Propel Holdings Inc

TSX:PRL

Earnings Call Transcript

[Operator]

Good morning, everyone. Welcome to the Propel Holdings Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded on August 9, 2022. [Operator Instructions]

I will now turn the call over to Sarika Ahluwalia. Please go ahead, Sarika.

[Sarika Ahluwalia, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's second quarter financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as the company's website, propelholdings.com.

Before we begin, I'd like to remind all participants that our statements and comments today may include forward-looking statements 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 and management's plans for future operations or similar matters which are subject 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, 2021, filed on SEDAR.

Any forward-looking statements we make today are only as of today's date. Except as required by applicable 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 ended June 30, 2022, for definitions of our non-IFRS measures and the reconciliation these measures to the most comparable IFRS measure.

I'm joined on the call today by Clive Kinross, Founder and Chief Executive Officer; and Sheldon Saidakovsky, Founder and Chief Financial Officer.

I will now pass the call over to Clive.

[Clive Kinross, executive]

Thank you, Sarika, and welcome, everyone, to our Q2 2022 conference call. I will start off today's call with an overview of market conditions and how Propel has navigated through the last few months. I will then provide highlights of our second quarter performance. Sheldon will provide a detailed analysis of our financial results. And before we open up the call for questions, I will review our strategy, growth drivers and our financial targets for 2022 and 2023.

Throughout the second quarter, we continued to experience a resurgence in consumer demand for credit post-COVID. Despite some uncertainty in the macroeconomic environment, including inflation pressures and the threat of a recession, we continued to produce profitable growth. Subprime consumers have been adapting through a turbulent economic environment and continue to demonstrate resilience as the global economy is navigating through post-COVID normalization, inflation and geopolitical tensions, all of which have had various impacts on consumers including through supply chain interruptions and rising food and gas prices.

Today, we are seeing strong wage growth, a strong job market and a low unemployment rate. Our data also tells us that consumers seeking credit products through our platform have strong incomes despite the inflationary pressures with incomes increasing at a faster rate than inflation between Q4 2021 and today. This means that while they may need credit to bridge gaps, that on balance, we expect these consumers to maintain their ability to repay.

While this is the picture we are seeing today, our data at the start of the quarter, particularly our delinquency and default rates, showed us that consumers were still in the process of adjusting to the new economic reality. As you may recall, in light of the economic backdrop and ensuing uncertainty, Propel-managed bank partners proactively began tightening credit criteria in Q1 of 2022. In addition, at the beginning of the quarter, our team put a lot of energy into automating and refining a number of our processes to help our consumers and our team navigate through the evolving economic landscape. In hindsight, we know that our thesis was correct and that these measures were the right thing to do.

While delinquency rates began to increase, we saw them peak approximately in the middle of the quarter when the effects of the credit tightening and process improvements began to come through and consumers had the opportunity to adjust. Towards the end of Q2, we saw stronger repayment behavior and improving default performance across our portfolios.

Today, these metrics continue to improve throughout the existing portfolio. Default performance for new customers is better than expected, and our AI-based machine learning underwriting engine is more robust than ever.

At a high level, we have also observed the tightening of credit criteria across the financial services sector. This has resulted in a material increase of new and high-quality applications characterized by higher incomes and credit scores across our platform. This dynamic has also contributed positively to our improving portfolio metrics in the back part of Q2 and into Q3.

Propel delivered record originations, revenue and ending combined loan and advance balances in Q2 2022. This growth was driven by the advancement of our strategy through the following factors: the addition of a new bank partner in Q2 2021; the rollout into 10 new states by our bank partners in 2021, expanding our geographic presence; the general economic recovery and return of demand as a result of easing of COVID-19 restrictions; the addition of marketing partners and expansion of existing marketing channels; the continuing successful performance of our graduation and variable pricing capabilities; and on an industry level, the continuing transition from brick-and-mortar to online lending; and as I just mentioned, the tightening of credit criteria across the financial system, which has resulted in a broader, higher credit quality consumer base seeking credits over our platform.

In light of this significant growth, we delivered strong profitability on both an IFRS and an adjusted basis, which is a testament to our operating discipline, our variable cost structure and the diligent execution of our strategy. You will recall that in periods of high growth, we recognized significant upfront cash costs, and we also booked significant noncash expenses relating to provisioning on new originations under IFRS with very little attributable revenue in the period of origination.

