Propel Holdings Inc

TSX:PRL

Earnings Call Transcript

[Operator]

Good morning, everyone, and welcome to Propel Holdings Third Quarter 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded on November 10, 2022, at this time. [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 third 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 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 and 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, 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's discussion and analysis for the quarter ended September 30, 2022, for definitions of our non-IFRS measures and the reconciliation of these measures to the most comparable IFRS measure.

I'm joined on the call today by Clive Kinross, Founder and Chief Executive Officer; Sheldon Saidakovsky, Founder and Chief Financial Officer; and Noah Buchman, Founder and President of CreditFresh. I will now pass the call over to Clive.

[Clive Kinross, executive]

Thank you, Sarika, and welcome, everybody, to our Q3 2022 conference call. I will begin today's call with a brief discussion of how we've been managing our business over the last several months in light of the evolving macroeconomic landscape. I will then provide an overview of our third quarter results and turn it to Sheldon for a more detailed look at our financials. We also have with us today Noah Buchman, who is one of my cofounders and the President of our CreditFresh line of business. Noah will be providing more detail on our recently announced lending-as-a-service partnership with Pathward. And before we open the call for questions, I will conclude our prepared remarks with a look at our progress over the last year since we went public and a review of our strategy and growth drivers.

As discussed last quarter, notwithstanding an uncertain macroeconomic environment, our business experienced strong consumer demand for credit as the economy returned to a more normalized state post COVID. We saw resilience amongst the subprime consumer market as the global economy navigated through various macroeconomic impacts, including continued supply chain interruptions and rising food and gas prices. These observations continue to be true. We see that consumers have adjusted to the new environment and are recalibrating their spending as well as their budgets accordingly.

As we did last quarter, we also continue to see strong wage growth and a strong job market with the latest job reports indicating that the U.S. and Canada added 261,000 and 108,000 jobs, respectively, last month. As expected, we are also continuing to see a general tightening of credit throughout the supply chain. Consumers who at one time would have qualified for a loan at a traditional bank may no longer have access due to a more conservative and risk-averse credit posture being taken across the financial services sector.

As you will recall, Propel and its bank partners were very proactive in this regard and began implementing tighter underwriting and more conservative credit policies in Q1 of this year. Observing that the broader economic variables could present challenges for our consumers, we, along with our partners, also implemented a number of operational and system-related enhancements to better serve consumers as they navigate through the general macro uncertainties.

As a result of these proactive measures as well as the resilience and flexibility we've observed in our consumer markets, we continue to see excellent quality new customer applications with credit risk scores and net monthly income levels increasing notably in the overall portfolio. We have also continued to see strong repayment behavior with delinquency rates continuing to decline throughout Q3.

Against the backdrop of continued macroeconomic uncertainty, Propel continued to produce strong profitable growth in Q3 2022. We know that the proactive measures that were put in place earlier this year were correct. And as a result, we continued to see strong performance metrics throughout the portfolio.

Propel has once again delivered record results in Q3 2022. As compared to the same quarter last year, total originations funded increased by 75% to over $97 million. Ending combined loan and advance balances increased by 115% to $208 million, and revenue increased by 82% to just under $60 million. As a result of our significant growth, continued cost discipline and prudent risk management, we delivered strong profitability on both an IFRS and adjusted basis with net income of $4.2 million and adjusted net income of $3.8 million for the quarter. For the 9 months ended September 30, our net income was $10.1 million and our adjusted net income was $13.7 million, both representing records for a year-to-date period through Q3.

Consistent with the last few quarters, our growth was driven primarily by: first of all, the rollout into new states by our bank partners in 2021, expanding our geographic presence; secondly, the general economic recovery post COVID; third, the addition of marketing partners and expansion of existing marketing channels; fourth, the continued successful performance of graduation and variable pricing capabilities; fifth, the continued transition from brick-and-mortar to online lending; and sixth, as discussed, the tightening on credit criteria across the financial sector, which has resulted in a broader, higher credit-quality consumer base seeking credits across our platform.

Although our total originations funded and CLAB; growth could have been even higher this quarter, we know that the proactive discipline with which we and our partners have approached the uncertain macro environment and our commitment to maintaining strong profitable growth has been an important factor in our success over the last several months. We believe that maintaining a conservative credit risk posture along with our partners into Q4 with a focus on higher credit quality is important to our success in fulfilling our long-term strategy.

