Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                 TO
Commission File Number 001-36779
 
 
 
 
On Deck Capital, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
42-1709682
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1400 Broadway, 25th Floor, New York, New York
 
10018
(Address of principal executive offices)
 
(Zip Code)

(888) 269-4246
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ý     NO  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
The number of shares of the registrant’s common stock outstanding as of October 31, 2016 was 71,441,993.

 


Table of Contents

On Deck Capital, Inc.
Table of Contents
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6
 
 
 
 


Table of Contents

PART I
 
Item 1.
Financial Statements (Unaudited)

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
 
September 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and cash equivalents
$
85,948

 
$
159,822

Restricted cash
42,827

 
38,463

Loans held for investment
905,327

 
552,742

Less: Allowance for loan losses
(87,368
)
 
(53,311
)
Loans held for investment, net
817,959


499,431

Loans held for sale
986

 
706

Property, equipment and software, net
30,289

 
26,187

Other assets
19,863

 
20,416

Total assets
$
997,872


$
745,025

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
4,087

 
$
2,701

Interest payable
1,583

 
757

Funding debt
651,753

 
375,890

Corporate debt
12,700

 
2,695

Accrued expenses and other liabilities
31,969

 
33,560

Total liabilities
702,092


415,603

Commitments and contingencies (Note 9)

 

Stockholders’ equity (deficit):
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 74,512,869 and 73,107,848 shares issued and 71,374,429 and 70,060,208 outstanding at September 30, 2016 and December 31, 2015, respectively
373

 
366

Treasury stock—at cost
(6,418
)
 
(5,843
)
Additional paid-in capital
472,555

 
457,003

Accumulated deficit
(175,447
)
 
(128,341
)
Accumulated other comprehensive loss
(149
)
 
(372
)
Total On Deck Capital, Inc. stockholders' equity
290,914

 
322,813

Noncontrolling interest
4,866

 
6,609

Total equity
295,780


329,422

Total liabilities and equity
$
997,872


$
745,025

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3


Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Interest income
$
71,361

 
$
48,624

 
$
188,726

 
$
147,571

Gain on sales of loans
2,670

 
16,789

 
12,594

 
35,178

Other revenue
3,340

 
1,985

 
8,168

 
4,418

Gross revenue
77,371

 
67,398

 
209,488

 
187,167

Cost of revenue:
 
 
 
 
 
 
 
Provision for loan losses
36,586

 
16,239

 
94,294

 
54,865

Funding costs
8,452

 
5,126

 
22,548

 
14,941

Total cost of revenue
45,038

 
21,365

 
116,842

 
69,806

Net revenue
32,333

 
46,033

 
92,646

 
117,361

Operating expense:
 
 
 
 
 
 
 
Sales and marketing
16,789

 
15,847

 
50,094

 
43,503

Technology and analytics
15,050

 
11,111

 
42,894

 
29,904

Processing and servicing
5,181

 
3,352

 
14,261

 
9,070

General and administrative
12,375

 
12,146

 
34,233

 
31,722

Total operating expense
49,395

 
42,456

 
141,482

 
114,199

Income (loss) from operations
(17,062
)
 
3,577

 
(48,836
)
 
3,162

Other expense:
 
 
 
 
 
 
 
Interest expense
(111
)
 
(70
)
 
(186
)
 
(250
)
Total other expense
(111
)
 
(70
)
 
(186
)
 
(250
)
Income (loss) before provision for income taxes
(17,173
)
 
3,507

 
(49,022
)
 
2,912

Provision for income taxes

 

 

 

Net income (loss)
(17,173
)
 
3,507

 
(49,022
)
 
2,912

Net loss attributable to noncontrolling interests
539

 
226

 
1,920

 
458

Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(16,634
)

$
3,733

 
$
(47,102
)
 
$
3,370

Net income (loss) per share attributable to On Deck Capital, Inc. common stockholders:
 
 
 
 
 
 
 
Basic
$
(0.23
)
 
$
0.05

 
$
(0.67
)
 
$
0.05

Diluted
$
(0.23
)
 
$
0.05

 
$
(0.67
)
 
$
0.04

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
70,971,895

 
69,678,742

 
70,750,037

 
69,472,636

Diluted
70,971,895

 
75,125,740

 
70,750,037

 
75,414,348

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(17,173
)
 
$
3,507

 
$
(49,022
)
 
$
2,912

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
210

 
(1,215
)
 
393

 
(1,215
)
Comprehensive income (loss):
(16,963
)
 
2,292

 
(48,629
)
 
1,697

Comprehensive income (loss) attributable to noncontrolling interests
(95
)
 
546

 
(177
)
 
546

Net loss attributable to noncontrolling interests
539

 
226

 
1,920

 
458

Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(16,519
)
 
$
3,064

 
$
(46,886
)
 
$
2,701

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income (loss)
$
(49,022
)
 
$
2,912

Adjustments to reconcile net loss to net cash provided by operating activities:

 

Provision for loan losses
94,294

 
54,865

Depreciation and amortization
6,887

 
4,621

Amortization of debt issuance costs
3,733

 
2,130

Stock-based compensation
11,423

 
8,065

Amortization of net deferred origination costs
25,837

 
26,041

Changes in servicing rights, at fair value
4,074

 

Gain on sales of loans
(12,594
)
 
(35,178
)
Unfunded loan commitment reserve
(405
)
 
1,915

Gain on extinguishment of debt
(940
)
 
(182
)
Changes in operating assets and liabilities:

 

Other assets
(1,221
)
 
(11,053
)
Accounts payable
1,386

 
59

Interest payable
826

 
(124
)
Accrued expenses and other liabilities
(844
)
 
10,313

Originations of loans held for sale
(238,077
)
 
(314,134
)
Payments of net deferred origination costs of loans held for sale
(8,074
)
 
(12,142
)
Proceeds from sale of loans held for sale
246,051

 
342,825

Principal repayments of loans held for sale
6,189

 
8,757

Net cash provided by operating activities
89,523


89,690

Cash flows from investing activities
 
 
 
Change in restricted cash
(4,364
)
 
(6,061
)
Purchases of property, equipment and software
(6,337
)
 
(5,115
)
Capitalized internal-use software
(3,702
)
 
(3,219
)
Originations of term loans and lines of credit, excluding rollovers into new originations
(1,333,192
)
 
(809,319
)
Proceeds from sale of loans held for investment
57,238

 
106,007

Payments of net deferred origination costs
(32,909
)
 
(20,578
)
Principal repayments of term loans and lines of credit
881,077

 
639,918

Purchases of term loans
(6,672
)
 

Other
(201
)
 

Net cash used in investing activities
(449,062
)

(98,367
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options and warrants
131

 
227

Payments of initial public offering costs

 
(1,845
)
Purchase of shares for treasury
(576
)
 
(184
)
Investments by noncontrolling interests

 
7,069

Issuance of common stock under employee stock purchase plan
2,606

 

Proceeds from the issuance of funding debt
606,051

 
159,557

Proceeds from the issuance of corporate debt
10,000

 

Payments of debt issuance costs
(4,655
)
 
(1,185
)

5


Table of Contents

 
Nine Months Ended September 30,
 
2016
 
2015
Repayments of funding debt principal
(328,321
)
 
(196,118
)
Repayments of corporate debt principal

 
(12,000
)
Net cash provided by (used in) financing activities
285,236


(44,479
)
Effect of exchange rate changes on cash and cash equivalents
429

 
(1,564
)
Net decrease in cash and cash equivalents
(73,874
)
 
