Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 every Interactive Data file required to be submitted 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 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
 
¨   
 
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 October 31, 2018 was 75,046,285.
 




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)
 
 
September 30,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Cash and cash equivalents
$
71,304

 
$
71,362

Restricted cash
48,919

 
43,462

Loans held for investment
1,117,828

 
952,796

Less: Allowance for loan losses
(133,644
)
 
(109,015
)
Loans held for investment, net
984,184

 
843,781

Property, equipment and software, net
16,286

 
23,572

Other assets
19,240

 
13,867

Total assets
$
1,139,933

 
$
996,044

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
5,651

 
$
2,674

Interest payable
2,132

 
2,330

Funding debt
812,428

 
684,269

Corporate debt

 
7,985

Accrued expenses and other liabilities
29,500

 
32,730

Total liabilities
849,711

 
729,988

Commitments and contingencies (Note 9)

 

Stockholders’ equity (deficit):
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 78,631,018 and 77,284,266 shares issued and 75,029,010 and 73,822,001 outstanding at September 30, 2018 and December 31, 2017, respectively.
393

 
386

Treasury stock—at cost
(8,766
)
 
(7,965
)
Additional paid-in capital
503,049

 
492,509

Accumulated deficit
(209,191
)
 
(222,833
)
Accumulated other comprehensive loss
(503
)
 
(52
)
Total On Deck Capital, Inc. stockholders' equity
284,982

 
262,045

Noncontrolling interest
5,240

 
4,011

Total equity
290,222

 
266,056

Total liabilities and equity
$
1,139,933

 
$
996,044

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


3

Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Interest income
$
99,476

 
$
80,122

 
$
278,216

 
$
250,954

Gain on sales of loans

 
146

 

 
1,890

Other revenue
3,523

 
3,398

 
10,681

 
10,365

Gross revenue
102,999

 
83,666

 
288,897

 
263,209

Cost of revenue:
 
 
 
 
 
 
 
Provision for loan losses
39,102

 
39,582

 
108,688

 
118,495

Funding costs
11,665

 
11,330

 
35,688

 
34,223

Total cost of revenue
50,767

 
50,912

 
144,376

 
152,718

Net revenue
52,232

 
32,754

 
144,521

 
110,491

Operating expense:
 
 
 
 
 
 
 
Sales and marketing
10,845

 
11,903

 
32,875

 
42,090

Technology and analytics
13,418

 
11,748

 
37,224

 
41,960

Processing and servicing
5,302

 
4,160

 
15,564

 
13,521

General and administrative
13,107

 
9,440

 
46,866

 
30,917

Total operating expense
42,672

 
37,251

 
132,529

 
128,488

Income (loss) from operations
9,560

 
(4,497
)
 
11,992

 
(17,997
)
Other expense:
 
 
 
 
 
 
 
Interest expense
63

 
35

 
157

 
706

Total other expense
63

 
35

 
157

 
706

Income (loss) before provision for income taxes
9,497

 
(4,532
)
 
11,835

 
(18,703
)
Provision for income taxes

 

 

 

Net income (loss)
9,497

 
(4,532
)
 
11,835

 
(18,703
)
Less: Net income (loss) attributable to noncontrolling interest
(272
)
 
(458
)
 
(1,807
)
 
(2,073
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
9,769


$
(4,074
)
 
$
13,642

 
$
(16,630
)
Net income (loss) per share attributable to On Deck Capital, Inc. common stockholders:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
(0.06
)
 
$
0.18

 
$
(0.23
)
Diluted
$
0.12

 
$
(0.06
)
 
$
0.17

 
$
(0.23
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,715,592

 
73,272,085

 
74,362,211

 
72,613,221

Diluted
79,372,491

 
73,272,085

 
78,314,719

 
72,613,221

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
9,497

 
$
(4,532
)
 
$
11,835

 
$
(18,703
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(306
)
 
246

 
(815
)
 
682

Comprehensive income (loss)
9,191

 
(4,286
)
 