Consequently, while we are otherwise on track to meet our ending CLAB forecast, the seasonal lift that we would otherwise experience in Q4 will be somewhat muted due to the deliberate and prudent measures we and our partners continue to have in place. As a result, we anticipate that our ending CLAB growth rate for 2022 will come in slightly below the guidance we have provided, while all other metrics continue to perform as expected.

We are committed to maintaining the overall health of our portfolio and continue to produce fundamentally sound, profitable growth. We believe that these proactive measures and a more cautious stance on CLAB growth in the current environment is in line with our strategy and important for our long-term success.

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

[Sheldon Saidakovsky, executive]

Thank you, Clive, and good morning, everyone. Propel delivered record revenues in Q3 2022 of $59.7 million, representing 82% growth over the prior year and $164.3 million for the year-to-date period, representing 86% growth over last year. Revenue growth is the result of record ending CLAB balances and total originations funded, which were driven by the factors that Clive outlined. However, as Clive also noted, we and our partners continue to take a more conservative approach on our underwriting, resulting in slower CLAB and revenue growth than we would have otherwise expected in a more normalized macroeconomic environment.

We realized an annualized revenue yield of 120% in Q3 relative to 143% in the prior year. This change in yield was expected and is in line with our strategy of moving up the credit spectrum to facilitate access to credit for more underserved consumers with lower credit risk profiles. As we and our bank partners continue to expand our offerings across the credit spectrum, grow through initiatives like variable pricing and graduation and as the newer vintages originated through tighter underwriting mature through the portfolio, we expect enhanced profitability. Such margin expansion will come through lower provisioning and charge-offs over time, lower relative customer acquisition costs and operating leverage.

Turning to provisioning and charge-offs. In Q3, you can see that while the provision for loan losses as a percentage of revenue has increased year-over-year from 47% to 54%, we saw a decrease from the elevated 58% mark in Q2. The sequential decrease reflects improving credit performance as a result of the tightened underwriting and enhanced operational processes that we implemented. The improving credit performance that we started to see in late Q2 continued throughout the third quarter and into Q4. Furthermore, I would note that 54% is in line with our target margins for profitability and indicative of strong unit economics and a more normalized growth environment.

With respect to net charge-offs, while we have seen an increase from 19% to 28% year-over-year, the percentage remains below pre-COVID levels. I would also note that while the provision for loan losses tends to be a current and forward indicator, net charge-offs tends to be a lagging measure. We observed the lagging nature of net charge-offs in Q3 as a large proportion of the charge-offs experienced related to originations and the uptick in delinquencies from the prior quarter.

The increase in both metrics can also be attributed to factors that impact the comparable period in 2021, in addition to the factors that apply to 2022. Starting with 2021, U.S. consumers were still benefiting from government stimulus, specifically the economic impact payments that were issued in the early part of 2021. And 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 through Q3 2021.

In 2022, on the other hand, we have experienced a return to a more normalized credit environment and are observing 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 Q3 and heading into Q4, we are expecting first payment delinquency rates that are comparable to what we saw during COVID, which was an exceptional period for credit quality. I would also note, our overall missed payment rates and delinquencies have decreased and moderated from their high points experienced in Q2 of this year. This performance is a reflection of the continued prudent underwriting approach by us and our partners, operating effectiveness and 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 we have previously stated, consumers in our segment of the market are resilient and we believe have been adjusting their budgets and spending behaviors in light of the elevated inflationary pressures and macroeconomic conditions.

In Q3 2022, our net income increased to $4.2 million from $600,000 in Q3 2021, while year-to-date, our net income increased to $10.1 million from $8.8 million in 2021. On an adjusted net income basis, we increased to $3.8 million in Q3 from $2.2 million in Q3 last year. And we generated $13.7 million year-to-date versus $11.9 million in 2021. Finally, our adjusted EBITDA increased to $8.8 million in Q3 from $5 million in Q3 2021 and increased to $27 million year-to-date from $22.7 million in 2021. All of these year-to-date results represent records for the company.

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 acquisitions; and our variable cost structure and cost containment on discretionary spending. 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 and investments made into our 2 new significant growth initiatives, Pathward and Canada, that have yet to be launched and have yet to generate revenue.

With respect to the investments made and expenses relating to Pathward and Canada, we spent approximately $800,000 in Q3 and approximately $1.7 million for the year-to-date period. 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 core business.

