Form 10-Q On Deck Capital, Inc. For: Mar 31

May 9, 2019 5:00 PM
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
 
(MARK ONE)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
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)
(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, a 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  ý
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.005 per share
ONDK
New York Stock Exchange
 
 
 
The number of shares of the registrant’s common stock outstanding as of April 30, 2019 was 75,918,756.


 


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 Changes in Equity
 
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


Item 1. Financial Statements (Unaudited)

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

 
March 31,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Cash and cash equivalents
$
60,085

 
$
59,859

Restricted cash
44,632

 
37,779

Loans held for investment
1,202,531

 
1,169,157

Less: Allowance for loan losses
(147,406
)
 
(140,040
)
Loans held for investment, net
1,055,125

 
1,029,117

Property, equipment and software, net
16,180

 
16,700

Other assets
48,636

 
18,115

Total assets
$
1,224,658

 
$
1,161,570

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
4,847

 
$
4,011

Interest payable
2,808

 
2,385

Debt
842,314

 
816,231

Accrued expenses and other liabilities
61,097

 
34,654

Total liabilities
911,066

 
857,281

Commitments and contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 79,706,639 and 79,135,510 shares issued and 75,907,393 and 75,375,341 outstanding at March 31, 2019 and December 31 2018, respectively.
399

 
396

Treasury stock—at cost
(10,113
)
 
(9,822
)
Additional paid-in capital
510,616

 
506,169

Accumulated deficit
(189,297
)
 
(195,155
)
Accumulated other comprehensive loss
(2,234
)
 
(1,832
)
Total On Deck Capital, Inc. stockholders' equity
309,371

 
299,756

Noncontrolling interest
4,221

 
4,533

Total equity
313,592

 
304,289

Total liabilities and equity
$
1,224,658

 
$
1,161,570

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


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Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Interest income
$
105,991

 
$
86,369

Other revenue
4,176

 
3,911

Gross revenue
110,167

 
90,280

Cost of revenue:
 
 
 
Provision for loan losses
43,291

 
36,293

Interest expense
11,332

 
11,872

Total cost of revenue
54,623

 
48,165

Net revenue
55,544

 
42,115

Operating expense:
 
 
 
Sales and marketing
11,960

 
10,598

Technology and analytics
16,806

 
11,007

Processing and servicing
5,489

 
5,221

General and administrative
14,029

 
17,725

Total operating expense
48,284

 
44,551

Income (loss) from operations, before provision for income taxes
7,260

 
(2,436
)
Provision for income taxes
1,740

 

Net income (loss)
5,520

 
(2,436
)
Less: Net income (loss) attributable to noncontrolling interest
(338
)
 
(518
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,858


$
(1,918
)
Net income (loss) per share attributable to On Deck Capital, Inc. common stockholders:
 
 
 
Basic
$
0.08

 
$
(0.03
)
Diluted
$
0.07

 
$
(0.03
)
Weighted-average common shares outstanding:
 
 
 
Basic
75,539,535

 
73,977,241

Diluted
79,115,037

 
73,977,241

Comprehensive income (loss):
 
 
 
Net income (loss)
$
5,520

 
$
(2,436
)
Other comprehensive income (loss):


 


Unrealized (loss) on derivative instrument
(742
)
 

Foreign currency translation adjustment
366

 
(113
)
Comprehensive income (loss)
5,144

 
(2,549
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
26

 
(50
)
Less: Net income (loss) attributable to noncontrolling interest
(338
)
 
(518
)
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,456

 
$
(1,981
)
 
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 Changes in Equity
(in thousands, except share data)
 
On Deck Capital, Inc.'s stockholders' equity
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Noncontrolling interest
 
Total
Equity
 
Shares
 
Amount
 
Balance at December 31, 2017
73,822,001

 
$
386

 
$
492,509

 
$
(222,833
)
 
$
(7,965
)
 
$
(52
)
 
$
262,045

 
$
4,011

 
$
266,056

Stock-based compensation

 

 
3,122

 

 

 

 
$
3,122

 

 
$
3,122

Issuance of common stock through vesting of restricted stock units and option exercises
271,517

 
2

 
39

 

 

 

 
$
41

 

 
$
41

Employee stock purchase plan
196,360

 
1

 
918

 

 

 

 
$
919

 

 
$
919

Repurchases of common stock
(25,387
)
 

 

 

 
(118
)
 

 
$
(118
)
 

 
$
(118
)
Currency translation adjustment

 

 

 

 

 
(63
)
 
$
(63
)
 
$
(50
)
 
$
(113
)
Net Income (loss)

 

 

 
(1,918
)
 

 

 
$
(1,918
)
 
$
(518
)
 
$
(2,436
)
Other

 

 

 
(1
)
 

 
(3
)
 
$
(4
)
 
$

 
$
(4
)
Balance-March 31, 2018
74,264,491

 
$
389

 
$
496,588

 
$
(224,752
)
 
$
(8,083
)
 
$
(118
)
 
$
264,024

 
$
3,443

 
$
267,467

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
75,375,341

 
$
396


$
506,169


$
(195,155
)

$
(9,822
)

$
(1,832
)

$
299,756


$
4,533

 
$
304,289

Stock-based compensation

 

 
2,743

 

 

 

 
2,743

 

 
2,743

Issuance of common stock through vesting of restricted stock units and option exercises
303,441

 
2

 
45

 

 

 

 
47

 

 
47

Employee stock purchase plan
267,688

 
1

 
1,659

 

 

 

 
1,660

 

 
1,660

Repurchases of common stock
(39,077
)
 

 

 

 
(291
)
 

 
(291
)
 

 
(291
)
Currency translation adjustment

 

 

 

 

 
340

 
340

 
26

 
366

Cash flow hedge

 

 

 

 

 
(742
)
 
(742
)
 

 
(742
)
Net Income (loss)

 

 

 
5,858

 

 

 
5,858

 
(338
)
 
5,520

Balance-March 31, 2019
75,907,393


$
399


$
510,616


$
(189,297
)

$
(10,113
)

$
(2,234
)

$
309,371


$
4,221


$
313,592

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

5

Table of Contents

ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
5,520

 
$
(2,436
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

Provision for loan losses
43,291

 
36,293

Depreciation and amortization
1,748

 
2,174

Amortization of debt issuance costs
802

 
1,230

Stock-based compensation
2,743

 
3,210

Amortization of net deferred origination costs
17,640

 
12,399

Changes in servicing rights, at fair value
69

 
131

Unfunded loan commitment reserve
48

 
171

Gain on lease termination

 
(1,481
)
Loss on disposal of fixed assets
674

 
5,668

Changes in operating assets and liabilities:

 

Other assets
(3,781
)
 
(3,484
)
Accounts payable
859

 
364

Interest payable
369

 
99

Accrued expenses and other liabilities
(1,189
)
 
(471
)
Net cash provided by operating activities
68,793


53,867

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(536
)
 
(313
)
Capitalized internal-use software
(1,379
)
 
(1,398
)
Originations of term loans and lines of credit, excluding rollovers into new originations
(537,147
)
 
(499,775
)
Payments of net deferred origination costs
(18,347
)
 
(14,193
)
Principal repayments of term loans and lines of credit
469,894

 
417,034

Net cash used in investing activities
(87,515
)

(98,645
)
Cash flows from financing activities
 
 
 
Purchase of treasury shares
(291
)
 
(119
)
Proceeds from exercise of stock options and warrants
45

 
39

Issuance of common stock under employee stock purchase plan
1,281

 
764

Proceeds from the issuance of debt
210,789

 
69,373

Payments of debt issuance costs
(3,097
)
 
(74
)
Repayments of debt principal
(182,849
)
 
(24,602
)
Net cash provided by financing activities
25,878


45,381

Effect of exchange rate changes on cash and cash equivalents
(77
)
 