I would also like to highlight the significant reduction in our acquisition cost per dollar funded, which is a result of our improving acquisition strategies, marketing partnerships and continuously refined underwriting and acceptance criteria in addition to originations in the quarter being more heavily concentrated towards existing customers. Our discipline in managing costs and our established infrastructure is expected to provide a solid base for operating leverage as revenue and profitability are expected to accelerate in the second half of 2022 and into 2023.

With that, I will now pass the call over to Sheldon.

[Sheldon Saidakovsky, executive]

Thank you, Clive, and good morning, everyone. Propel delivered record revenue in Q2 2022 of $54.1 million, representing 90% growth over the prior period; and $104.6 million for the first 6 months of the year, representing 88% growth over the comparable period.

The revenue growth comes as a result of our record loan balances and total originations funding, which were driven by the factors that Clive outlined, including our operational expansion and supportive macro tailwinds.

We realized an annualized revenue yield of 127% in Q2 relative to 154% in the prior year. This change in our yields is in line with our strategy going up the credit spectrum to facilitate access to credit for more underserved consumers with lower credit risk profiles. Along with the declining yields, we expect to see decreasing net charge-offs over the remainder of the year and beyond. We expect new capabilities like variable pricing and graduation, the continued expansion of products and geographies served through the Propel platform as well as other operational efficiencies and process improvements which we've invested in to drive continued portfolio growth and profitability through lower provisioning and charge-offs and lower relative customer in costs.

Turning to provisioning and charge-offs. In Q2 2022, you can see that the provision for loan losses as a percentage of revenue has increased, and net charge-offs have increased over the period as well. The provision for loan losses as a percentage of revenue was 58% in Q2 2022 as compared to the 38% in Q2 2021. For the year-to-date, we experienced an increase in the provision as a percentage of revenue to 52% from 32% in the prior year. Net charge-offs as a percentage of total funded increased to 25% in Q2 2022 from 16% in the prior year, and net charge-offs increased to 23% for the year-to-date from 18% in the prior year. The increase in both metrics can be attributed to 2 distinct sets of factors, those that impact the comparable period in 2021 and those factors that apply to 2022 this year.

Starting with the prior year. U.S. consumers were still benefiting from government stimulus, and demand continued to be muted. Specifically, 2 economic impact payments issued in Q1 2021 in the amount of $600 and $1,400, respectively, contributed to lower portfolio growth, stronger repayment performance and exceptional credit quality. This resulted in uncharacteristically low provisioning and net charge-offs in Q2 2021.

In Q2 2022, we experienced the return to a more normalized credit environment given the lack of government stimulus and higher demand for credit from our consumer base driven by the post-pandemic opening up of the economy. Notwithstanding tighter underwriting, demand for credit and corresponding originations were much stronger than expected, which, among other things, contributed to higher defaults and provisions for loan losses.

As a reminder, in periods of high growth, provision for loan losses as a percentage of revenue tends to be higher as new consumers have higher default rates relative to those in a mature portfolio. And under IFRS, we are required to book expected credit losses on new originations and accounts in good standing, which drives provisioning higher. As Clive mentioned, the defaults were weighted towards the first half of Q2, which resulted in higher provisioning and the buildup of allowances for loan losses against the portfolio.

Throughout the quarter, we rolled out some meaningful technological enhancements and operating efficiencies and continued refining underwriting. In addition, payment behavior indicates that consumers have started adjusting their budgets in accordance with the inflationary environment, and we have seen defaults come down in the latter half of Q2 and into Q3. It is also important to note that our portfolio composition at the end of Q2 comprises a higher proportion of consumers with higher incomes and credit scores in relation to prior quarters. This is due to the broad-based tightening of credit criteria across the financial services sector and our vigilance in managing risk. We believe the long-term trend in our credit metrics is unchanged. Net charge-offs remain below pre-COVID levels. We are currently seeing higher quality applications across our platform, and initiatives such as variable pricing and graduation are also expected to result in more lower-risk consumers in our portfolio.

In Q2 2022, net income decreased to $2 million from $2.5 million in Q2 2021, while adjusted net income improved to $4.3 million from $3.9 million in the comparable period.

The change in net income is attributable to many factors. Record revenue, a decrease in per-dollar funded acquisition and data costs, reflecting both originations for the quarter being more heavily weighted toward existing consumers and improvements in costs relating to new acquisitions and our variable cost structure and cost containment on discretionary spending all had positive contributions to profitability. These factors were offset by higher upfront costs and provisioning for loan losses relating to significant growth in originations, higher defaults earlier in the quarter and additional operating expenses as we transition from a private company to a public company. In addition, as mentioned in prior calls, the comparison to Q2 2021 is tricky as that period was skewed by slow growth and uncharacteristically high credit performance. We believe adjusted net income is a better representation of the company's core profitability as it removes provisioning against newly originated accounts and accounts in good standing.