11,020

 
(18,021
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
(138
)
 
111

 
(367
)
 
307

Less: Net income (loss) attributable to noncontrolling interest
(272
)
 
(458
)
 
(1,807
)
 
(2,073
)
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
$
9,601

 
$
(3,939
)
 
$
13,194

 
$
(16,255
)
 
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 Cash Flows
(in thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income (loss)
$
11,835

 
$
(18,703
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 
 
Provision for loan losses
108,688

 
118,495

Depreciation and amortization
6,232

 
7,623

Amortization of debt issuance costs
5,575

 
2,777

Stock-based compensation
8,852

 
9,521

Amortization of net deferred origination costs
41,180

 
36,419

Changes in servicing rights, at fair value
223

 
1,440

Gain on sales of loans

 
(1,890
)
Unfunded loan commitment reserve
829

 
227

Gain on extinguishment of debt

 
(312
)
Loss on disposal of fixed assets
5,667

 

Gain on lease termination
(1,481
)
 

Changes in operating assets and liabilities:

 

Other assets
(7,064
)
 
2,106

Accounts payable
2,977

 
(2,353
)
Interest payable
(198
)
 
91

Accrued expenses and other liabilities
(1,128
)
 
(7,641
)
Originations of loans held for sale

 
(44,489
)
Capitalized net deferred origination costs of loans held for sale

 
(1,128
)
Proceeds from sale of loans held for sale

 
45,921

Principal repayments of loans held for sale

 
1,039

Net cash provided by operating activities
182,187


149,143

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(677
)
 
(1,129
)
Capitalized internal-use software
(3,738
)
 
(2,226
)
Originations of term loans and lines of credit, excluding rollovers into new originations
(1,566,889
)
 
(1,302,889
)
Proceeds from sale of loans held for investment

 
12,396

Payments of net deferred origination costs
(46,659
)
 
(32,747
)
Principal repayments of term loans and lines of credit
1,324,078

 
1,220,673

Purchase of loans
(801
)
 
(13,730
)
Net cash used in investing activities
(294,686
)

(119,652
)
Cash flows from financing activities
 
 
 
Investments by noncontrolling interests
3,403

 
3,443

Purchase of treasury shares
(801
)
 
(864
)
Proceeds from exercise of stock options and warrants
76

 
490

Issuance of common stock under employee stock purchase plan
1,435

 
1,838

Proceeds from the issuance of funding debt
672,522

 
133,318

Proceeds from the issuance of corporate debt
25,000

 
24,200

Payments of debt issuance costs
(5,460
)
 
(3,228
)

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Nine Months Ended 
 September 30,
 
2018
 
2017
Repayments of funding debt principal
(544,586
)
 
(156,477
)
Repayments of corporate debt principal
(33,000
)
 
(35,000
)
Distribution to noncontrolling interest

 
(1,000
)
Net cash provided by (used in) financing activities
118,589


(33,280
)
Effect of exchange rate changes on cash and cash equivalents
(691
)
 
824

Net increase (decrease) in cash, cash equivalents, and restricted cash
5,399

 
(2,965
)
Cash, cash equivalents, and restricted cash at beginning of year
114,824

 
123,986

Cash, cash equivalents, and restricted cash at end of period
$
120,223


$
121,021

 
 
 
 
Reconciliation to amounts on consolidated balance sheets
 
 
 
Cash and cash equivalents
$
71,304

 
$
64,292

Restricted cash
48,919

 
56,729

Total cash, cash equivalents and restricted cash
$
120,223

 
$
121,021

 
 
 
 
Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
32,329

 
$
31,467

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
180

 
$
154

Unpaid principal balance of term loans rolled into new originations
$
258,220

 
$
220,925


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

6

Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
On Deck Capital, Inc.’s principal activity is providing financing to small businesses located throughout the United States, as well as 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 using the retrospective transition method for each period presented and no longer present restricted cash as a reconciling item in our consolidated statement of cash flows. For the nine months ended September 30, 2017, cash flows from investing activities increased $12.3 million and the net decrease in cash and cash equivalents of $15.3 million became a net decrease in cash, cash equivalents and restricted cash of $3.0 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. The new standard will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU provides a prospective transition option that would not require earlier periods to be restated upon adoption. We expect that most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the standard that will result in an offsetting increase in assets and liabilities on the Consolidated Balance Sheet. We do not expect the standard to impact our future results of operations or cash flows. The Company will adopt the standard in the first quarter of 2019 and apply the standard prospectively as of the adoption date. We expect to elect the package of practical expedients afforded under the standard which permit an entity not to: (i) reassess whether existing or expired contracts are or contain a lease, (ii) reassess the lease classification, and (iii) reassess any initial direct costs for any existing leases.
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 after December 15, 2018, however, we anticipate adopting the standard on January 1, 2020. 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net Income (loss)
$
9,497

 
$
(4,532
)
 
$
11,835

 
$
(18,703
)
Less: Net income (loss) attributable to noncontrolling interest
(272
)
 
(458
)
 
(1,807
)
 
(2,073
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
9,769

 
$
(4,074
)
 
$
13,642

 
$
(16,630
)
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
74,715,592

 
73,272,085

 
74,362,211

 
72,613,221

Net income (loss) per common share, basic
$
0.13

 
$
(0.06
)
 
$
0.18

 
$
(0.23
)
Effect of dilutive securities
4,656,899

 

 
3,952,508

 

Weighted-average common shares outstanding, diluted
79,372,491

 
73,272,085

 
78,314,719

 
72,613,221

Net income (loss) per common share, diluted
$
0.12

 
$
(0.06
)
 
$
0.17

 
$
(0.23
)
Anti-dilutive securities excluded
3,020,562

 
11,813,427

 
5,169,484

 
11,813,427


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. For the three and nine months ended September 30, 2017, the effects of potentially dilutive items were anti-dilutive given our net losses. The following common share equivalent securities have been included in the calculation of dilutive weighted-average common shares outstanding:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Dilutive Common Share Equivalents
 
 
 
 
 
 
 
Weighted Average common shares outstanding
74,715,592

 
73,272,085

 
74,362,211

 
72,613,221

Restricted stock units
1,616,072

 

 
1,083,237

 

Stock options
3,040,827

 

 
2,869,271

 

Employee stock purchase program

 

 

 

Total dilutive common share equivalents
79,372,491

 
73,272,085

 
78,314,719

 
72,613,221


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The following common share equivalent securities 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 nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 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
124,582

 
3,528,871

 
527,326

 
3,528,871

Stock options
2,840,298

 
8,227,736

 
4,586,476

 
8,227,736

Employee stock purchase program
33,682

 
34,820

 
33,682

 
34,820

Total anti-dilutive common share equivalents
3,020,562

 
11,813,427


5,169,484


11,813,427


The weighted-average exercise price for warrants to purchase 22,000 shares of common stock was $14.50 as of September 30, 2018. A warrant to purchase 1,985,846 shares expired in September 2018 as a result of performance conditions not being met by that time. That warrant was excluded in the prior year periods from the anti-dilutive common share equivalents as performance obligations 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 September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Term loans
$
928,091

 
$
804,227

Lines of credit
167,702

 
132,012

Total unpaid principal balance
1,095,792

 
936,239

Net deferred origination costs
22,036

 
16,557

Total loans held for investment
$
1,117,828

 
$
952,796

During the nine months ended September 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 September 30, 2018 and 2017 we purchased loans from our issuing bank partner in the amount of $112.1 million and $101.6 million, respectively. During the nine months ended September 30, 2018 and 2017 we purchased loans from our issuing bank partner in the amount of $360.6 million and $367.3 million, respectively.

