NEW YORK, February 11, 2020 /PRNewswire/ — OnDeck® (NYSE: ONDK), the leader in online lending for small business, today announced fourth quarter 2019 Net income of $9.3 million, Adjusted Net Income of $3.3 million and Gross revenue of $111.7 million. OnDeck also announced it had repurchased 7.5 million shares for $33.0 million during the fourth quarter of 2019, bringing full-year 2019 repurchases under its $50 million common stock repurchase program to 10.7 million shares for $44.0 million.
“Our fourth quarter closed out a year of significant progress at OnDeck, highlighted by solid growth in US lending, advancement of our strategic initiatives and improved capital efficiency,” said Noah Breslow, chief executive officer. “In 2019, we grew average loans and finance receivables 15%, expanded ODX, our platform-as-a-service business, combined with a leading on-line small business lender in Canada and repurchased 14% of our outstanding shares. We enter 2020 well-positioned to further expand the core US lending business, scale our international operations to profitability, drive value in the ODX platform and advance our efforts to obtain a bank charter, while increasing earnings per share and return on shareholders’ equity.”
Review of Financial Results for the Fourth Quarter of 2019
Net income was $9.3 million, or $0.13 per diluted share, compared to $8.7 million, $0.11 per diluted share, in the prior quarter and $13.9 million, or $0.17 per diluted share, in the year-ago period.
Adjusted Net Income was $3.3 million, or $0.05 per diluted share, compared to $7.8 million, or $0.10 per diluted share, in the prior quarter and $15.7 million, or $0.20 per diluted share, in the year-ago period.
Loans and finance receivables grew $38 million, or 3%, sequentially and $96 million, or 8%, from a year ago to $1.3 billion reflecting growth in all loan types and the closing of the Evolocity transaction in April 2019. Annual growth was also driven by lengthening the duration of the portfolio as the weighted average maturity of term loans originated in the fourth quarter of 2019 was 13.2 months compared to 11.8 months in the year-ago quarter. Origination volume of $618 million decreased 2% from the prior quarter and 6% from the year- ago quarter primarily reflecting lower conversion rates on higher application volume and longer portfolio duration. Demand for lines of credit remained strong, which now account for 23% of total loans and finance receivables at quarter-end, up from 21% at September 30, 2019 and 16% a year ago.
Gross revenue of $111.7 million was essentially flat with the prior periods as the benefit from portfolio growth in Interest and finance income was offset by a decline in Other revenue. Portfolio Yield of 34.8% decreased from 35.1% in the prior quarter and 36.5% in the year-ago quarter reflecting a lower blended yield on new originations, higher past due balances and an increased proportion of lines of credit. Other revenue was down slightly due to lower fee income in ODX reflecting the wind-down of a bank relationship.
Interest expense decreased slightly from the prior quarter and prior year to $10.7 million reflecting improved borrowing costs, as debt balances increased to fund portfolio growth and share repurchase. The Cost of Funds Rate improved to 4.8% from 5.6% in the year-ago quarter and 5.3% in the prior quarter reflecting lower market interest rates and lower borrowing spreads on issued debt.
Net Interest Margin was 29.1%, essentially flat with the prior quarter and down from 29.9% in the year-ago quarter as a lower portfolio yield was partially offset by improved funding costs.
Provision for credit losses was $44.0 million, up slightly from the prior quarter and up $4.2 million from the year-ago quarter largely reflecting increased reserves for portfolio growth. The Allowance for credit losses increased to $151 million at year-end, up $3 million from the prior quarter-end and $11 million from a year ago. The Reserve Ratio was 12.2% at December 31, 2019, essentially unchanged from the prior and year-ago quarters. The Provision Rate of 7.1% increased from 6.8% in the prior quarter and 6.0% in the year-ago quarter. The Net Charge-off Rate improved slightly from the prior quarter to 13.5% reflecting higher recoveries and increased from 12.0% in the year-ago quarter. The 15+ Day Delinquency Ratio increased to 9.0% from 8.5% the prior quarter reflecting softness in certain industries including wholesale trade, manufacturing and transportation.