The company's adjusted net income for Q3 was lower than our reported IFRS net income, which is uncharacteristic in a growing scenario. As a reminder, the adjustment to net income removes the required IFRS provision against new and good performing loans that have no indication of underperformance.

Although the portfolio balances grew in aggregate, balances under the MoneyKey programs that served customers with higher credit risk profiles relative to CreditFresh actually declined quarter-over-quarter. The tighter underwriting criteria that we discussed was disproportionately applied and prioritized to the highest risk portions of the portfolio that carry the highest loan loss allowance rates. Given that these higher risk portfolio balances declined, there was an allowance release that resulted in a reversal in the provision adjustment when computing the adjusted net income figure.

Turning to Propel's financial position. We remain well funded to continue executing on our growth plan to launch our new initiatives with Pathward and Canada and to continue paying our dividend. As of September 30, we had $64 million of undrawn capacity under our credit facilities as we increased the capacity of our CreditFresh facility with our existing lender group in Q3 to $160 million from $120 million.

Our cost of credit has increased to 10.5% in Q3 from 9.4% in the prior year, driven by the Fed's continued tightening monetary policy and consequently, the increases in the variable component of our rates, specifically SOFR, LIBOR and the U.S. prime rate. Although these increases are undesirable, our borrowing costs are not as significant an expense to our business compared to loan loss provisions, acquisition costs and people costs.

Our debt-to-equity ratio was approximately 1.5x as of September 30. Given the structuring of our debt facilities, which provides us the capacity for over 4x leverage, we continue to have the capacity to execute on our strategy, and we'll be looking to further upsize our existing credit facilities in light of our future growth plans. We are confident that Propel continues to be well funded for our existing business, the launch of the Pathward and Canada initiatives and to support our dividend.

I will now pass the call back over to Clive.

[Clive Kinross, executive]

Thank you, Sheldon. I anticipate that many of you on the call would have seen the transformative deal we announced with Pathward last month. Entering this agreement was a culmination of over 2 years of due diligence and innovative research and development spearheaded by my Cofounder and President of CreditFresh, Noah Buchman. I would like to hand it over to Noah to provide some more details on this incredible partnership.

[Noah Buchman, executive]

Thank you, Clive, and good morning, everybody. On October 17, we announced a transformational partnership with Pathward, a leading financial empowerment company, formerly known as MetaBank. We will become their primary lending-as-a-service fintech partner. Powered by Propel's industry-leading proprietary fintech platform, Pathward will offer a nationwide sub-36% APR line of credit to consumers through its vast and diversified existing partner network. These credit solutions will be offered online through a seamless integration into the Propel platform. There is a very large segment of the underserved market that qualifies for credit solutions just under 36% APR, which we have always viewed as a tremendous opportunity but a market segment that we would only enter with the right partner and in a way that provided a competitive and strategic advantage.

Expanding our current product offerings to provide this lending-as-a-service capability for Pathward aligns with Propel's strategy of addressing lower-risk markets, and we are pleased to be partnering with a company who shares our mission of financial inclusion. Through this agreement, Propel will provide white label technology and service solution for Pathward's consumer lending capabilities, including loan management software, licensing of AI-powered risk and response scores and credit servicing capabilities. Propel will earn revenue primarily from service and technology fees for the solutions I just outlined, which will scale as the book grows and as the product is offered to more and more consumers.

Due to the structure of the program and Pathward's partner network, the program will have a proprietary distribution channel of millions of consumers. Propel will also facilitate the sale of loan receivables by Pathward to a network of purchasers in a forward flow arrangement. We expect the program to launch in Q1 2023 and be accretive to revenue and net income in 2023 with financial impact continuing to grow into 2024 and beyond. The company will release more details in future financial outlook as we get closer to launch and a definitive rollout plan.

Winning the bid to become Pathward's primary lending-as-a-service partner furthers our position as one of the leading and fastest-growing fintech companies operating in the U.S. market today with a deep expertise in nonprime credit, world-class proprietary technology, an outstanding team and the mission and values that resonate deeply with both the Propel and Pathward teams.

I will now pass the call back to Clive.

[Clive Kinross, executive]

Thank you, Noah, for the overview of a game-changing partnership for Propel. Putting the Pathward partnership in context of our outlook for growth, this agreement aligns with the strategy we laid out over a year ago and will contribute significantly to Propel's long-term growth and profitability. We look forward to providing more details as the program gets closer to launch.

