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 JUNE 30, 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 July 31, 2018 was 74,651,796.
 




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)
 
 
June 30,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Cash and cash equivalents
$
74,262

 
$
71,362

Restricted cash
44,189

 
43,462

Loans held for investment
1,046,588

 
952,796

Less: Allowance for loan losses
(124,058
)
 
(109,015
)
Loans held for investment, net
922,530

 
843,781

Property, equipment and software, net
16,939

 
23,572

Other assets
14,264

 
13,867

Total assets
$
1,072,184

 
$
996,044

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
4,087

 
$
2,674

Interest payable
2,574

 
2,330

Funding debt
755,720

 
684,269

Corporate debt

 
7,985

Accrued expenses and other liabilities
32,115

 
32,730

Total liabilities
794,496

 
729,988

Commitments and contingencies (Note 9)

 

Stockholders’ equity (deficit):
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 78,189,980 and 77,284,266 shares issued and 74,641,004 and 73,822,001 outstanding at June 30, 2018 and December 31, 2017, respectively.
391

 
386

Treasury stock—at cost
(8,406
)
 
(7,965
)
Additional paid-in capital
499,347

 
492,509

Accumulated deficit
(218,960
)
 
(222,833
)
Accumulated other comprehensive loss
(334
)
 
(52
)
Total On Deck Capital, Inc. stockholders' equity
272,038

 
262,045

Noncontrolling interest
5,650

 
4,011

Total equity
277,688

 
266,056

Total liabilities and equity
$
1,072,184

 
$
996,044

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 Operations and Comprehensive Income
(in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Interest income
$
92,371

 
$
83,721

 
$
178,740

 
$
170,832

Gain on sales of loans

 
260

 

 
1,744

Other revenue
3,247

 
2,670

 
7,158

 
6,967

Gross revenue
95,618

 
86,651

 
185,898

 
179,543

Cost of revenue:
 
 
 
 
 
 
 
Provision for loan losses
33,293

 
32,733

 
69,586

 
78,913

Funding costs
12,202

 
11,616

 
24,023

 
22,893

Total cost of revenue
45,495

 
44,349

 
93,609

 
101,806

Net revenue
50,123

 
42,302

 
92,289

 
77,737

Operating expense:
 
 
 
 
 
 
 
Sales and marketing
11,432

 
15,368

 
22,030

 
30,187

Technology and analytics
12,799

 
14,769

 
23,806

 
30,212

Processing and servicing
5,041

 
4,826

 
10,262

 
9,361

General and administrative
16,034

 
9,590

 
33,759

 
21,477

Total operating expense
45,306

 
44,553

 
89,857

 
91,237

Income (loss) from operations
4,817

 
(2,251
)
 
2,432

 
(13,500
)
Other expense:
 
 
 
 
 
 
 
Interest expense
43

 
318

 
94

 
671

Total other expense
43

 
318

 
94

 
671

Income (loss) before provision for income taxes
4,774

 
(2,569
)
 
2,338

 
(14,171
)
Provision for income taxes

 

 

 

Net income (loss)
4,774

 
(2,569
)
 
2,338

 
(14,171
)
Less: Net income (loss) attributable to noncontrolling interest
(1,016
)
 
(1,071
)
 
(1,535
)
 
(1,615
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,790


$
(1,498
)
 
$
3,873

 
$
(12,556
)
Net income (loss) per share attributable to On Deck Capital, Inc. common shareholders:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
(0.02
)
 
$
0.05

 
$
(0.17
)
Diluted
$
0.07

 
$
(0.02
)
 
$
0.05

 
$
(0.17
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,385,446

 
72,688,815

 
74,182,929

 
72,276,734

Diluted
78,288,267

 
72,688,815

 
77,786,748

 
72,276,734

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
4,774

 
$
(2,569
)
 
$
2,338

 
$
(14,171
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(396
)
 
36

 
(509
)
 
436

Comprehensive income (loss)
4,378

 
(2,533
)
 
1,829

 
(13,735
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
(178
)
 
16

 
(229
)
 
196

Less: Net income (loss) attributable to noncontrolling interest
(1,016
)
 
(1,071
)
 
(1,535
)
 
(1,615
)
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,572

 
$
(1,478
)
 
$
3,593

 
$
(12,316
)
 
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)
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income (loss)
2,338

