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Enova Acquires OnDeck for $90 Million

Enova, best known for short term consumer loans, is acquiring OnDeck, one the leading online small business lenders, in a $90 million cash and stock deal

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In a deal that will rock the fintech space Enova announced this afternoon that they are acquiring OnDeck for $90 million. OnDeck has been struggling since the onset of the pandemic, to say the least, as small businesses across the country face unprecedented stress.

OnDeck reported in their Q1 earnings call in April that 45% of their loan book was in some stage of delinquency as they reported a $59 million net loss. They reported Q2 earnings earlier this afternoon and they somehow managed to eke out a $2.2 million profit on originations that were down 89% from the prior quarter, as they suspended new lending.

OnDeck CEO Noah Breslow was on the Enova earnings call this afternoon and he made the comment that the nadir for their loan book was in April and things have improved considerably since then as they economy has opened up. They have reduced their provision for credit losses as the future started to look better.

Anyway, back to Enova. They are a publicly traded company, primarily focused on consumer loans, that was spun out from Cash America in 2014. Incidentally, one of their brands, short term lender CashNetUSA, was actually started by Al Goldstein (co-founder of Avant) back in 2004, he sold to Cash America two years later. Another brand is NetCredit which is more of a near prime consumer lender (I interviewed the head of NetCredit on the podcast back in 2018).

While Enova has been focused on consumer lending with a range of products they have started making inroads in small business lending. They have two small business brands: Headway Capital and The Business Backer. While they started Headway Capital in-house Enova actually acquired Business Backer in 2015 so they have some history with acquisitions. Combined, the small business lending operations at Enova make up just 15% of their loan book. After the acquisition of OnDeck that number will rise to 60%. That gives you some idea of how big a deal this is for Enova.

While Enova has scaled back lending considerably since the start of pandemic they are in a strong position financially. In their Q2 financials released this afternoon they show a net profit of $48 million for Q2 on revenue of $259 million despite the slowdown and they have $321 million of cash on hand.

According to the press release announcing the acquisition the $90 million transaction values OnDeck at $1.38 per share which is a 90% premium on the closing price of $0.73 from July 27. The deal includes $8 million in cash and each share of OnDeck will be worth 0.092 shares of Enova. The transaction has been unanimously approved by both boards and is expected to close later this year.

My Take

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OnDeck Shares Early Progress in Borrower Behavior

OnDeck has been focused on cutting costs, amending credit facilities and has a plan in place for when they recommence originations.

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There has been a lot of uncertainty over the last 2 months, especially for fintech lenders. OnDeck found themselves in a particularly difficult spot since they lend to many of the small businesses hit the hardest by the coronavirus.  Today, OnDeck shared a presentation providing an update on the business and the outlook isn’t as bleak as previously thought by many.

In order to protect liquidity, OnDeck has suspended substantially all new originations and is proactively amending certain credit facilities. They are working to drive down the cost of credit and reduce operating expenses to see them through the current crisis. As they entered the pandemic, the company held $121 million in cash and cash equivalents and subsequently drew down debt facilities and their corporate line. In April they maintained a cash balance in excess of $100 million.

Their actions to reduce Q2 2020 expenses resulted in $10 million in savings. About half was related to reduced marketing expenses, vendor/contractor spend, discretionary spending, partner incentives and pausing the employee stock purchase plan. Full time employees took a 15% pay reduction with CEO Noah Breslow as well as the OnDeck Board taking a 30% pay reduction. Some employees are working part time with a max of 24 hours per week. Others were furloughed and are receiving no salary but are having benefits paid by OnDeck. They also realized $3 million in international savings, concentrated on employee costs.

Like many lenders they saw customers looking for flexibility when it came to repayment of loans. Inbound calls and emails peaked at around six times the normal levels during the second week of April. Customers were offered temporary payment reductions, payment deferrals or term extensions. The below data is an interesting look at what industries are being the most impacted, with accommodation and food services reporting the highest rate of 1+ day past delinquency. While 1+ day delinquencies had doubled by the end of March, many small businesses are making some form of payment.

OnDeck reports improvements in the percentage of customers paying both their term and line of credit products. The data below is even more recent, showing continued improvements through the middle of May.

OnDeck also shared their plans for when they continue originations. Their plan breaks out new and renewal originations. Industries are put into five groupings based on impact from the crisis and the anticipated recovery. Also factored in is whether the stay at home orders have been lifted as well as services related to medical, retail and dine-in restaurants. It is also important to note that OnDeck is an SBA PPP approved non-bank conduit.