As you may recall, Propel announced its plans to bring our offerings home to Canada by launching a new program here in Q1 2023. I am delighted to announce today that due to the exceptional work by our team, we are accelerating our launch and will be entering the Canadian markets before the end of this year. We expect to announce further details around the new band -- brand and product offering imminently. It is exceptionally exciting for us to be entering a new market with such incredible opportunity. Further details around the financial impact of our Canadian program will be released in our future financial outlook.

As we've mentioned, in light of the uncertain macroeconomic environment, Propel and its partners have deliberately and proactively taken a conservative approach towards underlining since Q1 of this year. As a result, the company continues to see excellent quality credit applications across its platform. As I previously discussed, we believe that maintaining this conservative posture into Q4 and deliberately taking a cautious stance towards growth is prudent given the continued macro uncertainties.

As a result, we expect that we'll most likely come in slightly below the ending CLAB range for 2022 while maintaining strong portfolio metrics and maintaining all other financial targets for 2022. We remain as committed as ever to delivering value to our shareholders through profitable growth and executing on our long-term strategy. Our 2023 guidance remains unchanged. However, as we've discussed today, we have a number of exciting initiatives launching imminently, which will necessitate an update to our future financial outlook, which we will release in due course.

Propel began trading as a public company in October 2021. And since that milestone, the Propel team has done a tremendous amount of work to execute on our mission and strategy. Although the guidance we provided to the market was done so against a vastly different economic backdrop, we have remained disciplined and steadfast in our commitments to the fundamentals and have continued to achieve record profitability and growth metrics amidst the challenging macroeconomic environment. We have also continued to advance on our strategy of graduating consumers up the credit spectrum, serving lower-risk markets and expanding our geographic presence.

Our partnership with Pathward will be incredibly meaningful both from a financial and strategic perspective. Helping deliver a nationwide sub-36% APR credit solution helps us tap into even lower-risk segment of the U.S. market and reach even more consumers across the country. Our imminent entry into the Canadian market is also very exciting for us, allowing us to bring our expertise home and advance on our strategy by entering a vast, new underserved geographic market with an abundance of opportunity.

Our business development pipeline continues to be strong, and we are looking forward to more exciting opportunities and announcements in 2023. The IPO has given Propel a significant platform and the balance sheet to be able to continue to grow and execute on our long-term vision and strategy. And we feel that our deep expertise, our technology and our AI-based capabilities and the stellar track record of execution by our team will open us up to even more opportunities in the near and long term.

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

[Operator]

[Operator Instructions] Your first question comes from Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Maybe you could start off with the charge-off, that increase. Maybe just if you can provide -- I know you said it's some loans from previous periods. But could you give any color in terms of, was it from a certain partner, a certain geography? And certainly, it just kind of caught us off guard a little bit this quarter.

[Sheldon Saidakovsky, executive]

Stephen, thanks a lot for the question. It's Sheldon here. So our -- the net charge-offs, as I mentioned in the remarks, they're lagging from originations from prior periods. So the way things work from an accounting perspective is charge-offs essentially happen after a loan is about over 90 days in delinquency. So if you can imagine, it takes a little bit of time for those loans to flush through the system and ultimately charge off. If you recall last quarter, we mentioned an uptick in our delinquency rates in the early part of Q2. We continued to tighten our underwriting over the course of Q2 as a result, and we continued that tightened underwriting posture in Q3.

So the -- those charge-offs that you're seeing in Q3 are essentially coming from the prior originations that had that uptick in delinquency rates. Keep in mind also that the provision for loan losses is a more current representation of the credit risk in the portfolio, inclusive of the future factors and macroeconomic factors that are built into our model. So the fact that the provision for loan losses has come down relative to Q2, that really is more representative of how the portfolio is performing today. And we're seeing very strong performance continuing into Q4.

[Clive Kinross, executive]

Yes. If I could just kind of maybe say that slightly differently, Steve. As Sheldon mentioned, the charge-offs are for the delinquencies that are greater than 90 days old, again, a function of what we experienced really in the first half of Q2. If you said to me, how is the stuff performing, that less than 90 days old delinquency, as evidenced by our first payment default rates, which is probably at record levels, kind of close to, perhaps even better in many instances than we experienced during COVID, what's our weighted average default rate like? Significantly better than what we experienced in Q2. And in fact, now that we're almost halfway through Q4, we're continuing to see improvement in that area. So when you look at all the other kind of pockets of delinquency, if you will, they're performing materially better than what we saw in Q2. And that will translate, as Sheldon said, into lower provisioning, which you're seeing as well.