(303
)
Net increase in cash, cash equivalents and restricted cash
7,079

 
300

Cash, cash equivalents, and restricted cash at beginning of year
97,638

 
114,824

Cash, cash equivalents, and restricted cash at end of period
$
104,717


$
115,124

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to amounts on consolidated balance sheets
 
 
 

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Three Months Ended March 31,
 
2019
 
2018
Cash and cash equivalents
$
60,085

 
$
70,415

Restricted cash
44,632

 
44,709

Total cash, cash equivalents and restricted cash
$
104,717

 
$
115,124

 
 
 
 
Supplemental disclosure of other cash flow information
 
 
 
Cash paid for interest
$
9,887

 
$
10,483

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Stock-based compensation included in capitalized internal-use software
$
57

 
$
68

Unpaid principal balance of term loans rolled into new originations
$
98,481

 
$
90,810


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

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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.
In October 2018, we announced the launch of ODX, a wholly-owned subsidiary that will focus on helping banks digitize their small business lending process. ODX offers a combination of software, analytic insights, and professional services that allow banks to bring their small business lending process online.
Basis of Presentation and Principles of Consolidation
We prepare our 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. When used in these notes to consolidated financial statements, the terms "we," "us," "our" or similar terms refers to On Deck Capital, Inc. and its consolidated subsidiaries.
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 consolidated financial statements and accompanying notes. Significant estimates include allowance for loan losses, stock-based compensation expense, capitalized software development costs, interest rate cap, the useful lives of long-lived assets, our effective income tax rate 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 August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The effective date for the standard is for fiscal years beginning after December 15, 2018. We elected to early adopt this ASU in fiscal 2018. See Note 9 for a discussion of our derivatives.
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 is 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. We elected the prospective transition option provided by the ASU that would not require earlier periods to be restated upon adoption. We elected 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. Our operating lease commitments, which were primarily real estate leases, were recognized as a $37.5 million lease liability which is included in Other Liabilities on the Consolidated Balance Sheet at March 31, 2019. We simultaneously recognized a $37.5 million right of use asset. Our right-of-use asset was partially offset by $10.1 million of existing deferred rent and lease incentives resulting in a net right-of-use asset of $27.6 million which is included in Other Assets on the Consolidate Balance Sheet at March 31, 2019. Our total operating lease cost for the three months ended March 31, 2019 was $1.5 million and allocated within operating expenses. The weighted average remaining lease term is 7.2 years and we utilized a weighted average discount rate of approximately 7%
Recent Accounting Pronouncements Not Yet Adopted
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, although we do not

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intend to do so. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements under ASC 820, Fair Value Measurement. The new guidance will be effective for annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact the new standard may have on our disclosures, but we do not expect it to have a material impact.
2. Net Income (Loss) 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 March 31,
 
2019
 
2018
Numerator:
 
 
 
Net Income (loss)
$
5,520

 
$
(2,436
)
Less: Net income (loss) attributable to noncontrolling interest
(338
)
 
(518
)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,858

 
$
(1,918
)
Denominator:
 
 
 
Weighted-average common shares outstanding, basic
75,539,535

 
73,977,241

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

 
$
(0.03
)
Effect of dilutive securities
3,575,502

 

Weighted-average common shares outstanding, diluted
79,115,037

 
73,977,241

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

 
$
(0.03
)
Anti-dilutive securities excluded
4,863,474

 
12,163,804

The difference between basic and diluted net 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 units, or RSUs, performance restricted stock units, or PRSUs, and the issuance of stock under our employee stock purchase plan. For the three months ended March 31, 2018 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 March 31,
Dilutive Common Share Equivalents
2019
 
2018
Weighted-average common shares outstanding
75,539,535

 
73,977,241

RSUs and PRSUs
1,024,301

 

Stock options
2,549,887

 

Employee stock purchase plan
1,314

 

Total dilutive common share equivalents
79,115,037

 
73,977,241

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 months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
 
2019
 
2018
Anti-Dilutive Common Share Equivalents
 
 
 
Warrants to purchase common stock
22,000

 
22,000

RSUs and PRSUs
669,075

 
3,874,666

Stock options
4,172,399

 
8,234,689

Employee stock purchase plan

 
32,449

Total anti-dilutive common share equivalents
4,863,474

 
12,163,804


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The weighted-average exercise price for warrants to purchase 22,000 shares of common stock was $14.50 as of March 31, 2019.
3. Interest Income
Interest income was comprised of the following components for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Interest on Unpaid Principal Balance
$
123,434

 
$
98,755

Amortization of net deferred origination costs
(17,700
)
 
(12,407
)
Interest income on loans, net
105,734

 
86,348

Interest on deposits and investments
257

 
21

Total interest income
$
105,991

 
$
86,369

4. Loans Held for Investment and Allowance for Loan Losses
Loans Held for Investment and Allowance for Loan Losses
Loans held for investment consisted of the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Term loans
$
962,777

 
$
956,755

Lines of credit
214,832

 
188,199

Total Unpaid Principal Balance
1,177,609

 
1,144,954

Net deferred origination costs
24,922

 
24,203

Total loans held for investment
$
1,202,531

 
$
1,169,157

We include both loans we originate and loans funded by our issuing bank partners and later purchased by us as part of our originations. During the three months ended March 31, 2019 and 2018 we purchased loans from our issuing bank partner in the amount of $111.5 million and $139.2 million, respectively.
The change in the allowance for loan losses for the three months ended March 31, 2019 and 2018 consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of period
$
140,040

 
$
109,015

Recoveries of loans previously charged off
3,914

 
3,345

Loans charged off
(39,839
)
 
(29,732
)
Provision for loan losses
43,291

 
36,293

Allowance for loan losses at end of period
$
147,406

 
$
118,921

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. We did not sell any previously charged-off loans for the three months ended March 31, 2019. For the three months ended March 31, 2018 loans sold accounted for $0.5 million of recoveries of loans previously charged off.
As of March 31, 2019 and December 31, 2018, our off-balance sheet credit exposure related to the undrawn line of credit balances wa$269.3 million and $264.2 million, respectively. The related reserve on unfunded loan commitments was $5.9 million as of March 31, 2019 and December 31, 2018, respectively. Net adjustments to the liability for unfunded loan commitments are included in general and administrative expense.

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The following table contains information, on a combined basis, regarding the Unpaid Principal Balance of loans we originated related to non-delinquent, paying and non-paying delinquent loans as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Current loans
$
1,053,903

 
$
1,031,449

Delinquent: paying (accrual status)
55,613

 
54,427

Delinquent: non-paying (non-accrual status)
68,093

 
59,078

Total
$
1,177,609

 
$
1,144,954

The portion of the allowance for loan losses attributable to current loans was $69.5 million and $85.7 million as of March 31, 2019 and December 31, 2018, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was $77.9 million and $54.3 million as of March 31, 2019 and December 31, 2018, respectively.
The following table shows an aging analysis of the unpaid principal balance related to loans held for investment by delinquency status as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
By delinquency status:
 
 
 
Current loans
$
1,053,903

 
$
1,031,449

1-14 calendar days past due
21,051

 
27,655

15-29 calendar days past due
17,749

 
14,665

30-59 calendar days past due
26,815

 
21,470

60-89 calendar days past due
18,811

 
19,031

90 + calendar days past due
39,280

 
30,684

Total unpaid principal balance
$
1,177,609

 
$
1,144,954

5. Debt
The following table summarizes our outstanding debt as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
Outstanding
 
Type
 
Maturity Date
 
Weighted Average Interest
Rate at March 31, 2019
 
March 31, 2019
 
December 31, 2018
Debt:
 
 
 
 
 
 
 