Conclusion

With the crisis still ongoing it is hard to say with any certainty what the ultimate impact will be on OnDeck. With states now reopening we will soon get a better understanding of what businesses are going to be able to survive. Clearly, OnDeck has been working hard to increase their probability of success. There is also a potential upside here as banks pull back further on small business lending so it will be interesting to see how this plays out.

All of the Fintechs Involved in PPP Loans

We share all of the fintech lenders who are currently involved in the Paycheck Protection Program

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It has been an interesting to say the least as we have watched everything play out with the Paycheck Protection Program loan process. Fintechs were eager to help small businesses with the $349 billion initially allocated to small businesses but initially there wasn’t clarity on when it might be possible. For many who wanted to be among the first to apply, going through a bank was the only option as LendIt Fintech experienced firsthand. As we stand today there are now many fintechs, both lenders and banks involved in the process although the initial $349 billion allocated to the PPP has run out, according to Senator Rubio this morning. It is expected that Congress will appropriate additional funds soon.

Approvals started with small business lenders like Kabbage, made possible through an unnamed bank partner. Then this week we saw lenders get approved on a standalone basis. Other fintechs have taken an entirely different route. StreetShares had originally planned to offer SBA loans but then opted to instead partner with Fiserv. They are providing to them a secure portal for bankers to review and prepare documents while also providing application processing and eligibility checks.

If you’re looking for a full list of PPP lenders, Gusto has created this helpful Google sheet which continues to be updated with the status of each lender.

We will continue to update the list below as more fintechs get approved.

Approved Fintech PPP Lenders

PayPal
Quickbooks
Square
OnDeck
Funding Circle
Kabbage
Bluevine
Credibly
Fundbox

Fintechs Working with Partner Banks for PPP Loans

Fundera
Lendio
Brex
Nav
SmartBiz
Biz2Credit

Fintech banks processing applications

Cross River Bank
Celtic Bank
Radius Bank
Sunrise Banks

It is difficult to overstate the importance of the PPP for the health of American small business. For many, it will have come too late but for millions of small businesses this money will allow them to stay in business and keep paying their employees. Congress needs to set aside its differences and provide more money for this program immediately. There is still a huge number of small businesses that need this money.

The Ten Biggest News Stories of the Decade in Marketplace Lending

We take a look back at the news stories that shaped marketplace lending in the 2010s

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I started writing about marketplace lending back in 2010, so I have spent almost the entire decade immersed in this space. While we have expanded our coverage on Lend Academy today beyond marketplace lending this remains a major focus.

We have certainly come a long way in the past ten years and the industry is almost unrecognizable from where it was in 2010. Back then there were just two notable companies in the space, LendingClub and Prosper, originating just a few million dollars a month in loans. No one could have predicted that by the end of the decade marketplace lending would have led to a resurgence in personal loans and changed expectations for customer experience across all lending verticals.

As I look back at the past decade here are, in my opinion, the top ten most important news stories in chronological order.

Prosper Recapitalizes and Brings in a New Management Team
(January 2013)

At the time this was a huge story. The number two marketplace lender had been struggling for some time and was in serious danger of running out of money. This new funding round was small by today’s standards at $20 million but it ensured that Prosper would remain a going concern. The deal was architected by, the now fintech legend, Ron Suber as he brought in a new management team and a new board to guide Prosper on to their future growth path. It helped set the industry up for success over the next several years.

LendingClub Becomes First Marketplace Lender to go Public
(December 2014)

This was a momentous day for marketplace lending as market leader LendingClub became the industry’s first company to go public. The IPO was a huge success by any measure. By the end of the first day of trading LendingClub was valued at $8.46 billion and they had raised $870 million in cash. Of course, at the time we had no idea what would happen to the stock but there was a sense a real optimism that this company was going to change the world.

Second Circuit Rules on The Madden Decision
(August 2015)

The biggest legal issue the industry dealt with this decade was the ramifications of the Madden v Midland decision. We have been following this case since the Second Circuit ruling in 2015 and it has had far reaching consequences for the industry. It has led to a reduction in lending activity in Second Circuit states (NY, CT and VT) but the bigger concern was that this kind of ruling would spread nationally. That has not happened and there have been multiple regulatory fixes proposed plus the OCC and FDIC have weighed in as well. But as of this writing nothing concrete has changed since the 2015 decision.

SoFi Raises $1 Billion Led by SoftBank
(September 2015) [Read more…]

OnDeck Q3 2019 Earnings Results Recap

Today OnDeck reported positive metrics on net income, revenues and their stock repurchase program.