Total operating expense of $54.4 million increased $2.7 million from the prior quarter and $9.5 million from the year-ago quarter. The sequential increase was driven by several items including a write-down of certain capitalized software costs, an increase in reserves for unfunded commitments and severance costs. The annual change also reflected costs related to our strategic initiatives including our acquisition in Canada. The Efficiency Ratio increased to 48.7% from 45.9% the prior quarter and 41.1% the year-ago quarter while the Adjusted Efficiency Ratio* increased to 46.7% from 43.8% the prior quarter and 39.4% the year-ago quarter.
We had a net benefit for income taxes of $5.4 million in the fourth quarter, which was driven by a $7.5 million reversal of the valuation allowance against the company’s deferred tax asset. There was a net tax benefit of $1.6 million in the prior quarter, which included a $2.8 million tax credit related to prior years’ research and development costs. Excluding these benefits, Provision for income taxes was approximately $2.1 million in the fourth quarter and $1.2 million the prior quarter. There was no income tax expense in the year-ago quarter as taxable income was completely offset by net operating loss carryforwards.
Total assets increased 2% from the prior quarter and 12% from a year ago to $1.3 billion reflecting portfolio growth. Cash and cash equivalents were $56 million, down from approximately $60 million in the prior and year-ago quarters. Debt increased to $915 million from $871 million at September 30, 2019 driven by the funding of portfolio growth and the share repurchase program, and increased 12% from $816 million a year ago primarily reflecting loan growth.
Total OnDeck stockholders’ equity of $294 million was down from $315 million the prior quarter as the $33 million of share repurchases outpaced fourth quarter retained earnings and equity issued for stock-based compensation. However, book value per diluted common share outstanding increased to $4.26 from $4.15 at September 30, 2019 and $3.75 a year ago as the diluted share count decreased from 79.5 million a year-ago and 75.9 million the prior quarter to 69.0 million at December 31, 2019.
Review of Financial Results for Full Year 2019
Net income of $28.0 million, or $0.36 per diluted share, increased from $27.0 million, or $0.34 per diluted share, in 2018. Adjusted Net income of $26.0 million, or $0.34 per diluted share, decreased from $44.8 million, or $0.57 per diluted share, in 2018.
Gross revenue increased 12% to $444.5 million, primarily due to increased interest and finance income driven by portfolio growth. Average loans and finance receivables grew 15% from 2018 and Net Interest Margin increased 30 basis points to 29.2% as funding cost improvements outpaced yield compression. Other revenue increased slightly from 2018.
Credit performance normalized in 2019 after a strong 2018. Provision for credit losses increased 17% to $173.4 million and the corresponding Provision Rate increased from 6.0% to 7.0%. The Net Charge-off Rate increased to 13.6% due in part to elevated losses on loans originated in the second half of 2018 and the 15+ Delinquency Ratio increased to 9.0%, due in part to our decision to retain and collect late stage delinquent accounts in-house. The Allowance for credit losses increased at a rate commensurate with portfolio growth and the Reserve Ratio of 12.2% was unchanged from a year-ago.
Operating expenses increased to $206.3 million driven by investments in our strategic growth initiatives including developing a new modular platform for ODX, investments in the international business including the acquisition of Evolocity in Canada, launching equipment finance and costs related to our pursuit of a bank charter. These investments resulted in our Efficiency Ratio and Adjusted Efficiency Ratio increasing to 46.4% and 44.0%, respectively.
OnDeck accrued for income taxes in 2019 as US federal net operating loss carryforwards were fully utilized. However, the company recorded a net $3.5 million tax benefit in 2019 driven by a $7.5 million reduction in the valuation allowance against our deferred tax asset and $2.8 million tax credit related to prior year research and development costs. The full year 2019 effective tax rate is not indicative of an ongoing effective tax rate due to the aforementioned $10.3 million of discrete items; excluding those items, our effective tax rate would have been approximately 34% which is above the US statutory rates primarily because we do not record tax benefits from losses in our international subsidiaries.