OnDeck Asset Securitization Trust II
Securitization
 
April 2022
(1) 
3.8%
 
$
225,000

 
$
225,000

OnDeck Account Receivables Trust 2013-1
Revolving
 
March 2022
(2) 
4.2%
 
114,425

 
117,664

Receivable Assets of OnDeck, LLC
Revolving
 
September 2021
(3) 
4.7%
 
111,569

 
113,631

OnDeck Asset Funding II LLC
Revolving
 
August 2022
(4) 
5.5%
 
106,413

 
109,568

Prime OnDeck Receivable Trust II
Revolving
 
March 2022
(5) 
4.6%
 
116,812

 
108,816

Loan Assets of OnDeck, LLC
Revolving
 
October 2022
(6) 
4.2%
 
106,625

 
100,000

Corporate Debt
Revolving
 
January 2021
 
5.5%
 
20,000

 

Other Agreements
Various
 
Various
(7) 
5.6%
 
49,351

 
47,318

 
 
 
 
 
4.5%
 
850,195

 
821,997

Deferred debt issuance cost
 
 
 
 
 
 
(7,881
)
 
(5,766
)
Total Debt
 
 
 
 
 
 
$
842,314

 
$
816,231


(1) 
The period during which new loans may be purchased under this securitization transaction expires in March 2020.
(2) 
The period during which new borrowings may be made under this facility was extended to March 2021 pursuant to an amendment described in more detail below.
(3) 
The period during which new borrowings of Class A revolving loans may be made under this debt facility expires in December 2020. The $19.7 million of Class B borrowing capacity matures in December 2019

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(4) 
The period during which new borrowings may be made under this facility expires in August 2021.
(5) 
The period during which new borrowings may be made under this facility was extended to March 2021 pursuant to an amendment described in more detail below.
(6) 
The period during which new borrowings may be made under this debt facility expires in April 2022.
(7) 
The periods during which new borrowings may be made under the various agreements expire between December 2019 and June 2021. Maturity dates range from June 2020 through December 2022.
Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled $1.0 billion and $1.0 billion as of March 31, 2019 and December 31, 2018, respectively. Our corporate debt facility is collateralized by substantially all of our assets.
Recent Amendments to Debt Facilities
On January 28, 2019, we established a new corporate revolving debt facility with a commitment amount of $85 million, an interest rate of 1-month LIBOR plus 3% and a final maturity date in January 2021.The facility may be used for working capital and other general corporate purposes. Concurrently with closing this facility, we optionally prepaid in full and terminated our corporate revolving debt facility with Pacific Western Bank (successor by merger to Square 1 Bank).
On February 8, 2019, Loan Assets of OnDeck, LLC, our wholly-owned subsidiary, entered into an amendment to further modify its asset-backed revolving debt facility. The Amendment primarily increased the revolving commitment amount by $50 million and reduced the interest rate margin over 1-month LIBOR by 0.25% and made various technical, definitional, conforming and other changes.
On March 12, 2019, we amended the OnDeck Account Receivables Trust 2013-1 facility to a commitment amount of $180 million, a borrowing rate of 1-month LIBOR + 1.75%, a borrowing base advance rate of 80%, and made various technical, definitional, conforming and other changes. Additionally, the period during which new borrowings may be made under this facility was extended to March 2021 and the final maturity date was extended to March 2022
On March 12, 2019, we amended the Prime OnDeck Receivable Trust II facility to increase the borrowing capacity from $125 million to $180 million, a borrowing rate of the CP Conduit Rate + 1.75%, a borrowing base advance rate of 80%, and made various technical, definitional, conforming and other changes. Additionally, the period during which new borrowings may be made under this facility was extended to March 2021 and the final maturity date was extended to March 2022.

6. Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
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. Our interest rate cap is reported at fair value utilizing Level 2 inputs. The fair value is determined using third party valuations that are based on discounted cash flow analysis using observed market inputs.
The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Interest rate cap

 
369

 

 
369

Total assets
$

 
$
369

 
$

 
$
369

 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Interest rate cap
$

 
$
1,253

 
$

 
$
1,253

Total assets
$

 
$
1,253

 
$

 
$
1,253

There were no transfers between levels for the three months ended March 31, 2019 and December 31, 2018.


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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):
 
March 31, 2019
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
1,055,125

 
$
1,182,910

 
$

 
$

 
$
1,182,910

Total assets
$
1,055,125

 
$
1,182,910

 
$

 
$

 
$
1,182,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
225,021

 
$
219,350

 
$

 
$

 
$
219,350

Total fixed-rate debt
$
225,021

 
$
219,350

 
$

 
$

 
$
219,350

 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
1,029,117

 
$
1,155,464

 
$

 
$

 
$
1,155,464

Total assets
$
1,029,117

 
$
1,155,464

 
$

 
$

 
$
1,155,464

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
232,972

 
$
226,965

 
$

 
$

 
$
226,965

Total fixed-rate debt
$
232,972

 
$
226,965

 
$

 
$

 
$
226,965

7. Income Taxes
For interim periods, the income tax provision is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We use an estimated annual effective tax rate which is based on expected annual income and statutory tax rates to determine our quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
Our provision for income taxes for the three months ended March 31, 2019 was $1.7 million, representing an effective income tax rate of 24%. The effective income tax rate for the full year 2018 was 0% due to the availability of net operating loss carryforwards.



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8. Stock-Based Compensation and Employee Benefit Plans
Options
The following is a summary of option activity for the three months ended March 31, 2019:
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2019
7,932,782

 
$
5.86

 

 

Exercised
(315,959
)
 
$
3.15

 

 

Expired
(182,492
)
 
$
12.19

 

 

Outstanding at March 31, 2019
7,434,331

 
$
5.82

 
5.5

 
$
13,360

Exercisable at March 31, 2019
6,207,892

 
$
5.79

 
4.9

 
$
13,165

Vested or expected to vest as of March 31, 2019
7,372,107

 
$
5.82

 
5.5

 
$
13,351

Total compensation cost related to nonvested option awards not yet recognized as of March 31, 2019 was $2.5 million and will be recognized over a weighted-average period of 2.1 years. The aggregate intrinsic value of employee options exercised during the three months ended March 31, 2019 and 2018 was $1.1 million and $1.0 million, respectively.
Restricted Stock Units
The following table is a summary of activity in RSUs and PRSUs for the three months ended March 31, 2019:
 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
Unvested at January 1, 2019
3,307,561

 
$
6.00

RSUs and PRSUs granted
1,323,978

 
$
6.07

RSUs and PRSUs vested
(116,798
)
 
$
6.06

RSUs and PRSUs forfeited/expired
(87,635
)
 
$
5.59

Unvested at March 31, 2019
4,427,106

 
$
6.03

Expected to vest after March 31, 2019
3,537,088

 
$
6.04

As of March 31, 2019, there was $16 million of unrecognized compensation cost related to unvested RSUs and PRSUs, which is expected to be recognized over a weighted-average period of 3.0 years.
Stock-based compensation expense related to stock options, RSUs, PRSUs and the employee stock purchase plan are included in the following line items in our accompanying consolidated statements of operations for the three months ended March 31, 2019 and 2018 (in thousands):
 
March 31, 2019
 
March 31, 2018
Sales and marketing
$
559

 
$
535

Technology and analytics
828

 
597

Processing and servicing
90

 
105

General and administrative
1,606

 
1,973

Total
$
3,083

 
$
3,210

9. Derivatives and Hedging
We are subject to interest rate risk in connection with borrowings under our debt agreements which are subject to variable interest rates. In December 2018 we entered into an interest rate cap, which is a derivative instrument, to manage our interest rate risk on a portion of our variable-rate debt. We do not use derivatives for speculative purposes. The interest rate cap is designated as a cash flow hedge. In exchange for our up-front premium, we would receive variable amounts from a counterparty if interest

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rates rise above the strike rate on the contract. The interest rate cap agreement is for a notional amount of $300 million and a maturity date of January 2021.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income, or AOCI, and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $1.0 million will be reclassified as an increase to interest expense over the next 12 months.
The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2019 and December 31, 2018 (in thousands):
Derivative Type
 
Classification
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
 
 
Interest rate cap agreement
 
Other Assets
$
369

 
$
1,253


The table below presents the effect of cash flow hedge accounting on AOCI as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Amount Recognized in OCI on Derivative:
 
 
 
Interest rate cap agreement
742

 
$
456


The table below presents the effect of our derivative financial instruments on the Income Statement as of three months ended March 31, 2019 and 2018 (in thousands):
 
 
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Interest expense
 
$
(135
)
 
$


10. Commitments and Contingencies
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and loans. We hold cash, cash equivalents and restricted cash in accounts at regulated domestic financial institutions in amounts that exceed or may exceed FDIC insured amounts and at non-U.S. financial institutions where deposited amounts may be uninsured. We believe these institutions to be of acceptable credit quality and we have not experienced any related losses to date.
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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11. Subsequent Events
On April 1, 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, a Montreal-based online small business lender. The purpose of the transaction was to accelerate the growth of our Canadian operations and to enable us to provide a broader range of financing options to Canadian small businesses nationwide. In the transaction, Evolocity contributed its business to a holding company, and we contributed our Canadian business plus cash to that holding company such that we own a 58.5% majority interest in the holding company. The remainder is owned by former Evolocity stockholders.



