Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
The OnDeck Roller Coaster of 2020
October 30, 2020
“2019 was an important year for OnDeck and we finished strong,” said OnDeck CEO Noah Breslow in the year-end earnings call that took place on February 11, 2020. “Financially, we had our second full year of profitability. And strategically, we are making significant progress positioning the company for improved performance and even greater long-term success.”
OnDeck reported net income of $28 million for 2019 and its share price closed at $4.07 the day earnings were announced, giving it a market cap of roughly $240 million. This was down significantly from its IPO value of $1.3 billion, but up from the lows it had hit in 2017 and 2019.
Over the next 30 days, however, the price fell by 50% on fears that the looming novel coronavirus could cause catastrophic disruption. The company also announced the departure of its Chief Accounting Officer.
As the industry looked on with wonder, news coming out of the company seemed strangely at odds with reality. For example, OnDeck announced a “first-ever” NASCAR sponsorship on March 10th.
“OnDeck is proud to sponsor the JR Motorsports team and driver Daniel Hemric for races during the 2020 NASCAR Xfinity Series season,” said a senior vice president of marketing at OnDeck. “So many of our small business customers are avid motorsports fans and we look forward to joining them to cheer on Daniel and the No. 8 car decked out in OnDeck colors at the Atlanta 250 and the Chicago 300.”
On March 23, OnDeck closed at 70 cents. The market, it seemed, valued OnDeck at a paltry $41 million.
Publicly, OnDeck kept up the optimism. The company applied to be a PPP lender as the program was just beginning to roll out. “We are excited to be one of the fintechs delivering PPP loans as a direct lender,” Breslow said. “Our team has been working around the clock getting us ready and now we wait and hope we are approved soon!”
Simultaneously, the company suspended the funding of its “Core” loans and lines of credit to new and existing customers. The company then went on to report a Q1 net loss of $59M due to covid-related damage, wiping out all of its 2019 profits and more. It also furloughed many employees while reducing the pay for those that stayed on.
That same month, OnDeck’s management “commenced a review of potential financing options to secure additional liquidity and potentially replace [its] corporate line facility and began contacting potential sources of alternative financing, including mezzanine debt.”
The response it got was grim.
“The interest rates offered by those alternative financing sources ranged from 1-month LIBOR plus 900 basis points to 1,700 basis points (in addition to an upfront fee) and all but one required a significantly dilutive equity component,” the company later disclosed. “The one proposal that did not include an equity component was at an interest rate of 1-month LIBOR plus 1,400 basis points to 1,700 basis points.”
OnDeck engaged in negotiations with four potential sources of alternative financing, but two dropped out as the economic effects of the pandemic worsened. At the same time, it was speaking with Enova about something else entirely, a potential merger.
On the frontend, OnDeck was keeping the public abreast of its negotiations with creditors. The pandemic had put them in a technical breach of its terms with several of them but the company was experiencing some success with securing workouts and reprieves.
Regardless, the stock continued to trade below $1 as the world looked on to see what would become of their Q2.
On July 28th, bombshell news broke. Enova, an international lending conglomerate, announced it was acquiring OnDeck for the price of approximately $90 million.
“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Noah Breslow said on a call with Enova executives the following day.
Some shareholders had a different opinion and thought that the deal and the terms looked a little fishy, all considered. Nine different shareholder lawsuits were filed over the next two months with the intent to delay or block the acquisition.
How could this possibly be the best deal or the right path?!
That was the underlying question being posed between the lines of the various claims asserted. OnDeck ultimately settled with all the parties by releasing supplemental information to the public about its financial situation and thought process that led up to the Enova merger. All the objections appeared to fade as shareholders approved the deal by an overwhelming majority.
On October 13th, Enova announced that it had completed the acquisition of OnDeck.
But by that time, was OnDeck merely a hollowed out shell of its former self? Not quite, according to disclosures made two weeks later. Enova announced that OnDeck’s portfolio performance was already exceeding their expectations.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago,” said David Fisher, CEO of Enova. “You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
Fisher was also bullish going forward. “We believe now is a great time to be increasing our presence in
small business lending. The pandemic has devastated many small businesses across the country. Their
revenues are down and small business owners are digging into their savings to survive until the pandemic subsides and the economy reopens.”
Enova reported monster quarterly earnings of $94 million, a company record.
“Together Enova and OnDeck will be well positioned to further support small businesses and consumers in the wake of the pandemic,” Fisher said.
SoFi, The “Don’t Bank” Non-Bank, Has Been Approved to Become a Bank
October 29, 2020It’s a little ironic. SoFi, one of the pioneers of the bank disruptor market, is embracing everything it preached against. The company founded in 2011 as an online student lender was just granted a preliminary approval for a national bank charter by the OCC.