[Stephen Boland, analyst]

Okay. I understand that now. Okay. And maybe just on the guidance, you mentioned you're going to be light on that one metric, but you're not changing your 2023 guidance for that metric or maybe you just haven't yet, which basically assumes that there's maybe more acceleration in 2023 or you're going to make -- you believe you're going to make the range that you have right now. Is that a fair statement, I guess?

[Clive Kinross, executive]

So let me say that in a couple of ways. First of all, our CLAB was exactly where we thought it would be and wanted it to be at the end of Q3. The growth of Q4, as I mentioned and as Sheldon mentioned, will be lower than we otherwise would have been in the seasonal period, as a result of which the growth in the CLAB from the end of Q3 to the end of Q4 will not be what it otherwise would have been, even though, as mentioned, we expect this to be another record quarter of growth. So because it's only impacting this quarter, and the originations that we put on this quarter don't necessarily have a material impact on revenues, we'll still hit our revenue number even though we'll start the year at a lower CLAB.

The guidance that we provided for CLAB growth in 2023 is not a dollar amount. It's a percentage amount. So we'll be starting from a slightly lower base than we otherwise would have done and maintain the guidance for growth in the CLAB. The obvious question then is if we're starting at a lower point than we otherwise would have done, how can we maintain the revenue guidance given a slightly lower starting point? And again, we're comfortable maintaining the revenue guidance because of the growth that we're expecting in 2023. And that growth, by the way, is relatively modest and in line with what our original expectations were. And in light of that, we know that we'll be able to hit the revenue and profitability guidance for next year.

[Sheldon Saidakovsky, executive]

I just wanted to really quickly layer on, Stephen, to what Clive said over there. I think what you're seeing in the financials also is we're really effectively managing our expenses. Our acquisition and data costs are reducing as a percentage of revenue and on a dollar-funded basis. We're effectively managing the, call it, operating costs and infrastructure costs. And also in terms of the portfolio, given the tightening on our highest risk portions of the portfolio, we think that at the end of the year, we're trending towards the portfolio being at a higher quality at the end of the year. So all of that's to say that as you translate that into 2023, we'll have some additional operating leverage and a very good quality book coming into the year, which is why we're comfortable maintaining the 2023 guidance.

[Stephen Boland, analyst]

Okay. I'll sneak one more in. Just the partnership with Pathward, primarily known, I thought, as more of a commercial product. Is this kind of like a new -- I guess, a new segment for them, getting into consumer loans? And can you just remind me then, what is their -- you mentioned their partners. What is their distribution to -- for originations?

[Noah Buchman, executive]

Sure, Stephen. So Pathward has, and remember, formerly known as MetaBank until their recent rebranding over the last few months, they've had a consumer lending program within the bank. They're predominantly known, maybe as you were alluding to, in payments and tax. And they have dozens and dozens of partners in those areas, over 60 of them.

And strategically, what the bank is looking to do is to tie it all together by offering this unsecured consumer lending product to their existing consumers in all of their divisions throughout the bank. So we won that RFP, that huge piece of business, in order to facilitate the bank offering a consumer credit product to their existing partners throughout payments and tax. And that is, to my comments earlier, they have millions of them.

[Operator]

Your next question comes from Andrew Scutt with ROTH Capital Partners.

[Andrew Scutt, analyst]

Congrats on the strong growth again. You guys kind of touched on this in the prepared remarks. My first question has to deal with applications. Are you guys still seeing lenders slide down the lending supply chain and seeing stronger creditworthy consumers in your applications? And are the daily applications still growing even with the macroeconomic uncertainty?

[Clive Kinross, executive]

Yes, Andrew, and thanks for the kind words and excellent question. And the reality is we're seeing very, very strong demand, and that's for 2 reasons. First of all, as mentioned, the economy is opening up. Consumers are more in need of credit, and that's one of the primary reasons. And the other reason is there's been the significant tightening across the supply chain. And because of where we sit in the waterfall, so to speak, a lot of the volume that would otherwise be funded ahead of us is dropping into our segment of the market. So demand is incredibly strong.

