What happened
Shares of On Deck Capital (ONDK +0.00%) were up more than 21% as of 3:15 p.m. EDT, after the company announced a smaller net loss during the second quarter and a promising expansion in its partnership with JPMorgan Chase (JPM 1.36%). Shares of LendingClub (LC 0.30%), its primary rival in the world of online lending, rose 7%, as investors see On Deck's recent performance as a good omen for the industry as a whole.
So what
On Deck Capital reported a net loss of $2.6 million in the second quarter, far better than the $18.7 million loss it posted during the year-ago period. A combination of rising net revenue (total revenue less interest expense and provisions for loan losses) and declining operating expenses drove its improved bottom line on a GAAP accounting basis. On an adjusted basis, On Deck reported net income of $1.5 million during the quarter, compared to a $14 million loss a year ago.
Image source: On Deck Capital.
On the conference call, management pointed to the company's reduced origination volume as a sign of strength, rather than weakness. On Deck CEO Noah Breslow said:
[T]he downshift in the originations volume in the second quarter was entirely of OnDeck's doing. This is about us tightening our credit box, changing the loan amount that we offer our customers to be more conservative. We believe that it's some of the highest-quality originations we have ever printed, both from an On Deck Score and FICO perspective.
A focus on higher-quality borrowers seems to have relaxed investors' worries about the company's loan quality, a perennial concern given that the average On Deck loan carries an APR in excess of 40% per year.
Now what
On Deck won an important expansion in its partnership with JPMorgan Chase. Though details were few and far between on the conference call, it's generally understood that a new agreement will increase the volume of loans that JPMorgan Chase is willing to fund with On Deck as a partner. On Deck will operate as the underwriter and servicer of loans. JPMorgan will supply the capital to fund them.
An expanded relationship is a boon for On Deck because it validates the company's underwriting and servicing abilities, as well as its proprietary On Deck Score, which it hopes can become as important to small-business loan origination as the FICO score is to consumer lending.
Perhaps most importantly, bank partnerships enable On Deck to grow beyond its own balance sheet, and generate fees by underwriting and servicing loans that are funded by bank partners. In contrast, On Deck has historically generated the bulk of its income by tying up its own capital to make loans for its portfolio.
New deals with the banking industry could put On Deck on a fast track to growing its fee-based business lines, thus removing the size of its balance sheet as the limiting factor on its ability to grow revenue and profit.