(54,720
)
Cash and cash equivalents at beginning of period
159,822

 
220,433

Cash and cash equivalents at end of period
$
85,948


$
165,713

Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
16,282

 
$
11,739

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
1,025

 
$
597

Loans transferred from loans held for sale to loans held for investment
$
861

 
$
1,348

Unpaid principal balance of term loans rolled into new originations
$
200,637

 
$
194,218


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies
On Deck Capital, Inc.’s principal activity is providing financing to small businesses located throughout the United States, as well as in Canada and Australia, through term loans and lines of credit. We use technology and analytics to aggregate data about a business and then quickly and efficiently analyze the creditworthiness of the business using our proprietary credit-scoring model. We originate most of the loans in our portfolio and also purchase loans from our issuing bank partner. We subsequently transfer most of our loan volume into one of our wholly-owned subsidiaries or sell them through OnDeck Marketplace®.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, as contained in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, for interim financial information. The results of operations for the periods presented are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, including the related notes, and the other information contained in our Annual Report on Form 10-K for the year ended December 31, 2015. Certain reclassifications have been made to the prior period amounts to conform to the current period presentation. When used in these notes to unaudited condensed consolidated financial statements, the terms “we,” “us,” “our” or similar terms refers to On Deck Capital, Inc. and its consolidated subsidiaries.
The unaudited condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries and subsidiaries in which we have a controlling financial interest. All intercompany transactions and accounts have been eliminated in consolidation.
Other than as described below and in Recently Adopted Accounting Standards, during the nine months ended September 30, 2016, there were no material changes to our significant accounting policies as disclosed under Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and accompanying notes. Significant estimates include allowance for loan losses, valuation of warrants, stock-based compensation expense, fair value of servicing assets/liabilities and loans purchased, capitalized software development costs, the useful lives of long-lived assets and the valuation allowance for deferred tax assets. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. These estimates and assumptions are inherently subjective in nature; actual results may differ from these estimates and assumptions.
Purchases of Loans
From time to time, we may purchase loans that we previously sold to third parties. We generally determine the price we are willing to pay for those loans through arm's-length negotiations and by using a discounted cash flow model which contain certain unobservable inputs such as discount rate, renewal rate and default rate, with adjustments that management believes a market participant would consider. We may also obtain third-party valuations of pools of loans we are considering purchasing. Upon purchase, loans are recorded at their acquisition price which represents fair value. The amortized cost of the purchased loans, which includes unpaid principal balances and any related premiums or discounts, when applicable, are included in loans held for investment on the unaudited condensed consolidated balance sheets.
Performance-Based Restricted Stock Units
In the third quarter of 2016, the Compensation Committee of the Board of Directors approved performance-based compensation awards to certain members of executive management and other key personnel. The performance-based compensation awards consist of performance-based restricted stock units, or PRSUs, to be settled solely in shares of our common stock, as well as performance units, to be settled solely in cash. The value of the awards is based on achieving a target performance level established by the Compensation Committee and the award value may increase or decrease based on actual performance relative to the target level. The compensation expense related to the PRSUs and performance units will be recorded on a straight-line basis with the expense being adjusted prospectively as our estimate of the expected performance is reassessed each reporting period.
Recently Adopted Accounting Standards

7


Table of Contents

In April 2015, the FASB issued Accounting Standards Update, or ASU, 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU simplifies the presentation of debt issuance costs by requiring that unamortized debt issuance costs be presented as a reduction of the applicable liability rather than an asset. The guidance was effective on January 1, 2016 and was required to be applied retrospectively. Accordingly, $4.2 million of deferred debt issuance costs on the consolidated balance sheet at December 31, 2015 has been reclassified to be presented as a reduction of the carrying value of the associated debt to conform with the current period presentation.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue Recognition, which creates ASC 606, Revenue from Contracts with Customers, and supersedes ASC 605, Revenue Recognition. ASU 2014-09 requires revenue to be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services and also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. The new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which makes amendments to the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction and impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which makes amendments to the new revenue standard regarding the identification of performance obligations and accounting for the license of intellectual property. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which makes amendments to the new revenue standard regarding assessing collectibility, presentation of sales taxes, noncash consideration and completed contracts and contract modifications at the time of transition to the new standard. Each amendment has the same effective date and transition requirements as the new revenue recognition standard. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which creates ASC 842, Leases, and supersedes ASC 840, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. Early adoption is permitted. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The new guidance will be effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted in any interim or annual period. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 will change the impairment model and how entities measure credit losses for most financial assets. The standard requires entities to use the new expected credit loss impairment model which will replace the incurred loss model used today. The new guidance will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted, but not prior to December 15, 2018. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.


8


Table of Contents

2. Net Loss Per Common Share
Basic and diluted net loss per common share is calculated as follows (in thousands, except share and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(17,173
)
 
$
3,507

 
$
(49,022
)
 
$
2,912

Less: net loss attributable to noncontrolling interest
539

 
226

 
1,920

 
458

Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(16,634
)
 
$
3,733

 
$
(47,102
)
 
$
3,370

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
70,971,895

 
69,678,742

 
70,750,037

 
69,472,636

Weighted-average effect of dilutive securities:
 
 
 
 
 
 
 
Stock options

 
5,151,449

 

 
5,607,795

Restricted stock and RSU's

 
16,531

 

 
52,229

Employee stock purchase program

 

 

 

Warrants to purchase common stock

 
279,018

 

 
281,688

Diluted weighted-average common shares outstanding
70,971,895

 
75,125,740

 
70,750,037

 
75,414,348

Net income (loss) attributable to On Deck Capital, Inc. common stockholders per common share:
 
 
 
 
 
 
 
Basic
$
(0.23
)
 
$
0.05

 
$
(0.67
)
 
$
0.05

Diluted
$
(0.23
)
 
$
0.05

 
$
(0.67
)
 
$
0.04

Diluted loss per common share is the same as basic loss per common share for all loss periods presented because the effect of potentially dilutive items were anti-dilutive given our net losses in those periods. The following common share equivalent securities have been excluded from the calculation of weighted-average common stock outstanding because the effect is anti-dilutive for the periods presented: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Anti-Dilutive Common Share Equivalents
 
 
 
 
 
 
 
Warrants to purchase common stock
22,000

 
22,000

 
22,000

 
309,792

Restricted stock units
4,225,480

 
1,120,030

 
4,225,480

 
1,163,580

Employee stock purchase program
40,706

 
18,176

 
40,706

 
18,176

Stock options
11,997,551

 
5,344,263

 
11,997,551

 
10,928,551

Total anti-dilutive common share equivalents
16,285,737

 
6,504,469

 
16,285,737

 
12,420,099


In September 2014 we issued a warrant to purchase 2,206,496 shares of common stock to a strategic partner. The number of exercisable shares is dependent upon performance conditions. On September 30, 2016, a performance condition was not met and the right to purchase 220,650 shares associated with the warrant expired. The right to purchase the remaining shares of common stock associated with the warrant will expire on September 30, 2017 if certain other performance conditions are not met.
The weighted-average exercise price for warrants to purchase 2,007,846 shares of common stock was $10.70 as of September 30, 2016. For the three months and nine months ended September 30, 2016 and 2015 a warrant to purchase 1,985,846 and 2,206,496 shares of common stock, respectively, was excluded from anti-dilutive common share equivalents as performance conditions had not been met.


9


Table of Contents

3. Loans Held for Investment and Allowance for Loan Losses
Loans held for investment consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
Term loans
$
783,803

 
$
482,596

Lines of credit
105,500

 
61,194

Total unpaid principal balance
889,303

 
543,790

Net deferred origination costs
16,024

 
8,952

Total loans held for investment
$
905,327

 
$
552,742

On June 15, 2016, we paid $6.7 million to purchase term loans that we previously sold to a third party which are included in the unpaid principal balance of loans held for investment on the unaudited condensed consolidated balance sheets at September 30, 2016.
We include both loans we originate and loans funded by our issuing bank partner and later purchased by us as part of our originations. During the three months ended September 30, 2016 and 2015, we purchased such loans in the amount of $147.3 million and $56.1 million, respectively. During the nine months ended September 30, 2016 and 2015, we purchased such loans in the amount of $381.0 million and $159.6 million, respectively.
The activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
73,849

 
$
53,052

 
$
53,311

 
$
49,804

Provision for loan losses
36,586

 
16,239

 
94,294

 
54,865

Loans charged off
(25,268
)
 
(18,839
)
 
(65,411
)
 
(57,853
)
Recoveries of loans previously charged off
2,201

 
2,135

 
5,174

 
5,771

Allowance for loan losses at end of period
$
87,368

 
$
52,587

 
$
87,368

 
$
52,587

When loans are charged-off, we may continue to attempt to recover amounts from the respective borrowers and guarantors, or pursue our rights through formal legal action. Alternatively, we may sell such previously charged-off loans to a third-party debt collector. The proceeds from these sales are recorded as a component of the recoveries of loans previously charged off. For the three months ended September 30, 2016 and 2015, previously charged-off loans sold accounted for $1.2 million and $1.5 million, respectively, of recoveries of loans previously charged off. For the nine months ended September 30, 2016 and 2015, previously charged-off loans sold accounted for $3.1 million and $4.4 million, respectively, of recoveries of loans previously charged off.
As of September 30, 2016 and December 31, 2015, our off-balance sheet credit exposure related to the undrawn line of credit balances was $149.6 million and $89.1 million, respectively. The related accrual for unfunded loan commitments was $3.8 million and $4.2 million as of September 30, 2016 and December 31, 2015, respectively. Net adjustments to the accrual for unfunded loan commitments are included in general and administrative expenses.
The following table contains information, on a combined basis, regarding the unpaid principal balance of loans we originated and the amortized cost of loans purchased from third parties other than our issuing bank partner related to non-delinquent, paying delinquent and non-paying delinquent loans as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
Non-delinquent loans
$
810,531

 
$
486,729

Delinquent: paying (accrual status)
46,736

 
28,192

Delinquent: non-paying (non-accrual status)
32,036

 
28,869

Total
$
889,303

 
$
543,790

The portion of the allowance for loan losses attributable to non-delinquent loans was $45.3 million and $27.0 million, as of September 30, 2016 and December 31, 2015, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was $42.1 million and $26.3 million as of September 30, 2016 and December 31, 2015, respectively.