When the company launched, SoFi’s message to the masses was not only that they were better than a bank but that customers shouldn’t use banks in general. They took this message to the extreme:
Just, don't do it. #DontBank pic.twitter.com/lnxKJHH3QJ
— SoFi (@SoFi) February 11, 2016
Banks send you statements. Our statement is we don’t like banks. Check us out at https://t.co/B5YXtHWKL0. #DontBank pic.twitter.com/RshfsAhdYR
— SoFi (@SoFi) January 26, 2016
Happily not a bank. http://t.co/bDN6i1Fd5W #SoFiSoFun
— SoFi (@SoFi) August 25, 2015
To be fair, a lot has changed at SoFi since. Anthony Noto, a former Goldman Sachs banker, took over as CEO in February 2018. And SoFi has grown well beyond just student loans to personal loans, home loans, insurance, small business financing, credit cards, and investing.
The company has also expanded its visibility, including by securing the name rights to the Los Angeles football stadium that serves as the home to the Rams and Chargers. When the deal was announced, it all sounded something very much like what a… bank… would do.
SoFi has technically been mulling the idea of becoming a bank for a long time. They applied for a state industrial bank charter in 2017 but withdrew it amid some internal issues as well as external criticism over the choice of charter.
According to Reuters, Noto said of the latest approval news:
“SoFi is on a mission to help consumers get their money right all in one app. This preliminary conditional approval from the OCC is a testament to the mission-driven company we have built, the employees who help it grow, and the over 1.5 million members we currently serve.”
OnDeck Originated $148M in Loans in Q3, is Moving Full Speed Ahead Under Enova
October 27, 2020
OnDeck more than doubled its Q2 loan volume, according to statements made on Enova’s latest quarterly earnings call. OnDeck originated $148M in Q3 versus the $66M in originated in Q2.
For frame of reference, this is still down significantly from the $618M that the company originated in Q4 2019, well before covid became a factor.
But expect the numbers to ramp up.
“We have basically all of our marketing channels turned on across consumer and small business [lending],” said David Fisher, Enova’s CEO.
“OnDeck is probably a little bit ahead of where we are on the Enova side. We were a little bit more cautious in our re-acceleration of our lending kind of going into the 3rd quarter but we are totally comfortable with that decision. If the biggest mistake we make during all of covid is waiting an extra 60 days to re-accelerate lending, we think that’s a great position to be in. We think that extra conservatism makes sense and with the rate that we’re re-accelerating lending, it won’t hurt that much in the long run.”
And apparently demand and credit quality are looking quite normal, despite covid, according to Fisher.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago. You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
OnDeck’s annualized quarterly net charge-off rate for the third quarter was 23% and its 15 day+ delinquency rate decreased from 40% at June 30th to 27% at September 30th.
Enova reported monster quarterly earnings of $94M. CEO David Fisher and CFO Steve Cunningham said it was a record-breaking quarter for profitability.
Lendified Survives, Under New Management
October 23, 2020
Toronto-based Lendified has returned from the brink. The Canadian alternative small business lender has a new CEO and has resumed the origination of new loans.
In June, deBanked published a story that described the company’s impending doom after it was placed in default with its credit facilities, could no longer originate new loans, and had virtually no capital to continue its operations.
The company was since able to partially recapitalize and John Gillberry has come on as the new CEO. Gillberry is described as a “seasoned senior executive with nearly three decades of experience in areas of managing the finance and operations of special situations and venture capital backed enterprises.”
In an announcement, Gillberry expressed optimism for Lendified’s future. “I am excited about the opportunity that Lendified presents and it is uniquely positioned to take advantage of a very large and underserved market,” he said. “The credit underwriting foundation that we are starting from is distinct from any other in this market and we are pleased to be once again originating new loans to independent business owners.”
The company’s primary senior lenders have resumed financing new loans.
deBanked Visits Local Commercial Finance Brokerage – Horizon Funding Group
October 22, 2020deBanked reporter Johny Fernandez visited the storefront office of Horizon Funding Group, a commercial finance brokerage located in Brooklyn. The company is owned by brothers James and John Celifarco.
The FTC’s Power to “Wipe Out” is Under Siege
October 9, 2020
As the FTC contemplates how to “wipe out” entire industries, federal courts around the country have recently ruled that the regulator can’t accomplish such a goal under Section 13(b) of the FTC act. That’s the statute the FTC relied on to bring its most recent actions against merchant cash advance companies. It might not have bite.
Under 13(b), the FTC is empowered to bring a lawsuit to obtain an injunction against unlawful activity that is currently occurring or is about to occur. It’s powerful, but very limited. However, for the last several decades, the FTC, with the help of federal courts, has interpreted the statute to mean that it can also force the defendants to “disgorge” with illegally obtained funds.
That’s how the FTC wiped out Scott Tucker and his payday lending empire. In a lawsuit the FTC brought against his companies under 13(b) in 2012, the Court entered a judgment of $1.3 billion against him.
Not so fast, modern legal analysis says. Tucker’s case is being brought before the Supreme Court of the United States to settle once and for all what 13(b) allows for and what it doesn’t.