 
(14,171
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 
 
Provision for loan losses
69,586

 
78,913

Depreciation and amortization
4,218

 
5,172

Amortization of debt issuance costs
3,756

 
1,874

Stock-based compensation
6,004

 
6,465

Amortization of net deferred origination costs
26,197

 
24,648

Changes in servicing rights, at fair value
188

 
1,093

Gain on sales of loans

 
(1,744
)
Unfunded loan commitment reserve
640

 
267

Gain on extinguishment of debt

 
(272
)
Loss on disposal of fixed assets
5,713

 

Gain on lease termination
(1,481
)
 

Changes in operating assets and liabilities:

 

Other assets
(1,999
)
 
374

Accounts payable
1,413

 
298

Interest payable
244

 
284

Accrued expenses and other liabilities
1,676

 
(7,569
)
Originations of loans held for sale

 
(41,421
)
Capitalized net deferred origination costs of loans held for sale

 
(950
)
Proceeds from sale of loans held for sale

 
42,730

Principal repayments of loans held for sale

 
1,004

Net cash provided by operating activities
118,493


96,995

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(695
)
 
(1,081
)
Proceeds from sale of fixed assets
(45
)
 

Capitalized internal-use software
(2,464
)
 
(1,824
)
Originations of term loans and lines of credit, excluding rollovers into new originations
(1,009,626
)
 
(857,841
)
Proceeds from sale of loans held for investment

 
10,008

Payments of net deferred origination costs
(29,642
)
 
(21,317
)
Principal repayments of term loans and lines of credit
865,537

 
804,875

Purchase of loans
(801
)
 
(13,730
)
Net cash used in investing activities
(177,736
)

(80,910
)
Cash flows from financing activities
 
 
 
Investments by noncontrolling interests
3,403

 
3,443

Purchase of treasury shares
(441
)
 
(644
)
Proceeds from exercise of stock options and warrants
39

 
347

Issuance of common stock under employee stock purchase plan
668

 
1,246

Proceeds from the issuance of funding debt
397,184

 
105,167


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Six Months Ended 
 June 30,
 
2018
 
2017
Proceeds from the issuance of corporate debt
10,000

 
7,000

Payments of debt issuance costs
(3,748
)
 
(3,284
)
Repayments of funding debt principal
(324,828
)
 
(111,023
)
Repayments of corporate debt principal
(18,000
)
 
(10,000
)
Distribution to noncontrolling interest

 
(1,000
)
Net cash provided by (used in) financing activities
64,277


(8,748
)
Effect of exchange rate changes on cash and cash equivalents
(1,407
)
 
779

Net increase (decrease) in cash, cash equivalents, and restricted cash
3,627

 
8,116

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

 
123,986

Cash, cash equivalents, and restricted cash at end of period
$
118,451


$
132,102

 
 
 
 
Reconciliation to amounts on consolidated balance sheets
 
 
 
Cash and cash equivalents
$
74,262

 
$
77,936

Restricted cash
44,189

 
54,166

Total cash, cash equivalents and restricted cash
$
118,451

 
$
132,102

 
 
 
 
Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
21,445

 
$
21,300

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
130

 
$
140

Unpaid principal balance of term loans rolled into new originations
$
167,687

 
$
138,115


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 six months ended June 30, 2017, cash flows from investing activities increased $9.7 million and the net decrease in cash and cash equivalents of $1.6 million became a net increase in cash, cash equivalents and restricted cash of $8.1 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. 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. Earnings Per Common Share
Basic and diluted net income (loss) per common share is calculated as follows (in thousands, except share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net Income (loss)
$
4,774

 
$
(2,569
)
 
$
2,338

 
$
(14,171
)
Less: Net Income (loss) attributable to noncontrolling interest
(1,016
)
 
(1,071
)
 
(1,535
)
 
(1,615
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,790

 
$
(1,498
)
 
$
3,873

 
$
(12,556
)
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
74,385,446

 
72,688,815

 
74,182,929

 
72,276,734

Net income (loss) per common share, basic
$
0.08

 
$
(0.02
)
 
$
0.05

 
$
(0.17
)
Effect of dilutive securities
3,902,821

 

 
3,603,819

 

Weighted-average common shares outstanding, diluted
78,288,267

 
72,688,815

 
77,786,748

 
72,276,734

Net income (loss) per common share, diluted
$
0.07

 
$
(0.02
)
 