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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.


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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: (1) our ability to achieve consistent profitability in the future in light of our prior loss history and competition; (2) our growth strategies, including the introduction of new products or features, expanding our platform to other lenders through ODX and maintaining ODX’s current clients, expansion into international markets, business development, acquisition and integration, offering equipment financing and our ability to effectively manage and fund our growth; (3) any material reduction in our interest rate spread and our ability to successfully mitigate this risk through interest rate hedging or raising interest rates or other means; (4) worsening economic conditions that may result in decreased demand for our loans or services and increase our customers’ default rates; (5) supply and demand driven changes in credit and increases in the availability of capital for our competitors that negatively impacts our loan pricing; (6) our ability to accurately assess creditworthiness and forecast and reserve for loan losses; (7) our ability to prevent or discover security breaches, disruption in service and comparable events that could compromise confidential information held in our data systems or adversely impact our ability to service our loans; (8) incorrect or fraudulent information provided to us by customers causing us to misjudge their qualifications to receive a loan; (9) the effectiveness of our efforts to identify, manage and mitigate our credit, market, liquidity, operational and other risks associated with our business and strategic objectives; (10) our ability to continue to innovate or respond to evolving technological changes and protect our intellectual property; (11) our reputation and possible adverse publicity about us or our industry; (12) failure of operating controls, including customer experience degradation, legal expenses, increased regulatory cost, significant fraud losses and vendor risk; and (13) changes in federal or state laws or regulations, or judicial decisions involving licensing or supervision of commercial lenders, interest rate limitations, the enforceability of choice of law provisions in loan agreements, the validity of bank sponsor partnerships, the use of brokers or other significant changes; and other risks, including those described in Part I - Item 1A. Risk Factors in our Annual Report on From 10-K for the year ended December 31, 2018 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.
 
 
 
 
In this report, when we use the terms “OnDeck,” the “Company,” “we,” “us” or “our,” we are referring to On Deck Capital, Inc. and its consolidated subsidiaries, and when we use the term "ODX" we are referring to our wholly-owned subsidiary ODX, LLC, in each case unless the context requires otherwise. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders, including FICO®, a registered trademark of Fair Issac Corporation.

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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 financing 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, fund as fast as 24 hours. We have originated more than $11 billion of loans since we made our first loan in 2007.
We have offered term loans since we made our first loan in 2007, lines of credit since 2013 and have begun offering equipment finance loans this year. Our term loans range from $5,000 to $500,000, have maturities of 3 to 36 months and feature fixed dollar repayments. Our lines of credit range from $6,000 to $100,000, and are generally repayable within 6 or 12 months of the date of the most recent draw. We are generally targeting equipment finance loans of $5,000 to $150,000 with maturities of 2 to 5 years as we develop this offering, although we may offer larger loans in cases we deem appropriate. Qualified customers may have multiple financings with us concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers.
We originate loans throughout the United States, Canada and Australia, although, to date, the majority of our revenue has been generated in the United States. These loans are originated through our direct marketing channel, including direct mail, our outbound sales team, our social media and other online marketing channels; referrals from our strategic partner channel, including small business-focused service providers, payment processors, and other financial institutions; and through independent funding advisor program partners, or FAPs, who advise small businesses on available funding options.
We generate the majority of our revenue through interest income and fees earned on the loans we make to our customers. 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 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 and securitizations. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. As of March 31, 2019, we had $850.2 million of debt principal outstanding and $1.2 billion total borrowing capacity.
Recent Development
On April 1, 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, a Montreal-based online small business lender. The purpose of the transaction was to accelerate the growth of our Canadian operations and to enable us to provide a broader range of financing options to Canadian small businesses nationwide. In the transaction, Evolocity contributed its business to a holding company, and we contributed our Canadian business plus cash to that holding company such that we own a 58.5% majority interest in the holding company. The remainder is owned by former Evolocity stockholders.


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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 or for the Three Months Ended March 31,
 
2019
 
2018
 
(dollars in thousands)
Originations
$
635,506

 
$
590,585

Loan Yield
35.6
%
 
35.6
 %
Cost of Funds Rate
5.4
%
 
6.8
 %
Net Interest Margin
29.5
%
 
27.8
 %
Provision Rate
6.8
%
 
6.1
 %
Reserve Ratio
12.5
%
 
12.0
 %
15+ Day Delinquency Ratio
8.7
%
 
6.7
 %
Net Charge-off Rate
12.2
%
 
10.9
 %
Efficiency Ratio
43.8
%
 
49.3
 %
Adjusted Efficiency Ratio*
41.0
%
 
40.1
 %
Return on Assets
1.9
%
 
(0.8
)%
Adjusted Return On Assets*
2.7
%
 
2.5
 %
Return on Equity
7.7
%
 
(2.9
)%
Adjusted Return On Equity*
10.9
%
 
9.7
 %
*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 loans before their existing term loan is fully repaid. In accordance with industry practice, originations of such repeat term loans are presented as the full renewal loan principal, rather than the net funded amount, which would be the renewal term loan’s principal net of the Unpaid Principal Balance on the existing term loan. Loans referred to, and funded by, our issuing bank partners and later purchased by us are included as part of our originations.
Unpaid Principal Balance represents the total amount of principal outstanding of term loans held for investment, amounts outstanding under lines of credit and the amortized cost of loans purchased from other than issuing bank partners at the end of the period. It excludes net deferred origination costs, allowance for loan losses and any loans sold or held for sale at the end of the period.
Loan Yield
Loan Yield is the rate of return we achieve on loans outstanding during a period. It is calculated as annualized interest income on Loans including amortization of net deferred origination costs divided by average Loans. Annualization is based on 365 days per year and is calendar day-adjusted. Loans represents the sum of loans held for investment and loans held for sale at end of the period.
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 Loan 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 Loan Yield.
Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”
Cost of Funds Rate
Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

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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 interest expense during the period. Annualization is based on 365 days per year and is calendar day-adjusted. Interest income is net of fees on loans held for investment and loans held for sale. Interest expense is the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our debt facilities. Interest Earning Assets represents the sum of Loans plus cash and cash equivalents plus restricted cash.
Reserve Ratio
Reserve Ratio is our allowance for loan losses at the end of the period divided by the Unpaid Principal Balance at the end of the period.
Provision Rate
Provision Rate equals the provision for loan losses for the period divided by originations of loans held for investment for the period. Because we reserve for probable credit losses inherent in the portfolio upon origination, this rate is significantly impacted by the expectation of credit losses for the period’s originations volume. This rate may also be impacted by changes in loss expectations for loans originated prior to the commencement of the period. 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 at the end of the period. 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 daily and weekly 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 at 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 during the period. Net charge-offs are charged-off loans in the period, net of recoveries of prior charged-off loans in the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Efficiency Ratio
Efficiency Ratio is a measure of operating efficiency and is calculated as total operating expense for the period divided by gross revenue for the period.
Adjusted Efficiency Ratio
Adjusted Efficiency Ratio is non-GAAP measure calculated as total operating expense divided by gross revenue for the period, adjusted to exclude (a) stock-based compensation expense and (b) items management deems to be non-representative of operating results or trends, all as shown in the non-GAAP reconciliation presentation of this metric. We believe Adjusted Efficiency Ratio is useful because it provides investors and others with a supplemental operating efficiency metric to present our operating efficiency across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically. Our use of Adjusted Efficiency Ratio has limitations as an analytical tool and you should not consider it in isolation, as a substitute for or superior to our Efficiency Ratio, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation.
Return on Assets
Return on Assets is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total assets for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