The momentum does not weigh in the FTC’s favor.
On September 30, the Third Circuit ruled in FTC v AbbVie that the FTC is not entitled to seek disgorgement under 13(b). The Seventh Circuit arrived at a similar conclusion last year in FTC v Credit Bureau Center.
In an interview with NBC, FTC Commissioner Rohit Chopra said in August “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
As the FTC attempts to be more proactive in the area of small business finance, it will be important to monitor what the Supreme Court ultimately decides it can actually accomplish.
LendingClub Formally Ends “Peer” Aspect of Its Business, Proceeding With Radius Bank Acquisition
October 7, 2020
LendingClub is finally ending the “peer-to-peer” aspect of its platform for good. Earlier today, the company announced that it would cease offering and selling Member Payment Dependent Notes effective December 31st.
“Ceasing the Retail Notes program will allow LendingClub to redeploy capital and improve platform efficiency, enabling the company to help even more members as LendingClub progresses towards closing the Merger and becoming a bank holding company,” the company said in an official statement. “All Retail Notes outstanding as of the date the Retail Note program is ceased will be unaffected by the cessation of the program. Accordingly, with respect to such outstanding Retail Notes, LendingClub will continue servicing the corresponding member loans and information regarding such Retail Notes will remain viewable in the applicable Retail Note investor accounts.”
LendingClub rose to fame with its peer-to-peer model nearly a decade ago, but using retail investors to fund loans has been eroding over time. ‘Peers’ Are Almost Gone From Lending Club’s Funding Mix was the title of a February 2019 deBanked story that highlighted this trend, for example.
Meanwhile, the focus on Radius Bank is a reminder that the announcement made nearly 8 months ago is still a work-in-progress.
“In connection with and in furtherance of the Merger, LendingClub has been in regular contact with federal banking regulators and, on September 25, 2020, filed an FR Y-3 application with the Federal Reserve to become a bank holding company,” the company said. “LendingClub plans to offer a full suite of products as a bank. This includes a high-yield savings account that will be initially exclusively available to its existing retail investors and will offer a compelling interest rate, as well as other products that take advantage of the marketplace to allow its customers to both pay less when borrowing and earn more when saving.”
Radius Bank was the subject of a major deBanked Magazine story in 2017 titled Tech Banks: Will Fintech Dethrone Traditional Banking?
Yellowstone Capital Moves to Dismiss FTC Lawsuit
October 3, 2020
Newly revealed in court documents filed on Friday is that the recent FTC lawsuit against Yellowstone Capital culminated after a 2-year inquiry. What may have been a surprise to the Yellowstone defendants is how the FTC brought its case or that it ultimately even decided to bring one at all. A motion to dismiss has been filed.
Specifically, counsel for Yellowstone references in its papers that in the preceding years, Yellowstone had already complied with FTC discovery requests that amounted to the production of “24,000 pages of documents, more than 1,400 audio recordings, and responses to numerous interrogatories and follow-up inquiries.”
Following that, the FTC filed suit on August 3, 2020, alleging Misrepresentations Regarding Collateral and Personal Guarantees, Misrepresentations Regarding Financing Amount, and Unfair Unauthorized Withdrawals. In it, it relies heavily on alleged materials dating as far back as five years ago to make its case.
This is fatal to the FTC’s suit, the defendants contend, because the FTC laid out its claims under a very specific statute of the FTC Act, Section 13(b), which can only be brought in federal court if they believe a defendant “is violating, or is about to violate” this area of the law. Past conduct, they say, even if it were true, is not applicable. No acts in 2020 or even from 2019 are alleged with any particularity, nor is it said that any might be happening or will happen.
Some of the purported web pages, ads, or contracts that the FTC refers to no longer exist, have long since been replaced, were taken out of context, or could not even be identified as to where or whom they even originated from, defendants say.
Defendants make further arguments for dismissal, one of which takes issue with alleged quotes or comments made by anonymous merchant customers. “The Complaint does not indicate, for instance, if these unidentified customers had breached their MCA agreements or otherwise incurred additional fees beyond the Purchased Amount that were due and owing to Yellowstone under their respective agreements.”
Deprived of all context and specifics, the complaint is loaded with elements that look bad but fall well short of the necessary legal burden, defendants essentially argue.
“The FTC has overextended itself in this litigation,” defendants say in their papers.
They further raise concern that it arises from a possible personal agenda rather than a legally-founded one. Reference is made to an NBC interview in which FTC Commissioner Rohit Chopra told the interviewer that “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
Chopra had also issued an official statement regarding Yellowstone in which he expounded almost entirely on legal questions that were not even raised in the lawsuit itself but create the impression that they are.
Yellowstone has asked for a stay of discovery pending the outcome of the motion to dismiss.
You can read Yellowstone’s full motion to dismiss here.
The FTC’s interest in this area of finance has been known for some time.
