1Q 2018 Investor Presentation. May 2018

Transcription

1 1Q 2018 Investor Presentation May 2018

2 Forward-Looking Statements This presentation, including the accompanying oral presentation (collectively, this presentation ), does not constitute an offer to sell or the solicitation of an offer to buy any securities. This presentation is provided by On Deck Capital, Inc. ( OnDeck ) for informational purposes only. No representations express or implied are being made by OnDeck or any other person as to the accuracy or completeness of the information contained herein. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. Forward-looking statements include statements about scalability, growing distribution channels, credit predictability and information concerning our future financial performance, business plans and objectives, potential growth opportunities, financing plans, competitive position, industry environment and potential market opportunities. Forward-looking statements can also be identified by words such as "will," "enables," "expects, may, "allows," "continues," "believes, intends, "anticipates," "estimates" or similar expressions. Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. Moreover, we do not assume responsibility for the accuracy and completeness of forward-looking statements. As such, they are subject to inherent uncertainties, changes in circumstances, known and unknown risks and other factors that are difficult to predict and in many cases outside our control. Therefore, you should not rely on any of these forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations. Important factors that could cause actual results to differ from our forward-looking statements are the risks that we may not be able to manage our anticipated or actual growth effectively, that our credit models do not adequately identify potential risks, the timing and amount of expected savings from cost rationalization programs and other risks, including those under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017 and in other documents that we file with the Securities and Exchange Commission from time to time which are or will be available on the Commission s website at We undertake no obligation to publicly update any forwardlooking statements for any reason after the date of this presentation to conform these statements to actual results or to changes in our expectations, except as required by law. In addition to U.S. GAAP financial information, this presentation includes certain non-gaap financial measures. We believe that non-gaap measures can provide useful supplemental information for period-to-period comparisons of our core business and are useful to investors and others in understanding and evaluating our operating results. These non-gaap measures have not been calculated in accordance with U.S. GAAP. You should not consider them in isolation or as a substitute for an analysis of our results under U.S. GAAP. There are a number of limitations related to the use of these non-gaap measures compared to their nearest U.S. GAAP equivalents. In addition, other companies may calculate non-gaap financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-gaap financial measures as tools for comparison. The non-gaap measures contained in this presentation include Adjusted Net income (loss) and Net Interest Margin (NIM). All of these measures exclude items required to be included in the most directly comparable measure calculated and presented in accordance with GAAP. Please refer to pages 25 through 27 in the Appendix of this presentation for a description of these non-gaap measures, their respective limitations and reconciliations to U.S. GAAP and/or incorporation of non-gaap elements. 2

3 The Leading Online Platform for Small Business Lending $8 Billion+ total originations 80,000+ small businesses served ORIGINATIONS ($ MILLIONS) $2,404 $2,115 $573 $ Q '17 1Q '18 Global in United States, Canada, and Australia 5 th Generation proprietary credit scoring model GROSS REVENUE ($ MILLIONS) $351 $291 $93 $90 79 net promoter score 1 Leading Partnerships JP Morgan Chase & Intuit Scalable and Profitable financial model Q '17 1Q '18 ADJ. NET INCOME (LOSS) ($ MILLIONS) 2 $1 $6 ($8) ($67) Q '17 1Q '18 1. Based on all OnDeck s distribution channels for the quarter ended March 31, See appendix for definitions of non-gaap measures, their limitations, and reconciliation to GAAP. 3

4 Investment Highlights Focus on large and underserved market Small business tailored product set Proprietary analytics and scoring models Diversified acquisition channels Compelling customer lifetime value Attractive loan portfolio characteristics Diversified funding model Execution on strategic priorities Strengthening credit Accelerating profitability 4

5 Small Business Lending Market 28MM U.S. Small Businesses $217Bn Business Loan Balances Under $250,000 in the U.S. in 4Q ꞌ17 80K+ OnDeck Unique US Small Businesses Served $993 million OnDeck Unpaid Principal Balance 1 Sources: U.S. SBA, FDIC 12/31/17 1. As of March 31, 2018; Unpaid Principal Balance represents the total amount of principal outstanding of term loans held for investment, amounts outstanding under lines of credit and the amortized cost of loans purchased from other than issuing bank partners at the end of the period. It excludes net deferred origination costs, allowance for loan losses and any loans sold or held for sale at the end of the period. 5