10


Table of Contents

The following table contains information, on a combined basis, regarding the unpaid principal balance of loans we originated and the amortized cost of loans purchased from third parties other than our issuing bank partner by delinquency status as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
By delinquency status:
 
 
 
Non-delinquent loans
$
810,531

 
$
486,729

1-14 calendar days past due
23,743

 
21,360

15-29 calendar days past due
12,045

 
8,703

30-59 calendar days past due
21,172

 
10,347

60-89 calendar days past due
12,437

 
7,443

90 + calendar days past due
9,375

 
9,208

Total unpaid principal balance
$
889,303

 
$
543,790

4. Servicing Rights
As of September 30, 2016 and December 31, 2015, we serviced for others term loans with a remaining unpaid principal balance of $233.6 million and $345.9 million, respectively. During the three months ended September 30, 2016 and 2015, we sold through OnDeck Marketplace loans with an unpaid principal balance of $87.5 million and $169.0 million, respectively, and during the nine months ended September 30, 2016 and 2015, we sold loans with an unpaid principal balance of $284.9 million and $404.1 million, respectively.
For the three months ended September 30, 2016 and 2015, we earned servicing revenue of $0.3 million and $1.3 million, respectively. For the nine months ended September 30, 2016 and 2015, we earned servicing revenue of $0.9 million and $2.7 million, respectively.
The following table summarizes the activity related to the fair value of our servicing assets for the three and nine months ended September 30, 2016 and September 30, 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Fair value at the beginning of period
$
1,989

 
$
78

 
$
3,489

 
$

Addition:
 
 
 
 
 
 
 
Servicing resulting from transfers of financial assets
717

 
1,466

 
2,272

 
1,544

Changes in fair value:
 
 
 
 
 
 
 
Change in inputs or assumptions used in the valuation model

 
972

 

 
972

Changes in fair value (1)
(1,019
)
 
(264
)
 
(4,074
)
 
(264
)
Fair value at the end of period (Level 3)
$
1,687

 
$
2,252

 
$
1,687

 
$
2,252

  ___________
(1) Represents changes due to collection of expected cash flows through September 30, 2016 and 2015 recognized through other income on the unaudited condensed consolidated statement of operations

11


Table of Contents

5. Debt
The following table summarizes our outstanding debt as of September 30, 2016 and December 31, 2015 (in thousands):
Description
Type
 
Maturity Date
 
Weighted Average Interest
Rate at September 30, 2016
 
September 30, 2016
 
December 31, 2015
Funding Debt:
 
 
 
 
 
 
 
ODAST II Agreement
Securitization Facility
 
May 2020 (1)
 
4.7%
 
$
250,000

 
$

ODART Agreement
Revolving
 
September 2017
 
3.2%
 
106,182

 
42,090

RAOD Agreement
Revolving
 
May 2017
 
3.5%
 
99,985

 
47,465

PORT Agreement
Revolving
 
June 2017
 
2.8%
 
67,313

 
59,415

ODAF Agreement
Revolving
 
August 2019 (2)
 
7.8%
 
64,521

 

ODAC Agreement
Revolving
 
May 2017
 
9.8%
 
59,888

 
27,699

SBAF Agreement
Revolving
 
Various (3)
 
6.5%
 
5,458

 
12,783

Partner Synthetic Participations
Term
 
Various (4)
 
Various
 
3,575

 
6,861

ODAP Agreement
Revolving
 
August 2017 (5)
 
5.0%
 

 
8,819

ODAST Agreement (6)
Securitization Facility
 
May 2018
 
—%
 

 
174,980

 
 
 
 
 
 
 
656,922

 
380,112

Deferred Debt Issuance Cost
 
 
 
 
 
 
(5,169
)
 
(4,222
)
Total Funding Debt
 
 
 
 
 
 
$
651,753

 
$
375,890

 
 
 
 
 
 
 
 
 
 
Corporate Debt:
 
 
 
 
 
 
 
 
 
Square 1 Agreement
Revolving
 
January 2017 (7)
 
4.5%
 
$
12,700

 
$
2,700

Deferred Debt Issuance Cost
 
 
 
 
 
 

 
(5
)
Total Corporate Debt
 
 
 
 
 
 
$
12,700

 
$
2,695

___________
(1)
The period during which remaining cash flow can be used to purchase additional loans expires April 2018.
(2)
The period during which new borrowings may be made under this debt facility expires in August 2018.
(3)
Maturity dates range from October 2016 through August 2017.
(4)
Maturity dates range from October 2016 through June 2018.
(5)
The period during which new borrowings may be made under this debt facility expired in August 2016.
(6)
This debt facility was terminated in May 2016.
(7)
On October 11, 2016 the maturity date was extended to January 2017.
On April 28, 2016, we amended the ODAC Agreement to increase the revolving commitment from an aggregate amount of $50 million to $75 million, increase the interest rate from LIBOR plus 8.25% to LIBOR plus 9.25%, increase in the borrowing base advance rate from 70% to 75% and make certain other related changes.
On May 17, 2016, we, through a wholly-owned subsidiary, OnDeck Asset Securitization Trust II LLC, or the ODAST II, entered into a $250 million asset-backed securitization facility with Deutsche Bank Trust Company Americas, as indenture trustee. The notes under the facility were issued in two classes; Class A in the amount of $211.5 million and Class B in the amount of $38.5 million. The Class A and Class B notes bear interest at a fixed rate of 4.21% and 7.63%, respectively. Interest only payments began in June 2016 and are payable monthly through May 2018. Beginning June 2018, monthly payments will consist of both principal and interest with a final maturity of May 2020. Concurrent with the closing of the ODAST II securitization, we voluntarily prepaid in full $175 million of funding debt outstanding from our prior asset-backed securitization transaction, or the ODAST Agreement. The remaining unamortized deferred issuance costs related to the ODAST Agreement of $1.6 million were written-off and are included within Funding Costs on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2016.
On June 17, 2016, we, through a wholly-owned subsidiary, amended our existing asset-backed revolving debt facility, or the ODART Agreement, to reintroduce Class B revolving loans from the Class B Revolving Lender resulting in additional funding capacity of $12.4 million, thereby increasing the total revolving commitment from $150 million to $162.4 million, establishing a

12


Table of Contents

Class B interest rate equal to LIBOR plus 8%, a borrowing base advance rate for the Class B revolving loans of 92% and make certain other changes.
On August 19, 2016, we, through a wholly-owned subsidiary, entered into a $100 million asset-backed revolving debt facility, or the ODAF Agreement. The commitment bears interest at LIBOR plus 7.25%, has a borrowing base advance rate of up to 80% and matures in August 2019.

6. Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to the lack of transparency and quantity of transactions related to trades of servicing rights of comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made.
The following tables present information about our assets that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
1,687

 
$
1,687

Total assets
$

 
$

 
$
1,687

 
$
1,687

 
December 31, 2015
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
3,489

 
$
3,489

Total assets
$

 
$

 
$
3,489

 
$
3,489

There were no transfers between levels during the nine months ended September 30, 2016 or during the year ended December 31, 2015.