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Adjusted Return on Assets
Adjusted Return on Assets is a non-GAAP measure calculated as Adjusted Net Income (Loss) for the period divided by average total assets for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted. We believe Adjusted Return on Assets is useful because it provides investors and others with a supplemental metric to assess our performance across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically, all as shown in the non-GAAP reconciliation presentation of this metric. Our use of Adjusted Return on Assets has limitations as an analytical tool and you should not consider it in isolation, as a substitute for or superior to Return on Assets, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation.
Return on Equity
Return on Equity is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total On Deck Capital, Inc. stockholders’ equity for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.
Adjusted Return on Equity
Adjusted Return on Equity is a non-GAAP measure calculated as Adjusted Net Income (Loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total On Deck Capital, Inc. stockholders’ equity for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted. We believe Adjusted Return on Equity is useful because it provides investors with a supplemental metric to assess our performance across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically, all as shown in the non-GAAP reconciliation presentation of this metric. Our use of Adjusted Return on Equity has limitations as an analytical tool and you should not consider it in isolation, as a substitute or superior to Return on Equity, which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation of Adjusted Net Income (Loss) to net income (loss).



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On Deck Capital, Inc. and Subsidiaries
Consolidated Average Balance Sheets
(in thousands)
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Assets
 
 
 
Cash and cash equivalents
$
48,115

 
$
49,812

Restricted cash
48,182

 
53,007

Loans held for investment
1,203,131

 
983,988

Less: Allowance for loan losses
(145,742
)
 
(114,839
)
Loans held for investment, net
1,057,389

 
869,149

Property, equipment and software, net
16,494

 
20,866

Other assets
38,842

 
14,026

Total assets
$
1,209,022

 
$
1,006,860

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
5,053

 
$
2,853

Interest payable
2,646

 
2,300

Debt
838,867

 
703,307

Accrued expenses and other liabilities
54,679

 
31,410

Total liabilities
901,245

 
739,870

Total On Deck Capital, Inc. stockholders' equity
303,321

 
263,195

Noncontrolling interest
4,456

 
3,795

Total equity
307,777

 
266,990

Total liabilities and equity
$
1,209,022

 
$
1,006,860

 
 
 
 
Memo:
 
 
 
Unpaid Principal Balance
$
1,177,801

 
$
966,327

Interest Earning Assets
$
1,299,428

 
$
1,086,807

Loans
$
1,203,131

 
$
983,988


Average Balance Sheet line items for the period represent the average of the balance at the beginning of the first month of the period and the end of each month in the period.

Non-GAAP Financial Measures
We believe that the non-GAAP metrics can provide useful supplemental measures for period-to-period comparisons of our core business and useful supplemental information to investors and others in understanding and evaluating our operating results. However, non-GAAP metrics are not calculated in accordance with GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these non-GAAP metrics differently than we do. The reconciliations below reconcile each of our non-GAAP metrics to their most comparable respective GAAP metric.


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Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share
Adjusted Net Income (Loss) represents net income (loss) attributable to OnDeck adjusted to exclude the items shown in the table below. 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 (Loss) 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 (Loss) does not reflect the potentially dilutive impact of stock-based compensation; and
Adjusted Net Income (Loss) excludes charges we are required to incur in connection with real estate dispositions, severance obligations, debt extinguishment costs and sales tax refunds.
The following tables present reconciliations of net income (loss) to Adjusted Net Income (Loss) and net income (loss) per share to Adjusted Net Income (Loss) per Share for each of the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except shares and per share data)
Reconciliation of Net Income (Loss) Attributable to OnDeck to Adjusted Net Income (Loss)
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,858

 
$
(1,918
)
Adjustments (after tax):
 
 
 
Stock-based compensation expense
2,436

 
3,210

Real estate disposition charges

 
4,187

Severance and executive transition expenses

 
911

Adjusted Net Income (Loss)
$
8,294

 
$
6,390

 
 
 
 
Adjusted Net Income (Loss) per share:
 
 
 
Basic
$
0.11

 
$
0.09

Diluted
$
0.10

 
$
0.08

Weighted-average common shares outstanding:
 
 
 
Basic
75,539,535

 
73,977,241

Diluted
79,115,037

 
77,352,294

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 March 31,
Reconciliation of Net Income (Loss) per Basic Share to Adjusted Net Income (Loss) per Basic Share
2019
 
2018
 
(per share)
Net income (loss) per basic share attributable to On Deck Capital, Inc. common stockholders
$
0.08

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

 
0.04

  Real estate disposition charges

 
0.06

  Severance and executive transition expenses

 
0.02

Adjusted Net Income (Loss) per Basic Share
$
0.11

 
$
0.09



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Three Months Ended March 31,
Reconciliation of Net Income (Loss) per Diluted Share to Adjusted Net Income (Loss) per Diluted Share
2019
 
2018
 
(per share)
Net income (loss) per diluted share attributable to On Deck Capital, Inc. common stockholders
$
0.07

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

 
0.04

  Real estate disposition charges

 
0.06

  Severance and executive transition expenses

 
0.01

  Adjusted Net Income (Loss) per Diluted Share
$
0.10

 
$
0.08


Adjusted Efficiency Ratio
Adjusted Efficiency Ratio is non-GAAP measure calculated as total operating expense divided by gross revenue for the period, adjusted to exclude (a) stock-based compensation expense and (b) items management deems to be non-representative of operating results or trends.

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Reconciliation of Efficiency Ratio to Adjusted Efficiency Ratio
 
 
 
Total operating expense
$
48,284

 
$
44,551

Gross revenue
$
110,167

 
$
90,280

Efficiency Ratio
43.8
%
 
49.3
%
Adjustments (pre-tax):
 
 
 
Stock-based compensation expense
$
3,083

 
$
3,210

Real estate disposition charges

 
4,187

Severance and executive transition expenses

 
911

Operating expenses less noteworthy items
$
45,201

 
$
36,243

Gross revenue
$
110,167

 
$
90,280

Adjusted Efficiency Ratio
41.0
%
 
40.1
%


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Adjusted Return on Assets
Adjusted Return on Assets represents net income (loss) attributable to OnDeck adjusted to exclude the items shown in the table below divided by average total assets.
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except share and per share data)
Reconciliation of Return on Assets to Adjusted Return on Assets
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,858

 
$
(1,918
)
Average total assets
$
1,209,022

 
$
1,006,860

Return on Assets
1.9
%
 
(0.8
)%
Adjustments (after tax):
 
 
 
Stock-based compensation expense
$
2,436

 
$
3,210

Real estate disposition charges

 
4,187

Severance and executive transition expenses

 
911

Adjusted Net Income (Loss)
$
8,294

 
$
6,390

Average total assets
$
1,209,022

 
$
1,006,860

Adjusted Return on Assets
2.7
%
 
2.5
 %

Adjusted Return on Equity
Adjusted Return on Equity represents net income (loss) attributable to OnDeck adjusted to exclude the items shown in the table below divided by average total On Deck Capital, Inc. stockholders' equity.
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Reconciliation of Return on Equity to Adjusted Return on Equity
 
 
 
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
$
5,858

 
$
(1,918
)
Average OnDeck stockholders' equity
$
303,321

 
$
263,195

Return on Equity
7.7
%
 
(2.9
)%
Adjustments (after tax):
 