$
0.05

 
$
(0.17
)
Anti-dilutive securities excluded
5,174,846

 
12,018,301

 
5,351,219

 
12,069,791


The difference between basic and diluted income per common share has been calculated using the Treasury Stock Method based on the assumed exercise of outstanding stock options, the vesting of restricted stock awards, and the issuance of stock under our employee stock purchase plan. The following common share equivalent securities have been included in the calculation of dilutive weighted-average common shares outstanding:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Dilutive Common Share Equivalents
 
 
 
 
 
 
 
Weighted Average common shares outstanding
74,385,446

 
72,688,815

 
74,182,929

 
72,276,734

Restricted stock units
1,018,066

 

 
768,172

 

Stock options
2,860,430

 

 
2,830,587

 

Employee stock purchase program
24,325

 

 
5,060

 

Total dilutive common share equivalents
78,288,267

 
72,688,815

 
77,786,748

 
72,276,734








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The following number of shares of common stock were excluded from the calculation of diluted net income per share attributable to common stockholders. Their effect would have been antidilutive for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Anti-Dilutive Common Share Equivalents
 
 
 
 
 
 
 
Warrants to purchase common stock
22,000

 
22,000

 
22,000

 
22,000

Restricted stock units
429,942

 
2,757,192

 
600,632

 
2,757,192

Stock options
4,722,904

 
9,159,794

 
4,728,587

 
9,159,794

Employee stock purchase program

 
79,315

 

 
130,805

Total anti-dilutive common share equivalents
5,174,846

 
12,018,301


5,351,219


12,069,791


The weighted-average exercise price for warrants to purchase 2,007,846 shares of common stock was $10.70 as of June 30, 2018. For the three months and six months ended June 30, 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.
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 June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Term loans
$
871,956

 
$
804,227

Lines of credit
154,630

 
132,012

Total unpaid principal balance
1,026,586

 
936,239

Net deferred origination costs
20,002

 
16,557

Total loans held for investment
$
1,046,588

 
$
952,796

During the six months ended June 30, 2018 and 2017, we paid $0.8 million and $13.7 million, respectively, to purchase term loans that we previously sold to a third party.
We include both loans we originate and loans originated by our issuing bank partner and later purchased by us as part of our originations. During the three months ended June 30, 2018 and 2017 we purchased loans from our issuing bank partner in the amount of $109.3 million and $120.7 million, respectively. During the six months ended June 30, 2018 and 2017 we purchased loans from our issuing bank partner in the amount of $248.5 million and $265.7 million, respectively.

The change in the allowance for loan losses for the three months and six months ended June 30, 2018 and 2017 consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
118,921

 
$
118,075

 
$
109,015

 
$
110,162

Recoveries of loans previously charged off
3,206

 
4,226

 
6,551

 
6,843

Loans charged off
(31,362
)
 
(49,817
)
 
(61,094
)
 
(90,701
)
Provision for loan losses
33,293

 
32,733

 
69,586

 
78,913

Allowance for loan losses at end of period
$
124,058

 
$
105,217

 
$
124,058

 
$
105,217

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 June 30, 2018 and 2017, previously charged-off loans sold accounted for $0.2

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million and $1.9 million, respectively, of recoveries of loans previously charged off. For the six months ended June 30, 2018 and 2017, previously charged-off loans sold accounted for $0.7 million and $3.8 million, respectively, of recoveries of loans previously charged off.
As of June 30, 2018 and December 31, 2017, our off-balance sheet credit exposure related to the undrawn line of credit balances was $228.0 million and $204.6 million, respectively. The related reserve on unfunded loan commitments was $5.1 million and $4.4 million as of June 30, 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 June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Current loans
$
938,369

 
$
850,060

Delinquent: paying (accrual status)
52,071

 
49,252

Delinquent: non-paying (non-accrual status)
36,146

 
36,927

Total
$
1,026,586

 
$
936,239

The portion of the allowance for loan losses attributable to current loans was $81.9 million and $74.0 million as of June 30, 2018 and December 31, 2017, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was $42.2 million and $35.0 million as of June 30, 2018 and December 31, 2017, respectively.
The following table shows an aging analysis of the unpaid principal balance related to loans held for investment by delinquency status as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
By delinquency status:
 
 
 