Authorization to Repurchase Common Shares
On July 29, 2019 the OnDeck Board of Directors authorized the repurchase of up to $50 million of common stock with the shares to be held in Treasury and available for possible re-issuance. During the third quarter of 2019, OnDeck repurchased 3.2 million shares for $11.0 million and during the fourth quarter of 2019 the company repurchased 7.5 million shares for $33.0 million. The average all-in cost of shares repurchased during 2019 was $4.11 per share. The company continued to repurchase shares during January 2020 and has nearly fully utilized the initial $50 million authorization.
On February 10, 2020, the Board authorized the company to repurchase up to an additional $50 million of common shares. Any share repurchases will be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any share repurchases will be subject to market conditions and other factors determined by the company. The company may suspend, modify or discontinue the program at any time in its discretion without prior notice. This press release is neither an offer to purchase nor a solicitation of an offer to buy any securities.
Current Expected Credit Loss (CECL) Implementation
OnDeck adopted the new accounting standard for measuring credit losses on financial instruments January 1, 2020. Upon adoption, the net change in the required Allowance for credit losses was minimal with an approximately $3 million decrease driven by lower required reserves for lines of credit. Additionally, the $7 million reserve for unfunded line of credit commitments previously included in Other liabilities was eliminated as part of the adoption. These changes resulted in a net increase of approximately $10 million in Stockholder’s equity upon adoption. The prospective impact on the company’s Provision for credit losses and Reserve Ratio is expected to be immaterial and is included in the 2020 financial guidance provided below. However, the new CECL methodology will increase cyclical volatility in the measures due to the requirement to incorporate future economic impact predictions in the analysis.
2020 Financial Guidance
OnDeck provided the following financial guidance for full-year 2020:
- Gross revenue of $465 million to $485 million,
- Net income of $25 million to $35 million,
- Adjusted Net Income of $25 million to $35 million.
Full-year 2020 financial guidance assumes the following trends relative to full-year 2019:
- Low-teens portfolio growth rate,
- Slight compression in Net Interest Margin reflecting a lower Portfolio Yield and increased leverage partially offset by a lower cost of funds,
- Higher Provision for credit losses driven by portfolio growth,
- Improved operating leverage,
- An Effective Tax Rate of approximately 30%, excluding an estimated $10 million valuation allowance release in the fourth quarter of 2020, and
- The repurchase of approximately $30 million of our common stock spread evenly over the year.
Additionally, OnDeck provided the following financial guidance for the first quarter of 2020:
- Gross revenue of $110 million to $115 million,
- Net Income of $1 million to $5 million, and
- Adjusted Net Income of $3 million to $7 million.
The financial guidance for 2020 assumes the macro-economic, small business lending and capital market environments remain steady throughout the year, with mild US economic softening commencing in 2021.
* Net income (loss) as used in the narrative of this release is Net income (loss) attributable to On Deck Capital, Inc. common stockholders in the accompanying tables. Adjusted Net income (loss) and Adjusted Efficiency Ratio are Non-GAAP financial measures. See “About Non-GAAP Financial Measures.”
Conference Call OnDeck will host a conference call to discuss its fourth quarter and full-year 2019 financial results on February 11, 2020 at 8:00 AM ET. Hosting the call will be Noah Breslow, Chief Executive Officer, and Ken Brause, Chief Financial Officer. The conference call can be accessed toll free by dialing (866) 393-4306 for calls within the U.S., or by dialing (734) 385-2616 for international calls. The Conference ID is 9185797. A live webcast of the call will also be available at https://investors.ondeck.com under the Press, Events & Presentations menu.
About OnDeck OnDeck (NYSE: ONDK) is the proven leader in transparent and responsible online lending to small business. Founded in 2006, the company pioneered the use of data analytics and technology to make real-time lending decisions and deliver capital rapidly to small businesses. Today, OnDeck offers a wide range of online term loans, lines of credit and secured equipment finance loans customized for the needs of small business owners. The company also offers bank clients a comprehensive technology and services platform that facilitates online lending to small business customers through ODX, a wholly-owned subsidiary. OnDeck has provided over $13 billion in loans to customers in 700 different industries across the United States, Canada and Australia. The company has an A+ rating with the Better Business Bureau and is rated 5 stars by Trustpilot. For more information, visit www.ondeck.com.