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The change in the allowance for loan losses for the three months and nine months ended September 30, 2018 and 2017 consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
124,058

 
$
105,217

 
$
109,015

 
$
110,162

Recoveries of loans previously charged off
3,306

 
5,330

 
9,857

 
12,173

Loans charged off
(32,822
)
 
(45,257
)
 
(93,916
)
 
(135,958
)
Provision for loan losses
39,102

 
39,582

 
108,688

 
118,495

Allowance for loan losses at end of period
$
133,644

 
$
104,872

 
$
133,644

 
$
104,872

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 September 30, 2018 and 2017, previously charged-off loans sold accounted for $0.2 million and $2.4 million, respectively, of recoveries of loans previously charged off. For the nine months ended September 30, 2018 and 2017, previously charged-off loans sold accounted for $0.9 million and $6.2 million, respectively, of recoveries of loans previously charged off.
As of September 30, 2018 and December 31, 2017, our off-balance sheet credit exposure related to the undrawn line of credit balances was $243.2 million and $204.6 million, respectively. The related reserve on unfunded loan commitments was $5.2 million and $4.4 million as of September 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 September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Current loans
$
1,002,932

 
$
850,060

Delinquent: paying (accrual status)
52,275

 
49,252

Delinquent: non-paying (non-accrual status)
40,585

 
36,927

Total
$
1,095,792

 
$
936,239

The portion of the allowance for loan losses attributable to current loans was $87.1 million and $74.0 million as of September 30, 2018 and December 31, 2017, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was $46.5 million and $35.0 million as of September 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 September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
By delinquency status:
 
 
 
Current loans
$
1,002,932

 
$
850,060

1-14 calendar days past due
22,573

 
23,611

15-29 calendar days past due
10,261

 
12,528

30-59 calendar days past due
18,671

 
22,059

60-89 calendar days past due
15,161

 
12,809

90 + calendar days past due
26,194

 
15,172

Total unpaid principal balance
$
1,095,792

 
$
936,239


4. Servicing Rights

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As of September 30, 2018 and December 31, 2017, the remaining unpaid principal balance of term loans we serviced that previously were sold was $132.0 million and $181.0 million, respectively. No loans were sold during the three and nine months ended September 30, 2018. During the three months and nine months ended September 30, 2017, we sold through OnDeck Marketplace loans with an unpaid principal balance of $5.3 million and $55.5 million, respectively.
For the three months ended September 30, 2018 and 2017, we earned $0.1 million and $0.4 million of servicing revenue, respectively. For the nine months ended September 30, 2018 and 2017, we earned $0.6 million and $1.3 million of servicing revenue, respectively.
The following table summarizes the activity related to the fair value of our servicing assets for the three months and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Fair value at the beginning of period
$
29

 
$
701

 
$
154

 
$
1,131

Addition:
 
 
 
 
 
 
 
Servicing resulting from transfers of financial assets
16

 
275

 
78

 
938

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

 

 

 

Other changes in fair value (1)
(36
)
 
(347
)
 
(223
)
 
(1,440
)
Fair value at the end of period (Level 3)
$
9

 
$
629

 
$
9

 
$
629

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

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

 
$

ODAST II Series 2016-1
Securitization
 
May 2020 (2)
 
N/A
 

 
250,000

ODART
Revolving
 
March 2019
 
4.7%
 
120,985

 
102,058

RAOD
Revolving
 
November 2018
 
5.3%
 
111,542

 
86,478

ODAC
Revolving
 
May 2019 (3)
 
N/A
 

 
62,350

ODAF
Revolving
 
February 2020 (3)
 
N/A
 

 
75,000

ODAF II
Revolving
 
August 2022 (4)
 
4.4%
 
111,119

 

PORT II
Revolving
 
December 2018
 
4.7%
 
110,605

 
63,851

LAOD
Revolving
 
October 2022 (5)
 
4.1%
 
95,096

 

Other Agreements
Various
 
Various (6)
 
7.4%
 
44,194

 
50,706

 
 
 
 
 
4.6%
 
818,541

 
690,443

Deferred debt issuance cost
 
 
 
 
 
 
(6,113
)
 
(6,174
)
Total Funding Debt
 
 
 
 
 
 
$
812,428

 
$
684,269

 
 
 
 
 
 
 
 
 
 
Corporate Debt:
 
 
 
 
 
 
 
 
 
Square 1
Revolving
 
October 2018 (7)
 
6.5%
 

 
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.

