What's happening?

Shares of OnDeck Capital (NYSE:ONDK) were down about 20% at 10:30 a.m. EST. The company reported disappointing earnings due to higher loan loss expectations.

So what

On a GAAP basis, OnDeck Capital reported a net loss to common shareholders of $35.9 million, or $0.50 per share compared to a net loss of $4.6 million, or $0.07 per share, in the year-ago period.

Blame the company's expectations for loan losses for the big increase in losses compared to the prior year. Provisions jumped to $55.7 million during the fourth quarter, up from $20 million last year. OnDeck Capital noted that $18.7 million of the increase was due to higher losses in loans with original maturities of 15 months or longer.

The company also announced plans to reduce operating expenses by cutting its headcount by 11%, and by slashing non-labor expenses inside its Sales & Marketing and Technology & Analytics departments.

On Deck Capital logo

Image source: OnDeck Capital.

Now what

On the conference call, OnDeck Capital suggested that it expects its loss rates to increase to 7% of loans, up from an earlier target of 6%. The company has been originating longer term loans at lower interest rates, believing that the longer term would make up for the lower rate, and thus enable the company to generate more interest income per dollar of originations.

That strategy isn't working according to plan. When an analyst asked about whether or not OnDeck Capital would increase rates on longer-term loans to account for higher defaults, management didn't give a clear answer. Shareholders are left to worry that OnDeck will endure higher loan defaults without an offsetting increase in interest income, threatening margins and earnings going forward.