As a result of quarter -- a quarter of record absolute growth in originations, we took a material adjustment for provision for loan losses on new accounts and accounts in good standing of $3 million pretax, which we add back to net income figure to reflect adjusted net income.

Turning to Propel's financial position. We remain well funded for growth and to continue paying our dividend. As of June 30, we had $53 million of undrawn capacity under our credit facilities. Our cost of credit has declined from the prior year due primarily to restructuring our CreditFresh debt facility as well as the retirement of a more expensive term loan.

We do know, however, that with rising interest rates, our cost of debt funding increased over Q1 2022, and we expect to continue increasing with additional Fed rate increases given that a portion of our interest rates are tied to variable components, including SOFR, LIBOR and the U.S. primary. While an increase in the cost of debt is undesirable, we do not expect it to materially impact our plan from either an operational or financial perspective. We continuously work towards optimizing our debt facilities and managing treasury as efficiently as possible. Our debt-to-equity ratio was approximately 1.1x as of June 30. Given the structuring of our debt facilities, which provided us the capacity for over 4x leverage, we continue to have the capacity to execute on our growth plans.

I will now pass the call back to Clive.

[Clive Kinross, executive]

Thank you, Sheldon. While we remain highly attuned to leading indicators that could impact the performance of our portfolio, we are still seeing an abundance of opportunities for sustainable and profitable growth. We remain confident that geographic expansion, the introduction of variable pricing and graduation capabilities over our platform, new and existing marketing partnerships and strong consumer demand for credit will continue to drive profitable growth this year and next. Furthermore, with the industry-wide tightening of credit criteria, we have the opportunity to grow while improving the quality of our portfolio and serving more underbanked consumers.

We touched briefly on some enhancements we have made to our platform that will improve the customer experience and our operating efficiency. We are always enhancing our proprietary technology platform, and we expect that as we continue to scale, we will see higher adjusted EBITDA and net income margins.

Our operating and financial targets for 2022 and 2023 remain unchanged. Thus far in 2022, we are ahead of our target growth rate for combined and advance balances. This is also leading to a decline in our revenue yield as the portfolio is comprised of more lower-risk consumers, which is consistent with our strategy. We expect profitability expansion in the back half of the year driven by the operational efficiencies we have implemented, lower relative provisioning and continued operating leverage. We also expect rising interest cost to impact profitability, albeit to a lesser extent than other costs.

Before we open the call to Q&A, I will revisit our strategy for growth. Our strategic pillars remained unchanged from our last call: graduating consumers up the credit spectrum; servicing lower-risk markets; increasing our geographic presence; and delivering high-quality products and services with exceptional service. We also continued to invest in business development. We are excited about our entry into the Canadian market, which is on track to be launched by Q1 2023. And we are working on other corporate development initiatives that are expected to expand both our service offering and geographic presence in innovative ways.

We remain a relatively small player in a very large market, and we feel that our proprietary technology platform and the history of execution by senior leadership will lead to additional significant growth opportunities beyond those contemplated in our guidance in the near and medium term.

That concludes our prepared remarks. Operator, you may now open up the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Andrew Scutt from ROTH Capital Partners. .

[Andrew Scutt, analyst]

Congrats on the strong results. So looking at the revenue growth in the quarter, it looks like a lot of it came from the CreditFresh program, and you guys cited the variable and graduation programs. Can you guys kind of talk to how often you're seeing customers redraw, maybe how quickly you're able to graduate them to better rates and just what's driving the growth there?

[Sheldon Saidakovsky, executive]

Yes. Thanks a lot, Andrew. It's Sheldon here. So I think overall, we're graduating consumers that have good payment history with our products. So typically, a customer has to exhibit in excess of 6 to 8 months of good payment history before we would consider graduating them to better rates. So that's obviously driving -- we provide them with higher credit limits as well as lower cost of credit. So that's driving some of the growth. And what's great with that is consumers stay with Propel products over the longer term. And there's -- any time they come back for any of their credit needs in the future. So that's a big part of that, and we continue to plan that, that's going to drive future revenue growth.

And sorry, your -- the other part of your question, can you please repeat that, Andrew?

[Andrew Scutt, analyst]

Just kind of how often you're seeing redraws in that program maybe relative to some of the other programs you guys have, lending programs.