The following tables present quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement as of September 30, 2016 and December 31, 2015:

 
 
 
September 30, 2016
 
Unobservable input
 
Minimum
Maximum
Weighted-Average
Servicing Assets
Discount rate
 
30.00
%
30.00
%
30.00
%
 
Cost of service (1)
 
0.09
%
0.12
%
0.11
%
 
Renewal rate
 
50.47
%
57.33
%
53.40
%
 
Default rate
 
10.12
%
10.72
%
10.33
%
 
 
 
December 31, 2015
 
Unobservable input
 
Minimum
Maximum
Weighted-Average
Servicing Assets
Discount rate
 
30.00
%
30.00
%
30.00
%
 
Cost of service (1)
 
0.09
%
0.09
%
0.09
%
 
Renewal rate
 
31.78
%
53.21
%
53.21
%
 
Default rate
 
6.43
%
10.36
%
10.00
%
(1) Estimated cost of servicing a loan as a percentage of unpaid principal balance


13


Table of Contents

Changes in certain of the unobservable inputs noted above may have a significant impact on the fair value of our servicing asset. The following table summarizes the effect adverse changes in estimate would have on the fair value of the servicing assets as of September 30, 2016 and December 31, 2015 given hypothetical changes in default rate and cost to service (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Servicing Assets
Default rate assumption:
 
 
 
Default rate increase of 25%
$
(107
)
 
$
(145
)
Default rate increase of 50%
$
(207
)
 
$
(282
)
Cost to service assumption:
 
 
 
Cost to service increase by 25%
$
(57
)
 
$
(79
)
Cost to service increase by 50%
$
(114
)
 
$
(159
)
Assets and Liabilities Disclosed at Fair Value
Because our loans held for investment, loans held for sale and fixed-rate debt are not measured at fair value, we are required to disclose their fair value in accordance with ASC 825. Due to the lack of transparency and comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made.
 
September 30, 2016
Description
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment
$
817,959

 
$
886,816

 
$

 
$

 
$
886,816

Loans held for sale
986

 
1,039

 

 

 
1,039

Total assets
$
818,945

 
$
887,855

 
$

 
$

 
$
887,855

 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
259,033

 
$
245,852

 
$

 
$

 
$
245,852

Total fixed-rate debt
$
259,033

 
$
245,852

 
$

 
$

 
$
245,852

 
December 31, 2015
Description
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment
$
499,431

 
$
545,740

 
$

 
$

 
$
545,740

Loans held for sale
706

 
763

 

 

 
763

Total assets
$
500,137

 
$
546,503

 
$

 
$

 
$
546,503

 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
194,624

 
$
190,411

 
$

 
$

 
$
190,411

Total fixed-rate debt
$
194,624

 
$
190,411

 
$

 
$

 
$
190,411

The following techniques and assumptions are used in estimating fair value:
Loans held for investment and loans held for sale - Fair value is based on discounted cash flow models which contain certain unobservable inputs such as discount rate, renewal rate and default rate.
Fixed-rate debt - Our ODAST Agreement, ODAST II Agreement, SBAF Agreement and Partner Synthetic Participations are considered fixed-rate debt. Fair value of our fixed-rate debt is based on a discounted cash flow model with the discount

14


Table of Contents

rate being an unobservable input. On May 17, 2016, we voluntarily prepaid in full all amounts due under the ODAST Agreement and simultaneously entered into the ODAST II Agreement.

15


Table of Contents

7. Noncontrolling Interest
The following table summarizes changes in equity, including the equity attributable to noncontrolling interests, for the nine months ended September 30, 2016 and September 30, 2015:
 
 
Nine Months Ended September 30, 2016
 
 
On Deck Capital, Inc.'s stockholders' equity
 
Noncontrolling interest
 
Total
Balance as of January 1, 2016
 
$
322,813

 
$
6,609

 
$
329,422

Net income (loss)
 
(47,102
)
 
(1,920
)
 
(49,022
)
Stock-based compensation (1)
 
11,399

 

 
11,399

Employee stock purchase plan
 
3,996

 

 
3,996

Cumulative translation adjustment
 
216

 
177

 
393

Exercise of options and warrants
 
168

 

 
168

Purchase of shares for treasury
 
(576
)
 

 
(576
)
Balance at September 30, 2016
 
290,914

 
4,866

 
295,780

 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)
 
(47,102
)
 
(1,920
)
 
(49,022
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
216

 
177

 
393

Comprehensive income (loss)
 
$
(46,886
)
 
$
(1,743
)
 
$
(48,629
)
 
 
Nine Months Ended September 30, 2015
 
 
On Deck Capital, Inc.'s stockholders' equity
 
Noncontrolling interest
 
Total
Balance as of January 1, 2015
 
$
310,605

 
$

 
$
310,605

Net income (loss)
 
3,370

 
(458
)
 
2,912

Stock-based compensation
 
8,065

 

 
8,065

OnDeck Australia capitalization
 

 
6,870

 
6,870

Exercise of options and warrants
 
2,422

 

 
2,422

Cumulative translation adjustment
 
(669
)
 
(546
)
 
(1,215
)
Other
 
(183
)
 

 
(183
)
Balance at September 30, 2015
 
323,610

 
5,866

 
329,476

 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
Net income (loss)
 
3,370

 
(458
)
 
2,912

Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
(669
)
 
(546
)
 
(1,215
)
Comprehensive income (loss)
 
$
2,701

 
$
(1,004
)
 
$
1,697

___________
(1) Includes only the amount of stock-based compensation recognized through additional paid-in capital and does not include stock-based compensation from the employee stock purchase plans.

16


Table of Contents

In the second quarter of 2015, we acquired a 55% interest in On Deck Capital Australia PTY LTD, or OnDeck Australia, with the remaining 45% owned by unrelated third parties. Additionally, in the third quarter of 2015, we acquired a 67% interest in an entity with the remaining 33% owned by an unrelated third party strategic partner for the purpose of providing small business loans to customers of the third party. We consolidate the financial position and results of operations of these entities. The noncontrolling interest, which is presented as a separate component of our consolidated equity, represents the minority owner's proportionate share of the equity of the jointly owned entities. The noncontrolling interest is adjusted for the minority owner's share of the earnings, losses, investments and distributions.

8. Stock-Based Compensation
Options
The following table summarizes option activity for the nine months ended September 30, 2016:
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2016
10,711,324

 
$
6.16

 
 
 
 
Granted
2,022,999

 
$
5.98

 
 
 
 
Exercised
(420,846
)
 
$
0.59

 
 
 
 
Forfeited
(234,919
)
 
$
9.47

 
 
 
 
Expired
(81,007
)
 
$
12.59

 
 
 
 
Outstanding at September 30, 2016
11,997,551

 
$
6.20

 
7.57
 
$
25,101

Exercisable at September 30, 2016
6,629,040

 
$
4.51

 
6.74
 
$
21,610

Vested or expected to vest as of September 30, 2016
11,721,660

 
$
6.16

 
7.57
 
$
25,063

Total compensation cost related to unvested option awards not yet recognized as of September 30, 2016 was $19.3 million and will be recognized over a weighted-average period of approximately 2.47 years. The aggregate intrinsic value of employee options exercised during the three months ended September 30, 2016 and 2015 was $0.9 million and $1.8 million, respectively. The aggregate intrinsic value of employee options exercised during the nine months ended September 30, 2016 and 2015 was $2.4 million and $9.7 million, respectively.
Restricted Stock Units
The following table summarizes activity in our RSUs and PRSUs during the nine months ended September 30, 2016:
 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
Unvested at January 1, 2016
1,853,452

 
$
12.85

RSUs and PRSUs granted
2,991,803

 
$
6.62

RSUs vested
(292,595
)
 
$
14.88

RSUs forfeited/expired
(327,180
)
 
$
10.52

Unvested at September 30, 2016
4,225,480

 
$
8.48

Expected to vest after September 30, 2016
3,438,805

 
$
9.17

During the nine months ended September 30, 2016, in addition to granting RSUs, we also granted 194,207 PRSUs with a grant date fair value of $5.95. For each of the three annual performance periods, one-third (1/3) of the total PRSUs may vest depending upon achievement of performance-based targets. Participants have the ability to earn up to 150% of the baseline award based on certain levels of achievement in excess of the relevant target performance level or could earn less than the baseline award, or nothing at all, based on certain levels of achievement below the relevant target performance level. Measurement of performance is based on a twelve-month period ending June 30 of each year. Performance goals have yet to be established for the twelve-month performance periods ending June 30, 2018 and June 30, 2019.
As of September 30, 2016, there was $23.9 million of unrecognized compensation cost related to unvested RSUs and PRSUs, which is expected to be recognized over the next 3.15 years.

