Small business online lender OnDeck (NYSE:ONDK), today announced fourth quarter and full year 2017 financial results, highlighted by fourth quarter GAAP net income of $5 million and its expectation for continued margin improvement and profit growth in 2018.
“2017 was a transformative year for OnDeck, marked by our strategic decision to strengthen our financial profile and accelerate our path to profitability,” CEO Noah Breslow said. “In the fourth quarter, we delivered on this objective, achieving over $5 million of GAAP profit, $41 million better than 2016’s fourth quarter results. In addition to this significant profit growth, we grew origination volume, controlled expenses and increased our effective interest yield to its highest levels since 2015. Credit performance continued improving in the fourth quarter while our provision rate, 15-plus day delinquency ratio and net charge-off rate all achieved their lowest quarterly levels of 2017.
“Looking ahead to 2018, we expect to drive double-digit loan growth due to our strong customer demand, disciplined risk management and focus on scaling responsibly. With improved credit performance and loan yields, our realigned cost structure and a secure funding base, we are well-positioned to build on our success and continue margin expansion.”
Review of financial results for the fourth quarter of 2017
Originations were $546 million, up three per cent from the prior quarter. Credit quality of new originations, as measured by both OnDeck Score and personal credit scores, achieved record levels.
Gross revenue increased to $87.7 million, up seven per cent year-over-year driven primarily by higher interest income. Effective interest yield was 35.6 per cent, up from 33.2 per cent in the prior year period, reflecting increases in average loan pricing and credit improvements.
Gain on sale was $0.6 million. Loans sold or designated as held for sale through OnDeck Marketplace represented 3.9 per cent of term loan originations.
Other revenue was $3.5 million, up from $3.4 million in the prior quarter, primarily reflecting increased revenues from the company’s OnDeck-as-a-Service (ODaaS) business, offset by a $0.7 million reduction in the fair value of the company’s loan servicing asset.
Net revenue was $42.1 million, up 159 per cent versus the prior year period, driven primarily by higher gross revenue and lower provision expense.
Provision for loan losses was $34.4 million and the provision rate was 6.4 per cent. The provision rate improved sequentially from 7.5 per cent largely due to stable credit and continued collections improvements, and the additional provision in the third quarter from Hurricanes Harvey and Irma.
The fourth quarter 15-plus day delinquency ratio was 6.7 per cent and the average term loan age in OnDeck’s portfolio was 4.2 months. The net charge-off rate in the fourth quarter was 12.9 per cent, down from 16.9 per cent in the third quarter of 2017.
The cost of funds rate was 6.5 per cent. Additionally in the fourth quarter an investment advisor subsidiary of BlackRock joined OnDeck’s platform of financing partners.
Operating expense was $37.7 million. Operating expense as a percent of revenue improved to 42.9 per cent in the quarter, down from 64.1 per cent in the prior year period. Operating expense continued to benefit from the company’s cost rationalization plan implemented in 2017. Subsequent to quarter-end, the company terminated a portion of its New York headquarters lease. This transaction, after giving effect to an associated $3.2 million charge to be recorded in the first quarter of 2018, is expected to result in approximately $2 million of annual savings through 2026, when the lease would have expired. The company continues to actively explore additional opportunities to reduce its real estate footprint.
GAAP net income attributable to On Deck Capital, Inc. common stockholders was $5.1 million, or $0.07 per basic and diluted share, for the quarter, which compares to GAAP net loss of $35.9 million, or a loss of $0.50 per basic and diluted share, in the prior year period.
Adjusted net income* was $8.1 million, or $0.11 per basic and $0.10 per diluted share, for the quarter, compared to negative $31.4 million, or a loss of $0.44 per basic and diluted share, in the prior year period.
Adjusted EBITDA* was $9.7 million for the quarter.
Unpaid principal balance was $936 million at the end of the fourth quarter of 2017, 0.5 per cent lower than the end of the third quarter of 2017. The company expects unpaid principal balance to grow again in the first quarter of 2018.
Total funding debt at the end of the fourth quarter of 2017 was $684 million, down 2.7 per cent sequentially, primarily reflecting the changes in unpaid principal balance.
Cash and cash equivalents were $71.4 million at the end of the quarter.
The Tax Cut and Jobs Act of 2017 had no impact on fourth quarter earnings.
Guidance for full year and first quarter 2018
OnDeck provided the following guidance for the full year ending December 31, 2018 and three months ending March 31, 2018.
Full year 2018
• Gross revenue between $370 million-$382 million.
• GAAP net income (loss) attributable to OnDeck between $(2) million-$10 million.
• Adjusted net income between $16 million and $28 million.
This outlook assumes unpaid principal balance growth between 10-15 per cent, a full year provision rate between 6-7 per cent, noteworthy real estate disposition and debt extinguishment costs between $4 million-$5 million, and an additional approximately $5 million investment compared to the annualized technology and analytics operating expense of the fourth quarter 2017.
First Quarter 2018
• Gross revenue between $86 million-$90 million.
• GAAP net income (loss) attributable to OnDeck between $(5.5) million-$(1.5) million.
• Adjusted net income between $1 million-$5 million.
This outlook assumes between 5-10 per cent sequential originations growth and approximately $43 million of operating expense which includes the $3.2 million charge for the partial termination of the New York office lease.
OnDeck also noted it may be able to make additional dispositions of portions of its office space during 2018, which would produce multi-year savings but would likely require cash or non-cash charges or both in the quarter the transaction(s) are booked. OnDeck’s first quarter and full year 2018 guidance includes the $3.2 million charge related to the partial termination of the New York office lease. Any future real estate disposition charges are not included. Refer to the non-GAAP guidance reconciliation section below for a reconciliation of adjusted net income guidance to GAAP Net income guidance.
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