 
 
Stock-based compensation expense
$
2,436

 
$
3,210

Real estate disposition charges

 
4,187

Severance and executive transition expenses

 
911

Adjusted Net Income (Loss)
$
8,294

 
$
6,390

Average total On Deck Capital, Inc. stockholders' equity
$
303,321

 
$
263,195

Adjusted Return on Equity
10.9
%
 
9.7
 %



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Table of Contents

Key Factors Affecting Our Performance
2019 Strategic Priorities
Our primary focus remains on prudently growing the business while increasing profitability. The core elements of our growth strategy include:
Expanding the scale and efficiency of our U.S. lending franchise;
Investing in growth adjacencies, including ODX, equipment finance and international; and
Innovating on our core strengths in risk, technology and funding.
We plan to continue to invest significant resources to accomplish these goals. As a result, our total operating expense increased in absolute dollars during 2018 and we anticipate it will continue to increase through 2019. These investments are intended to contribute to our long-term growth, but they may affect our near-term financial results.
In October 2018, we announced the launch of ODX, a wholly-owned subsidiary that focuses on helping banks digitize their small business lending process.  ODX offers a combination of software, analytic insights, and professional services that allow banks to bring their small business lending process online.  At the core of the ODX solution is a modular and scalable SaaS platform that enables banks to either create a fully end-to-end digital experience for their customers or to select certain components for specific functions.  We believe ODX can help banks improve customer experiences, increase portfolio growth, and reduce processing costs.  We expect ODX results to reflect a period of net investment as it builds its infrastructure and capabilities to grow existing and develop additional bank relationships.
Originations
chart-originations.jpg
During the three months ended March 31, 2019 and 2018, we originated $636 million and $591 million of loans, respectively. The increase in originations in the three months ended March 31, 2019 relative to the same period in 2018 was partly driven by the addition of new customers, including those in newly eligible industries, the continued growth of our line of credit originations, and an increase in the volume of renewals from existing customers. The above-mentioned increase of originations was primarily due to growth in our strategic partner channel, and to a lesser extent in the FAP channel, which was partially offset by a decline in the direct channel. The average term loan size was $53 thousand at March 31, 2019, down from an average term loan size of $58 thousand at March 31, 2018. Meanwhile, our aggregate unit volume increased by 15% from the year-ago quarter.
We anticipate that our future growth will continue to depend in part on attracting new customers. As we continue to aggregate data on existing customers and prospective customers, we seek to use that data to optimize our marketing spending and business development efforts to retain existing customers as well as to identify and attract prospective customers. We have historically relied on all three of our channels for customer acquisition. We plan to continue investing in direct marketing, increasing our brand awareness and growing our strategic partnerships.
The following table summarizes the percentage of loans made to all customers originated by our three distribution channels for the periods indicated. From time to time management may proactively adjust our originations channel mix based on market

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conditions. Our direct channel remains our largest channel as a percentage of origination dollars. Our strategic partner channel increased as a percentage of originations from the first quarter of 2018 compared to the first quarter of 2019, while our direct and FAP channel percentage of originations decreased period over period.
 
Three Months Ended March 31,
Percentage of Originations (Dollars)
2019
 
2018
Direct
43.0
%
 
47.9
%
Strategic Partner
29.8
%
 
23.3
%
Funding Advisor
27.2
%
 
28.8
%
We originate term loans and lines of credit to customers who are new to OnDeck as well as to existing customers. New originations are defined as new term loan originations plus all line of credit draws in the period, including subsequent draws on existing lines of credit. Renewal originations include term loans only. We believe our ability to increase adoption of our loans within our existing customer base will be important to our future growth. A component of our future growth will include increasing the length of our customer life cycle by expanding our loan offerings and features. In the three months ended March 31, 2019 and 2018 originations from our repeat customers were 50.4% and 52.1% respectively, of total originations to all customers. We believe our significant number of repeat customers is primarily due to our high levels of customer service and continued improvement in our loan features and services. Repeat customers generally show improvements in several key metrics. From our 2016 customer cohort, customers who took at least three loans grew their revenue and bank balance, respectively, on average by 33.7% and 39.8% from their initial loan to their third loan. Similarly, from our 2017 customer cohort, customers who took at least three loans grew their revenue and bank balance, respectively, on average by 29.5% and 39.9%. In the three months ended March 31, 2019, 30.8% of our origination volume from repeat customers was due to unpaid principal balance rolled from existing loans directly into such repeat originations. In order for a current customer to qualify for a renewal term loan while a term loan payment obligation remains outstanding, the customer must pass the following standards:
the business must be approximately 50% paid down on its existing loan;
the business must be current on its outstanding OnDeck loan with no material delinquency history; and
the business must be fully re-underwritten and determined to be of adequate credit quality.
The extent to which we generate repeat business from our customers will be an important factor in our continued revenue growth and our visibility into future revenue. In conjunction with repeat borrowing activity, many of our customers also tend to increase their subsequent loan size compared to their initial loan size.
The following table summarizes the percentage of loans originated by new and repeat customers. Loans from cross-selling efforts are classified in the table as repeat loans.
 
Three Months Ended March 31,
Percentage of Originations (Dollars)
2019
 
2018
New
49.6
%
 
47.9
%
Repeat
50.4
%
 
52.1
%


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Table of Contents

Loans
chart-loans.jpg

Loans held for investment consist of term loans and lines of credit that require daily or weekly repayments. We have both the ability and intent to hold these loans to maturity. Loans held for investment are carried at amortized cost. The amortized cost of a loan is the unpaid principal balance plus net deferred origination costs. Net deferred origination costs are comprised of certain direct origination costs, net of all loan origination fees received. Loan origination fees include fees charged to the borrower related to origination that increase the loan yield. Loan origination costs are limited to direct costs attributable to originating a loan, including commissions and personnel costs directly related to the time spent by those individuals performing activities related to loan origination. Direct origination costs in excess of loan origination fees received are included in the loan balance and for term loans are amortized over the life of the term loan using the effective interest method, while for lines of credit principal amounts drawn are amortized using the straight line method over 6 months. Loans held for investment increased from $1.0 billion at March 31, 2018 to $1.2 billion at March 31, 2019, reflecting the increase in originations over the 4-quarter period.

Pricing
Customer pricing is determined primarily based on credit risk assessment generated by our proprietary data and analytics engine and cash flow assessments of the customer's ability to repay the loan. Our decision structure also considers the OnDeck Score, FICO® Score, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. OnDeck assesses credit risk across several dimensions, including assessing the stability and credit worthiness of both the business and the personal guarantor and of the borrower's industry. Some of the most important factors assessed relate to the borrower's ability to pay, overall levels of indebtedness, cash flow and business outlook, and their personal and commercial credit history. These factors are assessed against certain minimum requirements in our underwriting standards, as well as through multivariate regressions and statistical models. In addition, general market conditions may broadly influence pricing industry-wide. Loans originated through the direct and strategic partner channels are generally priced lower than loans originated through the funding advisor channel due to the commission structure of the FAP program as well as the relative higher risk profile of the borrowers in the FAP channel.
As of March 31, 2019, our customers pay between 0.004 and 0.043 cents per month in interest for every dollar they borrow under one of our term loans. Historically, our term loans have been primarily quoted in Cents on Dollar, or COD, which reflects the monthly interest paid by a customer to us per dollar borrowed for a loan. Lines of credit have been historically quoted in APR. As of March 31, 2019, the APRs of our term loans outstanding ranged from 11.9% to 99.4% and the APRs of our lines of credit outstanding ranged from 11.0% to 57.9%.
We believe that our product pricing has historically fallen between traditional bank loans to small businesses and certain non-bank small business financing alternatives such as merchant cash advances.

