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 MARCH 31, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨

 
Accelerated filer
 
x
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨

 
 
 
 
Emerging growth company
 
x
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
YES ¨ NO x
The number of shares of the registrant’s common stock outstanding as of April 30, 2018 was 74,269,812.
 




Table of Contents

On Deck Capital, Inc.
Table of Contents
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements (Unaudited)
 
Unaudited Condensed Consolidated Balance Sheets
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
 
Unaudited Condensed Consolidated Statements of Cash Flows
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6
Exhibits
 
 
 
 
Signatures



Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
 
March 31,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Cash and cash equivalents
$
70,415

 
$
71,362

Restricted cash
44,709

 
43,462

Loans held for investment
1,010,944

 
952,796

Less: Allowance for loan losses
(118,921
)
 
(109,015
)
Loans held for investment, net
892,023

 
843,781

Property, equipment and software, net
17,455

 
23,572

Other assets
15,824

 
13,867

Total assets
$
1,040,426

 
$
996,044

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
3,038

 
$
2,674

Interest payable
2,429

 
2,330

Funding debt
730,024

 
684,269

Corporate debt
7,969

 
7,985

Accrued expenses and other liabilities
29,499

 
32,730

Total liabilities
772,959

 
729,988

Commitments and contingencies (Note 9)

 

Stockholders’ equity (deficit):
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 77,752,143 and 77,284,266 shares issued and 74,264,491 and 73,822,001 outstanding at March 31, 2018 and December 31, 2017, respectively.
389

 
386

Treasury stock—at cost
(8,083
)
 
(7,965
)
Additional paid-in capital
496,588

 
492,509

Accumulated deficit
(224,752
)
 
(222,833
)
Accumulated other comprehensive loss
(118
)
 
(52
)
Total On Deck Capital, Inc. stockholders' equity
264,024

 
262,045

Noncontrolling interest
3,443

 
4,011

Total equity
267,467

 
266,056

Total liabilities and equity
$
1,040,426

 
$
996,044

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


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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 March 31,
 
2018
 
2017
Revenue:
 
 
 
Interest income
$
86,369

 
$
87,111

Gain on sales of loans

 
1,484

Other revenue
3,911

 
4,297

Gross revenue
90,280

 
92,892

Cost of revenue:
 
 
 
Provision for loan losses
36,293

 
46,180

Funding costs
11,821

 
11,277

Total cost of revenue
48,114

 
57,457

Net revenue
42,166

 
35,435

Operating expense:
 
 
 
Sales and marketing
10,598

 
14,819

Technology and analytics
11,007

 
15,443

Processing and servicing
5,221

 
4,535

General and administrative
17,725

 
11,887

Total operating expense
44,551

 
46,684

Income (loss) from operations
(2,385
)
 
(11,249
)
Other expense:
 
 
 
Interest expense
(51
)
 
(353
)
Total other expense
(51
)
 
(353
)
Loss before provision for income taxes
(2,436
)
 
(11,602
)
Provision for income taxes

 

Net income (loss)
(2,436
)
 
(11,602
)
Net loss attributable to noncontrolling interest
518

 
544

Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
(1,918
)

$
(11,058
)
Net income (loss) per share attributable to On Deck Capital, Inc. common shareholders:
 
 
 
Basic and diluted
$
(0.03
)
 
$
(0.15
)
Weighted-average common shares outstanding:
 
 
 
Basic and diluted
73,977,241

 
71,854,287

Comprehensive loss:
 
 
 
Net loss
$
(2,436
)
 
$
(11,602
)
Other comprehensive loss:
 
 
 
Foreign currency translation adjustment
(113
)
 
400

Comprehensive loss
(2,549
)
 
(11,202
)
Comprehensive loss attributable to noncontrolling interests
50

 
(180
)
Net loss attributable to noncontrolling interest
518

 
544

Comprehensive loss attributable to On Deck Capital, Inc. common stockholders
$
(1,981
)
 
$
(10,838
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income (loss)
$
(2,436
)
 
$
(11,602
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Provision for loan losses
36,293

 
46,180

Depreciation and amortization
2,174

 
2,596

Amortization of debt issuance costs
1,230

 
797

Stock-based compensation
3,210

 
3,491

Amortization of net deferred origination costs
12,399

 
11,883

Changes in servicing rights, at fair value
131

 
701

Gain on sales of loans

 
(1,484
)
Unfunded loan commitment reserve
171

 
119

Gain on extinguishment of debt

 
(229
)
Loss on disposal of fixed assets
5,713

 

Gain on lease termination
(1,481
)
 

Changes in operating assets and liabilities:

 

Other assets
(3,484
)
 
1,120

Accounts payable
364

 
(1,231
)
Interest payable
99

 
488

Accrued expenses and other liabilities
(471
)
 
(8,053
)
Originations of loans held for sale

 
(33,042
)
Capitalized net deferred origination costs of loans held for sale

 
(911
)
Proceeds from sale of loans held for sale

 
33,326

Principal repayments of loans held for sale

 
722

Net cash provided by operating activities
53,912


44,871

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(313
)
 
(145
)
Proceeds from sale of fixed assets
(45
)
 

Capitalized internal-use software
(1,398
)
 
(1,219
)
Originations of term loans and lines of credit, excluding rollovers into new originations
(499,775
)
 
(469,913
)
Proceeds from sale of loans held for investment

 
10,008

Payments of net deferred origination costs
(14,193
)
 
(12,314
)
Principal repayments of term loans and lines of credit
417,034

 
389,976

Purchase of loans

 
(13,518
)
Net cash used in investing activities
(98,690
)

(97,125
)
Cash flows from financing activities
 
 
 
Investments by noncontrolling interests

 
3,443

Purchase of treasury shares
(119
)
 
(205
)
Proceeds from exercise of stock options and warrants
39

 
195

Issuance of common stock under employee stock purchase plan
764

 
1,246

Proceeds from the issuance of funding debt
59,373

 
66,119

Proceeds from the issuance of corporate debt
10,000

 

Payments of debt issuance costs
(74
)
 
(2,488
)

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Three Months Ended March 31,
 
2018
 
2017
Repayments of funding debt principal
(14,602
)
 
(2,794
)
Repayments of corporate debt principal
(10,000
)
 

Net cash provided by financing activities
45,381


65,516

Effect of exchange rate changes on cash and cash equivalents
(303
)
 
421

Net increase (decrease) in cash, cash equivalents, and restricted cash
300

 
13,683

Cash, cash equivalents, and restricted cash at beginning of year
114,824

 
123,986

Cash, cash equivalents, and restricted cash at end of period
$
115,124


$
137,669

 
 
 
 
Reconciliation to amounts on consolidated balance sheets
 
 
 
Cash and cash equivalents
$
70,415

 
$
72,997

Restricted cash
44,709

 
64,672

Total cash, cash equivalents and restricted cash
$
115,124

 
$
137,669

 
 
 
 
Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
10,483

 
$
10,257

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
68

 
$
92

Unpaid principal balance of term loans rolled into new originations
$
90,810

 
$
70,059


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

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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 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 an issuing bank partner. We subsequently transfer most of our loan volume into one of our wholly-owned subsidiaries and also have the option to sell them through OnDeck Marketplace®.
Basis of Presentation and Principles of Consolidation
We prepare our condensed consolidated financial statements and footnotes 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. All intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. When used in these notes to condensed consolidated financial statements, the terms "we," "us," "our" or similar terms refers to On Deck Capital, Inc. and its consolidated subsidiaries.
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 owners' proportionate share of the equity of the jointly owned entities. The noncontrolling interest is adjusted for the minority owners' share of the earnings, losses, investments and distributions.
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 condensed consolidated financial statements and accompanying notes. Significant estimates include allowance for loan losses, stock-based compensation expense, capitalized software development costs, the useful lives of long-lived assets, servicing assets/liabilities, loans purchased, and 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.
Recently Adopted Accounting Standards
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 FASB subsequently issued numerous amendments including ASU 2016-08 - Principal versus Agent Considerations, ASU 2016-10 - Identifying Performance Obligations and Licensing, and ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients. Each amendment has the same effective date and transition requirements as the new revenue recognition standard. We adopted the new standard effective January 1, 2018 and applied the modified retrospective method of adoption. The adoption of ASC 606 did not have a material effect on our condensed consolidated financial statements and disclosures, nor did it result in a cumulative effect adjustment at the date of initial application.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows.  ASU 2016-18 clarifies that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are not part of the entity’s operating, investing, and financing activities, and details of those transfers should not be reported as cash flow activities in the statement of cash flows. It requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the new standard effective January 1, 2018 and no longer present restricted cash as a reconciling item in our consolidated statement of cash flows. For the three months ended March 31, 2017, cash flows from investing activities increased $20.2 million and the net decrease in cash and cash equivalents of $6.6 million became a net increase in cash, cash equivalents and restricted cash of $13.6 million.


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Recent Accounting Pronouncements Not Yet Adopted
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 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.
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 March 31,
 
2018
 
2017
Numerator:
 
 
 
Net loss
$
(2,436
)
 
$
(11,602
)
Less: net loss attributable to noncontrolling interest
518

 
544

Net loss attributable to On Deck Capital, Inc. common stockholders
$
(1,918
)
 
$
(11,058
)
Denominator:
 
 
 
Weighted-average common shares outstanding, basic and diluted
73,977,241

 
71,854,287

Net loss per common share, basic and diluted
$
(0.03
)
 
$
(0.15
)

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given our net losses. The following common share equivalent securities have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented: 
 
Three Months Ended March 31,
 
2018
 
2017
Anti-dilutive common share equivalents
 
 
 
Warrants to purchase common stock
22,000

 
22,000

Restricted stock units
3,874,666

 
3,487,022

Stock options
8,234,689

 
10,056,752

Employee stock purchase program
32,449

 
51,491

Total anti-dilutive common share equivalents
12,163,804

 
13,617,265


The weighted-average exercise price for warrants to purchase 2,007,846 shares of common stock was $10.70 as of March 31, 2018. For the three months ended March 31, 2018 and 2017, a warrant to purchase 1,985,846 and 1,985,846 shares of common stock, respectively, was excluded from anti-dilutive common share equivalents as performance conditions had not been met.


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3. Loans Held for Investment and Allowance for Loan Losses
Loans Held for Investment and Allowance for Loan Losses
Loans held for investment consisted of the following as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Term loans
$
847,403

 
$
804,227

Lines of credit
145,192

 
132,012

Total unpaid principal balance
992,595

 
936,239

Net deferred origination costs
18,349

 
16,557

Total loans held for investment
$
1,010,944

 
$
952,796

We include both loans we originate and loans originated by our issuing bank partners and later purchased by us as part of our originations. During the three months ended March 31, 2018 and 2017 we purchased loans in the amount of $139.2 million and $145.0 million, respectively.

The change in the allowance for loan losses for the three months ended March 31, 2018 and 2017 consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Balance at beginning of period
$
109,015

 
$
110,162

Recoveries of loans previously charged off
3,345

 
2,617

Loans charged off
(29,732
)
 
(40,884
)
Provision for loan losses
36,293

 
46,180

Allowance for loan losses at end of period
$
118,921

 
$
118,075

When loans are charged-off, we typically continue to attempt to recover amounts from the respective borrowers and guarantors, including, when we deem it appropriate, through formal legal action. Alternatively, we may sell 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 March 31, 2018 and 2017, previously charged-off loans sold accounted for $0.5 million and $1.9 million, respectively, of recoveries of loans previously charged off.
As of March 31, 2018 and December 31, 2017, our off-balance sheet credit exposure related to the undrawn line of credit balances was $209.6 million and $204.6 million, respectively. The related reserve on unfunded loan commitments was $4.6 million and $4.4 million as of March 31, 2018 and December 31, 2017, respectively. Net adjustments to the accrual for unfunded loan commitments are included in general and administrative expense.
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 current, paying and non-paying delinquent loans as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Current loans
$
904,660

 
$
850,060

Delinquent: paying (accrual status)
50,338

 
49,252

Delinquent: non-paying (non-accrual status)
37,597

 
36,927

Total
$
992,595

 
$
936,239

The portion of the allowance for loan losses attributable to current loans was $79.5 million and $74.0 million as of March 31, 2018 and December 31, 2017, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was $39.4 million and $35.0 million as of March 31, 2018 and December 31, 2017, respectively.

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The following table shows an aging analysis of the unpaid principal balance related to loans held for investment by delinquency status as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
By delinquency status:
 
 
 
Current loans
$
904,660

 
$
850,060

1-14 calendar days past due
21,080

 
23,611

15-29 calendar days past due
12,068

 
12,528

30-59 calendar days past due
19,557

 
22,059

60-89 calendar days past due
13,850

 
12,809

90 + calendar days past due
21,380

 
15,172

Total unpaid principal balance
$
992,595

 
$
936,239


4. Servicing Rights
As of March 31, 2018 and December 31, 2017, the remaining unpaid principal balance of term loans we serviced that previously were sold was $191.0 million and $181.0 million, respectively. No loans were sold during the three months ended March 31, 2018. During the three months ended March 31, 2017, we sold through OnDeck Marketplace loans with an unpaid principal balance of $41.1 million.
For the three months ended March 31, 2018 and 2017, we earned $0.3 million and $0.3 million of servicing revenue, respectively.
The following table summarizes the activity related to the fair value of our servicing assets for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Fair value at the beginning of period
$
154

 
$
1,131

Addition:
 
 
 
Servicing resulting from transfers of financial assets
52

 
430

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

 

Other changes in fair value (1)
(131
)
 
(701
)
Fair value at the end of period (Level 3)
$
75

 
$
860

(1) Represents changes due to collection of expected cash flows through March 31, 2018 and 2017.

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5. Debt
The following table summarizes our outstanding debt as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
 
 
 
 
 
Outstanding

Type
 
Maturity Date
 
Weighted Average Interest Rate at March 31, 2018
 
March 31, 2018
 
December 31, 2017
Funding Debt:
 
 
 
 
 
 
 
 
 
ODAST II Agreement
Securitization
 
May 2020 (1)
 
4.7%
 
$
250,000

 
$
250,000

ODART Agreement
Revolving
 
March 2019
 
4.4%
 
112,499

 
102,058

RAOD Agreement
Revolving
 
November 2018
 
5.1%
 
98,983

 
86,478

ODAC Agreement
Revolving
 
May 2019
 
9.0%
 
75,454

 
62,350

ODAF Agreement
Revolving
 
February 2020 (2)
 
8.9%
 
75,000

 
75,000

PORT II Agreement
Revolving
 
December 2018
 
4.3%
 
72,630

 
63,851

Other Agreements
Various
 
Various (3)
 
Various
 
50,378

 
50,706

 
 
 
 
 
 
 
734,944

 
690,443

Deferred debt issuance cost
 
 
 
 
 
 
(4,920
)
 
(6,174
)
Total Funding Debt
 
 
 
 
 
 
730,024

 
684,269

 
 
 
 
 
 
 
 
 
 
Corporate Debt:
 
 
 
 
 
 
 
 
 
Square 1 Agreement
Revolving
 
October 2018
 
6.0%
 
8,000

 
8,000

Deferred debt issuance cost
 
 
 
 
 
 
(31
)
 
(15
)
Total Corporate Debt
 
 
 
 
 
 
7,969

 
7,985

 
(1) In April 2018, we issued $225 million of debt in a new securitization transaction. The net proceeds were used, together with other available funds, to voluntarily prepay in full all $250 million of the prior ODAST II Notes. See Note 10, "Subsequent Events" of Notes to Unaudited Condensed Consolidated Financial Statements.
(2) The period during which new borrowings may be made under this debt facility expires in February 2019.
(3) Maturity dates range from April 2018 through November 2020.
In April 2018, Loan Assets of OnDeck, LLC, a wholly-owned subsidiary of the Company, established a new asset-backed revolving debt facility with a commitment amount of $100 million. For additional information, see Note 10, "Subsequent Events" of Notes to Unaudited Condensed Consolidated Financial Statements.
Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled $904.7 million and $852.3 million as of March 31, 2018 and December 31, 2017, respectively. Our corporate debt facility is collateralized by substantially all of our assets.