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(2) In April 2018, we issued $225 million of debt in a new ODAST II securitization transaction (Series 2018-1) and the net proceeds were used, together with other available funds, to voluntarily prepay in full all $250 million of the prior Series 2016-1 Notes.
(3) This debt facility was voluntarily repaid in full and terminated in August 2018.
(4) The period during which new borrowings may be made under this debt facility expires in August 2021.
(5) The period during which new borrowings may be made under this debt facility expires in April 2022.
(6) Maturity dates range from January 2020 through June 2021.
(7) In October 2018 this debt facility was amended to extend the maturity date to January 2019.
On August 8, 2018, our wholly-owned subsidiary, OnDeck Asset Funding II LLC, established a new asset-backed revolving debt facility with a commitment amount of $175 million and an interest rate of 1-month LIBOR + 3.0%. The period during which new borrowings may be made under this facility expires on August 6, 2021 and the final maturity date is August 8, 2022. Concurrent with closing this facility, the Company optionally prepaid in full and terminated the $100 million asset-backed revolving debt facility by and between, among others, On Deck Asset Company, LLC, as borrower, and WM 2016-1, LLC, as administrative agent.
On August 14, 2018, our wholly-owned subsidiary, OnDeck Asset Funding I LLC, voluntarily prepaid in full and terminated the $150 million asset-backed revolving debt facility originally entered into in August 2016 by and between, among others, OnDeck Asset Funding I LLC, as borrower, and Ares Agent Services, L.P., as administrative agent.
On October 4, 2018, On Deck Capital, Inc. amended its existing $30 million revolving debt facility to extend the maturity date of the facility to January 2019 and made various technical, definitional, conforming and other changes.
Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled $970.2 million and $852.3 million as of September 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 September 30, 2018 and December 31, 2017 (in thousands):
 
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Servicing assets
$

 
$

 
$
9

 
$
9

Total assets
$

 
$

 
$
9

 
$
9

 
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 nine months ended September 30, 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 September 30, 2018 and December 31, 2017:

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September 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
%
 
50.56
%
 
Default rate
 
10.63
%
 
10.92
%
 
10.68
%
(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 September 30, 2018 and December 31, 2017 given hypothetical changes in default rate and cost to service (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Servicing Assets
Default rate assumption:
 
 
 
Default rate increase of 25%
$
(3
)
 
$
(40
)
Default rate increase of 50%
$
(5
)
 
$
(76
)
Cost to service assumption:
 
 
 
Cost to service increase by 25%
$
(4
)
 
$
(63
)
Cost to service increase by 50%
$
(9
)
 
$
(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):
 
September 30, 2018
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
984,184

 
$
1,095,854

 
$

 
$

 
$
1,095,854

Total assets
$
984,184

 
$
1,095,854

 
$

 
$

 
$
1,095,854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
232,982

 
$
223,022

 
$

 
$

 
$
223,022

Total fixed-rate debt
$
232,982

 
$
223,022

 
$

 
$

 
$
223,022


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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 nine months ended September 30, 2018 and 2017 (in thousands):

 
 
Nine Months Ended September 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)
 
13,642

 
(1,807
)
 
11,835

Stock based compensation
 
8,573

 

 
8,573

Exercise of options and warrants
 
76

 

 
76

Employee Stock Purchase Plan
 
1,895

 

 
1,895

Cumulative translation adjustment
 
(448
)
 
(367
)
 
(815
)
Purchase of treasury shares
 
(801
)
 

 
(801
)
Investments by noncontrolling interests
 

 
3,403

 
3,403

Balance at September 30, 2018
 
284,982

 
5,240

 
290,222

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
Net income (loss)
 
13,642

 
(1,807
)
 
11,835

Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
(448
)
 