On the other hand, as mentioned, we and our bank partners have tightened our underwriting quite significantly. And as a result of that, we're being really, really selective in who we fund, just given some of the macro uncertainty. I will tell you that I think that there's probably, in order of magnitude, more originations that we could be doing today than we are doing today on a profitable basis as well and likely growing faster than we're growing and also on a profitable basis. But at the end of the day, we'd rather err on the side of caution, grow a little bit slower than we will otherwise grow, even still approximately 80% year-over-year organic growth heading into 2023. Again, we expect that to be kind of high double-digit growth, organic growth next year as well. And that's on a backdrop of exceptionally tight underwriting and being controlled with our growth in light of that backdrop.

[Andrew Scutt, analyst]

Yes. I agree. Despite the conservative underwriting, the growth is great to see. Another follow-up for me, and you guys might not be able to answer this, but on the Canadian expansion, can you guys maybe talk to -- if you'll be in all the provinces, what products you plan to offer? And any additional details you could provide would be great.

[Clive Kinross, executive]

Yes. I will tell you that ultimately, we plan on being in 9 provinces. As mentioned, we expect to launch that ahead of plan, really, really delighted about that. As I'm sure you can imagine, Andrew, we've worked exceptionally hard this year, first of all, in delivering the results; second of all, in bringing Pathward to market; and third of all, accelerating the Canadian initiative. So we expect to launch that this quarter.

Details around the product, details around the brand, our funding partner and a host of other things, I know that my communications team doesn't want me to steal their thunder. So if it's okay with you, we will be putting that out when we launch. And to reiterate, we expect that to be this quarter. We're very, very excited about the Canadian market. It's a very large market. We believe it to be underserved. And even though we all know that Canada is obviously a much smaller market than the U.S., when you adjust for competition, we believe that the Canadian opportunity ultimately could be just as big as our U.S. opportunity.

[Andrew Scutt, analyst]

I thought I'd ask, and we're excited to see more details as they come out.

[Clive Kinross, executive]

Fantastic. When we're excited to share them with you, trust me. I've had a battle with my communications team over here. And they've told me, "Clive, let's do it with a big, big roaring thunder." So we'll be doing that.

[Operator]

[Operator Instructions] Your next question comes from Pratik Agarwal with Canaccord.

[Pratik Agarwal, analyst]

I have a couple of questions. One is on the acquisition and data costs, which came out around like $0.06 per origination funded in Q3 versus around $0.07 last quarter and $0.10 to $0.11 historically. And I know this could be partly because Propel is focused on existing customers. Are there some other factors that are playing out here? What -- how should we think about that cost item going forward?

And then on salaries, those costs were up 14% quarter-over-quarter. Is this because of new hirings? Or are we seeing some inflationary pressures? Any color on that would be helpful.

[Noah Buchman, executive]

Great. Thanks for the question, Pratik. So in terms of the acquisition and data costs first, yes, we're very proud of the work we're doing in that area. I think we've been saying for a while that we're adding additional new marketing partners and channels, and there's a constant optimization going on strategically with the partners that we work with. So what that means is we're able to pay less effectively for better quality leads across all of our -- all of the channels through which acquisitions come from.

Secondly, just given the acquisition algorithm, we're seeking better and better quality and trying to match consumers better to the products that they're requesting. So what happens over there is the conversion rates are increasing. So in other words, on every application that's hitting our system, we're able to convert more and more consumers into loans. And that's effectively driving down the cost per acquisition on new consumers.

And then thirdly, just when you look at it, the way we report it is on a blended basis, obviously. And I think given the maturation of the portfolio and the tighter underwriting on the front end, meaning we're lowering new consumer originations, that shift, existing consumers that doesn't cost us anything to provide credit to them. So on a blended basis, if your existing consumer funding is growing as a portion of your total originations, the marketing costs will go down by virtue of that, relatively speaking.

Sorry, and I know you asked in terms of the future trend. I mean, I think this is -- it's a reasonable level. I don't -- it is dependent on how fast we would open up new customer originations. And obviously, right now, we're maintaining a very tightened underwriting posture. So I think the level we experienced in Q3 will probably continue over the short term, but it will depend on originations.

And I know that you asked about salaries, wages and benefits. Keep in mind that -- and we -- this is the first time we've kind of talked about it. But obviously, in building out the Pathward program and the Canadian program, we've had to do some hiring. We've had to build out some additional infrastructure. So that's part of what you're seeing in the increased people costs for the quarter. But notwithstanding that, if you look at it kind of as a percentage of our whole cost and the percentage of revenue, I think we're experiencing some good operating leverage on that front. And I don't think they'll be increasing at this rate going forward.