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.


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The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in thousands):
 
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
75

 
$
75

Total assets
$

 
$

 
$
75

 
$
75

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
154

 
$
154

Total assets
$

 
$

 
$
154

 
$
154

There were no transfers between levels for the three months ended March 31, 2018 or December 31, 2017.

The following tables presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
Unobservable input
 
Minimum
 
Maximum
 
Weighted Average
Servicing assets
Discount rate
 
30.00
%
 
30.00
%
 
30.00
%
 
Cost of service(1)
 
0.04
%
 
0.13
%
 
0.13
%
 
Renewal rate
 
41.06
%
 
51.83
%
 
49.29
%
 
Default rate
 
10.63
%
 
10.92
%
 
10.71
%
(1) Estimated cost of servicing a loan as a percentage of unpaid principal balance.

 
December 31, 2017
 
Unobservable input
 
Minimum
 
Maximum
 
Weighted Average
Servicing assets
Discount rate
 
30.00
%
 
30.00
%
 
30.00
%
 
Cost of service(1)
 
0.04
%
 
0.13
%
 
0.12
%
 
Renewal rate
 
41.06
%
 
51.83
%
 
49.59
%
 
Default rate
 
10.63
%
 
10.92
%
 
10.70
%
(1) Estimated cost of servicing a loan as a percentage of unpaid principal balance.

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 asset as of March 31, 2018 and December 31, 2017 given a hypothetical changes in default rate and cost to service (in thousands):

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Table of Contents

 
March 31, 2018
 
December 31, 2017
 
Servicing Assets
Default rate assumption:
 
 
 
Default rate increase of 25%
$
(23
)
 
$
(40
)
Default rate increase of 50%
$
(43
)
 
$
(76
)
Cost to service assumption:
 
 
 
Cost to service increase by 25%
$
(36
)
 
$
(63
)
Cost to service increase by 50%
$
(71
)
 
$
(126
)
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. The following tables summarize the carrying value and fair value of our loans held for investment and fixed-rate debt (in thousands):
 
March 31, 2018
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment
$
892,023

 
$
989,477

 
$

 
$

 
$
989,477

Total assets
$
892,023

 
$
989,477

 
$

 
$

 
$
989,477

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
300,377

 
$
293,408

 
$

 
$

 
$
293,408

Total fixed-rate debt
$
300,377

 
$
293,408

 
$

 
$

 
$
293,408

 
December 31, 2017
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment
$
843,781

 
$
932,343

 
$

 
$

 
$
932,343

Total assets
$
843,781

 
$
932,343

 
$

 
$

 
$
932,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
300,706

 
$
293,512

 
$

 
$

 
$
293,512

Total fixed-rate debt
$
300,706

 
$
293,512

 
$

 
$

 
$
293,512




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7. Noncontrolling Interest
The following tables summarize changes in equity, including the equity attributable to noncontrolling interests, for the three months ended March 31, 2018 and 2017 (in thousands):

 
 
Three Months Ended March 31, 2018
 
 
On Deck Capital, Inc's stockholders' equity
 
Noncontrolling interest
 
Total
Balance as of January 1, 2018
 
262,045

 
4,011

 
266,056

Net income (loss)
 
(1,918
)
 
(518
)
 
(2,436
)
Stock based compensation
 
3,122

 

 
3,122

Exercise of options and warrants
 
39

 

 
39

Employee stock purchase plan
 
918

 

 
918

Cumulative translation adjustment
 
(63
)
 
(50
)
 
(113
)
Purchase of shares for treasury
 
(119
)
 

 
(119
)
Balance at March 31, 2018
 
264,024

 
3,443

 
267,467

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
     Net loss
 
(1,918
)
 
(518
)
 
(2,436
)
   Other comprehensive income (loss):
 
 
 
 
 
 
       Foreign currency translation adjustment
 
(63
)
 
(50
)
 
(113
)
Comprehensive income (loss):
 
(1,981
)
 
(568
)
 
(2,549
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
On Deck Capital, Inc.'s stockholders' equity
 
Noncontrolling interest
 
Total
Balance as of January 1, 2017
 
$
259,525

 
$
4,072

 
$
263,597

Net income (loss)
 
(11,058
)
 
(544
)
 
(11,602
)
Stock based compensation
 
3,309

 

 
3,309

Exercise of options and warrants
 
195

 

 
195

Employee stock purchase plan
 
1,541

 

 
1,541

Cumulative translation adjustment
 
220

 
180

 
400

Purchase of shares for treasury
 
(205
)
 

 
(205
)
Investments by noncontrolling interests
 

 
3,443

 
3,443

Balance at March 31, 2017
 
253,527

 
7,151

 
260,678

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
Net loss
 
(11,058
)
 
(544
)
 
(11,602
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
220

 
180

 
400

Comprehensive income (loss):
 
$
(10,838
)
 
$
(364
)
 
$
(11,202
)


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8. Stock-Based Compensation and Employee Benefit Plans
Options

The following is a summary of option activity for the three months ended March 31, 2018:
 
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2018
7,918,853

 
$
5.75

 

 

Granted
595,861

 
$
5.19

 

 

Exercised
(205,768
)
 
$
0.45

 

 

Forfeited
(5,853
)
 
$
13.08

 

 

Expired
(68,404
)
 
$
12.15

 

 

Outstanding at March 31, 2018
8,234,689

 
$
5.79

 
6.5

 
$
16,370

Exercisable at March 31, 2018
6,121,753

 
$
5.42

 
5.8

 
$
15,507

Vested or expected to vest as of March 31, 2018
8,119,911

 
$
5.79

 
6.5

 
$
16,329

Total compensation cost related to nonvested option awards not yet recognized as of March 31, 2018 was $5.2 million and will be recognized over a weighted-average period of approximately 1.9 years. The aggregate intrinsic value of employee options exercised during the three months ended March 31, 2018 and 2017 was $1.0 million and $2.3 million, respectively.