17


Table of Contents

Stock-based compensation expense related to stock options, RSUs, PRSUs and the 2014 Employee Stock Purchase Plan are included in the following line items in our accompanying consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Sales and marketing
$
920

 
$
1,012

 
$
2,749

 
$
2,180

Technology and analytics
793

 
778

 
2,437

 
1,719

Processing and servicing
227

 
227

 
781

 
530

General and administrative
1,821

 
1,690

 
5,456

 
3,636

Total
$
3,761

 
$
3,707

 
$
11,423

 
$
8,065


18


Table of Contents

9. Commitments and Contingencies
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and loans. We hold cash, cash equivalents and restricted cash in accounts at regulated domestic financial institutions in amounts that exceed or may exceed FDIC insured amounts and at non-U.S. financial institutions where deposited amounts may be uninsured. We believe these institutions to be of acceptable credit quality and we have not experienced any related losses to date.
Contingencies
Two separate putative class actions were filed in August 2015 in the United States District Court for the Southern District of New York against us, certain of our executive officers, our directors and certain or all of the underwriters of our initial public offering. The suits allege that the registration statement and prospectus for our initial public offering contained materially false and misleading statements regarding, or failed to disclose, certain information in violation of the Securities Act of 1933, as amended. The suits seek a determination that the case is a proper class action and/or certification of the plaintiff as a class representative, rescission or a rescissory measure of damages and/or unspecified damages, interest, attorneys’ fees and other fees and costs. On February 18, 2016, the court issued an order (1) consolidating the two cases, (2) selecting the lead plaintiff and (3) appointing lead class counsel.  On March 18, 2016, the lead plaintiff filed an amended complaint. In accordance with the court approved schedule for the case as modified by the court, on June 13, 2016 we filed a motion to dismiss the case and on September 9, 2016, the lead plaintiff filed his opposition to the motion to dismiss. On September 26, 2016, the lead plaintiff filed a notice of voluntary dismissal of the consolidated cases without prejudice as to all parties, which was so ordered by the court on September 28, 2016.
From time to time we are subject to other legal proceedings and claims in the ordinary course of business. The results of such matters cannot be predicted with certainty. However, we believe that the final outcome of any such current matters will not result in a material adverse effect on our consolidated financial condition, consolidated results of operations or consolidated cash flows.


19


Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, or SEC, on March 3, 2016. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” below for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, objectives, plans and current expectations.
Forward-looking statements appear throughout this report, including in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements can generally be identified by words such as “will,” “enables,” “expects,” “intends,” “may,” “allows,” “plans,” “continues,” “believes,” “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. As such, they are 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 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 or contribute to such differences include risks relating to: our ability to attract potential customers to our platform; the degree to which potential customers apply for loans, are approved and borrow from us; anticipated trends, growth rates, originations and challenges in our business and in the markets in which we operate; the ability of our customers to repay loans and our ability to accurately assess credit worthiness; our ability to adequately reserve for loan losses; our liquidity and working capital requirements, including the availability and pricing of new debt facilities, extensions and increases to existing debt facilities, increases in our corporate line of credit, securitizations and Marketplace sales to fund our existing operations and planned growth, including the consequences of having inadequate resources to fund additional loans or draws on lines of credit; our reliance on our third-party service providers and the effect on our business of originating loans without third-party funding sources; the impact of increased utilization of cash or incurred debt to fund originations; the effect on our business of utilizing cash for voluntary loan purchases from third parties; the effect on our business of the current credit environment and increases in interest rate benchmarks; our continuing compliance measures related to our funding advisor channel and their impact; changes in our product distribution channel mix and/or our funding mix; our ability to anticipate market needs and develop new and enhanced offerings to meet those needs; interest rates and origination fees on loans; maintaining and expanding our customer base; the impact of competition in our industry and innovation by our competitors; our anticipated growth and growth strategies, including the possible introduction of new products and possible expansion into new international markets, and our ability to effectively manage that growth; our reputation and possible adverse publicity about us or our industry; the availability and cost of our funding, including challenges faced by the expiration of existing debt facilities; the impact on our business of funding loans from our cash reserves; locating funding sources for new loan products that are ineligible for funding under our existing credit or securitization facilities and the possibility of reducing originations of these loan types; the effect of potential selective pricing increases; our expected utilization of OnDeck Marketplace and the available Marketplace premiums; our failure to anticipate or adapt to future changes in our industry; our ability to hire and retain necessary qualified employees; the lack of customer acceptance or failure of our products; our ability to offer loans to our small business customers that have terms that are competitive with alternative sources of capital; our ability to issue new loans to existing customers that seek additional capital; the evolution of technology affecting our offerings and our markets; our compliance with applicable local, state and federal and non-U.S. laws, rules and regulations and their application and interpretation, whether existing, modified or new; our ability to adequately protect our intellectual property; the effect of litigation or other disputes to which we are or may be a party; the increased expenses and administrative workload associated with being a public company; failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; the estimates and estimate methodologies used in preparing our consolidated financial statements; the future trading prices of our common stock, the impact of securities analysts’ reports and shares eligible for future sale on these prices; our ability to prevent or discover security breaks, disruption in service and comparable

20


Table of Contents

events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of our platform or adversely impact our ability to service our loans; and other risks, including those described in “Part I - Item 1A. Risk Factors in our most recent Annual Report on Form 10-K and in "Part II - Item 1A. Risk Factors" in this report, as well as other documents that we file with the SEC from time to time which are available on the SEC website at www.sec.gov.
Except as required by law, we undertake no duty to update any forward-looking statements. Readers are also urged to carefully review and consider all of the information in this report, as well as the other documents we make available through the SEC’s website.
 
 
 
 
When we use the terms “OnDeck,” the “Company,” “we,” “us” or “our” in this report, we are referring to On Deck Capital, Inc. and its consolidated subsidiaries unless the context requires otherwise.
OnDeck, the OnDeck logo, OnDeck Score, OnDeck Marketplace and other trademarks or service marks of OnDeck appearing in this report are the property of OnDeck. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We have generally omitted the ®, ™ and other designations, as applicable, in this report.

21


Table of Contents

Overview
We are a leading online platform for small business lending. We are seeking to transform small business lending by making it efficient and convenient for small businesses to access capital. Enabled by our proprietary technology and analytics, we aggregate and analyze thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately. Small businesses can apply for a term loan or line of credit on our website in minutes and, using our proprietary OnDeck Score®, we can make a funding decision immediately and transfer funds as fast as the same day. We have originated more than $5 billion of loans since we made our first loan in 2007. Our loan originations have increased at a compound annual growth rate of 60% from 2013 to 2015 and had year-over-year growth rates of 27% and 34% for the three months and nine months ended September 30, 2016.
We generate the majority of our revenue through interest income and fees earned on the term loans we retain. Our term loans, which we offer in principal amounts ranging from $5,000 to $500,000 and with maturities of 3 to 36 months, feature fixed dollar repayments. Our lines of credit range from $6,000 to $100,000, and are repayable within six or 12 months of the date of the latest funds draw. We earn interest on the balance outstanding and lines of credit are subject to a monthly fee unless the customer makes a qualifying minimum draw, in which case it is waived for the first six months. In September 2015, in response to what we believe to be the unmet demand of larger, higher credit quality businesses, we began offering term loans up to $500,000 with terms as long as 36 months as compared to our previous limits of $250,000 and 24 months. We also increased the maximum size of our line of credit from $25,000 to $100,000. In October 2013, we began generating revenue by selling some of our term loans to third-party institutional investors through our OnDeck Marketplace®. The balance of our revenue comes from our servicing and other fee income, which primarily consists of fees we receive for servicing loans owned by third-parties and marketing fees from our issuing bank partner.
We rely on a diversified set of funding sources for the capital we lend to our customers. Our primary source of this capital has historically been debt facilities with various financial institutions. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. As of September 30, 2016, we had $656.9 million of funding debt principal outstanding and $796.5 million total borrowing capacity under such debt facilities. During the third quarter of 2016 and 2015, we sold approximately $89.9 million and $173.7 million, respectively, while for the nine months ended September 30, 2016 and 2015, we sold $292.9 million and $415.8 million, respectively, of loans to OnDeck Marketplace investors. In May 2016, we completed a second securitization transaction, pursuant to which we issued $250 million initial principal amount of asset-backed notes secured by a revolving pool of OnDeck small business loans. This represents an increase of $75 million over our first securitization transaction in May 2014. Additionally, in August 2016, we established a new asset-backed revolving debt facility providing a commitment of up to $100 million. Of the total principal outstanding as of September 30, 2016, including our loans held for investment and loans held for sale, plus loans sold to OnDeck Marketplace investors which had a balance remaining as of September 30, 2016, 21% were funded via OnDeck Marketplace investors, 44% were funded via our debt facilities, 25% were financed via proceeds raised from our securitization transaction and 10% were funded via our own equity.
We originate loans throughout the United States, Canada and Australia, although, to date, substantially all of our revenue has been generated in the United States. These loans are originated through our direct marketing, including direct mail, social media and other online marketing channels. We also originate loans through our outbound sales team, referrals from our strategic partners, including banks, payment processors and small business-focused service providers, and through funding advisors who advise small businesses on available funding options.