(367
)
 
(815
)
Comprehensive income (loss):
 
$
13,194

 
$
(2,174
)
 
$
11,020

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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)
 
(16,630
)
 
(2,073
)
 
(18,703
)
Stock based compensation
 
9,115

 

 
9,115

Exercise of options and warrants
 
490

 

 
490

Employee stock purchase plan
 
2,299

 

 
2,299

Cumulative translation adjustment
 
375

 
307

 
682

Purchase of treasury shares
 
(864
)
 

 
(864
)
Investments by noncontrolling interests
 

 
3,443

 
3,443

Return of equity to noncontrolling interest
 

 
(959
)
 
(959
)
Balance at September 30, 2017
 
254,310

 
4,790

 
259,100

 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
Net income (loss)
 
(16,630
)
 
(2,073
)
 
(18,703
)
Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation adjustment
 
375

 
307

 
682

Comprehensive income (loss):
 
$
(16,255
)
 
$
(1,766
)
 
$
(18,021
)

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 nine months ended September 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
(531,747
)
 
$
0.98

 

 

Forfeited
(212,410
)
 
$
8.17

 

 

Expired
(185,067
)
 
$
10.91

 

 

Outstanding at September 30, 2018
8,021,179

 
$
5.84

 
5.9

 
$
24,922

Exercisable at September 30, 2018
6,329,697

 
$
5.76

 
5.2

 
$
21,739

Vested and expected to vest as of September 30, 2018
7,917,209

 
$
5.85

 
5.9

 
$
24,694

Total compensation cost related to nonvested option awards not yet recognized as of September 30, 2018 was $3.4 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 nine months ended September 30, 2018 and 2017 was $2.9 million and $5.0 million, respectively.

Restricted Stock Units

The following table summarizes our Restricted Stock Units ("RSUs") and Performance Restricted Stock Units ("PRSUs") activity during the nine months ended September 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
1,304,194

 
$
5.71

RSUs vested
(514,972
)
 
$
7.60

RSUs forfeited/expired
(404,092
)
 
$
6.30

Unvested at September 30, 2018
3,727,770

 
$
5.80

Expected to vest after September 30, 2018
3,066,327

 
$
5.86


As of September 30, 2018, there was $13 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 nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Sales and marketing
$
452

 
$
538

 
$
1,492

 
$
1,830

Technology and analytics
621

 
499

 
1,874

 
1,824

Processing and servicing
77

 
99

 
278

 
429

General and administrative
1,698

 
1,920

 
5,208

 
5,438

Total
$
2,848

 
$
3,056

 
$
8,852

 
$
9,521


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 our wholly-owned ODX subsidiary 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

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provisions in our loan agreements and any potential violation of state interest rate limit laws; our ability to successfully evaluate, consummate and 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 one business 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 $10 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 through our wholly-owned subsidiary, ODX, 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 September 30, 2018, we had $818.5 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 nine months ended September 30, 2018. During the three months and nine months ended September 30, 2017, we sold loans with an unpaid principal balance of $5.3 million and $55.5 million, respectively. Of the total principal outstanding as of September 30, 2018, including our loans held for investment, plus loans sold to OnDeck Marketplace purchasers which had a balance remaining as of September 30, 2018, 65% were funded via our debt facilities, 23% were financed via proceeds raised from our securitization transaction, 11% 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 and for the Three Months Ended September 30,
 
As of and for the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
(dollars in thousands)
Originations
$647,796
 