[Sheldon Saidakovsky, executive]

Yes. So I think overall, with the majority of our portfolio today, not only with CreditFresh but with the MoneyKey brand as well, consists of line of credit products. We do have some installment products under the MoneyKey brand as well. But I think overall, the redraws on our line of credit products are consistent across the programs. And I think the good thing with that is consumers are taking exactly what they need for their immediate needs, and they come back and draw quite frequently, paying down and then redrawing back up when they need additional credit. So I think it's a pretty meaningful kind of utilization of their credit, so they're doing it quite frequently.

[Clive Kinross, executive]

Yes. And if I could just add, Andrew, just looking at this quarter and contrasting it to what we saw in particular over COVID, we -- as I mentioned, we saw strong demand right across the board for all the reasons that I mentioned. And that was from potentially new customers. We also saw strong demand from our existing customers.

When we speak about tightening our underwriting, we're speaking about it in the context, first of all, of new customers as well as our existing customers who are coming back for redraws or existing customers who have either paid back of a loan or paid down on their facility and want to draw down more. This criteria that we have in place that, again, with discussion -- of the discussion with our bank partners, we're able to partner and loosen as appropriate.

So we saw significantly stronger demand from our existing customers as well this quarter. The tightened underwriting that we implemented in consultation with our partners allowed us to not only grow that book over the quarter but do it in a controlled fashion whereby we were able to take default rates, which again spiked from both new and existing customers by mid-quarter. And with the processes and tighter underwriting that we've put in place, we're able to bring those down quite materially towards the end of the quarter and into Q3. But to reiterate, the stronger demand we're seeing both -- from both new and existing consumers.

[Andrew Scutt, analyst]

Great. One more follow-up for me, and I'll jump back in the queue. But I think one of the most exciting things you guys have gone through is the opportunities to enter new geographies, as you talked about. Can you talk about any opportunities you might see in the States in the second half of the year and then kind of provide an update on the 2023 planned entry into Canada?

[Clive Kinross, executive]

Yes. No, I don't disagree. This is -- we're at the starting point of what we believe is going to be a global industry leader. And by global, obviously, I'm referring partially to geographic expansion. And by industry leader means we want to be the #1 player in the markets that we operate. As it relates to Canada, it's an initiative that a lot of people in the company are working on at the moment. Obviously, there's a huge legal and compliance burden that we need to make sure is as robust as our regulatory framework is in the U.S. or compliance system is in the U.S. In addition to that, there's lots of partners, both marketing and underwriting partners, that we're onboarding.

And as I'm sure you can appreciate as well, we also need debt capabilities for that program as well. We're quite excited on all fronts about how that's developing. And while we said that we will get that launched by Q1 of 2023, myself and the team are obviously working hard to see if we could perhaps accelerate that. And just to reiterate, that is going to be a tremendous opportunity for the business, which isn't included in any of their guidance, not for 2022 and perhaps for 2023, where we expect the Canadian business to have certainly a material impact in 2023.

As it relates to geographic expansion in the U.S., it's another area we believe there's tremendous opportunity for expansion. And we are looking at other types of initiatives where we could roll out with bank partners our services and our offerings right across the country. Stay tuned. We hope to have some announcements in that regard over the coming months.

And the other area that's obviously a significant focus to us is our ability to serve consumers higher up the credit spectrum in the markets that we operate. And the business development and corporate development team have just made such incredible inroads in that regard. We've never wanted to get into those markets unless we had a well-thought-out strategy with the right partners and some type of edge over lenders that are already participating in that market.

We believe that we've established that and are working at the final stages of what we hope and expect will be a significant partnership that will enable us to expand and offer our services to consumers in the U.S. at rates below 36% and, in so doing, dramatically, obviously, expand our ability to offer credit to consumers across the U.S.

Outside of America, we have looked at several acquisitions over the past several months since going public. There's a couple of really interesting ones at the moment that we're taking a good hard look at that will allow us to expand into other geographies as well. I don't want to put -- I don't want to even state what the probability of doing those deals is one way or another other than to say we're a global business and are constantly looking at opportunities to work with best-in-class management teams in bringing our best practices, coupled with their products, to market in different geographies.

[Operator]

Our next question comes from Stephen Boland from Raymond James.

[Stephen Boland, analyst]

Maybe just start off with the charge-offs. You did mention they're elevated. That charge-offs, that rate or that trend started to improve. Could you just maybe a little bit more detail in terms of what was the source of the charge-offs, that rise? Was it a specific geography, a partner, source of distribution? What did you notice? And obviously, how was that corrected?

