OnDeck Flips To Profitability Much To The Market’s Delight

After a series of earning performances that left investors disappointed, OnDeck reported a profitable Q4.

That performance is largely credited to fewer charge-offs and a reduction in the costs of originating loans.

The mood during the earnings call was also somewhat lighter and improved, too.

“2017 was a transformative year for OnDeck,” CEO Noah Breslow noted at the beginning of his remarks. He reminded investors that the firm, which had a very rocky start in 2017, managed to end the year with its effective interest yield up by over 200 basis points and its net charge-off rate down by over 100 basis points.

Breslow also touted the firm’s nearly $100 million in new funding capacity and a decrease in quarterly operating expenses of $15 million year-over-year.

“We believe OnDeck now has the right foundation from which to drive profitable growth and shareholder value.”

By the Numbers

Originations were up 3 percent over the previous quarter to $546 million. Credit quality of new originations, as measured by both the OnDeck Score and personal credit scores, achieved “record levels” according to OnDeck (though it was not disclosed what that means in hard figures). Loans sold or designated as held for sale through OnDeck Marketplace represented 3.9 percent of term loan originations. Provision for loan losses was $34.4 million and the Provision Rate was 6.4 percent, down from Q3’s 7.5 percent.

OnDeck also reported a net charge-off rate in the fourth quarter of 12.9 percent, down from 16.9 percent in the third quarter of 2017.

Gross revenue increased to $87.7 million, up 7 percent year-over-year, while net revenue was $42.1 million, up 159 percent year-on-year. That pick-up was driven primarily by higher gross revenue and falling expenses. according to OnDeck.

The cost of funds rate was 6.5 percent, which was a slight increase over Q3. OnDeck noted that figure will likely continue to tick up during 2018, as the Fed is forecast to keep raising short-term interest rates.

“To counter this, we will actively seek to tighten our borrowing spreads throughout 2018, as our securitization in certain higher-cost credit facilities become eligible for refinancing,” CFO Howard Katzenberg noted.

What’s Next

Coming off an apparent change in the tide for the business, Breslow told investors the firm is expecting to drive double-digit loan growth in 2018 – buttressed by increasing demand, improved risk management and a “focus on scaling responsibly.”

Breslow pointed in particular to OnDeck’s markedly improving credit performance and loan yields, rebuilt cost structure and better secured funding base as proof that “our lending business is well-positioned to continue margin expansion and profit growth.”

Offering some color to Breslow’s remarks about OnDeck’s improved funding situation, Katzenberg touted OnDeck’s Q4 with BlackRock.

“In Q4, we were pleased to welcome a unit of BlackRock to our funding platform to further diversify our stable of investors,” he said. “As of year-end, we had over $1 billion of committed funding debt capacity, providing over $320 million of excess funding capacity with maturities on our credit facilities laddered through 2020.”

Breslow concluded that while 2017 was all about pulling off a successful reinvention of the firm, 2018 would be about capitalizing on those improvements.

“The economy and employment continue to be robust, and small business confidence is at its highest level in years,” he noted. “And the recent tax reform will be good for OnDeck’s customers, as small business owners see their tax bills reduce and their businesses benefit from consumers having additional discretionary income. Although our market remains competitive, we believe steps we have taken will position us to win.”

That is a big prediction from a firm whose last several earnings reports have inspired a good deal less confidence than this one.

OnDeck’s earnings report last year at this time was so bad, in fact, that experts and market watchers were wondering if it was a portent of not only the company’s doom, but also a sign that the entire marketplace lending segment was ultimately doomed as well.

But for now, investors seem pleased with OnDeck’s turnaround story – and there seems to be a good chance that the momentum will continue in the near term, as OnDeck closed 8 percent higher than it opened yesterday morning.