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OnDeck’s Q2 financial results included a handful of interesting updates from the company, but the news of losing JPMorgan Chase as a partner overshadowed any positive news coming out of last quarter. Today the company announced their Q3 2019 financial results which investors have responded positively to, sending the stock up 15% at the time of this writing.

The company continues their profitability streak, posting net income of $8.7 million (up from $4.3 million in Q2) in the third quarter. Gross revenues also grew 9% to $112.6 million. This is a result of higher interest and finance income as the portfolio has also grown.

Originations were $629 million, up 6% from the prior quarter and down 3% from the prior year period. This is a result of OnDeck’s tightening of underwriting criteria along with market dynamics. Interestingly, lines of credit account for 21% of OnDeck’s total loans and finance receivables, up from 15% last year. [Read more…]

OnDeck Pursuing Bank Charter, Loses Chase

OnDeck shared a flurry of updates on the business in their Q2 earnings results.

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OnDeck had some pretty interesting updates in their earnings release which took place earlier today. CEO Noah Breslow shared that the company has decided to pursue a bank charter which will enable the company to offer their small business customers a wider range of products. OnDeck has been studying their options for some time and felt that the timing was right. While OnDeck didn’t want to divulge their vision or timing for what the company may offer they did mention that the bank charter would be accomplished through a transaction or a de novo bank application. 

To date, OnDeck has operated as a non-bank lending institutions, but they believe the opportunity is much bigger, even mentioning “digital banking for small businesses” as well as increasing product and services both in lending and non-lending on the call. There will also be benefits as it relates to funding. While this may be a costly endeavor they believe the benefits outweigh the costs. At this point this announcement leaves a lot to the imagination but it alludes to a number of interesting opportunities for OnDeck in how their business could transform.

OnDeck also shared plans for a $50 million stock repurchase program noting that even with the investment they will still have capital for further growth and a buffer against economic uncertainty.

Probably the biggest shock was that Chase is concluding their partnership with OnDeck. When this partnership was announced it created quite the buzz in the fintech community. To be working with Chase was a huge vote of confidence for OnDeck and I too thought it would radically change OnDeck’s business.

Chase will stop originating loans through OnDeck and OnDeck will continue to service the loans for two years. Breslow stated that the decision on Chase’s side was due to a change in strategic priorities and spanned more than just their small business lending plans. This decision makes one think about the long term plans of the bank as perhaps they look to build their own technology platform.

Despite the bad news with Chase, we learned that the pipeline has never been stronger with OnDeck’s ODX offering and that they are making progress in converting new customers. We should hear more announcements before year end.

In the quarter OnDeck also closed the transaction with Evolocity to combine their Canadian operations. Moving on to financials in Q2 2019, net income was $4.3 million compared to $5.6 million from the prior year period and $5.7 million in Q1 2019. Gross revenues were $110.2 million and originations were $592 million in what is typical for the second quarter.

 

You can view OnDeck’s Q2 earnings press release here.

Conclusion

It’s hard to sugarcoat losing the largest bank in the US as a client. Since the relationship was announced many have been looking to get a better understanding of the traction of the partnership. Now we have an understanding of perhaps why we never got the details. Since the Chase partnership was announced OnDeck created a new division called ODX to house this part of the business and signed up PNC on their ODX platform. There is clearly still opportunity in the ODX business but going forward OnDeck is going to have to work harder to prove the model out to their investors.

LendingClub, GreenSky and OnDeck Q1 2019 Earnings Results

We share the results of the public online lenders

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Every quarter we check in on the public online lenders. This includes LendingClub, OnDeck and GreenSky. LendingClub and Greensky reported today and we’ll review some general highlights from OnDeck who reported last week. 

LendingClub rounded out 2018 originating the most loans in the company’s history at $10.9 billion. With their Q1 2019 results, the company is off to a great start in 2019.  Originations were $2.7 billion, up 18% year over year. The company reported that application growth was 31% over the same period.

Net revenues came in above high end guidance of $172 million at $174.4 million for the quarter, up 15% year over year. GAAP Consolidated Net Loss was $(19.9) million, compared to $(31.2) million in Q1 2018. Finally, the company delivered adjusted EBITDA of $22.6, up 47% year over year and well above their projections of $13-$18 million. LendingClub is on track to become adjusted net income profitable over the second half of 2019.

As always, it’s always interesting to look at the investor mix over time.

There were a few interesting news items from the quarter as well as some comments from CEO Scott Sanborn on the earnings call. The most significant news was that the company announced a shift to the way they serve small businesses. LendingClub is no longer originating small business loans themselves and is instead opting for a partnership approach. The co-branded offering is made possible by Funding Circle and Opportunity Fund. In addition, small business loans will no longer be funded by LendingClub investors.