[Sheldon Saidakovsky, executive]

Yes. Stephen, so I think from a charge-off perspective, I think -- as we've mentioned, I think we headed into Q2 with overall, ourselves and our bank partners, with a tightened underwriting approach. And we started seeing obviously inflationary and macro pressures impacting consumers in general, which were offset to a large degree with the wage growth and employment numbers we were seeing.

Notwithstanding that, we did experience some higher net charge-offs in the beginning of Q2, and I would say that was coming probably more from our existing consumers rather than new -- than the new consumers that were going through the underwriting that was tighter heading into the quarter. So I would say that we saw that across the board. We continue to refine our underwriting and implement a number of process enhancements and tech efficiencies to help consumers that were in delinquency and to rehabilitate them. And also, what we observed is an adjustment, just a general adjustment from these consumers over the quarter. And all of those factors put together, we saw a decrease in charge-offs and delinquencies in the back part of the quarter, and we're seeing very strong credit performance in Q3 so far.

[Clive Kinross, executive]

Stephen, let me also provide a bit of color, if you don't mind. And again, I do want to differentiate between new customers and existing customers because I think it's an important distinction to make. And with the tightening of credit all the way up to, call it, credit supply chain, particularly with banks actually, we are to seeing higher-quality consumers applying for credit. And when I say higher quality, the 2 variables I would point to is average incomes as average credit scores which this quarter for new customers are the best on record, and new customer default rates are really performing at or above our expectations.

I suspect that these advantages will be the strongest ever. And I could tell you that if you go back to '08 and '09 and look at the lenders who continue to lend to new customers through those cycles, those were very, very strong advantages largely because lenders who continue to lend in that period were able to cherry pick as so many pulled back credits. That doesn't necessarily speak to what happened with our existing consumers who took a little bit of time adjust to inflation. And as we said, despite our tightening, we saw rises in default rates beyond what we were expecting.

I remember in early May, we got together for a 2-day meeting over here, the executive team as well as other members of the management team, to look at what going on and think about ways that we could address what we were seeing as default beyond our expectations. We walked out of the 2 exceptionally productive days with a whole bunch of measures to contain costs, to make sure that we continue to run the business profitably, on the one hand; and on the other hand, put in place a rack of different technology and risk initiatives in consultation with our bank partners to ultimately drive down default rates.

The tech team as well as the operational team did an unbelievably stellar job working with urgency to get those changes implemented. And by the end of the quarter, we were seeing tremendously -- a tremendous turnaround in those delinquencies and default rates. And as Sheldon said, that has continued to follow into this quarter.

If you said to me how much of the improvement are we seeing because of changes in the macro conditions and consumers adjusting to these inflationary environments, I certainly think that's a big component of it. But I also think that are Propel-specific things that we did to drive those defaults done. And I would expect our performance certainly from a default perspective and the cost-containment perspective to be better than our comps.

[Sheldon Saidakovsky, executive]

There's one other -- just a couple of quick additional points I would add to that, and I think that Clive mentioned this. But if you look at the portfolio today, Stephen, you'll see higher constitution of consumers with higher incomes and higher credit scores in general. And that's coming as a result of both the tightened underwriting approach on new customers and the existing -- the best existing consumers continuing to graduate through the platform. So that's an important sort of position to be in, in order to see reducing charge-offs moving forward.

The other thing I would mention is that notwithstanding the net charge-off rate being at 25% for the quarter, it's still below pre-COVID levels, so it is important to compare it to a more normalized period for credit conditions. But with that said, the 25% we expect, moving forward, it to be more in the 20% range.

[Stephen Boland, analyst]

Okay. That's helpful. And maybe just going on that, when I look at your guidance for 2023, which really hasn't changed, you mentioned a number of things: your originations are higher than expected; you've tightened your criteria here midyear; a bunch of other things. But your guidance isn't changing. Is that just you guys being conservative or patient in terms of providing you numbers for 2023?

[Sheldon Saidakovsky, executive]

Yes. I think it's a number of things, Stephen. I think starting with our growth so far for the first half of the year has exceeded expectations. So I think we're heading into the second half of the year with a higher book overall. That will contribute to continued revenue growth and revenue to continue trending our guidance range.

Now even though defaults and provisions have been higher for the first half of the year, given the -- all those factors we discussed, the consumers adjusting to the new economic environment, all the operational and tech efficiencies we've rolled out and the tightened underwriting on new consumers, we expect the provision to drop quite a bit to the back half of the year.