6 Diversity of Small Businesses Creates Challenges for Traditional Lenders Diverse businesses require manual underwriting Technology and data limitations Lack of standardized small business credit score Leading to a Frustrating Borrowing Experience for Small Businesses Time consuming offline process Non-tailored credit assessment Product mismatch CASH FLOW PROFILE Restaurant Credit Card Rev. Cash Rev. Monthly Exp. Inventory & Payroll Landscaping Company Landscaping Rev. Snow Removal Rev. Monthly Exp. Fuel & Payroll Plumbing Company Repair Rev. Subcontractor Rev. Monthly Exp. Supplies & Payroll 1Q 2Q 3Q 4Q Rigid collateral requirements 6

7 OnDeck Solution for Small Business Lending APPLY APPROVE FUND Online Minutes 1 Automated Review As Fast as Immediately As Fast As Same Day TRADITIONAL LENDING Offline 33 Hours 2 Manual Review Weeks or Months Several Days 1. Application time depends on customer having the required documentation available. 2. Source: Small business survey conducted by the Federal Reserve Bank of New York, Spring

8 Tailored Products for Small Businesses TERM LOAN (Launched in 2007) LINE OF CREDIT (Launched in 2013) Use Case Buying Inventory Hiring New Staff Marketing Managing Cash Flow Size $5,000 $500,000 $5,000 $100,000 Term 3 36 months 6 months 3 Pricing 4,5 Annual Interest Rate as low as 9.99% 1 Annual Interest Rate as low as 13.99% 1 Weighted Average APR 48.0% 2 Weighted Average APR 32.4% 2 Payment Automated daily or weekly payments Automated weekly payments Availability Renewal opportunity at ~50% paid down Draw on-demand 1. For select customers. Annual Interest Rate is that interest rate in annualized terms, excluding fees. 2. Weighted average. Based on 1Q ꞌ18 Originations month reset upon each draw. 4. Pricing available through certain OnDeck strategic partners or channels may vary. 5. The blended weighted average APR for term loans and lines of credit was 46.0% for 1Q 18 originations. 8

9 Established and Diverse Customer Base $678,000 Median Annual Revenue 1 8 Years Median Time in Business Industries 80,000+ Small Businesses Served 1. Based on 1Q ꞌ18 Originations. 9

10 The OnDeck Score Proprietary and purpose built for small business 5 th Generation proprietary credit scoring model Transactional Data 10 Million+ small businesses in proprietary database Credit Data Public Records Proprietary Data Analysis Platform Score 1 Million+ applications Proprietary Data 18 Million+ customer payments Accounting Data Social Data 10

11 Diversified Distribution Channels OnDeck originates through three scaled channels DIRECT STRATEGIC PARTNER FUNDING ADVISOR 48% 1 Originations Volume 23% 1 Originations Volume 29% 1 Originations Volume Direct Mail Online Marketing Radio/TV Loan Brokers ISOs Equipment Leasing 1. Represents 1Q 18 Originations volume. 2. Based on 2015 and 2016 customer cohorts through March 31, LTV is Lifetime Value expressed in dollars and equals interest income and fees collected over customer lifetime less acquisition costs for repeat loans, less estimated third party processing and servicing expenses, estimated funding costs (excluding any cost of equity capital), and net charge-offs. CAC is Customer Acquisition Cost expressed in dollars and includes upfront internal and external commissions as well as direct marketing expense. Total equals LTV minus CAC. All estimates may be adjusted in subsequent periods to reflect updated information. 11

12 Compelling Customer Lifetime Value ALL TERM LOAN CUSTOMERS ACQUIRED IN 2016 Average 1.5 loans per customer through 9 quarters 1.9x+ ROI ($ MILLIONS) $53 $15 $7 $5 $10 Or $131 Return 3 after 9 quarters $70 $42 $70 Investment Acquisition Cost 1 Contribution 2 +Q1 +Q2 +Q3 +Q4 +Q5 Through March 31, Includes upfront internal and external commissions as well as direct marketing expenses. 2. Contribution is defined to include interest income and fees collected on all loans including new, repeat and line of credit loans, less acquisition costs for repeat loans, less the following items for all loan types: estimated third party processing and servicing expenses, estimated funding costs (excluding any cost of equity capital) and net charge-offs. For this purpose, processing and servicing expenses are estimated based on the mix of loan originations and outstanding principal balances. Includes all loans originated in the period. Funding cost for new and repeat loans sold is estimated based on the average on-balance sheet cost of funds rate in the period. All estimates may be adjusted in subsequent periods to reflect updated information. 3. Return on Investment (ROI) is contribution divided by initial acquisition cost. Acquisition costs include upfront internal and external commissions as well as direct marketing expenses. 4. Figures may not sum due to rounding. 12

