon. I thought your question was going to be, in light of all of this brilliant news, why is the share price so low? I don't know what the answer to that one is, by the way. But what I will say is, first of all, I think we tightened too much last year. In hindsight, and by the way, I'd rather tighten too much than too little. The company's growing, you know, at an exceptional rate, irrespective. And as Sheldon mentioned, in terms of the credit performance on new customers, It's been exemplary, which is an indicator that we probably just tightened too much. It's not the end of the world. We'll get to where we're going to get to. It may take us a quarter longer than we otherwise would have liked, but we're clearly on our path. I think planet performance is clearly a key driver, first and foremost, is how I would think about it. I remember another important one for me. I think I'm doing these in no particular order, by the way. I think what the Fed does with their fund rates is actually quite important. Nobody could have expected that the Fed fund rates would have increased, I think, by over 4% since a year ago. I remember on our call last year, we were speaking about the sensitivity to interest And I was citing a few examples, if the Fed rates go up by 1% or if they go up by 2%, which at the time felt like a lot to me, that the impact wouldn't be that material to us, certainly didn't expect it to go up as much as it has. Our average loan book, our average debt this year will be, call it in the $200 to $250 million range. So every percent... decrease, I suppose, from there will add $2.5 million on a pre-tax basis to the business. If there are increases above what we expect, obviously that will be a drag, but I will tell you that inherent in the model, we've assumed that there will be additional increases over the course of the year, which was certainly our perspective when we did our modeling a couple months ago, given some of the recent changes in the environment Obviously, there could be some positive deltas as far as that's concerned. And I think the third one is obviously our ability to continue to grow and expand the business and execute mainly the fora and pathway initiatives, which are a very, very small part of our revenues and profits in 2023. As mentioned, we'll actually be a drag on our profits in 2023, not the opposite. But they're new nascent programs, and even though we've got an exceptional track record of executing on new programs, by their nature they pose a little bit more uncertainty than established programs. The growth of our established programs I feel like we have a really good handle on. We'll maintain our tight underwriting posture through the year, which will be a mitigating factor should there be any degradation in credit quality. And likely a few months from now, we'll turn around and say we're probably tighter than we otherwise should have been. And from my perspective, that's never a bad thing.

Just another thing, Phil, to add, just for our portfolio in particular, as far as kind of You know, other things we look at as a leading indicator, obviously default rates and missed payment rates, both the first payment delinquency rate as well as how consumers are performing on a second, third, fourth payment. We look at all of that very carefully, but also what we look at is credit utilization. So, as an example, most of our portfolio today is lines of credit. So, consumers typically will utilize, let's say, about 70% to 80% of their available credit. In Q4, we saw that uptick. Now, that's typical in a seasonally high demand period. In Q1, we've kind of seen that moderate and actually come down a little bit. Q1 has been much more normalized from a tax refund perspective and a normalized Q1. So what we're seeing is higher paydowns, lower utilization, and very, very strong default rates, meaning low default rates. But also as part of that, there's a bit of lower demand in Q1 because of those factors. So originations are a little bit lighter as well. So credit utilization and paydowns and how consumers are redrawing are certainly very important as well.

That sounds great insight. Thank you. Thanks, Phil.

There are no further questions at this time. Please proceed.

Thank you again for attending our call this morning. I really do want to congratulate our entire Propel team on an outstanding year and all the hard work to get us to where we are today. I would also like to thank our investors for your continued support and belief in Propel and our mission of facilitating access to credit for underserved consumers. Believe me, the best is yet to come. On that note, have an excellent day. Operator, you may end the call.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.