The other thing I would add is -- and you may have noticed this, but we're making significant strides on our operating costs, particularly on the acquisition cost side. Our cost per dollar funded has dropped quite significantly from $0.10 in the comparable period to close to $0.073 in the quarter. So we've done that through, first of all, just doing a lot of work with our various marketing partners and optimizing the channels where the lead applications are flowing from. So we've improved our conversion rates and just improved our cost per acquisition on new originations.

The other piece is, if you look at the constitution of originations in Q2, it was more weighted towards existing consumers. So the existing consumer loan book is growing faster than anticipated as well. And all things considered, growth in our existing customer base does not incur material costs. And also from a default perspective, they perform much better on balance than new consumers.

So if you take all of that into account, the lower operating costs particularly on the acquisition and data side, and our stance on underwriting and credit quality for the second half of the year and given the revenue is trending quite well, we feel comfortable with our guidance.

[Clive Kinross, executive]

And let me jump in as well. I mean I know we're tag-teaming with the answers over here. And I think Sheldon is doing a great job, by the way. I just want to add a little bit more color, if that's okay. As mentioned, there's a host of new initiatives that aren't included in the guidance. The one I could speak to openly is obviously the Canadian launch, but there are other initiatives as well. And the plan will be, once we announce those, and we will obviously be updating our guidance once we finalize our plan for Canada, we'll be updating our guidance for that as well. So let me say that to begin with.

The other thing is we're just seeing such strong credit quality at the moment that we're oftentimes very, very tempted to lean into the stronger demand that we see particularly given the strong credit performance. And probably -- this is kind of just me being candid and open. Probably if we were a private company, we would do that. It would have negative consequences on our short-term profitability, but we know it would have excellent prospects for our longer-term growth and profitability and value creation and so on.

But we're just over 9 months into this IPO, and we're working with new investors. And credibility and doing what we say we're going to do is very, very import to us. And to a large degree, there's elements of the business that we're managing according to the forecasts and the targets that we put out to the market. So that's just to provide some color over here in how we're thinking about things.

And also to make the point, as we have done in prior periods, of a couple of things. First of all, our business' subprime lending to underserved consumers tends to be more resilient during times of economic uncertainty. And hopefully, that's what's starting to prove out over here. And the other thing is we have a lot of levers in the business which we've often spoken about. And it's always excellent when we could kind of walk the walk rather than talk the talk. And hopefully, you're seeing us do that by continuing to drive profitable growth on both the non-IFRS -- on both an IFRS and an adjusted earnings basis.

[Operator]

Our next question comes from Scott Chan from Canaccord Genuity.

[Scott Chan, analyst]

You just talked about a lot of your growth coming from existing customers versus new customers, but you also talked about new clients being kind of stronger and better advantages expected in this part of the cycle. Can you quantify that proportion of the quarter? And is that mix going to change going forward, i.e., more new clients relative to existing, do you think?

[Sheldon Saidakovsky, executive]

Scott, so I think from a proportion standpoint in Q2 out of our -- out of the total originations fund of $97 million, approximately 60% came from existing consumers, whereas 40% came from new consumers. And that has tilted towards existing consumers historically over the past several quarters. Going back probably a year, it's been more like 50-50; and in some cases, higher on the new consumer side. So I think part of that is, as we discussed, we entered the quarter with tightened underwriting together with our bank partners on the new acquisition side. And we focused on extending credit to the existing consumers that were performing well. Notwithstanding the spike in default rates on the existing book, but a lot of that we've observed is normalizing and adjusting towards the back part of the quarter.

So I think moving forward, our inclination heading into Q3 is to maintain a tightened underwriting posture. So I would expect that distribution to stay around what we saw in Q2. Now if the macroeconomic environment, I guess, becomes a little bit more easier or favorable on the consumer side, we can open things up together with our bank partners a little bit for additional new customer acquisitions. But for now, this is our posture, to remain tight in light of what we're seeing.

[Scott Chan, analyst]

The proportion seems to be, I guess, kind of the same near term. So in terms of the acquisition and data costs, that came in a lot lower, $0.073 versus, I think, $0.10 prior. Is that sustainable near term?

[Sheldon Saidakovsky, executive]

Yes. The quick answer, Scott, is yes. And that's coming not only as a result of the growing constitution of originations to the existing customer book. But it's also we've made meaningful improvements on the new acquisition side, increasing conversion rates and lowering the cost per funded loan on new acquisitions themselves.

