Growth Companies

Small Business Originations Rise at P2P Lender

OnDeck Capital grew its portfolio of small business loans and lines of credit by $369 million in the fourth quarter but still reported a net loss.
Vincent RyanFebruary 24, 2015
Small Business Originations Rise at P2P Lender

This story was updated early Wednesday to reflect the company’s explanation of two return metrics used in its earnings report.

Peer-to-peer small business lender OnDeck Capital reported a greater loss than analysts estimated in the fourth quarter but grew its loan originations by triple digits. In its first quarterly earnings report, it also disclosed lower funding costs and an increase in small business loans purchased by institutional investors.

OnDeck reported a GAAP net loss of $4.3 million, or 13 cents per share, for the quarter, which included “the adverse impact of a $2.1 million non-cash charge related to the increase in fair value of warrants outstanding prior to the IPO.” The earnings loss was smaller than a year ago, when OnDeck reported a GAAP net loss of $5.6 million, or $1.78 per share. Gross revenue hit $50.5 million for the quarter.

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For the full year, OnDeck’s loss totaled $18.7 million, compared with annual losses of $16.8 million in 2012 and $24.4 million in 2013.

“OnDeck delivered strong financial performance during the fourth quarter and full year, primarily driven by the momentum of our direct channel and expansion of our Marketplace business,” said Howard Katzenberg, chief financial officer, in a press release. “We generated triple-digit top line growth during both the quarter and year, all while preserving the credit quality of our portfolio, passing along savings to our customers, and achieving positive adjusted EBITDA in the fourth quarter.”

However, operating expenses at OnDeck rose by triple digits also, to $27.5 million during the fourth quarter. The company attributed the rise to accelerated investment in direct marketing, technology and analytics team expansion, and growth in infrastructure due to being a public company.

The effective interest yield for the fourth quarter of 2014 was 38.7%, down from 43.9% in the comparable prior year period, “reflecting the mix shift in distribution channels, increase in average [loan] term length over the period, and OnDeck’s continuing efforts to lower pricing for customers as it achieves cost efficiencies,” the company said. The average APR of loans originated in the fourth quarter was 51.2%, declining ten percentage points from the prior year.

In an email response to questions from CFO, an OnDeck Capital spokesperson said that “because of the short-term nature of our loans, we have seen our borrowers primarily look at the cost of our loans in terms of the cents of interest paid per dollar borrowed … APR is a way of translating our pricing to customers into an annualized rate which controls for loan term.”


The other metric, “effective interest yield” is also annualized, the spokesman said, “but it reflects the rate of return we achieve on a loan after taking into account certain direct origination costs that are required by GAAP.”

Those costs include internal commissions, external commissions for loans from OnDeck’s strategic partner and funding adviser channels, and underwriting costs.

OnDeck provided an example. For a $50,000 loan, it would send the merchant $48,750 in proceeds at origination ($50,000 less the $1,250 origination fee). Given OnDeck  incurred $1,750 in direct origination costs for the loan, it would record an asset of $50,500 ($48,750 plus $1,750) on its books at origination.

“Effective interest yield represents the corresponding rate for the loan’s total payback of $58,500 over 9 months compared to $50,500,” the company added.

In other earnings metrics, OnDeck said its cost of funds rate during the fourth quarter of 2014 declined to 5.1% of average funding debt, down from 9.9% in the comparable prior year period. The improvement was primarily the result of the company’s continued shift to lower-cost funding sources, OnDeck said, including the company’s securitization that closed in the second quarter of 2014.

The quarterly growth in small business term loans and lines of credit of $369 million led to an increase in provision for loan losses to $20.4 million, up from $10.3 million during the year ago period.

For full-year 2015 OnDeck is projecting adjusted EBITDA between a loss of $2 million and a profit of $3 million.” For 2014, adjusted EBITDA was $0.2 million.

Gross revenue is forecast to be between $254 million and $258 million, a $100 million increase over 2014.

OnDeck’s share price jumped above $21 per share in early morning trading but fell back to $19.51 by 10:45 a.m.

Featured image: Thinkstock