Propel Holdings Inc

TSX:PRL

Earnings Call Transcript

[Operator]

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 22, 2023. [Operator Instructions] I will now turn the call over to Devon Ghelani. Please go ahead, Devon.

[Devon Ghelani, executive]

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. 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 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 SEDAR today. 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 and the company's management's 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 measures.

I am 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, Devon, 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 the 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 adjusted 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 higher 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 are onetime would have quantified for a loan at a traditional bank may longer -- 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 trend 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 miss payment 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 are seeing subprime delinquency rates decline during these periods.

Some of the reasons for this include, the ability for the nonprime 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 credit 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 pivot if needed, with market dynamics. Sitting behind everything we do is our AI power and underwriting platform and our proprietary technology. We are very fortunate that we have more than 11 years of data and have issued almost 1 million loans and lines of credit that have all contributed to our ability to navigate through the last several months with the urgency and nuance required to profitably operate our growing business.

Now on to 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 advanced 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 platform. 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 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 Sheldon.

[Sheldon Saidakovsky, executive]

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 2 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 tightened the higher risk portion of the portfolio -- 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 CLAB and the ending balance for 2022 of $247.5 million was higher than we had expected at the start of Q4. The higher CLAB was driven by 3 factors. First, the previously mentioned tightening that resulted in originations for higher-quality customers. These higher credit quality consumers typically qualify 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 and 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 CLAB 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 products 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 observed the lagging nature of net charge-offs in Q3 and Q4 as a large portion of the charge-offs experienced 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 to 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 continued 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 related 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 2 new significant growth initiatives, Pathward 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 Pathward 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 quarter.

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 31, 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 1.8x as of the year-end. Given the structuring of our credit facilities, which provides us the capacity for over 4x 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, we'll 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.

[Clive Kinross, executive]

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 credits, 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 were required during the ramp-up phase.

We will continue rolling Fora 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 5-year lending as a service partnership with Pathward. 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 1, 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 mark Propel's entrance into the sub-36% APR market in the U.S. and allow the company to facilitate access to credit to an even larger number of consumers. Additional details regarding formal program launch timing will be provided in the 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 in so far 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 underwriting 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 market through additional variable pricing and graduation programs with our bank partners onboarding new marketing partners and expanding existing channels, a 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 and is driven mainly by our CLAB 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 pathway 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 expansion.

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, both organically or through acquisition. 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 strategy. 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 USD 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.

[Operator]

[Operator Instructions] Your first question comes from Andrew Scutt with ROTH MKM.

[Andrew Scutt, analyst]

First one for me is, do you guys have reported exceptional profitability and 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 managed the 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.

[Sheldon Saidakovsky, executive]

Yes. Thanks a lot for the question, Andrew. I think, firstly, what I would say is that there is 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 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 both 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, 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. We're doing a great job with containing costs and managing expenses in general.

[Andrew Scutt, analyst]

Great. 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.

[Clive Kinross, executive]

Yes. Thanks a lot, Andrew. I think that credit performance has been excellent. And generally speaking, when you -- when credit performance is excellent, that means more customers graduated and so far 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, 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.

With 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 [ taxes ].

[Operator]

Your next question comes from Scott Chan with Canaccord Genuity.

[Scott Chan, analyst]

Clive, just on Fora, you talked about stronger-than-expected since 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.

[Clive Kinross, executive]

Yes. 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, we do lots of homework before we launch these initiatives at a macro perspective and 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 excellence.

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, 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 there. What we have heard anecdotally from other industry sources is there were [ full ] of elevated defaults in Canada in January and February relative to prior years, again, because of our tightened underwriting 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 of relatively low volumes, so take it for what it's worth.

[Scott Chan, analyst]

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

[Clive Kinross, executive]

It's [ 40% ]. 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%.

[Scott Chan, analyst]

Got it. Got it. And then in the U.S. market, with what's going on with deposit runoffs in 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?

[Clive Kinross, executive]

Yes. It's a great question, Scott. And certainly, 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 Bank -- Silicon Valley Bank or any of the others. And consequently, we don't anticipate any direct or indirect implications of what's going on in the regional banking segments. With that said, as you pointed out, Silicon Valley Bank are in the heart of Silicon Valley, they have -- we certainly had vendors and partners with bank accounts with them, and there was a day or 2 there where they instructed us not to send any payments we owe through 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 a pullback 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 too 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 is 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 are otherwise qualify for low-cost credit moving to 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 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 at Silicon Valley Bank with somebody else where they now can go down on those funds. We don't have that risk in our business.