13 Attractive Loan Portfolio Characteristics LOAN BALANCE BY INDUSTRY 1 AVG. BUSINESS OWNER S FICO 1,2 Retail Construction Accommodation & Food Services Wholesale Trade Manufacturing Healthcare Services Professional and Tech Services Other Services Transportation Other Key Drivers Highly diversified portfolio across industry and geography 84%+ of Business Owners with a FICO 650+ Short average remaining term of 9.5 months High net interest margins >650 Improving credit metrics < As of March 31, 2018, all Loans Under Management, excluding international. 2. FICO is a registered trademark of Fair Issac Corporation.. 13

14 Diversified Funding Model ($ millions) FUNDING CAPACITY & TOTAL CAPACITY UTILIZATION (%) $1,009 Million (+10% YoY; +3% QoQ) CASH & CASH EQUIVALENTS $70 Million (-4% YoY; -1% QoQ) $1,400 85% 74% 72% 68% 73% 100% 80% $73 $78 $64 $71 $70 $1,200 60% $1,000 $800 $600 $400 $200 $1,012 $1,009 $982 $983 $942 $146 $256 $274 $322 $274 $250 $250 $250 $250 $250 $546 $476 $459 $440 $485 40% 20% 0% -20% -40% -60% -80% 1Q '17 2Q '17 3Q '17 4Q '17 1Q '18 EQUITY $267 Million (+3% YoY; +1% QoQ) $261 $260 $259 $266 $267 $- 1Q '17 2Q '17 3Q '17 4Q '17 1Q '18-100% Warehouse Securitization Excess Capacity Total Capacity Utilization 1Q '17 2Q '17 3Q '17 4Q '17 1Q '18 14

15 2018 Strategic Priorities Grow Responsibly: Drive 10-15% loan growth via disciplined risk management, channel development and strong customer demand. Strengthen Credit: Enhance OnDeck Score, introduce troubled debt restructurings, improve recovery performance and target a full year Provision Rate between 6% to 7%. Invest in High-Growth Areas: Invest an incremental $5 million in Technology & Analytics, announce second major OnDeck-as-a-Service bank. Continue to invest in our international businesses. Broaden Product Reach & Appeal: Roll out Instant Funding capability, grow Line of Credit, announce new small business lending product in Improve Operating Leverage: Optimize unit economics and gain operational leverage on fixed cost base. 15

16 Strategic Priority: Grow Responsibly Maintaining credit discipline while expanding the portfolio UNPAID PRINCIPAL BALANCE ($ MILLIONS) $1,026 $980 $954 $941 $936 $889 $993 Key Drivers 2017 pullback to control credit Returning to growth in 2018 $790 Longer-term growth initiatives Direct and Strategic Platform channel growth Repeat loan and Line of Credit cross-sell growth New lending products to increase wallet share Increasing flexibility and utilization of term loan and LOC products 6/30/16 9/30/16 12/31/16 3/31/17 6/30/17 9/30/17 12/31/17 3/31/18 Credit policy and scoring enhancements 16

17 Strategic Priority: Strengthen Credit 1Q 17 2Q 17 3Q 17 4Q 17 1Q 18 Wtd Avg FICO Wtd Avg Term (Months) Wtd Avg Remaining Term (Months) Delinquency Ratio 7.8% 7.2% 7.5% 6.7% 6.7% Net Charge-Off Rate 15.0% 18.6% 16.9% 12.9% 10.9% Provision Rate 8.7% 7.2% 7.5% 6.4% 6.1% Key Drivers Improving loan application quality Pricing optimization initiatives Shortening portfolio duration Priorities Enhance OnDeck Score Introduce troubled debt restructurings Improve recovery performance 1. Portfolio average as of period end. FICO is a registered trademark of Fair Issac Corporation. 2. For loans originated in period. Term loans only. 3. Portfolio average as of period end. Term loans only. Targeting a 6-7% Provision Rate range 17