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Table of Contents

 
For the Year
 
For the Quarter
 
2016
2017
2018
 
Q1 2018
Q2 2018
Q3
2018
Q4
2018
Q1 2019
Weighted Average Term Loan "Cents on Dollar" Borrowed, per Month
1.82¢
1.95¢
2.14¢
 
2.08¢
2.15¢
2.17¢
2.17¢
2.19¢
Weighted Average APR - Term Loans and Lines of Credit
41.4%
43.7%
46.9%
 
46.0%
47.2%
47.5%
47.0%
46.9%
The pricing increases in 2017 and 2018 were primarily a reflection of past and expected future increases in the underlying market interest rates that we, like many other lenders in the market, were passing on to our customers. Additionally, in 2017 and 2018 we increased our originations in the funding advisor channel, which typically have higher APRs than the direct and strategic partner channels. The decrease of APR in the first quarter of 2019 compared to the fourth quarter of 2018 reflected the decrease in the originations in the funding advisor channel during the first quarter of 2019.
We consider Loan Yield as a key pricing measure. Loan Yield is the rate of return we earn on loans outstanding during a period. Our Loan Yield differs from APR in that it takes into account deferred origination fees and deferred origination costs. Deferred origination fees include fees paid up front to us by customers when loans are originated and decrease the carrying value of loans, thereby increasing the Loan 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 performing activities related to loan origination and increase the carrying value of loans, thereby decreasing the Loan Yield. Our decision to hold more delinquent loans on balance sheet for collection rather than sell those loans to third parties reduces Loan Yield.
Loan Yield
For the Year
 
For the Quarter
2016
 
2017
 
2018
 
Q1 2018
 
Q2 2018
 
Q3 2018
 
Q4 2018
 
Q1 2019
33.2%
 
33.8%
 
36.2%
 
35.6%
 
36.1%
 
36.5%
 
36.6%
 
35.6%

In addition to individual loan pricing, and the number of days in a period, there are many other factors that can affect Loan Yield, including:
Channel Mix - In general, loans originated from the strategic partner channel have lower Loan Yields than loans from the direct and funding advisor channel. This is primarily due to the strategic partner channel's higher commissions as compared to the direct channel, and lower pricing as compared to the funding advisor channel.
Term Mix - In general, term loans with longer durations have lower annualized interest rates.  Despite lower Loan Yields, total revenues from customers with longer loan durations are typically higher than the revenue of customers with shorter-term, higher Loan Yield loans because total payback is typically higher compared to a shorter length term for the same principal loan amount.  Following the introduction of our 24-month and 36-month term loans, the average length of new term loan originations had increased from 10.8 months for the year ended December 31, 2014 to 13.3 months for the year ended December 31, 2016. As part of our 2017 credit tightening, when appropriate, the offered duration of term loans to certain customers was shortened to control duration risk. For the three months ended March 31, 2019, the average length of new term loan originations was 11.4 months and was consistent to the average length of new term originations for the three months ended March 31, 2018.
Customer Type Mix - In general, loans originated from repeat customers historically have had lower Loan Yields than loans from new customers.  This is primarily because repeat customers typically have a higher OnDeck Score and are therefore deemed to be lower risk.  In addition, repeat customers are more likely to be approved for longer terms than new customers given their established payment history and lower risk profiles. Finally, origination fees can be reduced or waived for repeat customers, contributing to lower Loan Yields. 
Loan Mix - In general, lines of credit have lower Loan Yields than term loans. For the three months ended March 31, 2019, the weighted average line of credit APR was 33.7%, compared to 50.2% for term loans.  Draws by line of credit customers increased to 23.5% of total originations for the three months ended March 31, 2019 from 20.5% in three months ended March 31, 2018.




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Table of Contents

Interest Expense
We source financing principally through debt facilities and securitizations with a diverse group of banks, insurance companies and other institutional lenders. Interest expense consist of the interest expense we incur on our debt, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker fees, origination fees and legal fees and, in applicable periods, certain costs associated with our interest rate hedging activity. Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period. Our Cost of Funds Rate decreased to 5.4% for the three months ended March 31, 2019 as compared to 6.8% for the three months ended March 31, 2018. The decrease in our Cost of Funds Rate was driven by the decrease in our weighted average interest rate on debt outstanding. That decrease was attributable to decreases in interest rate spread (the applicable percentage rate above the benchmark interest rate charged by the lender) which was partially offset by an increase in benchmark rates.
Credit Performance
Credit performance refers to how credit losses on a portfolio of loans performs relative to expectations. Generally speaking, perfect credit performance is a loan that is repaid in full and in accordance with the terms of the agreement, meaning that all amounts due were repaid in full and on time. However, no portfolio is without risk and a certain amount of losses are expected. In this respect, credit performance must be assessed relative to pricing and expectations. Because a certain degree of losses are expected, pricing will be determined with the goal of allowing for estimated losses while still generating the desired rate of return after taking into account those estimated losses. When a portfolio has higher than estimated losses, the desired rate of return may not be achieved, and that portfolio would be considered to have underperformed. Conversely, if the portfolio incurred lower than estimated losses, resulting in a higher than expected rate of return, the portfolio would be considered to have overperformed.
We originate and price our loans expecting that we will incur a degree of losses. When we originate our loans, we record a provision for estimated loan losses. As we gather more data as the portfolio performs, we may increase or decrease that reserve as deemed necessary to reflect our latest loss estimate. Some portions of our loan portfolio may be performing better than expected while other portions may perform below expectations. The net result of the underperforming and overperforming portfolio segments determines if we require an overall increase or decrease to our loan reserve related to those existing loans. A net decrease to the loan reserve related to the existing loans reduces provision expense, while a net increase to the loan reserve increases provision expense.
In accordance with our strategy to expand the range of our loan offerings, over time, we have expanded the offerings of our term loans by making available longer terms and larger amounts. When we begin to offer a new type of loan, we typically extrapolate our existing data to create an initial version of a credit model to permit us to underwrite and price the new type of loan. Thereafter, we begin to collect actual performance data on these new loans which allows us to refine our credit model based on actual data as opposed to extrapolated data. It often takes several quarters after we begin offering a new type of loan for that loan to be originated in sufficient volume to generate a critical mass of performance data. In addition, for loans with longer terms, it takes longer to acquire significant amounts of data because the loans take longer to season.
Each loan cohort is unique. A loan cohort refers to loans originated in the same specified time period. For a variety of reasons, one cohort may exhibit different performance characteristics over time compared to other cohorts at similar months of seasoning.
We evaluate and track portfolio credit performance primarily through four key financial metrics: 15+Day Delinquency Ratio; Net Charge-off Rate; Reserve Ratio; and Provision Rate.

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Table of Contents

Net Charge-off Rate
chart-netchargeoff.jpg
Our Net Charge-off Rate, which is calculated as our annualized net charge-offs for the period divided by the average Unpaid Principal Balance outstanding, increased from 10.9% in three months ended March 31, 2018 to 12.2% in three months ended March 31, 2019, driven by credit expansion, channel mix changes and changes in small business sentiment and behavior. In addition, the Net Charge-off Rate in the three months ended March 31, 2018 was unusually low by historical standards reflecting our decision to tighten our credit policies in the first half of 2017.
Historical Charge-Offs
We illustrate below our historical loan losses by providing information regarding our net lifetime charge-off ratios by cohort. Net lifetime charge-offs are the unpaid principal balance charged off less recoveries of loans previously charged off. A given cohort’s net lifetime charge-off ratio is the cohort’s net lifetime charge-offs through March 31, 2019 divided by the cohort’s total original loan volume. Repeat loans in the denominator include the full renewal loan principal, rather than the net funded amount, which is the renewal loan’s principal net of the unpaid principal balance on the existing loan. Loans are typically charged off after 90 days of nonpayment and 30 days of inactivity. The chart immediately below includes all term loan originations, including loans sold through OnDeck Marketplace or held for sale on our balance sheet.