Restricted Stock Units

The following table summarizes our activities of Restricted Stock Units ("RSUs") and Performance Restricted Stock Units ("PRSUs") during the three months ended March 31, 2018:

 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
Unvested at January 1, 2018
3,342,640

 
$
6.18

RSUs and PRSUs granted
703,492

 
$
5.09

RSUs vested
(75,213
)
 
$
6.27

RSUs forfeited/expired
(96,253
)
 
$
5.70

Unvested at March 31, 2018
3,874,666

 
$
5.99

Expected to vest after March 31, 2018
3,267,046

 
$
6.12


As of March 31, 2018, there was $15 million of unrecognized compensation cost related to unvested RSUs and PRSUs, which is expected to be recognized over a weighted-average period of 2.7 years.
Stock-based compensation expense related to stock options, RSUs, PRSUs and the ESPP are included in the following line items in our accompanying consolidated statements of operations for the three months ended March 31, 2018 and 2017 (in thousands):
 
March 31, 2018
 
March 31, 2017
Sales and marketing
535

 
$
771

Technology and analytics
597

 
783

Processing and servicing
105

 
173

General and administrative
1,973

 
1,764

       Total
$
3,210


$
3,491


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9. Commitments and Contingencies

Commitments under Operating Leases
Effective February 1, 2018, we terminated our lease obligation for the 12th floor of our New York office which accounted for approximately 32% of our total New York office space. The lease of the 12th floor was previously scheduled to continue through December 2026. As part of the termination, we paid the landlord a cash surrender fee of approximately $2.6 million and recorded a net charge of approximately $3.2 million in the quarter ending March 31, 2018. The net charge includes the surrender fee and approximately $4.0 million related to the impairment of leasehold improvements and other fixed assets in the surrendered space, which were partially offset by other deferred credits.
On March 29, 2018, we terminated our lease obligation with respect to a portion of our Denver office which accounted for approximately 38% of our total Denver office space. Our lease of that space was previously scheduled to continue through April 2026. As part of the termination, we paid a surrender fee and related charges of approximately $900,000 and recorded a net charge of approximately $1 million in the quarter ended March 31, 2018. The net charge includes the surrender fee and the impairment of leasehold improvements and other fixed assets in the surrendered space, which were partially offset by other deferred credits.
The net charges related to these lease terminations were allocated to each of our operating expense line items on our condensed consolidated statement of operations with the exception of the aggregate impairment charges of leasehold improvements and other fixed assets in the surrendered spaces of approximately $5.7 million which were included in general and administrative expense.
In the aggregate, the termination of these two leases reduced future required rental payments by approximately $23 million through 2026.

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 recognized standing and we have not experienced any related losses to date.
We are exposed to default risk on loans we originate and hold and that we purchase from our issuing bank partner. We perform an evaluation of each customer's financial condition and during the term of the customer's loan(s), we have the contractual right to limit a customer's ability to take working capital loans or other financing from other lenders that may cause a material adverse change in the financial condition of the customer.

Contingencies
From time to time we are subject to 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.


10. Subsequent Events

On April 13, 2018, Loan Assets of OnDeck, LLC, a wholly-owned subsidiary of the Company, established a new asset-backed revolving debt facility with a commitment amount of $100 million and a 1 month LIBOR + 2.0% interest rate. The period during which new borrowings may be made under this facility expires on April 13, 2022 and the final maturity date is October 13, 2022.
On April 17, 2017, our wholly-owned subsidiary, OnDeck Asset Securitization Trust II LLC, issued $225 million in initial principal amount of fixed-rate asset backed offered notes in a securitization transaction. The notes were issued in four classes with a weighted average fixed interest rate of 3.75%. The revolving period expires on March 31, 2020 and the final maturity date is April 2022. The net proceeds of this transaction were used, together with other available funds, to voluntarily prepay in full all $250 million of notes from a prior securitization.



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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. 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” and Part II - Item 1A. "Risk Factors" sections of this report 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 1. Business, Item 1A. Risk Factors, Item 3. Legal Proceedings and Item 7. 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,” "plan," “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 and broaden our distribution capabilities and offerings; the degree to which potential customers apply for loans, are approved and borrow from us; anticipated trends, growth rates, loan originations, volume of loans sold 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 creditworthiness; our ability to adequately reserve for loan losses; the impact of our decision to tighten our credit policies; 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 OnDeck 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 ability to hire and retain necessary qualified employees in a competitive labor market; practices and behaviors of members of our funding advisor channel and other third parties who may refer potential customers to us; 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; lack of customer acceptance of possible increases in 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 and unanticipated growth and growth strategies, including the possible introduction of new products or features, our strategy to expand the availability of our platform to other lenders through OnDeck-as-a-Service and possible expansion in new or existing 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 types of loans 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 OnDeck Marketplace premiums; our failure to anticipate or adapt to future changes in our industry; the impact of the Tax Cuts and Jobs Act of 2017 and any related Treasury regulations, rules or interpretations, if and when issued; 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

17

Table of Contents

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 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 other documents that we file with the Securities and Exchange Commission, or 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.

Overview

We are a leading online small business lender. We make it efficient and convenient for small businesses to access financing. 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, if approved, transfer funds as fast as the same day. Qualified customers may have both a term loan and line of credit concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers. We originated more than $8 billion of loans since we made our first loan in 2007.
We generate the majority of our revenue through interest income and fees earned on the loans we make to our customers. 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 generally repayable within six months of the date of the most recent 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 the fee is waived for the first six months. The balance of our other revenue primarily comes from our servicing and other fee income, most of which consists of marketing fees from our issuing bank partner, fees generated by OnDeck-as-a-Service, and monthly fees earned from lines of credit.
We rely on a diversified set of funding sources for the loans we make to our customers. Our primary source of this financing 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 March 31, 2018, we had $734.9 million of funding debt principal outstanding and $1.0 billion total borrowing capacity under such debt facilities. No loans were sold through OnDeck Marketplace during the three months ended March 31, 2018. During the three months ended March 31, 2017, we sold loans with an unpaid principal balance of $42.0 million. Of the total principal outstanding as of March 31, 2018, including our loans held for investment, plus loans sold to OnDeck Marketplace purchasers which had a balance remaining as of March 31, 2018, 60% were funded via our debt facilities, 30% were financed via proceeds raised from our securitization transaction, 9% were funded via cash on hand and 1% were funded via OnDeck Marketplace purchasers.
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, 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.
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.
 

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Table of Contents

 
As of or for the Three Months Ended March 31,
 
2018
 
2017
 
(dollars in thousands)
Originations
$
590,585

 
$
573,015

Effective Interest Yield
35.6
%
 
33.8
%
Cost of Funds Rate
6.8
%
 
5.9
%
Net Interest Margin*
31.3
%
 
30.0
%
Marketplace Gain on Sale Rate
N/A

 
3.5
%
Provision Rate
6.1
%
 
8.7
%
Loan Reserve Ratio
12.0
%
 
11.5
%
15+ Day Delinquency Ratio
6.7
%
 
7.8
%
Net Charge-off Rate
10.9
%
 
14.9
%
*Non-GAAP measure. Refer to "Non-GAAP Financial Measures" below for an explanation and reconciliation to GAAP.
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 originated by, our issuing bank partner and later purchased by us are included as part of our originations.
Effective Interest Yield
Effective Interest Yield is the rate of interest we achieve on loans outstanding during a period. It is calculated as our calendar day-adjusted annualized interest income divided by average Loans. Prior to the first quarter of 2018, annualization was based on 252 business days per year. Beginning with the three months ended March 31, 2018, annualization is based on 365 days per year and is calendar day-adjusted. All revisions have been applied retrospectively.
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 originated and decrease the carrying value of loans, thereby increasing Effective Interest Yield. 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 Effective Interest Yield.
Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”
Cost of Funds Rate
Cost of Funds Rate is the interest expense, fees and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our funding debt facilities. 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. Annualization is based on four quarters per year and is not business or calendar day-adjusted.
Net Interest Margin
Net Interest Margin is calculated as annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding costs during the period. Interest income is net of fees on loans held for investment and held for sale. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination costs as offset by corresponding deferred origination fees. Deferred origination fees include fees paid up front to us by customers when loans are funded. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination. Funding costs are the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our debt facilities. Annualization is based on 365 days per year and is calendar day-adjusted.