[Clive Kinross, executive]

So the other thing that we're doing over here is we're getting -- as we're getting larger and more important to many of our partners on the marketing side is we're going in and we're cutting different deals with them as well. I mean, I think the largest reason for the decline in the marketing cost is everything that Sheldon went over. But in addition to that, as we have more leverage, as we get bigger, we're able to go in and cut even better deals with them. And our team is doing an outstanding job in that regard as well. So it's also contributing to lower overall marketing costs.

[Pratik Agarwal, analyst]

Got it. Makes sense. And just one last question on credit. I know you said delinquencies are improving. But in general, like how are you seeing credit trends quarter-to-date? Is it fair to say that net charge-offs will trend towards pre-pandemic levels? Or was it like a high watermark this quarter? Just some color on that.

[Sheldon Saidakovsky, executive]

So firstly, Pratik, I think we -- the delinquencies that -- the lower delinquency rates that we've been experiencing over the course of Q3 have continued into Q4. We expect them to -- this trend to continue throughout the quarter, given our tightened underwriting and the very high quality of applications that we're seeing.

In terms of the net charge-offs, ultimately, they will be below pre-pandemic levels because of the shift in the portfolio towards better quality in general. So I think on a normalized basis, we should be kind of in the low 20% range. Now given the dynamics with growth, because that metric, again, net charge-offs as a percent which are funded, is in relation -- first of all, it's a lagging indicator, so it looks at prior period originations. And in addition, it's related to how much origination volume you do in the current quarter.

So if you imagine, if we slow down originations, think about it as the denominator, and you've got charge-offs from prior high-volume periods coming through, it could uptick that rate, even though the quality of the delinquencies are very strong that we're experiencing. Ultimately, once these dynamics flush out and we get back into a normalized growth environment, the net charge-off rate will fall to pre-pandemic levels and, as I said, in kind of the low 20% range.

[Clive Kinross, executive]

Sheldon, if it's okay, I also want to give a little bit of color to that as well. And I want to speak about credit risk, thinking about it in terms of controllable and, call it, uncontrollable variables. And let me start speaking about the uncontrollable variables, which is the macro economy.

As we know, jobs are growing month-to-month. There's certainly inflationary pressure, but jobs are growing even more so at a higher proportion in our segment of the market. And our consumers have adjusted to inflation. They're spending less on discretionary items, spending less on take-out food, on a raft of other areas where they would otherwise be spending. And you could just look at a host of companies that serve our segment of the market, and they're saying consumers are adjusting.

What that's translating to, and it's fascinating kind of to be a part of this, is lower delinquency rates and lower default rates. And I'm talking more in this context about our existing customers than about our new customers. It's fascinating. The subprime consumer, certainly from our vantage point, is performing as the years progressed, has been performing better and better.

In terms of variables that we can control, we know that we have a team that's been working together over here, the founding team, each and every day for over 11 years now. Our executive team has also been working together for many years now. The culture at this company is absolutely top-notch. As a result of that and the expertise, when things don't go according to plan, we know exactly where to look. We know how to -- we know which adjustments to make.

And probably most importantly, we have the culture as well as the infrastructure to execute on those adjustments. And that's one of the reasons that when you talk about the variables in our control, that we're performing vastly, vastly better than our competitors and then the broader market. So as a result of both of those reasons, credit quality has been outstanding. As Sheldon said, if anything, it continues to improve over the quarter.

The only thing I will say maybe just to caveat this quarter a little bit because the credit performance really has been outstanding so far, but Q4 does tend to be a period of 2 periods, if you will, really strong credit performance leading up to Thanksgiving. In your period post-Thanksgiving, you see a big uptick on the demand side with slightly higher default rates. So it's conceivable that we will see a little bit of an uptick in default rates in the back half of the quarter. But even still, we expect this quarter's overall defaults and provisions to be quite a bit better than even what we experienced in the improving Q3.

[Operator]

There are no further questions at the time. I would now like to turn the conference back over to Clive Kinross.

[Clive Kinross, executive]

Thanks so much, and thank you again, everybody, for attending the call this morning. I really do want to congratulate our entire team who've been working tirelessly to ensure we are delivering on what we have committed to, all while creating and fulfilling on the new opportunities we have in front of us. I would also like to thank our investors for your continued belief in Propel and our mission. 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.

With that, have an excellent day. Operator, you may end the call.

[Operator]

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