OnDeck’s mounting losses prompt cuts, questions about credit model

In a challenging climate for online lenders, questions are mounting about OnDeck Capital’s path to eventual profitability.

The New York-based small-business lender reported its fifth consecutive quarterly loss on Thursday. The $35.9 million loss was the firm’s biggest since its initial public offering in late 2014. That gusher of red ink equaled more than 10% of OnDeck’s $340 million in market capitalization.

Following the disappointing quarter, OnDeck announced plans cut its annual expenses by $20 million. The company said that it will reduce its workforce by 11% and also cut its marketing and technology costs. In addition, the firm said that it is committed to becoming profitable in 2018.

While OnDeck “promised better days ahead … the company’s near-term optics were not pretty,” Mark Palmer, an analyst at BTIG Partners who has a “neutral” rating on the company, said in a research note.

Noah Breslow, chairman and CEO of OnDeck Capital.

OnDeck makes three- to 36-month loans of up to $500,000 to businesses that are often unable to qualify for traditional credit from a bank. The nonbank lender also licenses its technology to JPMorgan Chase, which has started offering online small-business loans to its own customers.

OnDeck’s recent earnings have been hurt by shifts in investor demand for online loans. Institutional investors that have been big buyers of online loans — both from OnDeck and from other firms — are demanding better prices amid concerns about deteriorating credit quality and other shifts in market dynamics.

In response, OnDeck has chosen to keep a larger percentage of loans on its own balance sheet, which has forced it to make bigger set-asides for future losses.

That trend continued in the fourth quarter, with loans sold to outside investors accounting for just 15.8% of OnDeck’s term loan originations, down from 39.8% during the same period a year earlier.

The company also reported new headwinds, saying that it expects to record higher losses than it previously projected on loans with maturities of 15 months or more. Those loans account for a growing share of OnDeck’s business.

During the fourth quarter, OnDeck recorded a loss provision of $55.7 million, up from $36.6 million during the third quarter and $20 million in the fourth quarter of 2015.

The news was not all bad. OnDeck's revenue rose 21% year over year in the fourth quarter to $81.8 million. And CEO Noah Breslow was upbeat regarding the performance of the company’s nascent partnership with JPMorgan Chase, though he did not provide details.

And OnDeck is not alone in its struggle to become profitable. Lending Club, the only other publicly traded U.S. online lender, reported a $32 million quarterly loss on Tuesday.

But during a conference call Tuesday, analysts who cover OnDeck were not in a forgiving mood.

Michael Tarkan, an analyst at Compass Point Research & Trading, expressed dissatisfaction with the company’s upward revision of its predicted future losses. He asked whether OnDeck’s proprietary customer-scoring model, which the firm has long touted, can be trusted as a reliable predictor of loan performance.

“We feel incredibly comfortable with that,” Breslow responded.

Later, Chris Brendler, an analyst at Stifel Financial Corp., raised the question of whether OnDeck should consider selling itself. “What we do very deeply believe is that this model makes absolute sense as a stand-alone company,” Breslow responded.

Shares in OnDeck were down 16.2% to $4.71 during midday trading Thursday.

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