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Table of Contents

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.
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 estimates for loans originated prior to the commencement of the period.
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.
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.
Loan Reserve Ratio
Loan 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 our loans require weekly or 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.
Net Charge-off Rate
Net Charge-off Rate is calculated as our annualized net charge-offs for the period divided by the average Unpaid Principal Balance outstanding. Annualization is based on four quarters per year and is not business or calendar day-adjusted. Net charge-offs are charged-off loans in the period, net of recoveries.


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Table of Contents

On Deck Capital, Inc. and Subsidiaries
Consolidated Average Balance Sheets
(in thousands)
 
 
Three Months Ended March 31,
 
2018
 
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
49,812

 
$
63,588

Restricted cash
 
53,007

 
50,811

Loans held for investment
 
983,988

 
1,044,815

Less: Allowance for loan losses
 
(114,839
)
 
(115,597
)
Loans held for investment, net
 
869,149

 
929,218

Loans held for sale
 

 
856

Property, equipment and software, net
 
20,866

 
28,812

Other assets
 
14,026

 
19,717

Total assets
 
$
1,006,860

 
$
1,093,002

Liabilities and equity
 
 
 
 
Liabilities:
 
 
 
 
Accounts payable
 
$
2,853

 
$
4,356

Interest payable
 
2,300

 
2,298

Funding debt
 
698,825

 
763,833

Corporate debt
 
4,482

 
27,969

Accrued expenses and other liabilities
 
31,410

 
36,385

Total liabilities
 
739,870

 
834,841

 
 
 
 
 
Total On Deck Capital, Inc. stockholders' equity
 
263,195

 
253,345

Noncontrolling interest
 
3,795

 
4,816

Total equity
 
266,990

 
258,161

Total liabilities and equity
 
$
1,006,860

 
$
1,093,002

 
 
 
 
 
Memo:
 
 
 
 
Unpaid Principal Balance
 
$
966,327

 
$
1,023,882

Interest Earning Assets
 
$
966,327

 
$
1,024,731

Loans
 
$
983,988

 
$
1,045,671


Average Balance Sheet Items for the period represent the average as of the beginning of the month in the period and as of the end of each month in the period.
Non-GAAP Financial Measures
We believe that the non-GAAP metrics can provide useful supplemental measures for period-to-period comparisons of our core business and useful supplemental 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. The reconciliations below reconcile each of our non-GAAP metrics to their most comparable respective GAAP metric.
Adjusted Net Income (Loss)

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Adjusted Net Income (Loss) represents our net income (loss) adjusted to exclude net income (loss) attributable to noncontrolling interest, stock-based compensation expense, real estate disposition charges, and department relocation and executive transition expenses. Stock-based compensation includes employee compensation as well as compensation to third-party service providers.
Our use of Adjusted Net Income 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:
 
Adjusted Net Income does not reflect the potentially dilutive impact of stock-based compensation; and
Adjusted Net Income excludes charges we are required to incur in connection with real estate dispositions and severance obligations.
The following table presents a reconciliation of net loss to Adjusted Net Income (Loss) for each of the periods indicated:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Reconciliation of Net Income (Loss) to Adjusted Net (Loss) Income
 
 
 
Net loss
$
(2,436
)
 
$
(11,602
)
Adjustments:
 
 
 
Net loss attributable to noncontrolling interest
518

 
544

Stock-based compensation expense
3,210

 
3,491

Real estate disposition charges
4,187

 

Department relocation and executive transition expenses
911

 

Adjusted Net Income (Loss)
$
6,390

 
$
(7,567
)

Net Interest Margin
Net Interest Margin, is calculated as annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding costs during the period. Interest income is net of fees on loans held for investment and held for sale. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination costs as offset by corresponding deferred origination fees. Deferred origination fees include fees paid up front to us by customers when loans are funded. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination. Funding costs are the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our debt facilities. Annualization is based on 365 days per year and is calendar day-adjusted.
Our use of Net Interest Margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

Net Interest Margin is the rate of net return we achieve on our Average Interest Earning Assets outstanding during a period. It does not reflect the return from loans sold through OnDeck Marketplace, specifically our gain on sale revenue. Similarly, Average Interest Earning Assets does not include the unpaid principal balance of loans sold through OnDeck Marketplace. Further, Net Interest Margin does not include servicing revenue related to loans previously sold, fair value adjustments to servicing rights, monthly fees charged to customers for our line of credit, and marketing fees earned from our issuing bank partners, which are recognized as the related services are provided.

Funding costs do not reflect interest associated with debt used for corporate purposes.

The following table presents a reconciliation of interest income to Net Interest Margin for each of the periods indicated:

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Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Reconciliation of Interest Income to Net Interest Margin (NIM)
 
 
 
Interest income
$
86,369

 
$
87,111

Less: Funding costs
(11,821
)
 
(11,277
)
Net interest income
74,548

 
75,834

Divided by: calendar days in period
90

 
90

Net interest income per calendar day
828

 
843

Multiplied by: calendar days per year

365

 
365

Annualized net interest income
302,220

 
307,695

Divided by: Average Interest Earning Assets
$
966,327

 
$
1,024,731

Net Interest Margin (NIM)
31.3
%
 
30.0
%



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Key Factors Affecting Our Performance

Investment in Long-Term Growth
The core elements of our growth strategy include expanding our financing offerings, acquiring new customers, broadening our distribution capabilities through strategic partners and funding advisors, enhancing our technology, data and analytics capabilities, and extending customer lifetime value. We plan to continue to invest significant resources to accomplish these goals. We anticipate that our total operating expense will increase during 2018 as we plan to continue investing in marketing, technology and analytics, portfolio management and our collection capabilities. These investments are intended to contribute to our long-term growth, but they may affect our near-term operating performance.
Originations
During the three months ended March 31, 2018, December 31, 2017 and March 31, 2017, we originated $590.6 million, $546.4 million, and $573.0 million of loans, respectively. The increase in originations for the three months ended March 31, 2018 relative to the three months ended December 31, 2017 was largely driven by the increased average loan size and the addition of new customers. The increase in originations for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 was primarily due to the increase in business from repeat customers. In addition, during the first quarter of 2018 we continued to grow our line of credit originations, which made up 20.5%, 20.0%, and 18.0% of total dollar originations in the three months ended March 31, 2018, December 31, 2017 and March 31, 2017, 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 their 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. As we continue to aggregate data on customers and prospective customers, we seek to use that data and our increasing knowledge to optimize our marketing spending to attract these customers as well as to continue to focus our analytics resources on better identifying potential customers. We have historically relied on all three of our channels for customer acquisition but remain focused on growing our direct and strategic partner channels. Collective originations through our direct and strategic partner channels made up 71% and 72% of total originations from all customers in the first quarter of 2018 and 2017, respectively. We plan to continue investing in direct marketing and sales, increasing our brand awareness and growing our strategic partnerships.

The following table summarizes 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 March 31,
Percentage of Originations (Dollars)
2018
 
2017
Direct and Strategic Partner
71%
 
72%
Funding Advisor
29%
 
28%
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 loans 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 product offerings. In the first quarter of 2018 and 2017 originations from our repeat customers, were 52% and 49%, respectively, of total originations to all customers. We believe our significant number of repeat customers is primarily due to our high levels of customer service and continued improvement in our types of loans and services. Repeat customers generally show improvements in several key metrics. From our 2015 customer cohort, customers who took at least three loans grew their revenue and bank balance, respectively, on average by 31% and 50% from their initial loan to their third loan. Similarly, from our 2016 customer cohort, customers who took at least three loans grew their revenue and bank balance, respectively, on average by 29% and 37%. In the first quarter of 2018, 28% of our origination volume from repeat customers was due to unpaid principal balance rolled from existing 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 loan;

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the business must be current on its outstanding OnDeck loan 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, many of our customers also tend to increase their subsequent loan size compared to their initial loan size.
The following table summarizes the percentage of loans originated by new and repeat customers. Loans from cross-selling efforts are classified in the table as repeat loans.
 