$530,926
 
$1,825,109
 
$1,568,303
Effective Interest Yield
36.5
%
 
33.1
%
 
36.1
%
 
33.5
%
Cost of Funds Rate
6.0
%
 
6.4
%
 
6.5
%
 
6.2
%
Net Interest Margin*
32.9
%
 
28.9
%
 
32.1
%
 
29.5
%
Marketplace Gain on Sale Rate
N/A

 
2.7
%
 
N/A

 
3.3
%
Reserve Ratio
12.2
%
 
11.1
%
 
12.2
%
 
11.1
%
Provision Rate
6.0
%
 
7.5
%
 
6.0
%
 
7.8
%
15+ Day Delinquency Ratio
6.4
%
 
7.5
%
 
6.4
%
 
7.5
%
Net Charge-off Rate
11.1
%
 
16.9
%
 
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
55,851

 
$
59,530

 
$
50,004

 
$
58,595

Restricted cash
 
53,024

 
58,659

 
55,466

 
59,316

Loans held for investment
 
1,081,259

 
960,587

 
1,030,403

 
1,001,697

Less: Allowance for loan losses
 
(129,804
)
 
(103,397
)
 
(122,319
)
 
(109,486
)
Loans held for investment, net
 
951,455

 
857,190

 
908,084

 
892,211

Loans held for sale
 

 

 

 
462

Property, equipment and software, net
 
16,591

 
25,919

 
18,416

 
27,480

Other assets
 
15,967

 
17,843

 
15,302

 
18,483

Total assets
 
$
1,092,888

 
$
1,019,141

 
$
1,047,272

 
$
1,056,547

Liabilities and equity
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
4,318

 
$
3,077

 
$
3,607

 
$
3,377

Interest payable
 
2,402

 
2,300

 
2,388

 
2,322

Funding debt
 
771,483

 
710,601

 
733,601

 
737,864

Corporate debt
 

 
11,078

 
1,783

 
20,213

Accrued expenses and other liabilities
 
31,645

 
32,277

 
31,004

 
33,786

Total liabilities
 
809,848

 
759,333

 
772,383

 
797,562

 
 
 
 
 
 
 
 
 
Total On Deck Capital, Inc. stockholders' equity
 
277,570

 
254,731

 
269,924

 
253,716

Noncontrolling interest
 
5,470

 
5,077

 
4,965

 
5,269

Total equity
 
283,040

 
259,808

 
274,889

 
258,985

Total liabilities and equity
 
$
1,092,888

 
$
1,019,141

 
$
1,047,272

 
$
1,056,547

 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
Unpaid Principal Balance
 
$
1,060,222

 
$
944,372

 
$
1,011,155

 
$
983,230

Interest Earning Assets
 
$
1,060,222

 
$
944,372

 
$
1,011,155

 
$
983,689

Loans
 
$
1,081,259

 
$
960,587

 
$
1,030,403

 
$
1,002,159


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Reconciliation of Net Income (Loss) Attributable to OnDeck to Adjusted Net Income (Loss)
 
 
 
 
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
9,769

 
$
(4,074
)
 
$
13,642

 
$
(16,630
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
2,848

 
3,056

 
8,852


9,521

Real estate disposition charges

 

 
4,187

 

Severance and executive transition expenses

 

 
911

 
3,183

Debt Extinguishment Costs
550

 

 
1,935

 

Adjusted Net income (loss)
$
13,167

 
$
(1,018
)
 
$
29,527

 
$
(3,926
)
 
 
 
 
 
 
 
 
Adjusted Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
(0.01
)
 
$
0.40

 
$
(0.05
)
Diluted
$
0.17

 
$
(0.01
)
 
$
0.38

 
$
(0.05
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
74,715,592

 
73,272,085

 
74,362,211

 
72,613,221

Diluted
79,372,491

 
73,272,085

 
78,314,719

 
72,613,221


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(per share)
 
(per share)
Net income (loss) per basic share attributable to On Deck Capital, Inc. common stockholders
$
0.13

 
$
(0.06
)
 
$
0.18

 
$
(0.23
)
Add / (Subtract):
 
 
 
 
 
 
 
  Stock-based compensation expense
0.04

 
0.05

 
0.12

 
0.13

  Real estate disposition charges

 

 
0.06

 

  Severance and executive transition expenses

 

 
0.01

 
0.05

  Debt Extinguishment Costs
0.01

 

 
0.03

 

Adjusted Net income (loss) per basic share
$
0.18

 
$
(0.01