Beyond the small business operation, Sanborn discussed that the company is working towards their vision of not just being a “lending club” but a financial health club. To date we’ve seen little progress in realizing this vision, but clearly they want to do more. They envision moving from simply a product focus to a platform focus in areas where it makes sense. The decision to make the change in their small business operation is the first example of this.

In the personal loan space LendingClub is also looking to offer a unique opportunity for their investors. The reality today is that the company receives 40,000 applications a day but only a small fraction of these borrowers get approved and subsequently take a loan. LendingClub realizes that there is a lot of expertise in their broad investor base and they may give investors the opportunity to provide their custom models to underwrite a subset of these applicants. This would also result in higher satisfaction on the borrower side as more borrowers would be approved. In my opinion this gets back to LendingClub’s original promise of being a true marketplace, offering a wide range of loans to every type of borrower.

Interestingly, Sanborn commented on the opportunity of a bank charter, something that would be hugely beneficial for a company seeking to offer a wider range of products. Other potential benefits include margin improvement, more resilient funding and giving the company more regulatory clarity. While this would certainly change many dynamics in the business, Sanborn noted that this is a massive undertaking that will come with significant time and costs and they will update investors as their thinking evolves.

LendingClub is also very much focused on cutting costs as part of their simplification program. Last week Bloomberg published a piece on LendingClub’s plans to move employees to Utah from their expensive San Francisco office. The cost savings are significant as they decrease their footprint by around 41% in the city as leases expire and they sublease their open space. Below is LendingClub’s Q2 2019 and full year guidance.

GreenSky Q1 2019 Earnings

In Q1 2019 GreenSky increased transaction volume on the platform 20% to $1.2 billion. They also grew revenue 22% to $103.7 million form the prior year period. GAAP Net Income in Q1 2019 was $7.4 million. The company had aggregate commitments of $11.8 billion from nine bank partners of which $4.5 billion remain unused. The company ended the quarter with $268 million in cash.

Last year we reported on the potential of the company’s partnership with American Express. GreenSky shared that since the alliance launched 3,600 merchants have been referred to GreenSky for enrollment evaluation. In February 2019, the program was extended to include elective healthcare.

Below is a look at how their merchant network has grown over time and the verticals they currently serve.

GreenSky also noted new relationships with a field services software company, a dental practice management software company and an HVAC home services software enterprise. In all of these relationships, the GreenSky financing platform is integrated into the software. These types of relationships and the market GreenSky focuses on is what makes them different from many of the fintech companies around today.

In Q1 2019 GreenSky also repurchased 4.3 million shares at a cost of $50.9 million which is part of their $150 million share repurchase program. Since then the company has purchased more shares and in total has repurchased 9.1 million shares.

OnDeck Q1 2019 Earnings

OnDeck reported Q1 2019 earnings last week. Originations fell for the quarter to $636 million compared to $658 million for the previous quarter. This was attributed to OnDeck tightening their credit box during the quarter. The company shared that their line of credit product reached an all time high of $150 million for the quarter. Further information on their quarter is available in their press release.

Women in Fintech Demolish Glass Ceiling

LendIt Fintech Woman of the Year 2019 award finalists target diversity, equality, education

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[Editor’s note: This is a guest post from Mark Lusky of Mark Lusky Communications, a writing and marketing communications firm, operating since 1982. He specializes in ghostwriting expert advice articles, blogposts and other bylined content for clients, along with writing e-books, whitepapers, case studies, websites, opinion pieces and other communiques—incorporating marketing skills and perspectives acquired as a regional marketing director for Ringling Bros. and Barnum & Bailey Circus. He will be attending LendIt in San Francisco this April.]

LendIt Fintech’s Fintech Women of the Year 2019 award finalists champion the causes of diversity, equality and education—and shout it from the rooftops. In the process, they’re demolishing glass ceilings for women and other diversity-challenged groups.

They are dedicated to achieving gender, ethnic and racial equality. And they are educating a variety of audiences— including borrowers, investors and the Fintech industry—about ways to grow and thrive by becoming savvier and open to all people.

These finalists are changing not just their world—but the whole world.

Promote diversity, respect, collaboration
Valerie Kay, Chief Capital Officer at LendingClub, is responsible for overseeing LendingClub’s Investor Group. She addresses the need for diversity, inclusion, mutual respect and collaboration. She emphasizes the vital importance of diversity to drive better workplaces, happier customers and more profits.

[Read more…]

OnDeck Q4 2018 Earnings Review

Today OnDeck hosted their Q4 2018 earnings call and provided an update across all aspects of their business.