 
Three Months Ended March 31,
Percentage of Originations (Dollars)
2018
 
2017
New
48%
 
51%
Repeat
52%
 
49%
Credit Performance
Credit performance refers to how credit losses on a portfolio of loans performs relative to expectations. A certain amount of losses are expected so credit performance must be assessed relative to pricing and expectations. Pricing will be determined with the goal of allowing for estimated losses while still generating the desired rate of return after taking into account those estimated losses. When a portfolio has higher than estimated losses, the desired rate of return may not be achieved and that portfolio would be considered to have underperformed. Conversely, if the portfolio incurred lower than estimated losses, resulting in a higher than expected rate of return, the portfolio would be considered to have overperformed.
We originate and price our loans based on risk. When we originate our loans, we establish a reserve for estimated loan losses. As we gather more data as the portfolio performs, we may increase or decrease that reserve as deemed necessary to reflect our latest loss estimate. Some portions of our loan portfolio may be performing better than expected while other portions may perform below expectations. The net result of the underperforming and overperforming portfolio segments determines if we require an overall increase or decrease to our loan reserve related to those existing loans.
In accordance with our strategy to expand the range of our loan offerings, over time, we have expanded the offerings of our term loans by making available longer terms and larger amounts. When we begin to offer a new type of loan, we typically extrapolate our existing data to create an initial version of a credit model to permit us to underwrite and price the new type of loan. Thereafter, we begin to collect actual performance data on these new loans which allows us to refine our credit model based on actual data as opposed to extrapolated data. It often takes several quarters after we begin offering a new type of loan for that loan to be originated in sufficient volume to generate a critical mass of performance data. In addition, for loans with longer terms, it takes longer to acquire significant amounts of data because the loans take longer to season.
In 2017, we tightened our credit policies used to determine eligibility, pricing and loan size for certain customers. As additional seasoning took place on our loans and as our predictive model incorporated newer data, our provision rate generally improved during 2017. Our provision rate improved in the first quarter of 2018 to 6.1% as compared to 6.4% in the fourth quarter of 2017. The decrease was primarily driven by the improved quality of our originations. We expect that our provision rate for the year ending December 31, 2018 will be within our expected range of 6% to 7%.
Pricing
Customer pricing is determined primarily based on the customer’s risk level as measured using the OnDeck Score, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. In addition, general market conditions and the competitive environment may broadly influence pricing industry-wide. 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 $0.006 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. Historically, our term loans have been primarily quoted in “Cents on Dollar,” or COD, and lines of credit in annual percentage rate, or APR. Given the use case and payback period associated with our shorter term loans, we believe many of our customers prefer to understand pricing on a

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“dollars in, dollars out” basis and are primarily focused on total payback cost. As of March 31, 2018, the APRs of our term loans outstanding ranged from 16.7% to 99.4% and the APRs of our lines of credit outstanding ranged from 11.0% to 60.8%.
“Cents on Dollar” is the total interest to be paid for each dollar of principal borrowed, excluding the origination fee. We believe our customers tend to evaluate our term loans, many of which have terms of a year or less, primarily based on Cents on Dollar rather than APR. Because APR is calculated on an annualized basis, small differences in loan term can cause large changes in APR, making it harder to understand the total interest cost. We believe Cents on Dollar and similar measures of total interest expense are more useful to a borrower in comparing and evaluating shorter term loans. Historically, we have not used APR as an internal metric to evaluate performance of our business, compensate our employees or measure their performance.
We believe that our product pricing has historically fallen between traditional bank loans to small businesses and certain non-bank small business financing alternatives such as merchant cash advances.
 
For the Quarter
 
For the Year
 
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
 
2016
2015
2014
2013
Weighted Average Term Loan "Cents on Dollar" Borrowed, per Month
2.08¢
1.97¢
1.96¢
1.94¢
1.95¢
 
1.82¢
1.95¢
2.32¢
2.65¢
Weighted Average APR - Term Loans and Lines of Credit
46.0%
43.8%
43.8%
43.2%
44.0%
 
41.4%
44.5%
54.4%
63.4%

The pricing decrease between 2013 and 2016 were due 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 product which is priced at a lower APR level than our term loans, the introduction of our customer loyalty program and our continued efforts to pass savings on to customers. The pricing increases in 2017 and during the first quarter of 2018 were primarily a reflection of past and expected future increases in the underlying market rates that we, like many other lenders in the market, are passing on to our customers.
We consider Effective Interest Yield, or 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 originated 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 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. This is primarily due to the lower pricing of loans in the direct and strategic partner channels, which reflect lower acquisition costs and lower loss rates compared to loans in the funding advisor channel.  The direct and strategic partner channels' have, in the aggregate, made up 71% and 72% of total originations during the first quarter ended March 31, 2018 and 2017 respectively. We expect the combined direct and strategic partner channels', as well as the funding advisor channel's, percentage of originations in 2018 to remain generally comparable to 2017 levels.

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.  Following the introduction of our 24-month and 36-month term loans, the average length of new term loan originations had increased from 10.8 for the year December 31, 2014 to 13.3 for the year ended December 31, 2016. As part of our 2017 credit tightening policy, when appropriate, the offered duration of term loans to certain customers was shortened to control duration risk. For the three-months ended March 31, 2018, the average length of new term loan originations had decreased to 11.4 months.


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Customer Type Mix - In general, loans originated from repeat customers historically have had 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 terms than new customers given their established payment history and lower risk profiles. Finally, origination fees can be reduced or waived for repeat customers due to our loyalty program, contributing to lower EIYs. 

Product Mix - In general, loans originated by 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 three months ended 2018, the average line of credit APR was 32.4%, compared to the average term loan APR which was 48.0%.  Further, draws by line of credit customers have increased to 20.5% of total originations in 2018 from 18.0% in 2017.


Effective Interest Yield
For the Quarter
 
For the Year
Q1 2018
 
Q4 2017
 
Q3 2017
 
Q2 2017
 
Q1 2017
 
2016
 
2015
 
2014
 
2013
35.6%
 
34.8%
 
33.1%
 
33.5%
 
33.8%
 
33.2%
 
35.4%
 
40.4%
 
42.7%

Prior to the first quarter of 2018, annualization was based on 252 business days per year. Beginning with the three months ended March 31, 2018, annualization is based on 365 days per year and is calendar day-adjusted. All revisions have been applied retrospectively.

Sale of Whole Loans through OnDeck Marketplace
We may 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. No loans were sold during the three months ended March 31, 2018. During the three months ended March 31, 2017, we sold through OnDeck Marketplace loans with an unpaid principal balance of $42.0 million. We have the ability to fund our originations through a variety of funding sources, including OnDeck Marketplace. Due to the flexibility of our diversified 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. For the three months ended March 31, 2018, we elected not to sell any loans through OnDeck Marketplace. Although premiums being offered and demand to purchase loans were consistent with prior quarters, our cash position, our available liquidity and our volume of loans eligible for debt financing permitted us to make the strategic decision not to utilize OnDeck Marketplace. We may elect to make OnDeck Marketplace loan sales in the future to provide us an additional source of liquidity and to maintain active relationships with our institutional loan purchasers. Our use of OnDeck Marketplace, regardless of whether premiums increase or decrease, may fluctuate subject to our overall financing and liquidity needs as well as the eligibility to finance new originations under our existing debt facilities.
To the extent our use of OnDeck Marketplace as a funding source fluctuates 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 OnDeck Marketplace.
Our OnDeck Marketplace originations come from one of the following two origination sources:
New loans that are designated at origination to be sold, referred to as “Originations of loans held for sale;” and
Loans that 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 2018 and 2017.