22


Table of Contents

Key Financial and Operating Metrics
We regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions. Beginning with the three months ended March 31, 2016, we refined the calculation of Effective Interest Yield, or EIY, and certain related definitions to reflect the substantial growth and impact of OnDeck Marketplace and to present EIY on a business day adjusted basis. In addition, effective January 1, 2016, we adopted a new requirement in accordance with accounting principles generally accepted in the United States of America, or GAAP, regarding the presentation of debt issuance costs. All revisions have been applied retrospectively.
 
As of or for the Three Months Ended September 30,
 
As of or for the Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(dollars in thousands)
 
(dollars in thousands)
Originations
$
612,557

 
$
482,653

 
$
1,771,906

 
$
1,317,672

Unpaid Principal Balance
$
889,303

 
$
504,314

 
$
889,303

 
$
504,314

Average Loans
$
856,303

 
$
541,151

 
$
748,997

 
$
541,808

Average Interest Earning Assets
$
841,270

 
$
531,223

 
$
735,825

 
$
529,756

Loans Under Management
$
1,123,863

 
$
781,357

 
$
1,123,863

 
$
781,357

Average Loans Under Management
$
1,087,641

 
$
748,266

 
$
1,015,768

 
$
687,844

Effective Interest Yield
32.8
%
 
34.8
%
 
33.4
%
 
36.1
%
Marketplace Gain on Sale Rate
3.0
%
 
9.7
%
 
4.3
%
 
8.5
%
Average Funding Debt Outstanding
$
597,678

 
$
351,675

 
$
505,406

 
$
364,742

Cost of Funds Rate
5.7
%
 
5.8
%
 
5.9
%
 
5.5
%
Provision Rate
6.9
%
 
5.1
%
 
6.4
%
 
5.9
%
Reserve Ratio
9.8
%
 
10.4
%
 
9.8
%
 
10.4
%
15+ Day Delinquency Ratio
6.2
%
 
7.5
%
 
6.2
%
 
7.5
%
Originations
Originations represent the total principal amount of the term loans we made during the period, plus the total amount drawn on lines of credit during the period. Many of our repeat term loan customers renew their term loan before their existing term loan is fully repaid. In accordance with industry practice, originations of such repeat term loans are presented as the full renewal loan principal, rather than the net funded amount, which would be the renewal term loan’s principal net of the unpaid principal balance on the existing term loan. Loans referred to, and funded by, our issuing bank partner and later purchased by us are included as part of our originations.
Unpaid Principal Balance
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 third parties other than our issuing bank partner 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.
Average Loans
Average Loans for the period is the average of the sum of loans held for investment and loans held for sale as of the beginning of the period and as of the end of each month in the period.
Average Interest Earning Assets
Average Interest Earning Assets is calculated as the average of the Unpaid Principal Balance plus the amount of principal outstanding of loans held for sale based on the beginning of the period and as of the end of each month in the period.
Loans Under Management
Loans Under Management represents the Unpaid Principal Balance plus the amount of principal outstanding of loans held for sale, excluding net deferred origination costs, plus the amount of principal outstanding of term loans we serviced for others at the end of the period.

23


Table of Contents

Average Loans Under Management
Average Loans Under Management for the period is the average of Loans Under Management at the beginning of the period and the end of each month in the period.
Effective Interest Yield
Effective Interest Yield is the rate of return we achieve on loans outstanding during a period. It is calculated as our business day adjusted annualized interest income divided by Average Loans. Annualization is based on 252 business days per year, which is weekdays per year less U.S. Federal Reserve Bank holidays.
Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination fees and costs. Deferred origination fees include fees paid up front to us by customers when loans are funded and decrease the carrying value of loans, thereby increasing the Effective Interest Yield earned. 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 and increase the carrying value of loans, thereby decreasing the Effective Interest Yield earned.
Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”
Marketplace Gain on Sale Rate
Marketplace Gain on Sale Rate equals our gain on sale revenue from loans sold through OnDeck Marketplace divided by the carrying value of loans sold, which includes both unpaid principal balance sold and the remaining carrying value of the net deferred origination costs. A portion of loans regularly sold through OnDeck Marketplace are or may be loans which were initially designated as held for investment upon origination. The portion of such loans sold in a given period may vary materially depending upon market conditions and other circumstances.
Average Funding Debt Outstanding
Funding debt outstanding is the debt that we incur to support our lending activities and does not include our corporate debt. Average Funding Debt Outstanding for the period is the average of the funding debt outstanding as of the beginning of the period and as of the end of each month in the period. Additionally, in accordance with Financial Accounting Standards Board’s update to ASC 835-30, which was effective January 2016 and applied retrospectively, deferred debt issuance costs are presented as a direct deduction from the carrying value of the associated debt.
Cost of Funds Rate
Cost of Funds Rate is our funding cost, which is 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, divided by Average Funding Debt Outstanding. For full years, it is calculated as our funding cost divided by Average Funding Debt Outstanding and for interim periods it is calculated as our annualized funding cost for the period divided by Average Funding Debt Outstanding.
Provision Rate
Provision Rate equals the provision for loan losses divided by the new originations volume of loans held for investment, net of originations of sales of such loans within the period. Because we reserve for probable credit losses inherent in the portfolio upon origination, this rate is significantly impacted by the expectation of credit losses for the period’s originations volume. This rate may also be impacted by changes in loss expectations for loans originated prior to the commencement of the period.
The denominator of the Provision Rate formula includes the new originations volume of loans held for investment, net of originations of sales of such loans within the period. However, the numerator reflects only the additional provision required to provide for loan losses on the net funded amount during such period. Therefore, all other things equal, an increased volume of loan rollovers and line of credit repayments and re-borrowings in a period will reduce the Provision Rate.
A portion of loans regularly sold through OnDeck Marketplace are or may be loans which were initially designated as held for investment upon origination. The portion of such loans sold in a given period may vary materially depending upon market conditions and other circumstances.
The Provision Rate is not directly comparable to the net cumulative lifetime charge-off ratio because (i) the Provision Rate reflects estimated losses at the time of origination while the net cumulative lifetime charge-off ratio reflects actual charge-offs, (ii) the Provision Rate includes provisions for losses on both term loans and lines of credit while the net cumulative lifetime charge-off ratio reflects only charge-offs related to term loans and (iii) the Provision Rate for a period reflects the provision for losses related to all loans held for investment while the net cumulative lifetime charge-off ratio reflects lifetime charge-offs of term loans related to a particular cohort of term loans.

24


Table of Contents

Reserve Ratio
Reserve Ratio is our allowance for loan losses as of the end of the period divided by the Unpaid Principal Balance as of the end of the period.
15+ Day Delinquency Ratio
15+ Day Delinquency Ratio equals the aggregate Unpaid Principal Balance for our loans that are 15 or more calendar days past due as of the end of the period as a percentage of the Unpaid Principal Balance. The Unpaid Principal Balance for our loans that are 15 or more calendar days past due includes loans that are paying and non-paying. Because the majority of our loans require daily repayments, excluding weekends and holidays, they may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments.
15+ Day Delinquency Ratio is not annualized, but reflects balances as of the end of the period.

Non-GAAP Financial Measures
We believe that the provision of non-GAAP metrics in this report can provide a useful measure for period-to-period comparisons of our core business and useful information to investors and others in understanding and evaluating our operating results. However, non-GAAP metrics are not calculated in accordance with GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these non-GAAP metrics differently than we do.
Adjusted EBITDA
Adjusted EBITDA represents our net income (loss), adjusted to exclude interest expense associated with debt used for corporate purposes (rather than funding costs associated with lending activities), income tax expense, depreciation and amortization and stock-based compensation expense. Stock-based compensation includes employee compensation as well as compensation to third-party service providers.
Our use of Adjusted EBITDA 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:
 
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; and
Adjusted EBITDA does not reflect interest associated with debt used for corporate purposes or tax payments that may represent a reduction in cash available to us.
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Reconciliation of Net Income (Loss) to Adjusted EBITDA
 
 
 
 
 
 
 
Net income (loss)
$
(17,173
)
 
$
3,507

 
$
(49,022
)
 
$
2,912

Adjustments:
 
 
 
 
 
 
 
Interest expense
111

 
70

 
186

 
250

Income tax expense

 

 

 

Depreciation and amortization
2,452

 
1,678

 
6,887

 
4,621

Stock-based compensation expense
3,761

 
3,707

 
11,423

 
8,065

Adjusted EBITDA
$
(10,849
)
 
$
8,962

 
$
(30,526
)
 