Current loans
$
938,369

 
$
850,060

1-14 calendar days past due
18,466

 
23,611

15-29 calendar days past due
12,722

 
12,528

30-59 calendar days past due
17,788

 
22,059

60-89 calendar days past due
14,320

 
12,809

90 + calendar days past due
24,921

 
15,172

Total unpaid principal balance
$
1,026,586

 
$
936,239


4. Servicing Rights
As of June 30, 2018 and December 31, 2017, the remaining unpaid principal balance of term loans we serviced that previously were sold was $160.0 million and $181.0 million, respectively. No loans were sold during the three and six months ended June 30, 2018. During the three months and six months ended June 30, 2017, we sold through OnDeck Marketplace loans with an unpaid principal balance of $9.1 million and $50.2 million, respectively.
For the three months ended June 30, 2018 and 2017, we earned $0.2 million and $0.6 million of servicing revenue, respectively. For the six months ended June 30, 2018 and 2017, we earned $0.5 million and $0.9 million of servicing revenue, respectively.

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The following table summarizes the activity related to the fair value of our servicing assets for the three months and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Fair value at the beginning of period
$
75

 
$
860

 
$
154

 
$
1,131

Addition:
 
 
 
 
 
 
 
Servicing resulting from transfers of financial assets
11

 
233

 
63

 
663

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

 

 

 

Other changes in fair value (1)
(57
)
 
(392
)
 
(188
)
 
(1,093
)
Fair value at the end of period (Level 3)
$
29

 
$
701

 
$
29

 
$
701

(1) Represents changes due to collection of expected cash flows through June 30, 2018 and 2017.
5. Debt
The following table summarizes our outstanding debt as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
 
 
 
 
 
Outstanding

Type
 
Maturity Date
 
Weighted Average Interest Rate at June 30, 2018
 
June 30, 2018
 
December 31, 2017
Funding Debt:
 
 
 
 
 
 
 
 
 
ODAST II
Securitization
 
April 2022 (1)
 
3.8%
 
$
225,000

 
$
250,000

ODART
Revolving
 
March 2019
 
4.7%
 
87,446

 
102,058

RAOD
Revolving
 
November 2018
 
5.5%
 
92,644

 
86,478

ODAC
Revolving
 
May 2019
 
9.3%
 
73,599

 
62,350

ODAF
Revolving
 
February 2020 (2)
 
9.2%
 
75,000

 
75,000

PORT II
Revolving
 
December 2018
 
4.7%
 
68,442

 
63,851

LAOD
Revolving
 
October 2022 (3)
 
4.0%
 
72,220

 

Other Agreements
Various
 
Various (4)
 
8.0%
 
67,543

 
50,706

 
 
 
 
 
5.6%
 
761,894

 
690,443

Deferred debt issuance cost
 
 
 
 
 
 
(6,174
)
 
(6,174
)
Total Funding Debt
 
 
 
 
 
 
755,720

 
684,269

 
 
 
 
 
 
 
 
 
 
Corporate Debt:
 
 
 
 
 
 
 
 
 
Square 1
Revolving
 
October 2018
 
6.0%
 

 
8,000

Deferred debt issuance cost
 
 
 
 
 
 

 
(15
)
Total Corporate Debt
 
 
 
 
 
 

 
7,985

 
(1) The period during which new borrowings may be made under this facility expires in March 2020.
(2) The period during which new borrowings may be made under this debt facility expires in February 2019.
(3) The period during which new borrowings may be made under this debt facility expires in April 2022.
(4) Maturity dates range from July 2018 through November 2020.


On April 13, 2018, our wholly-owned subsidiary, Loan Assets of OnDeck, LLC, established a new asset-backed revolving debt facility with a commitment amount of $100 million and an interest rate of 1-month LIBOR + 2.0%. 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, 2018, 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

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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.
On June 27, 2018, our wholly-owned subsidiary, Canada OnDeck Asset Funding, L.P, established a new asset-backed revolving debt facility with a commitment amount of CAD25 million and an additional CAD25 million of capacity available at the discretion of the lenders.  The interest rate for the facility is a commercial paper rate + 4%. The period during which new borrowings may be made under this facility expires on June 27, 2020 and the final maturity date is June 27, 2021.
On June 28, 2018, OnDeck Funding Trust No. 2, a wholly-owned subsidiary of On Deck Capital Australia Pty Ltd, established a new asset-backed revolving debt facility with a commitment amount of AUD75 million.  The interest rate for the facility is 1-month BBSW+ 3.75%.  The period during which new borrowings may be made under this facility expires on December 28, 2019 and the final maturity date is June 28, 2020.
Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled $941.2 million and $852.3 million as of June 30, 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.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
29

 
$
29

Total assets
$

 
$

 
$
29

 
$
29

 
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 six months ended June 30, 2018 or December 31, 2017.