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Last quarter the the big news for OnDeck was the creation of their technology subsidiary called ODX, a platform that houses their lending as a service offering. While OnDeck has had a longstanding partnership with JP Morgan Chase it showed a renewed focus on that side of the business and a look into what the future at OnDeck may look like.

The company achieved much of what they set to do in 2018 and posted another solid quarter as they rounded out the year. Q4 2018 net income came in at $14 million on gross revenues of $109.5 million. The company ended the year with a total of $27.7 million in net income. Below is a snapshot of their Q4 and 2018 full year highlights.

After coming off a tough Q1 2018, the company turned the rest of the year around and moved well into profitable territory. What has been a main driver of profitability for the company has been decreasing funding costs since Q2 2018 even as originations have increased and interest rates broadly have increased. Sales and marketing expenses as a percentage of originations have also held steady at 1.7% for Q4. As of Q4 2018 the company still had $246 million of excess debt capacity.

You can see below how OnDeck has been able to consistently increase revenue over time even as their business model shifted. Gain on sale revenue, or loans sold to investors was just a small sliver of revenue back in Q4 2017. What I imagine many investors are keeping a close eye on is the other revenue category which has remained stagnant over the past year.

It appears as though the partnership with OnDeck hasn’t yet resulted in a meaningful increase of revenue. OnDeck noted that JP Morgan Chase volume increased in Q4 after a dip both in Q2 and Q3. ODX is slated for a full rollout in 2019 and OnDeck plans to expand their work with PNC, which was announced late last year as their second bank partner. Commenting on the pipeline of bank partnerships through ODX, CEO Noah Breslow noted that the pipeline has strengthened since the last earnings call and there is a mix of large scale banks and mid-sized to smaller banks which have entered the pipeline.

On the origination side, the company increased volume $10 million sequentially. OnDeck did share that they saw an increase in charge offs and delinquencies in Q4 which were attributed to some selective testing the company was doing. They have since ended these tests and kept the ones that were performing well.

Looking forward there are a few interesting things happening at OnDeck. While it won’t have a meaningful impact on their business in 2019, OnDeck recently announced they were entering the equipment finance space. OnDeck also has their Australian business which is not often talked about. They grew their portfolio organically 80% in 2018 albeit this is likely off of a smaller base. Last December OnDeck shared they were merging their Canadian business with Evolocity Financial Group creating OnDeck Canada which will be the second largest online small business lender in Canada once the deal closes midyear.

OnDeck provided the below guidance for Q1 2019 and the full year.

 

Equipment Financing Market to Get Boost From OnDeck

The small business online lending leader will offer equipment finance loans in 2019

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Hoping to transform the traditionally slow-moving, opaque, and complicated process of the equipment financing market, online small business lender OnDeck has announced it will enter the market for small ticket ($250,000 and under) loans in this category. OnDeck will offer loans online of up to $100,000 to U.S. small businesses beginning in 2019.

Here is what CEO and Chairman, Noah Breslow said in the press release:

With more than a decade of success and over $10 billion funded to small businesses online, we believe OnDeck’s technology is primed to revolutionize how small businesses finance their equipment needs. We expect OnDeck equipment finance loans to quickly become a vital source of online financing for small business owners seeking simple, transparent equipment financing they can understand and utilize.

OnDeck’s decision to add only the third lending product in its history is based on a successful pilot program begun last summer and resulting data indicating that the equipment financing market is vulnerable to disruption. According to the Equipment Leasing and Finance Association, 68% of all capital purchases in the United States are financed, with small-ticket (under $250,000) equipment finance loans and leases representing $35 billion in originations in 2017. Applying for and receiving the majority of those small ticket loans remains a cumbersome, time consuming and paper-based process. That is a similar scenario to the market for small business loans that OnDeck first began disrupting in 2008.

In 2019, OnDeck will begin making its own equipment finance loans, ranging from $5,000 up to $100,000, with terms ranging from 24 to 60 months, secured by new and used equipment. OnDeck plans to offer only equipment finance loans, rather than leases.

OnDeck also announced the appointment of Mark Erickson as Vice President of Equipment Finance. Erickson is a veteran of the equipment finance market, previously serving in executive roles in sales, operations, syndications, and risk at Key Equipment Finance, Inc., a unit of Key Corp. He was also the managing director of the firm’s Australia and New Zealand subsidiary from 2000 to 2004. He had this to say about his new position:

I look forward to working with the team to leverage OnDeck’s online originations and underwriting technology to deliver speed and convenience for small business owners seeking equipment finance loans. With speed, service and transparency, we are poised to transform this market to the benefit of small businesses.

ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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