$
15,848


25


Table of Contents

Adjusted Net Income (Loss)
Adjusted Net Income (Loss) represents our net income (loss) adjusted to exclude stock-based compensation expense, each on the same basis and with the same limitations as described above for Adjusted EBITDA, and net loss attributable to noncontrolling interest.
The following table presents a reconciliation of net income (loss) to Adjusted Net Income (Loss) for each of the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss)
 
 
 
 
 
 
 
Net income (loss)
$
(17,173
)
 
$
3,507

 
$
(49,022
)
 
$
2,912

Adjustments:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
539

 
226

 
1,920

 
458

Stock-based compensation expense
3,761

 
3,707

 
11,423

 
8,065

Adjusted Net Income (Loss)
$
(12,873
)
 
$
7,440

 
$
(35,679
)
 
$
11,435


26


Table of Contents

Key Factors Affecting Our Performance
Originations
For the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, the growth in originations was driven by business from repeat customers, increased average loan size and the addition of new customers. During the third quarter of 2016, total originations grew 27% as compared to the prior year period, to $612.6 million. In addition, during the third quarter of 2016, the outstanding balance of our lines of credit increased. Line of credit originations made up 15.4% and 9.2% of total dollar originations in the third quarter of 2016 and 2015, respectively.
The number of weekends and holidays in a period can impact our business. Many small businesses tend to apply for loans on weekdays, and such businesses may be closed at least part of a weekend and on holidays. In addition, our loan fundings and automated customer loan repayments only occur on weekdays (excluding bank holidays).
We anticipate that our future growth will continue to depend, in part, on attracting new customers. We plan to continue our sales and marketing spending to attract these customers, while controlling for cost per customer acquisition, and we also plan to increase our analytics spending to better identify potential customers. Collective originations through our direct and strategic partner channels made up 73% and 76% of total originations from all customers for the three months ended September 30, 2016 and 2015, respectively. We plan to continue investing in direct marketing and sales, increasing our brand awareness and growing our strategic partnerships.
The following tables summarize the percentage of loans made to all customers originated by our three distribution channels for the periods indicated. From time to time, management is required to make judgments to determine customers' appropriate channel distribution.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Percentage of Originations (Number of Loans)
2016
 
2015
 
2016
 
2015
Direct and Strategic Partner
79.8
%
 
81.4
%
 
80.3
%
 
79.3
%
Funding Advisor
20.2
%
 
18.6
%
 
19.7
%
 
20.7
%
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Percentage of Originations (Dollars)
2016
 
2015
 
2016
 
2015
Direct and Strategic Partner
73.0
%
 
75.5
%
 
73.1
%
 
71.8
%
Funding Advisor
27.0
%
 
24.5
%
 
26.9
%
 
28.2
%
We originate term loans and lines of credit to customers who are new to OnDeck as well as to repeat customers. New originations are defined as new term loan originations plus all line of credit draws in the period, including subsequent draws on existing lines of credit. Renewal originations include term loans only. We believe our ability to increase adoption of our offerings within our existing customer base will be important to our future growth. A component of our future growth will include increasing the length of our customer life cycle by expanding our offerings. We believe our significant number of repeat customers is primarily due to our high levels of customer service and continued improvement in products and services. Repeat customers generally account for our highest quality loans, given that successful repayment of an initial loan is a positive indicator of future credit performance, and OnDeck has more data about a repeat loan applicant than a new loan applicant. From our 2013 customer cohort, customers who took at least three term loans grew their revenue and bank balance on average by 28% and 50%, respectively, from their initial loan to their third term loan. Similarly, from our 2014 customer cohort, customers who took at least three term loans grew their revenue and bank balance on average by 30% and 57%, respectively. In the third quarter of 2016, 22.1% percent of our origination volume from repeat customers was attributable to unpaid principal balance rolled from existing term loans directly into such repeat originations. In order for a current customer to qualify for a new term loan while a term loan payment obligation remains outstanding, the customer must pass the following standards:
 
the business must be approximately 50% paid down on its existing term loan;
the business must be current on its outstanding OnDeck loan(s) with no material delinquency history; and
the business must be fully re-underwritten and determined to be of adequate credit quality.
The extent to which we generate repeat business from our customers will be an important factor in our continued revenue growth and our visibility into future revenue. In conjunction with repeat borrowing activity, our customers also tend to increase their subsequent loan size compared to their initial loan size. In the fourth quarter of 2014, we introduced the ability for our customers to carry a term loan and line of credit concurrently, which we believe will continue to enhance our ability to generate repeat business going forward.

27


Table of Contents


We reserve for probable credit losses inherent in the portfolio upon origination, and as a result, the Provision Rate is significantly impacted by the expectation of credit losses for the period’s originations volume as well as changes in the expected performance of our seasoned loan portfolio. For the three months ended September 30, 2016, the Provision Rate was 6.9% as compared to 6.3% for the three months ended June 30, 2016. The increase in the rate was primarily the result of a build of loss reserves for term loans originated in prior periods, generally reflecting an increase in delinquency roll rates from historically low levels. As a percentage of Unpaid Principal Balance, non-delinquent loans were approximately 91% and 92% as of September 30, 2016 and June 30, 2016, respectively.

Pricing
Customer pricing is determined primarily based on the customer’s OnDeck Score, the loan term, the customer type (new or repeat) and origination channel. Loans originated through the direct and strategic partner channels are generally priced lower than loans originated through the funding advisor channel due to the higher commissions paid to funding advisors.
Our customers generally pay between $0.003 and $0.04 per month in interest for every dollar they borrow under one of our term loans, with the actual amount typically driven by the length of term of the particular loan. In general, our term loans have been primarily quoted in “Cents on Dollar,” or COD, and lines of credit are quoted in annual percentage rate, or APR. Given the use case and payback period associated with our shorter term offerings, we believe many of our customers prefer to understand pricing on a “dollars in, dollars out” basis and are primarily focused on total payback cost.
We believe that our pricing has historically fallen between traditional bank loans to small businesses and certain non-bank small business financing alternatives such as merchant cash advances. The weighted average pricing on our originations has generally declined over time as measured by both average “Cents on Dollar” borrowed per month and APR as shown in the table below.
 
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
2014
2013
Weighted Average Term Loan “Cents on Dollar”
 Borrowed, per Month
1.85¢
1.75¢
1.78¢
1.82¢
1.86¢
2.04¢
2.15¢
2.32¢
2.65¢
Weighted Average APR - Term Loans and Lines of Credit
42.1%
40.2%
40.6%
41.4%
42.7%
46.5%
49.3%
54.4%
63.4%
We attribute this general pricing shift to longer average loan term lengths, increased originations from our lower cost direct and strategic partner channels as a percentage of total originations, the growth of our line of credit offering which is generally priced at lower APR levels than our term loans, and the introduction of our customer loyalty program in the first half of 2015. Our customer loyalty program reduces APR for qualifying repeat customers, who historically have exhibited stronger credit characteristics than new customers, demonstrated successful loan history by paying down previous loans and generated stronger unit economics in part due to the lower customer acquisition cost, or CAC, of a repeat customer. This aligns with our goal of building long-term relationships with our customers. During the third quarter of 2016, we implemented selective price increases which increased our weighted average COD and weighted average APR. We intend to continue to manage the pricing of our loans to optimize between risk-adjusted yields and loan origination volume.
“Cents on Dollar” borrowed reflects the total interest to be paid by a customer to us for each dollar of principal borrowed, and does not include the loan origination fee. As of September 30, 2016, the APRs of our term loans outstanding ranged from 9.1% to 99.0% and the APRs of our lines of credit outstanding ranged from 13.0% to 39.9%. Because many of our loans are short term in nature and APR is calculated on an annualized basis, we believe that small business customers tend to understand and evaluate term loans, especially those of a year or less, primarily on a COD borrowed or similar dollar cost basis (expressing the cost of borrowing in dollar terms), rather than APR.  While annualized rates like APR may help a borrower compare similar loan options, an annualized rate may be less useful, especially for loans of 12 months or less, because it is sensitive to duration.  For loans of 12 months or less, small differences in loan term can yield large changes in the associated APR, which may make comparisons and understanding of total dollar interest cost more difficult.  In order to provide our customers with additional information, however, we are adopting the recently announced SMART (Straightforward Metrics Around Rate and Total cost) Box, a model pricing disclosure and comparison tool introduced by the Innovative Lending Platform Association of which we are a founding member. Among other things, the SMART Box will include APR disclosure.
The table above provides APRs for prior periods as supplemental information for comparative purposes.  Historically, we have not used APR as an internal metric to evaluate performance of our business or as a basis to compensate our employees or to measure their performance. The interest on commercial business loans is also tax deductible as permitted by law compared to