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The following tables presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement as of June 30, 2018 and December 31, 2017:
 
June 30, 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
%
 
51.01
%
 
Default rate
 
10.63
%
 
10.92
%
 
10.67
%
(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 June 30, 2018 and December 31, 2017 given a hypothetical changes in default rate and cost to service (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Servicing Assets
Default rate assumption:
 
 
 
Default rate increase of 25%
$
(9
)
 
$
(40
)
Default rate increase of 50%
$
(16
)
 
$
(76
)
Cost to service assumption:
 
 
 
Cost to service increase by 25%
$
(14
)
 
$
(63
)
Cost to service increase by 50%
$
(28
)
 
$
(126
)
Assets and Liabilities Disclosed at Fair Value
Because our loans held for investment 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):

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June 30, 2018
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
922,530

 
$
1,024,712

 
$

 
$

 
$
1,024,712

Total assets
$
922,530

 
$
1,024,712

 
$

 
$

 
$
1,024,712

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
271,367

 
$
261,717

 
$

 
$

 
$
261,717

Total fixed-rate debt
$
271,367

 
$
261,717

 
$

 
$

 
$
261,717

 
December 31, 2017
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
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 six months ended June 30, 2018 and 2017 (in thousands):

 
 
Six Months Ended June 30, 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)
 
3,873

 
(1,535
)
 
2,338

Stock based compensation
 
5,834

 

 
5,834

Exercise of options and warrants
 
39

 

 
39

Employee Stock Purchase Plan
 
968

 

 
968

Cumulative translation adjustment
 
(280
)
 
(229
)
 
(509
)
Purchase of treasury shares
 
(441
)
 

 
(441
)
Investments by noncontrolling interests
 

 
3,403

 
3,403

Balance at June 30, 2018
 
272,038

 
5,650

 
277,688

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
Net income (loss)
 
3,873

 
(1,535
)
 
2,338

Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
(280
)
 
(229
)
 
(509
)
Comprehensive income (loss):
 
3,593

 
(1,764
)
 
1,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 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)
 
(12,556
)
 
(1,615
)
 
(14,171
)
Stock based compensation
 
6,134

 

 
6,134

Exercise of options and warrants
 
347

 

 
347

Employee stock purchase plan
 
1,618

 

 
1,618

Cumulative translation adjustment
 
240

 
196

 
436

Purchase of treasury shares
 
(644
)
 

 
(644
)
Investments by noncontrolling interests
 

 
3,443

 
3,443

Return of equity to noncontrolling interest
 

 
(960
)
 
(960
)
Balance at June 30, 2017
 
254,664

 
5,136

 
259,800

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
Net loss
 
(12,556
)
 
(1,615
)
 
(14,171
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
240

 
196

 
436

Comprehensive income (loss):
 
$
(12,316
)
 
$
(1,419
)
 
(13,735
)

In the third quarter of 2015, we acquired a 67% interest in an entity, with the remaining 33% owned by an unrelated third party strategic partner, for the purpose of providing small business loans to customers of the third party. We consolidate the financial position and results of operations of that entity. On June 29, 2017, OnDeck purchased the loans owned by that entity for an immaterial amount. That entity made a liquidating distribution to us of approximately $2 million and to the unrelated

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third party of approximately $1 million representing our respective proportionate share of the equity in that entity. The loan sale and distribution effectively ended the operations of that entity. No material gain or loss was recorded.
8. Stock-Based Compensation and Employee Benefit Plans
Options

The following is a summary of option activity for the six months ended June 30, 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
1,031,550

 
$
5.41

 

 

Exercised
(380,151
)
 
$
0.55

 

 

Forfeited
(211,743
)
 
$
8.16

 

 

Expired
(93,402
)
 
$
11.81

 

 

Outstanding at June 30, 2018
8,265,107

 
$
5.82

 
6.1

 
$
22,721

Exercisable at June 30, 2018
6,393,532

 
$
5.62

 
5.4

 
$
20,300

Vested or expected to vest as of June 30, 2018
8,142,643

 
$
5.82

 
6.1

 
$
22,521

Total compensation cost related to nonvested option awards not yet recognized as of June 30, 2018 was $4.3 million and will be recognized over a weighted-average period of approximately 2.0 years. The aggregate intrinsic value of employee options exercised during the six months ended June 30, 2018 and 2017 was $2.0 million and $3.6 million, respectively.