About Non-GAAP Financial Measures This press release and its attachments include historical and projected “Adjusted” metrics including Adjusted Net income (loss), Adjusted Net income (loss) per share, Adjusted Efficiency Ratio, Adjusted Return on Assets and Adjusted Return on Equity. These financial measures are not calculated or presented in accordance with United States generally accepted accounting principles, or GAAP, because they all exclude items required to be included in the most directly comparable measure calculated and presented in accordance with GAAP. Adjusted metrics exclude items management deems to be non-representative of operating results or trends (“noteworthy items”) and expenses related to stock-based compensation, which are non-cash expenses. We believe these non-GAAP measures provide useful supplemental information for period-to-period comparisons of our business and can assist investors and others in understanding and evaluating our operating results. However, these non-GAAP measures should not be considered in isolation or as a substitute for or superior to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these or similarly titled non-GAAP measures differently than we do. See “Non-GAAP Reconciliation” and “Non-GAAP Guidance Reconciliation” later in this press release for a description of these non-GAAP measures and a reconciliation to the most directly comparable financial measures prepared in accordance with GAAP.
Safe Harbor Statement
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. Forward-looking statements can be identified by words such as “will,” “enables,” “targets,” “expects,” “intends,” “may,” “allows,” “plans,” “continues,” “believes,” “anticipates,” “estimates” or similar expressions. These include statements regarding guidance on gross revenue, net income and Adjusted Net Income for the first quarter and full-year 2020, and the assumed portfolio growth rate, Net Interest Margin, Net Charge-off Ratio, Reserve Ratio, Adjusted Efficiency Ratio, Provision for credit losses, Effective Tax Rate, Portfolio Yield, repurchases of common stock under our share repurchase authorization, CECL implementation, ongoing capital efficiency improvements, credit quality and macro-economic and other external factors. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. As such, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and in many cases outside our control. Therefore, you should not rely on any of these forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations. Important factors that could cause or contribute to such differences include risks relating to: (1) our ability to achieve consistent profitability in the future in light of our prior loss history and competition; (2) our growth strategies, including the introduction of new products or features, expanding our platform to other lenders through ODX and maintaining ODX’s current clients, expansion into international markets, business development, offering equipment financing and our ability to effectively manage and fund our growth; (3) possible future acquisitions of complementary assets, businesses, technologies or products with the goal of growing our business, and the integration of any such acquisitions including Evolocity; (4) any material reduction in our interest rate spread and our ability to successfully mitigate this risk through interest rate hedging or raising interest rates or other means; (5) worsening economic conditions that may result in decreased demand for our loans or services and increase our customers’ default rates; (6) supply and demand driven changes in credit and increases in the availability of capital for our competitors that negatively impacts our loan pricing; (7) our ability to accurately assess creditworthiness and forecast and reserve for loan losses; (8) our ability to prevent or discover security breaches, disruption in service and comparable events that could compromise confidential information held in our data systems or adversely impact our ability to service our loans; (9) incorrect or fraudulent information provided to us by customers causing us to misjudge their qualifications to receive a loan; (10) the effectiveness of our efforts to identify, manage and mitigate our credit, market, liquidity, operational and other risks associated with our business and strategic objectives; (11) our ability to continue to innovate or respond to evolving technological changes and protect our intellectual property; (12) our reputation and possible adverse publicity about us or our industry; (13) failure of operating controls, including customer or partner experience degradation, and related legal expenses, increased regulatory cost, significant fraud losses and vendor risk; (14) changes in federal or state laws or regulations, or judicial decisions involving licensing or supervision of commercial lenders, interest rate limitations, the enforceability of choice of law provisions in loan agreements, the validity of bank sponsor partnerships, the use of brokers or other significant changes; and (15) risks associated with pursuing a bank charter, and risks associated with either failing to obtain or obtaining a bank charter; and other risks, including those described in Part I – Item 1A. Risk Factors in our Annual Report on From 10-K for the year ended December 31, 2018, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are or will be available on the SEC website at www.sec.gov.
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