And I think we've spoken about it a number of times over the past several quarters around new relationships and strategies implemented with marketing partners, new channels, optimizing our cost on the acquisition side. And we're seeing -- and we're seeing that materialize year-to-date. So it's a mix of those 2 factors which obviously will provide continued operating efficiencies and operating leverage to the business over time.

[Clive Kinross, executive]

Scott, let me just also provide a bit of color, if that's okay. And you've heard me say this many times before. We are looking for profitable growth. Both of those variables are important, profitable and growth. And if you ask me to choose one over the other, it's profitable. Profitability in the lending business is absolutely critical. I've spoken many times about not understanding this notion of valuing a lending business on revenue multiples. Especially when the lender is not holding principal risk, I think that is a complete misalignment. I think it creates all sorts of bad behaviors.

And looking recently at Upstart's results, for example, here's a company that was valued on revenues as though the 2008 global financial meltdown didn't happen only 14 years ago, when the whole world almost turned upside down because banks decided to be irresponsible with their lending, to try and grow the top line and not really care that much about credit risk. It's a bad, bad practice, and any lender who's valued off of the top line is misguided, in our view, and it's only a matter of time before it catches up.

What's happening now is they're now realizing that the business model where they had to have these loans, where the market loved them because they weren't taking principal risk, what they're now realizing is you always take principal risk. And they took it through now the buyers of those loans not wanting to come back and buy them because of credit performance. So from our perspective, we need to run this business profitably. We're a lending business, and that's first and foremost.

When we talk about profitability, and I think you can appreciate this, our 2 biggest costs in writing our loan are our provision for loan losses as well as our marketing and underwriting costs, we can toggle with those 2 variables in arriving at a profitable loan, meaning we can absorb -- all things being equal, we can absorb a higher cost per acquisition if the default rates are lower. And similarly, if the cost per acquisition is lower, we can absorb a higher default rate and still be able to provide access to credit to more consumers on a profitable basis.

Given what we're seeing in the market right now and because of our tightening, we're able to perform exceptionally well in both of those 2 categories as it relates to new consumers, meaning we're able to tighten our underwriting to the point that cost of acquisition are exceptionally low and default rates are exceptionally low and continue to grow our business through that right now. We expect that type of trend to continue certainly for the remainder of the year and beyond, which is not to say that these types of CPAs are sustainable at these levels for the long term, but I certainly think that some of the tactics and strategies that we've deployed will lead overall to lowering cost of acquisition costs over the long term and certainly to remain at these levels for the remainder of the year.

[Scott Chan, analyst]

And just on that point on acquisition and data costs and trying it in some originations, record originations in Q2, exceeded Q1. What's the outlook for the back half of the year in terms of originations? And my understanding in terms of seasonality, Q4 is typically the strongest.

[Clive Kinross, executive]

Yes, I think that's absolutely right. Q4 is the strongest. But typically, demand grows as the year continues. So Q3 will be stronger than Q2. and Q4 will be stronger than Q3. Q4, typically by quite a bit, actually. And by the same token, as mentioned, we expect to see continued revenue growth as well as margin expansion both at the EBITDA line as well as the net income line as the year progresses.

[Sheldon Saidakovsky, executive]

Yes. What I would just add over there is, and I think we've said it before, because of what's happened with the pandemic and the quick kind of normalization of credit conditions and what we're seeing in the macro environment today, a lot of the seasonal dynamics Clive mentioned in a normalized environment are not kind of working out the way we would see in typical years. So with that said, and as you've seen, Scott, I think in Q1, we exceeded originations overall beyond -- even on a seasonally adjusted basis. The same thing happened in Q2.

So I think Q3, given the underwriting posture that we're heading into the quarter with together with our bank partners, I think you're to see as big of a growth relative to Q2 than you would see in more normalized times. And I would say the same thing in terms of Q4.

Now with all of that said, it's kind of, if you look at it on a more normal basis, higher growth this year in 2022 in the first half, lower than on a seasonally adjusted in the back half. But all things considered, that's how we hit the CLAB growth targets in our guidance.

[Scott Chan, analyst]

And maybe one last question just on your target for 2022 or 2023. Margins have been a bit kind of lower tracking in previous quarters. What is the largest risk or largest opportunity in your business model to kind of achieve those margin targets or improvement from here?

[Clive Kinross, executive]

Yes. I need to think about that, Scott. But I think at the end of the day, our biggest expense is our provision for loan losses. So when you think about that, that's where the opportunity for expansion or contraction, if you will, comes into play. Now we're going to have higher revenue numbers this quarter and certainly higher revenue numbers in Q4 as well relative to Q2. So the fact that you've got higher revenue numbers, if you keep your provision for loan losses at the same percentage, all other things being equal, that should drive higher profitability just in and of itself.