Restricted Stock Units

The following table summarizes our Restricted Stock Units ("RSUs") and Performance Restricted Stock Units ("PRSUs") activity during the six months ended June 30, 2018:

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

 
$
6.18

RSUs and PRSUs granted
1,037,461

 
$
5.33

RSUs vested
(365,198
)
 
$
7.05

RSUs forfeited/expired
(328,328
)
 
$
6.42

Unvested at June 30, 2018
3,686,575

 
$
5.84

Expected to vest after June 30, 2018
3,129,517

 
$
5.94


As of June 30, 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 2.6 years.

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Stock-based compensation expense related to stock options, RSUs, PRSUs and the Employee Stock Purchase Plan ("ESPP") are included in the following line items in our accompanying consolidated statements of operations for the three months and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Sales and marketing
$
505

 
$
521

 
$
1,040

 
$
1,292

Technology and analytics
657

 
542

 
1,253

 
1,325

Processing and servicing
94

 
157

 
201

 
330

General and administrative
1,538

 
1,754

 
3,510

 
3,518

Total
$
2,794

 
$
2,974

 
$
6,004

 
$
6,465


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.



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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 unaudited 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 Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II - Item 1. Legal Proceedings and Part II - Item 1A. Risk Factors. 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 forecast and 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 introduction of new products or features, expanding 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 in replacing existing debt facilities and arranging funding for new types of loans; the impact 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; the unenforceability of choice of law provisions in our loan agreements and any potential violation of state interest rate limit laws; our ability to successfully evaluate, consummate and

18

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integrate acquisitions; failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; the estimates and estimate methodologies used in preparing our consolidated financial statements; the future trading prices of our common stock, and the impact of securities analysts’ reports and shares eligible for future sale on these prices; our ability to prevent or discover security breaches, 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; the impact of our cost rationalization programs; and other risks, including those described in Part I - Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are or will be 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 loan decision process, including 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 $9 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 June 30, 2018, we had $761.9 million of funding debt principal outstanding and $1.2 billion total borrowing capacity under such debt facilities. No loans were sold through OnDeck Marketplace during the six months ended June 30, 2018. During the three months and six months ended June 30, 2017, we sold loans with an unpaid principal balance of $9.1 million and $50.2 million, respectively. Of the total principal outstanding as of June 30, 2018, including our loans held for investment, plus loans sold to OnDeck Marketplace purchasers which had a balance remaining as of June 30, 2018, 66% were funded via our debt facilities, 25% were financed via proceeds raised from our securitization transaction, 8% 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.


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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.
 
 
As of for the Three Months Ended June 30,
 
As of and for the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
(dollars in thousands)
Originations
$586,728
 
$464,362
 
$1,177,313
 
$1,037,377
Effective Interest Yield
36.1
%
 
33.5
%
 
35.9
%
 
33.7
%
Cost of Funds Rate
6.6
%
 
6.2
%
 
6.7
%
 
6.1
%
Net Interest Margin*
32.0
%
 
29.3
%
 
31.7
%
 
29.8
%
Marketplace Gain on Sale Rate
N/A

 
2.8
%
 
N/A

 
3.4
%
Reserve Ratio
12.1
%
 
11.0
%
 
12.1
%
 
11.0
%
Provision Rate
5.7
%
 
7.2
%
 
5.9
%
 
8.0
%
15+ Day Delinquency Ratio
6.8
%
 
7.2
%
 
6.8
%
 
7.2
%
Net Charge-off Rate
11.2
%
 
18.5
%
 
11.1
%
 
16.8
%
*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.