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Three Months Ended March 31,
 
2018
 
2017
Originations of loans held for sale

 
33,042

Originations of loans held for investment, modified

 
9,204

    Marketplace originations

 
42,246

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 sales force 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 sales force and strategic partners. CACs in our funding advisor channel include commissions paid to our internal sales force 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 for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.  The decrease was primarily attributable to a decline in CACs in our direct and strategic partner channels resulting from improvements in customer targeting in the direct channel as well as increased average loan size and a decrease in commission rates in both channels. The decrease was partially offset by an increase in CACs in our funding advisor channel driven by an increase in external commissions and a decrease in the average size loan.
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.

Historical Charge-Offs
We illustrate below our historical loan losses by providing information regarding our net lifetime charge-off ratios by cohort. Net lifetime charge-offs are the unpaid principal balance charged off less recoveries of loans previously charged off, and a given cohort’s net lifetime charge-off ratio equals the cohort’s net lifetime charge-offs through March 31, 2018 divided by the cohort’s total original loan volume. Repeat loans in the denominator include the full renewal loan principal, rather than the net funded amount, which is the renewal loan’s principal net of the unpaid principal balance on the existing loan. Loans are typically charged off after 90 days of nonpayment. Loans originated and charged off between January 1, 2013 and March 31, 2018 were on average charged off near the end of their loan term. The chart immediately below includes all term loan originations, regardless of funding source, including loans sold through our OnDeck Marketplace or held for sale on our balance sheet.


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Net Charge-off Ratios by Cohort Through March 31, 2018
chart-bbc00cef36695addaf9a01.jpg

 
For the Year
 
For the Quarter
 
2013
2014
2015
2016
 
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Principal Outstanding as of March 31, 2018 by Period of Origination
0.0%
0.0%
0.0%
1.0%
 
3.9%
9.9%
27.2%
57.3%
86.7%

The following charts display the historical lifetime cumulative net charge-off ratio, by origination year. The charts reflect all term loan originations, regardless of funding source, including loans sold through our OnDeck Marketplace or held for sale on our balance sheet. The data is shown as a static pool for annual cohorts, illustrating how the cohort has performed given equivalent months of seasoning.
Given that the originations in the first quarter of 2018 cohort are relatively unseasoned as of March 31, 2018, these cohorts reflect low lifetime charge-off ratios in each of the new customer, repeat customer and total loans charts below. Further, given our loans are typically charged off after 90 days of nonpayment, all cohorts reflect approximately 0% charge offs for the first three months in the charts below.

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Net Cumulative Lifetime Charge-off Ratios
All Loans
 
 
chart-25f5228938dd5653866a01.jpg
The chart above shows that loans we originated in 2016 had higher than historical net cumulative lifetime charge-off ratios primarily related to loans with longer terms and larger loan sizes. In response, during 2017, we tightened our credit policies which is evidenced by the improved net cumulative lifetime charge-off ratios of loans originated in the second quarter of 2017. Loans originated after the second quarter of 2017 are not yet seasoned enough for meaningful comparison.

 
For the Year
 
For the Quarter
Originations
2013
2014
2015
2016
 
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
All term loans (in millions)
$
459

$
1,158

$
1,874

$
2,404

 
$
573

$
464

$
531

$
546

$
591

Weighted average term (months)
10.0

11.2

12.4

13.2

 
12.3

11.8

12.1

12.2

11.8

Economic Conditions
Changes in the overall economy may impact our business in several ways, including demand for our loans, credit performance, and funding costs.
 
Demand for Our Loans. Generally, we believe a strong economic climate tends to increase demand for our loans as consumer spending increases and small businesses seek to expand and more potential customers may meet our underwriting requirements, although some small businesses may generate enough additional cash flow that they no longer require a loan. In that climate, traditional lenders may also approve loans for a higher percentage of our potential customers.

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Credit Performance. In a strong economic climate, our customers may experience improved cash flow and liquidity, which may result in lower loan losses. In a weakening economic climate or recession, the opposite may occur. We factor economic conditions into our loan underwriting analysis and reserves for loan losses, but changes in economic conditions, particularly sudden changes, may affect our actual loan losses. These effects may be partially mitigated by the short-term nature and repayment structure of our loans, which should allow us to react more quickly than if the terms of our loans were longer.
Loan Losses. Our underwriting process is designed to limit our loan losses to levels consistent with our risk tolerance and financial model. Our aggregate loan loss rates from 2013 through 2015 were consistent with our financial targets while 2016 was higher than our financial target as we incurred higher than estimated loss rates on certain longer-term loans. Our 2017 loan loss levels were also higher than our financial targets largely because we were taking corrective action throughout the first half of the year to address the higher 2016 loan losses. Our first quarter 2018 loan loss levels are consistent with our financial targets. Our overall loan losses are affected by a variety of factors, including external factors such as prevailing economic conditions, general small business sentiment and unusual events such as natural disasters, as well as internal factors such as the accuracy of the OnDeck Score, the effectiveness of our underwriting process and the introduction of new types of loans, such as our line of credit, with which we have less experience to draw upon when forecasting their loss rates. Our loan loss rates may vary in the future.
Funding Costs. Changes in monetary and fiscal policy may affect generally prevailing interest rates. Interest rates may also change for reasons unrelated to economic conditions. To the extent that interest rates rise, our funding costs will increase and the spread between our Effective Interest Yield and our Cost of Funds Rate may narrow to the extent we cannot correspondingly increase the interest rates we charge our customers. As we have grown, we have been able to lower our Cost of Funds Rate by negotiating more favorable interest rates on our debt and accessing new sources of funding. However, we expect our Cost of Funds Rate to gradually move higher in 2018 due to anticipated increases in the interest rate environment.


Components of Our Results of Operations

Revenue

Interest Income. We generate revenue primarily through interest and origination fees earned on the term loans and lines of credit we originate. Interest income also includes interest income earned on loans held for sale from the time the loan is originated until it is ultimately sold, as well as other miscellaneous interest income. Our interest and origination fee revenue is amortized over the term of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are netted with direct origination costs and recorded as a component of loans held for investment or loans held for sale, as appropriate, on our consolidated balance sheets and recognized over the term of the loan. Direct origination costs include costs directly attributable to originating a loan, including commissions, vendor costs and personnel costs directly related to the time spent by those individuals performing activities related to loan origination.
Gain on Sales of Loans. We may sell term loans to third-party institutional investors through OnDeck Marketplace. We recognize a gain or loss on the sale of such loans as the difference between the proceeds received, adjusted for initial recognition of servicing assets or liabilities obtained at the date of sale, and the outstanding principal and net deferred origination costs.
Other Revenue. Other revenue includes servicing revenue related to loans serviced for others, fair value adjustments to servicing rights, platform fees, monthly fees charged to customers for our line of credit, and marketing fees earned from our issuing bank partner, which are recognized as the related services are provided.
Cost of Revenue

Provision for Loan Losses. Provision for loan losses consists of amounts charged to income during the period to maintain an allowance for loan losses, or ALLL, estimated to be adequate to provide for probable credit losses inherent in our existing loan portfolio. Our ALLL represents our estimate of the credit losses inherent in our portfolio of term loans and lines of credit and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, delinquency levels, our historical charge-off and loss experience and general economic conditions. We expect our aggregate provision for loan losses to increase in absolute dollars as the amount of term loans and lines of credit we originate and hold for investment increases.
Funding Costs. Funding costs consist of the interest expense we pay on the debt we incur to fund our lending activities, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker

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fees, origination fees and legal fees. Such costs are expensed immediately upon early extinguishment of the related debt. Our Cost of Funds Rate will vary based on a variety of external factors, such as credit market conditions, general interest rate levels and spreads, as well as OnDeck-specific factors, such as origination volume and credit quality. We expect our funding costs will continue to increase in absolute dollars due to increased utilization of our funding debt facilities resulting from planned portfolio growth and higher interest rates. We also expect the Cost of Funds Rate to increase driven by expected increases in the interest rate environment.
Operating Expense

Operating expense consists of sales and marketing, technology and analytics, processing and servicing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of each of these expense categories. The number of employees was 502, 475 and 641 at March 31, 2018, December 31, 2017 and March 31, 2017, respectively. All operating expense categories also include an allocation of overhead, such as rent and other overhead, which is based on employee headcount. We believe that continuing to invest in our business is essential to maintaining our competitive position, and therefore, we expect the absolute dollars of operating expenses to increase in 2018, excluding charges related to real estate dispositions and executive transitions, but to remain relatively constant as a percentage of revenue.
Sales and Marketing. Sales and marketing expense consists of salaries and personnel-related costs of our sales and marketing and business development employees, as well as direct marketing and advertising costs, online and offline CACs (such as direct mail, paid search and search engine optimization costs), public relations, radio and television advertising, promotional event programs and sponsorships, corporate communications and allocated overhead. We expect our sales and marketing expense in terms of absolute dollars to remain generally consistent with 2017 levels but to decrease as a percentage of revenue in the near term as we continue to optimize marketing spend.
Technology and Analytics. Technology and analytics expense consists primarily of the salaries and personnel-related costs of our engineering and product employees as well as our credit and analytics employees who develop our proprietary credit-scoring models. Additional expenses include third-party data acquisition expenses, professional services, consulting costs, expenses related to the development of new types of loans and technologies and maintenance of existing technology assets, amortization of capitalized internal-use software costs related to our technology platform and allocated overhead.
Processing and Servicing. Processing and servicing expense consists primarily of salaries and personnel related costs of our credit analysis, underwriting, funding, fraud detection, customer service and collections employees. Additional expenses include vendor costs associated with third-party credit checks, lien filing fees and other costs to evaluate, close and fund loans and overhead costs.
General and Administrative. General and administrative expense consists primarily of salary and personnel-related costs for our executive, finance and accounting, legal and people operations employees. Additional expenses include a provision for the unfunded portion of our lines of credit, consulting and professional fees, insurance, legal, travel, gain or loss on foreign exchange and other corporate expenses. These expenses also include costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, directors’ and officers’ liability insurance and increased accounting costs.
Other Expense
Interest Expense. Interest expense consists of interest expense and amortization of deferred debt issuance costs incurred on debt associated with our corporate activities. It does not include interest expense incurred on debt associated with our lending activities.
Provision for Income Taxes
We have not recorded any provision for U.S. federal, state and foreign income taxes. Through December 31, 2016, we have not been required to pay U.S. federal or state income taxes nor any foreign taxes because of our current and accumulated net operating losses. As of December 31, 2017, we had $82.1 million of federal net operating loss carryforwards and $81.3 million of state net operating loss carryforwards available to reduce future taxable income, unless limited due to historical or future ownership changes. The federal net operating loss carryforwards will begin to expire at various dates beginning in 2029.
The Internal Revenue Code of 1986, as amended, or the Code, imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Events which may cause limitation in the amount of the net operating losses and other tax attributes that are able to be utilized in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period, which has occurred as a result of historical ownership changes. Accordingly, our ability to use pre-change net operating loss and certain other attributes are limited as prescribed

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under Sections 382 and 383 of the Code. Therefore, if we earn net taxable income in the future, our ability to reduce our federal income tax liability with our existing net operating losses is subject to limitation. Future offerings, as well as other future ownership changes that may be outside our control could potentially result in further limitations on our ability to utilize our net operating loss and tax attributes. Accordingly, achieving profitability may not result in a full release of the valuation allowance.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, that was codified through the issuance of ASU No. 2018-05. This pronouncement permits us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We recorded the impact of the Tax Cuts and Jobs Act for the year ended December 31, 2017, which included a provisional amount associated with our deferred tax asset.  We did not revise our initial provisional estimate during the three months ended March 31, 2018, and we have not completed our analysis of the income tax effects of the tax reform. Because a full valuation allowance has been and will continue to be recorded against our deferred tax asset, any change in our provisional amounts is expected to be offset by a corresponding change in our valuation allowance, resulting in no net impact to our results of operations.
As of December 31, 2017, a full valuation allowance of $37.8 million was recorded against our net deferred tax assets.

Results of Operations
The consolidated statements of operations data as a percentage of gross revenue for each of the periods indicated.

Comparison of the Three Months Ended March 31, 2018 and 2017
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-to-Period
 
2018
 
2017
 
Change
 
Amount
 
Percentage of
Gross
Revenue
 
Amount
 
Percentage of
Gross
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
86,369

 
95.7
 %
 
$
87,111

 
93.8
 %
 
$
(742
)
 
(0.9
)%
Gain on sales of loans

 

 
1,484

 
1.6

 
(1,484
)
 
(100.0
)
Other revenue
3,911

 
4.3

 
4,297

 
4.6

 
(386
)
 
(9.0
)
Gross revenue
90,280

 
100.0

 
92,892

 
100.0

 
(2,612
)
 
(2.8
)
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Provision for loan losses
36,293

 
40.2

 
46,180

 
49.7

 
(9,887
)
 
(21.4
)
Funding costs
11,821

 
13.1

 
11,277

 
12.2

 
544

 
4.8

Total cost of revenue
48,114

 
53.3

 
57,457

 
61.9

 
(9,343
)
 
(16.3
)
Net revenue
42,166

 
46.7

 
35,435

 
38.1

 
6,731

 
19.0

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
10,598

 
11.7

 
14,819

 
16.0

 
(4,221
)
 
(28.5
)
Technology and analytics
11,007

 
12.2

 
15,443

 
16.6

 
(4,436
)
 
(28.7
)
Processing and servicing
5,221

 
5.8

 
4,535

 
4.9

 
686

 
15.1

General and administrative
17,725

 
19.6

 
11,887

 
12.8

 
5,838

 
49.1

Total operating expenses
44,551

 
49.3

 
46,684

 
50.3

 
(2,133
)
 
(4.6
)
Loss from operations
(2,385
)
 
(2.6
)
 
(11,249
)
 
(12.1
)
 
8,864

 
78.8

Other expense:
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(51
)
 
(0.1
)
 
(353
)
 
(0.4
)
 
302

 
(85.6
)
Total other expense:
(51
)
 
(0.1
)
 
(353
)
 
(0.4
)
 
302

 
(85.6
)
Loss before provision for income taxes
(2,436
)
 
(2.7
)
 
(11,602
)
 
(12.5
)
 
9,166

 
(79.0
)
Provision for income taxes

 

 

 

 

 

Net loss
$
(2,436
)
 
(2.7
)%
 
$
(11,602
)
 
(12.5
)%
 
$
9,166

 
(79.0
)%

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Revenue
 
 
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
Period-to-Period
 
2018
 
2017
 
Change
 
Amount
 
Percentage of
Gross
Revenue
 
Amount
 
Percentage of
Gross
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue:
 
Interest income
$
86,369

 
95.7
%
 
$
87,111

 
93.8
%
 
$
(742
)
 
(0.9
)%
Gain on sales of loans

 

 
1,484