28


Table of Contents

typical personal loans which do not provide a tax deduction. APR does not give effect to the small business customer’s possible tax deductions and cash savings associated with business related interest expenses.
We consider EIY as a key pricing metric. EIY is the rate of return we achieve on loans outstanding during a period. Our EIY differs from APR in that it takes into account deferred origination fees and deferred origination costs. Deferred origination fees include fees paid up front to us by customers when loans are funded and decrease the carrying value of loans, thereby increasing the EIY. 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 and increase the carrying value of loans, thereby decreasing the EIY.
In addition to individual loan pricing and the number of days in a period, there are many other factors that can affect EIY, including:
Channel Mix - In general, loans originated from the direct and strategic partner channels have lower EIYs than loans from the funding advisor channel primarily due to their lower rates, lower acquisition costs and lower loss rates.  The direct and strategic partner channels have, in the aggregate, made up 73% and 76% of total originations during the three months ended September 30, 2016 and 2015, respectively. We expect the combined direct and strategic partner channels' percentage of originations to remain generally comparable in the near-term.
Term Mix - In general, term loans with longer durations have lower annualized interest rates.  Despite lower EIYs, total revenues from customers with longer loan durations are typically higher than the revenue of customers with shorter-term, higher EIY loans because total payback is typically higher compared to a shorter length term for the same principal loan amount.  Since the introduction of our 24-month and 36-month term loans, the average length of term loan originations has increased to 13.1 from 12.3 months for the three months ended September 30, 2016 and September 30, 2015, respectively.
Customer Type Mix - In general, loans originated from repeat customers have lower EIYs than loans from new customers.  This is primarily due to the fact that repeat customers typically have a higher OnDeck Score and are therefore deemed to be lower risk.  In addition, repeat customers are more likely to be approved for longer term lengths than new customers given their established payment history and lower risk profiles. Finally, origination fees are generally reduced or waived for repeat term loan customers, contributing to lower EIYs. Our level of repeat customer originations in the third quarter of 2016 decreased compared to the third quarter of 2015, but remained greater than 50%.
Product Mix - In general, loans originated from line of credit customers have lower EIYs than loans from term loan customers.  This is primarily due to the fact that lines of credit are expected to have longer lifetime usage than term loans, enabling more time to recoup upfront acquisition costs.  For the third quarter of 2016, the average line of credit APR was 32.5%, compared to the average term loan APR which was 42.9%.  Further, draws from line of credit customers have increased to 15.4% from 9.2% of total dollar originations in the third quarter of 2016 and 2015, respectively.
Competition - During 2015, new lenders entered the online lending market. During the first three quarters of 2016, we believe the number of new entrants into the market as well as the amount of funding invested in these competitors from private equity or venture capital sources slowed. At the same time, more traditional small business lenders such as banks have and may continue to enter the space. As these trends evolve, competitors may attempt to obtain new customers by pricing term loans and lines of credit below prevailing market rates. This could cause downward pricing pressure as these new entrants attempt to win new customers even at the cost of pricing loans below market rates, or even at rates resulting in net losses to them. While we recognize that there has been increased competition in the market of small business loans, we believe only a small portion of our period over period EIY decline is a result of increased competition.
Since 2013, as part of our continuing initiative to reduce pricing while controlling risk, our EIY has generally declined.
Effective Interest Yield
Q3 2016
 
Q2 2016
 
Q1 2016
 
Q4 2015
 
Q3 2015
 
Q2 2015
 
Q1 2015
32.8%
 
33.3%
 
34.5%
 
34.2%
 
34.8%
 
35.9%
 
37.6%
We expect EIY to stabilize in the short term and increase thereafter as our portfolio shifts towards our higher yielding offerings and as we continue to manage the pricing of our loans to optimize between risk-adjusted yields and loan origination volume.
Sale of Whole Loans through OnDeck Marketplace
We sell whole loans to institutional investors through OnDeck Marketplace. Marketplace originations are defined as loans that are sold through OnDeck Marketplace in the period or are held for sale at the end of the period. For the three months ended September 30, 2016 and 2015, approximately 16.6% and 38.2%, respectively, of total term loan originations were designated as Marketplace originations, which resulted in $89.9 million and $173.7 million of loans sold, respectively. We have the ability to

29


Table of Contents

fund our originations through a variety of funding sources, including OnDeck Marketplace. Due to the flexibility of our hybrid funding model, management has the ability to exercise judgment to adjust the percentage of term loans originated through OnDeck Marketplace considering numerous factors including the premiums, if any, available to us. During the three months ended September 30, 2016, premiums decreased due, in part, to the loan mix we elected to sell. Marketplace originations increased to 16.6% of originations for the three months ended September 30, 2016 compared to 15.6% for the three months ended June 30, 2016. The lower premiums available during the three months ended September 30, 2016 resulted in a Marketplace Gain on Sale Rate of 3.0% compared to 3.5% for the three months ended June 30, 2016 and 9.7% for the three months ended September 30, 2015. Despite these trends, we elected to make Marketplace loan sales in the period to provide us an additional source of liquidity and to maintain active relationships with our institutional loan purchasers. If premiums remain steady or decreases further, we may reduce our percentage of Marketplace originations, subject to our overall financing needs including our ability to negotiate new debt facilities, or renew or modify existing debt facilities.
To the extent our use of OnDeck Marketplace as a funding source increases or decreases in the future, our gross revenue and net revenue could be materially affected. The sale of whole loans generates gain on sales of loans which is recognized in the period the loan is sold. In contrast, holding loans on balance sheet generates interest income and funding costs over the term of the loans and generally generates a provision for loan loss expense in the period of origination. Typically, over the life of a loan, we generate more total revenue and income from loans we hold on our balance sheet to maturity as compared to loans we sell through Marketplace.
Our Marketplace originations come from one of the following two origination sources:
New loans which are designated at origination to be sold, referred to as “Originations of loans held for sale;” and
Loans which were originally designated as held for investment that are subsequently designated to be sold at the time of their renewal and which are considered modified loans, referred to as “Originations of loans held for investment, modified.”
The following table summarizes the initial principal of originations of the aforementioned two sources as it relates to the statement of cash flows during the three months ended and nine months ended of 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
(in thousands)
Originations of loans held for sale
$
70,870

 
$
128,820

 
$
238,077

 
$
314,134

Originations of loans held for investment, modified
15,078

 
38,371

 
54,865

 
72,134

    Marketplace originations
$
85,948

 
$
167,191

 
$
292,942

 
$
386,268

Customer Acquisition Costs
Our customer acquisition costs, or CACs, differ depending upon the acquisition channel. CACs in our direct channel include the commissions paid to our internal salesforce and expenses associated with items such as direct mail, social media and other online marketing activities. CACs in our strategic partner channel include commissions paid to our internal salesforce and strategic partners. CACs in our funding advisor channel include commissions paid to our internal salesforce and funding advisors. CACs in all channels include new originations as well as renewals.
Our CACs, on a combined basis for all three acquisition channels and evaluated as a percentage of originations, declined in the third quarter of 2016 as compared to the third quarter of 2015.  The decrease was primarily attributable to a decline in CACs in our direct channel resulting from improvements in customer targeting, increased drawn balances of our customers' lines of credit, and increased renewal activity within the direct channel on an absolute dollar basis.  The decrease in the combined CAC was partially offset by an increase in CACs across our funding advisor and strategic partner channels driven by an increase in external commissions paid in the third quarter of 2016.  Our combined CACs in the third quarter of 2016 was generally comparable to the second quarter of 2016.
Increased competition for customer response could require us to incur higher customer acquisition costs and make it more difficult for us to grow our loan originations in both unit and volume for both new as well as repeat customers.
Customer Lifetime Value
The ongoing lifetime value of our customers will be an important component of our future performance. We analyze customer lifetime value not only by tracking the “contribution” of customers over their lifetime with us, but also by comparing this contribution to the acquisition costs incurred in connection with originating such customers’ initial loans. We define the contribution to include

30


Table of Contents

the interest income and fees collected on a cohort of customers’ initial and repeat loans less acquisition costs for their repeat loans, estimated third party processing and servicing expenses for their initial and repeat loans, estimated funding costs (excluding any cost of equity capital) for their initial and repeat loans, and charge-offs of their initial and repeat loans. Relative to the customer lifetime value of the 2013 cohort, against like periods, the 2014 and 2015 cohorts generally exhibit improved return on investment due to economies of scale and improved efficiencies in marketing, cost of funds and processing and servicing costs, as well as credit improvements which resulted in larger average loan sizes.