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Table of Contents

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.
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 any loans sold through OnDeck Marketplace may be loans which were initially designated as held for investment upon origination. The portion of such loans sold, if any, in a given period may vary materially depending upon market conditions and other circumstances.
Reserve Ratio
Reserve Ratio is our allowance for loan losses as of the end of the period divided by the Unpaid Principal Balance as of the end of the period.
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.
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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On Deck Capital, Inc. and Subsidiaries
Consolidated Average Balance Sheets
(in thousands)
 
 
Average
 
Average
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
55,516

 
$
61,104

 
$
50,128

 
$
60,824

Restricted cash
 
54,859

 
68,530

 
55,251

 
58,956

Loans held for investment
 
1,025,143

 
1,003,103

 
1,003,655

 
1,020,727

Less: Allowance for loan losses
 
(121,899
)
 
(110,542
)
 
(118,290
)
 
(112,355
)
Loans held for investment, net
 
903,244

 
892,561

 
885,365

 
908,372

Loans held for sale
 

 
561

 

 
660

Property, equipment and software, net
 
17,182

 
27,776

 
19,248

 
28,298

Other assets
 
15,782

 
18,030

 
14,773

 
18,940

Total assets
 
$
1,046,583

 
$
1,068,562

 
$
1,024,765

 
$
1,076,050

Liabilities and equity
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
3,627

 
$
3,412

 
$
3,269

 
$
3,862

Interest payable
 
2,519

 
2,461

 
2,407

 
2,347

Funding debt
 
735,123

 
747,009

 
715,110

 
750,761

Corporate debt
 
1,976

 
24,723

 
2,552

 
26,114

Accrued expenses and other liabilities
 
29,856

 
31,347

 
30,795

 
34,336

Total liabilities
 
773,101

 
808,952

 
754,133

 
817,420

 
 
 
 
 
 
 
 
 
Total On Deck Capital, Inc. stockholders' equity
 
268,060

 
253,260

 
265,857

 
253,271

Noncontrolling interest
 
5,422

 
6,350

 
4,775

 
5,359

Total equity
 
273,482

 
259,610

 
270,632

 
258,630

Total liabilities and equity
 
$
1,046,583

 
$
1,068,562

 
$
1,024,765

 
$
1,076,050

 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
Unpaid Principal Balance
 
$
1,006,133

 
$
984,812

 
$
985,321

 
$
1,001,231

Interest Earning Assets
 
$
1,006,133

 
$
985,370

 
$
985,321

 
$
1,001,887

Loans
 
$
1,025,143

 
$
1,003,664

 
$
1,003,654

 
$
1,021,387


Average Balance Sheet Items for the period represent monthly averages based on the beginning and the ending period balances.
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.

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Table of Contents

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share
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 severance and executive transition expenses. Stock-based compensation includes employee compensation as well as compensation to third-party service providers. Adjusted Net Income (Loss) per Share is calculated by dividing Adjusted Net Income (Loss) by the weighted average common shares outstanding during the period.
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, severance obligations and debt extinguishment costs.
The following table presents a reconciliation of net loss to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share for each of the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Reconciliation of Net Income Attributable to OnDeck to Adjusted Net Income (Loss)
 
 
 
 
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,790

 
$
(1,498
)
 
$
3,873

 
$
(12,556
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
2,794

 
2,974

 
6,004


6,465

Real estate disposition charges

 

 
4,187

 

Severance and executive transition expenses

 
3,183

 
911

 
3,183

Debt Extinguishment Costs
1,384

 

 
1,384

 

Adjusted Net income (loss)
$
9,968

 
$
4,659

 
$
16,359

 
$
(2,908
)
 
 
 
 
 
 
 
 
Adjusted Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
0.06

 
$
0.22

 
$
(0.04
)
Diluted
$
0.13

 
$
0.06

 
$
0.21

 
$
(0.04
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,385,446

 
72,688,815

 
74,182,929

 
72,276,734

Diluted
78,288,267

 
72,688,815

 
77,786,748

 
72,276,734


Below are reconciliations of the Adjusted Net income (loss) per basic and diluted share to the most directly comparable measures calculated in accordance with GAAP.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(per share)
 
(per share)
Net income (loss) per basic share attributable to On Deck Capital, Inc. common shareholders
$
0.08

 
$
(0.02
)
 
$
0.05

 
$
(0.17
)
Add/ (Subtract):
 
 
 
 
 
 
 
  Stock-based compensation expense
0.03

 
0.04

 
0.08

 
0.09

  Real estate disposition charges

 

 
0.06

 

  Severance and executive transition expenses

 
0.04

 
0.01

 
0.04

  Debt Extinguishment Costs
0.02

 

 
0.02

 

Adjusted Net income (loss) per basic share
$
0.13

 
$
0.06

 
$
0.22

 
$
(0.04
)


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Table of Contents

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(per share)
 
(per share)
Net income (loss) per diluted share attributable to On Deck Capital, Inc. common shareholders