With that said, as mentioned, we're already seeing stronger performance towards the back half of Q2 and into Q3 largely as a result of our underwriting, also as a result of our consumers adjusting to these inflationary periods. So as a result of that, first and foremost, we think that there'll be a relative reduction in the provisions, coupled with higher revenues, which will drive higher margins in Q3 and into Q4. If that performance is even stronger than what we anticipated to be, then obviously that will lead to even higher profits and higher margin expansion.

Conversely, if we're wrong and if the economy takes a turn, even though from our consumers' perspective doesn't seem like it any time soon, I mean, there's more job applications available today for our segment of the market, I believe, than there'll ever be and there continues to be wage growth for our segment of the market. So while these are very interesting economic times, our consumers seem to be faring fairly well. But if there is some type of change to that posture, as you know, we have other levers in our business where we could control costs and ultimately drive the same profitability, albeit off of a lower overall revenue.

[Operator]

Our next question comes from Phil Hardie from Scotiabank.

[Phil Hardie, analyst]

I think most of my questions have been asked and answered but maybe just got 2 quick ones. Maybe the first one, obviously, you've got a shift in the portfolio or patience towards lower-risk loans obviously with a lower yield. Can you just remind us, from the current trend in average repayment period, really how long you think it takes for the portfolio to kind of turn over to more fully reflect or mirror those recent origination mix and trend and reflect those credit characteristics?

[Sheldon Saidakovsky, executive]

Phil, yes, so it's -- firstly, I would say that the majority of our portfolio today, as you know, consists of open-ended lines of credit. So there's not a defined or definitive term. Consumers are able to draw up and down on their credit limit as long as they're in good standing. But typically, what we see is consumers usually have the loan for around 1 year to 18 months, so it -- but in terms of kind of when you start seeing new originations really get reflected in the portfolio composition and, I guess, the overall loss rates on the portfolio, you're probably looking at 3 to 6 months once they work their way through. So hopefully, that answers your question.

[Phil Hardie, analyst]

Yes. That's perfect. And then just one additional one. Particularly just on the funding cost sensitivity, can you just talk about how much of an increase is contemplated in the current outlook and maybe what thresholds we should be thinking about?

[Sheldon Saidakovsky, executive]

Yes. So firstly, obviously, our interest cost is linked to some variable components depending on the facility to SOFR, LIBOR and U.S. prime. The interest cost has been increasing, but we did contemplate some of that in the guidance and are planning for that in the overall business model and financial plan. Even given the increases in interest rates today, it doesn't materially change our financial plan or position. The business model can absorb higher interest costs in general, although it's obviously not desirable. Good thing is we work with multiple lenders. We have 5 separate lenders, including debt funds and banks. And we consistently work with them to optimize our debt structure and lower our cost of credit.

So as an example, earlier in 2021, we restructured our debt and lowered our cost of debt substantially. And that's part of what you're seeing kind of when you're looking at the quarter-over-quarter decrease in the cost of debt, notwithstanding it's increasing from here on out.

So with all of that said, Phil, right now, our interest cost is probably going to go up about 2% moving forward relative to kind of where we are. But we're going to be working to manage our treasury and cash as efficiently as possible and work with lenders to bring down that cost of debt and structure our credit facilities in the most optimized way in addition to working on potentially upsizing the credit facilities to support some significant growth well beyond 2022.

[Clive Kinross, executive]

We do see a fall from our lenders all the time that were best-in-class. I think we've had a very, very good relationship or do have a very good relationship with them. And rest assured, we're going to be doing what we can to see if we could bring down those costs relative to the cost Sheldon just mentioned. But certainly, in light of what's going on with interest rate hikes, we do expect that to increase irrespective. Fortunately, for our business, even though it's a lending business, we're less sensitive to those costs than, say, a near-prime or prime lender will be.

[Operator]

That does conclude today's questions. At this time, I would now like to turn the call over to Clive for closing remarks.

[Clive Kinross, executive]

Yes. Thank you very much, everybody, for attending this morning's call. Our growth would not be possible without the contributions of the really, really outstanding Propel team. I'd also like to thank our investors for their continued support and belief in Propel's mission of credit inclusion, evolution and experience.

The executive team here is resolute on delivering profitable growth, and we feel that our prospects are stronger than ever. We look forward to sharing developments with you all as they unfold.

Have a great day. Operator, you may end the call.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.