18 Strategic Priority: Strengthen Credit (cont.) NET CUMULATIVE LIFETIME CHARGE-OFF RATIOS ALL LOANS 1 9% 8% 7% Key Drivers 6% 5% 4% 3% 2% Q Q2 1Q 17 credit changes resulting in improving Provision Rate metrics 1% 0% Months of Seasoning 2017 Q Q Q1 Charge-off trajectory in line with expectations PROVISION RATE 5.8% 6.3% 6.9% 10.2% 8.7% (2) 7.2% 7.5% $4M 6.4% 6.1% Recent vintages showing improvement 1Q '16 2Q '16 3Q '16 4Q '16 1Q '17 2Q '17 3Q '17 4Q '17 1Q '18 1. As of March 31, Net cumulative charge-off as a percentage of original loan amount for all term loan originations, regardless of funding source, including loans sold through OnDeck Marketplace or held for sale on our balance sheet. Given our loans are typically charged off after 90 days of nonpayment, all cohorts reflect approximately 0% for the first three months in this chart. 2. Excluding a $4 million hurricane impact, the Provision Rate would have been 6.9%. 18

19 Strategic Priority: Invest In High Growth Areas Back-End: Integration Front-End: Funding in a Few Clicks Tech platform OnDeck Score Customer Service Deposit customers Marketing Credit policy Invest an incremental $5 million in Technology & Analytics Announce second major OnDeck-as-a- Service bank Invest in the International Businesses 19

20 Strategic Priority: Broaden Product Reach Enhanced Flexibility & Utility International expansion Strategic partnerships Loyalty Benefits Data and analytics New Products 20

21 Strategic Priority: Improve Operating Leverage ($ millions) OPERATING EXPENSE & PERCENT OF GROSS REVENUE (%) $45 Million (-5% YoY; +18% QoQ) Noteworthy Items & Opportunities 50% 51% $47 $45 45% 43% 44% $45 (1) (1) Noteworthy Items Announced lease agreements for New York and Denver which are expected to result in over $2 million of savings annually over the next 8 years. $12 $10 $5 $5 $37 $38 $9 $11 $5 $13 Noteworthy Items Making a $5 million incremental investment in Technology & Analytics in $15 $15 $4 $12 $5 $5 $11 $11 Will drive continued operating leverage by further reducing real estate footprint, shifting hiring to lower cost offices, and re-negotiating vendor contracts. $15 $15 $12 $11 $11 1Q '17 2Q '17 3Q '17 4Q '17 1Q '18 S&M T&A P&S G&A Noteworthy Items 1. Operating Expense Adjustments in Q1 18 include $4 million in Real Estate Disposition charges and $1 million in Severance charges. 21

22 Appendix 22

23 Net Charge-Offs By Cohort 9.0% 8.1% 5.5% 6.4% 5.5% 6.8% 6.9% 7.0% 6.8% 6.3% 4.4% 4.1% 3.2% 1.2% 0.0% Avg. Term of Originations (months) Q '17 2Q '17 3Q '17 4Q '17 1Q ' Represents net lifetime charge-offs of the unpaid principal balances charged off less recoveries of loans previously charged off. A given cohort s net lifetime charge-off ratio equals the cohort s net lifetime charge-offs through March 31, 2018 divided by the cohort s total original loan volume. Repeat loans in the denominator include the full renewal loan principal amount. The chart includes term loan originations, regardless of funding source, including loans sold through our OnDeck Marketplace or held for sale on our balance sheet and excluding ODaaS related loans. 2. As of March 31, 2018, principal balance of term loans including loans sold through our OnDeck Marketplace or held for sale on our balance sheet still outstanding was 0% for all cohorts except the 2015, 2016, 1Q 17, 2Q 17, 3Q 17, 4Q 17 and 1Q 18 cohorts, which had principal outstanding of 0.04%, 1.0%, 3.9%, 9.9%, 27.2%, 57.3% and 86.7%, respectively. 3. Represents the initial contractual term at origination for designated period. 23

24 Current Debt Facilities At March 31, 2018 Borrower Funding Debt ($ millions) Maturity Date Weighted Average Interest Rate Principal Outstanding Borrowing Capacity OnDeck Asset Securitization Trust II LLC May % $250 $250 OnDeck Account Receivables Trust LLC March % $113 $214 Receivable Assets of OnDeck, LLC November % $99 $120 On Deck Asset Company, LLC May % $76 $100 OnDeck Asset Funding I, LLC February % $75 $150 Prime OnDeck Receivable Trust II, LLC December % $73 $125 (3) (1) (2) Other Agreements Various Various $50 $50 Total Funding Debt $735 $1,009 (5) (4) Corporate Debt On Deck Capital, Inc. October % $8 $30 1. In April 2018, we issued $225 million of debt in a new securitization transaction. The net proceeds were used, together with other available funds, to voluntarily repay in full all $250 million of the prior ODAST II Notes. 2. The period during which new borrowings may be made under this debt facility expires in February Maturity dates range from April 2018 through November Lenders obligation consist of a commitment to make loans in amount of up to $125 million on a revolving basis. Lenders may also, in their sole discretion and on an uncommitted basis, make additional loans in amount of up to $75 million on a revolving basis. 5. May not sum due to rounding. 24