[Scott Chan, analyst]

And Clive, with the 2 new growth initiatives, Fora and Pathward, I get questions on which one of these initiatives could have higher profitability in 2024. Can you maybe kind of talk about that like is one much quick than the other? Or like how should people think about that, albeit it still very early on that.

[Clive Kinross, executive]

I think, Scott, they both are tremendous. I think they are both tremendous initiatives. And obviously, Fora, 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 Pathward, 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, and both of them will certainly contribute to the top line in Fora more so. We expect Fora also to contribute a little bit more to the bottom line in 2024 than Pathward and for them ready 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 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 can 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 into -- as we move beyond 2024 to 2025, we think it's going to be delivering somewhere north of 8 figures from a revenue perspective and margin is certainly in line with what we're expecting in the U.S. business. And certainly, as we -- as Pathward move into the same time line, 2025, it may actually surpass Fora, not from a revenue standpoint, but certainly from a contributional profit standpoint.

[Operator]

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

[Stephen Boland, analyst]

Shel, you mentioned existing customers better performing credit than new customers. Can you talk a little bit about the new customer trends that you're seeing in terms of like 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 the more traditional lenders are tightening?

[Sheldon Saidakovsky, executive]

Yes. Thanks a lot, Stephen. I think there's a couple of things going on when we talk about tightening. I think number 1 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 rate that we're seeing on new vintages of new consumers that were originated through Q4 that are very, very strong, certainly the best over the entirety of 2022.

[Stephen Boland, analyst]

Okay. And maybe second question. Clive, if you can just talk about, much 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 the marketing, the partners that you have, you can identify them? Is it going to be online? Is it through your existing website? What's the marketing angle for growth here in Canada?

[Clive Kinross, executive]

Yes. Yes. 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 -- for almost 12 years. Obviously, and 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 with the marketing side or the risk side, frankly, 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 store fronts that we're providing access to unsecured smaller dollar loans. Today, that number is close to 10,000 to 11,000 storefronts. And if you said to me, what's the reason for that? The main reason for that is the transition in the industry from online -- 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. I think it says low that says supply begets demand. And I certainly think that's what happened in the U.S. online preferred distribution channel compared to going and knocking on doors and standing in line to get access to a product that ultimately is just there or 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 asset, 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 stake side. And that includes organic marketing efforts like PBC, like SEO, through the likes of Google and Facebook and others, we're obviously very seasoned -- direct mail campaigns, which are also part of our organic efforts. And then there's some tremendous marketing partners across Canada who built outstanding businesses and 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 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 book. So there's many more waiting 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.

[Operator]

Your next question comes from Phil Hardie with Scotiabank.

[Phil Hardie, analyst]

So most of my questions have been answered here. So just one quick one for you. I wonder if you could just talk about kind of what you would think about is the 2 to 3 kind of leading indicators, that really do come inform risk appetite at this part of the cycle. And again, either kind of loosening or tightening credit underwriting from here?

[Clive Kinross, executive]

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, this brilliant news, why is the share price so low? That's not -- 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've tightened too much last year in hindsight. And by the way, I'd rather tighten too much than too little. The company is growing at an exceptional rate of respective. And as Sheldon mentioned in terms of the credit performance of new customers, it's been exemplary, and 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 credit performance is clearly a key driver, first and foremost, all 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 million to $250 million range. So every percent decrease, I suppose, from there, we'll add $2.5 million on a pretax 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 of 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 Pathward initiatives, which are a very, very small part of our revenues and profits in 2023. As mentioned, it will actually be a drag on our profits in 2023, not the opposite, but their new nascent programs. And even though we've got an exceptional track record of executing on new programs, by the nature, they pose -- that posed 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 current underwriting posture through the year, which will be a mitigating factor should there be any degradation in credit quantity 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.

[Sheldon Saidakovsky, executive]

Just another thing, Phil, to add, just for our portfolio, in particular, as far as kind of 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 and 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 pay downs and how consumers are redrawing are certainly very important as well.

[Operator]

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

[Clive Kinross, executive]

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.

[Operator]

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