25 Non-GAAP Reconciliation: Adjusted Net Income (Loss) Quarter Ended ($ thousands) Mar 31, 2017 Jun 30, 2017 Sep 30, 2017 Dec 31, 2017 Mar 31, 2018 Net income (loss) ($11,602) ($2,569) ($4,532) $4,358 ($2,436) Adjustments: Net loss attributable to noncontrolling interest 544 1, Stock-based compensation expense 3,491 2,974 3,056 2,994 3,210 Operating Expense Adjustments ,098 (1) (2) Adjusted Net income (loss) ($7,567) $1,476 ($1,018) $8,090 $6, Adjusted Net income (loss), a non-gaap measure, represents Net income (loss) attributable to On Deck Capital, Inc. common stockholders adjusted to exclude stock-based compensation expense, real estate disposition charges, severance and executive transition expenses. Stock-based compensation includes employee compensation as well as compensation to third-party service providers. Our use of Adjusted Net income (loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted Net income (loss) does not reflect the potentially dilutive impact of stock-based compensation and does not reflect expenses incurred in connection with real estate dispositions and severance. 2. Operating Expense Adjustments in Q1 18 include $4.2 million in Real Estate Disposition charges and $0.9 million in Severance charges. 25

26 Non-GAAP Reconciliation: Net Interest Margin ($ thousands) Three Months Ended March 31, 2017 March 31, 2018 Interest income $87,111 $86,369 Less: Funding costs (11,277) (11,821) Net interest income 75,834 74,548 Divided by: calendar days in period Net interest income per calendar day Multiplied by: calendar days per year Annualized net interest income 307, ,220 Divided by: Average Interest Earning Assets $1,024,731 $966,327 (1) Net Interest Margin (NIM) 30.0% 31.3% 1. Net Interest Margin (NIM) is a non-gaap measure and is calculated as annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding costs during the period. Interest income is net of fees on loans held for investment and held for sale. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination costs as offset by corresponding deferred origination fees. Deferred origination fees include fees paid up front to us by customers when loans are funded. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination. Funding costs are the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our debt facilities. Annualization is based on 365 days per year and is calendar day-adjusted. Our use of Net Interest Margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: Net Interest Margin is the rate of net return we achieve on our Average Interest Earning Assets outstanding during a period. It does not reflect the return from loans sold through OnDeck Marketplace, specifically our gain on sale revenue. Similarly, Average Interest Earning Assets does not include the unpaid principal balance of loans sold through OnDeck Marketplace. Further, Net Interest Margin does not include servicing revenue related to loans previously sold, fair value adjustments to servicing rights, monthly fees charged to customers for our line of credit, and marketing fees earned from our issuing bank partners, which are recognized as the related services are provided. Funding costs do not reflect interest associated with debt used for corporate purposes. 26

27 Non-GAAP Reconciliation: Forward-Looking Guidance ($ millions) Net income (loss) attributable to On Deck Capital, Inc common shareholders Three Months Ending, June 30, 2018 Twelve Months Ending, December 31, 2018 Low High Low High $ (3) $ 1 $ - $ 10 Loss from early extinguishment of debt Real estate disposition charges Severance expenses Stock based compensation (1) (2) Adjusted net income $ 1 $ 5 $ 18 $ Forward looking Adjusted Net income guidance is a non-gaap measure and represents our Net income (loss) attributable On Deck Capital, Inc. common stockholders adjusted to exclude loss from early extinguishment of debt, real estate disposition charges and stock-based compensation expense, each on the same basis and with the same limitations as described above for Adjusted Net income (loss), and in addition does not reflect the cost of the early extinguishment of debt. As a result, our GAAP Net income (loss) for these future periods will be less favorable than our Adjusted Net income for the corresponding periods. In addition, forward looking Adjusted Net income (loss) guidance is neither historical fact nor an assurance of future performance. It is based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. As such, it is subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and in many cases outside our control. Therefore, you should not rely on this guidance. 2. May not sum due to rounding. 27