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Table of Contents

Net Charge-off Ratios by Cohort Through March 31, 2019
chart-chargeoffcohort.jpg
 
For the Year
 
For the Quarter
 
2015
2016
2017
 
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Principal Outstanding as of March 31, 2019 by Period of Origination
—%
0.1%
0.6%
 
2.9%
9.4%
27.2%
58.1%
85.1%

The following chart displays the historical lifetime cumulative net charge-off ratio by cohort for the origination periods shown. The chart reflects all term loan originations, including, if applicable, loans sold through OnDeck Marketplace or held for sale on our balance sheet. The data is shown as a static pool for each cohort, illustrating how the cohort has performed given equivalent months of seasoning.
Given that the originations in the fourth quarter of 2018 and first quarter of 2019 cohorts are relatively unseasoned as of March 31, 2019, these cohorts reflect low lifetime charge-off ratios in the total loans chart below. Further, given our loans are typically charged off after 90 days of nonpayment and 30 days of inactivity, all cohorts reflect minimal charge offs for the first three months in the chart below.


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Table of Contents

Net Cumulative Lifetime Charge-off Ratios
All Loans
chart-cumlifetimechargeoff.jpg
 
 
For the Year
 
For the Quarter
Originations
2015
2016
2017
2018
 
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
All term loans
(in millions)
$
1,704

$
2,052

$
1,697

$
1,972

 
$
469

$
465

$
520

$
517

$
486

Weighted average term (months) at origination
12.4

13.2

12.1

11.8

 
11.8

11.8

11.9

11.8

11.7


Loans we originated in 2016 demonstrated higher than historical net cumulative lifetime charge-off ratios, which were primarily related to loans with longer terms and larger loan sizes. In response and as part of our focus on achieving profitability, during the first and second quarters of 2017 we broadly tightened our credit policies to eliminate originations of loans with expected negative unit economics and to reduce those with expected marginal unit economics.
By design, the broad credit tightening resulted in a significant decline in originations for the second quarter of 2017 and a significant decline in the net cumulative lifetime charge-off ratios for loans originated in that quarter. Subsequent cohorts have incorporated measured and targeted credit optimization designed to bring our net cumulative charge-off ratios in line with business model objectives. Loans originated after the second quarter of 2018 are not yet seasoned enough for meaningful comparison.


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15+ Day Delinquency Ratio
chart-15deliquent.jpg
The 15+ Day Delinquency Ratio is 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 15+ Day Delinquency ratio increased from 6.7% at March 31, 2018 to 8.7% at March 31, 2019 driven by our decision in 2018 to hold and collect delinquent loans longer, credit tests we performed in 2018, and a normalizing credit environment in 2019. The increase in loans 15-89 days past due was primarily driven by the credit testing we performed in 2018, while the increase in loans 90+ days past due primarily reflects the change in our collection strategy.
Reserve Ratio
chart-reserveratio.jpg
The Reserve Ratio, which is the allowance for loan losses divided by the Unpaid Principal Balance as of a specific date, is a comprehensive measurement of our allowance for loan losses because it presents, as a percentage, the portion of the total Unpaid Principal Balance for which an allowance has been recorded. Our Reserve Ratio increased from 12.0% at March 31, 2018, to

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12.5% at March 31, 2019. The increase in the Reserve Ratio reflects higher delinquencies including a greater proportion of late stage delinquencies, ongoing credit testing, and a normalizing credit environment in 2019.
Provision Rate
chart-provisionrate.jpg

The Provision Rate is the provision for loan losses divided by the new originations volume of loans held for investment. Originations include the full renewal loan principal of repeat loans, rather than the net funded amount.
Our Provision Rate increased in the first quarter of 2019 to 6.8% from 6.0% in the fourth quarter of 2018 and 6.1% in the first quarter of 2018. This increase in Provision Rate was primarily driven by the deterioration of loans originated in the second half of 2018, the impact of credit testing and a normalizing credit environment.
Economic Conditions
Changes in the overall economy may impact our business in several ways, including demand for our loans, credit performance, and interest expense.
 
Demand for Our Loans. Generally, we believe a strong economic climate tends to increase demand for our loans as consumer spending increases and small businesses seek to expand and more potential customers may meet our underwriting requirements, although some small businesses may generate enough additional cash flow that they no longer require a loan. In that climate, traditional lenders may also approve loans for a higher percentage of our potential customers.
Credit Performance. In a strong economic climate, our customers may experience improved cash flow and liquidity, which may result in lower loan losses. In a weakening economic climate or recession, the opposite may occur. We factor economic conditions into our loan underwriting analysis and reserves for loan losses, but changes in economic conditions, particularly sudden changes, may affect our actual loan losses. These effects may be partially mitigated by the short-term nature and repayment structure of our loans, which should allow us to react more quickly than if the terms of our loans were longer.
Loan Losses. Our underwriting process is designed to limit our loan losses to levels consistent with our risk tolerance and financial model. Our 2017 loan loss levels were also higher than our financial targets largely because we were taking corrective action throughout the first half of the year to address the higher 2016 loan losses. Our 2018 loan loss levels are consistent with our financial targets. Our overall loan losses are affected by a variety of factors, including external factors such as prevailing economic conditions, general small business sentiment and unusual events such as natural disasters, as well as internal factors such as the accuracy of our loan decisioning, the effectiveness of our underwriting process and the introduction of new loan types or features with which we have less experience to draw upon when forecasting their loss rates. Our loan loss rates may vary in the future.

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Interest Expense. Changes in monetary and fiscal policy may affect generally prevailing interest rates. Interest rates may also change for reasons unrelated to economic conditions. To the extent that interest rates rise, our interest expense will increase and the spread between our Loan Yield and our Cost of Funds Rate may narrow to the extent we cannot correspondingly increase the interest rates we charge our customers or reduce the credit spreads in our borrowing facilities.

Customer Acquisition Costs
Our customer acquisition costs, or CACs, differ depending upon the acquisition channel. CACs in our direct channel include the commissions paid to our internal sales force and expenses associated with items such as direct mail, social media and other online marketing activities. CACs in our strategic partner channel and funding advisor channel include commissions paid. CACs in all channels include new originations as well as renewals. For both the three months ended March 31, 2019 and March 31, 2018 our FAP channel had the highest CAC per unit, while our strategic partner channel had the lowest CAC per unit.
Our CACs, on a combined basis for all three acquisition channels increased for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.  Our CACs evaluated as a percentage of originations, increased for our FAP and direct channel, and decreased slightly for our strategic partner channel period over period. The increase in absolute dollars was primarily attributable to an increase in CACs in our strategic partner channel driven by an increase in external commissions and origination volume.
Increased competition for customer response could require us to incur higher customer acquisition costs and make it more difficult for us to grow our loan originations in both unit and volume for both new as well as repeat customers.

    
Components of Our Results of Operations
Revenue
Interest Income. We generate revenue primarily through interest and origination fees earned on the term loans and lines of credit we originate. Interest income in applicable periods also includes interest income earned on loans held for sale from the time the loan is originated until it is ultimately sold. Interest income also includes miscellaneous interest income such as interest earned on invested cash. Our interest and origination fee revenue is amortized over the term of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are netted with direct origination costs and recorded as a component of loans held for investment or loans held for sale, as appropriate, on our consolidated balance sheets and recognized over the term of the loan. Direct origination costs include costs directly attributable to originating a loan, including commissions, vendor costs and personnel costs directly related to the time spent by those individuals performing activities related to loan origination.
Other Revenue. Other revenue includes fees generated by ODX, marketing fees earned from our issuing bank partner, monthly fees charged to customers for our line of credit, and referral fees from other lenders.
Cost of Revenue
Provision for Loan Losses. Provision for loan losses consists of amounts charged to income during the period to maintain an allowance for loan losses, or ALLL, estimated to be adequate to provide for probable credit losses inherent in our existing loan portfolio. Our ALLL represents our estimate of the credit losses inherent in our portfolio of term loans and lines of credit and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, delinquency levels, our historical charge-off and loss experience and general economic conditions. In general, we expect our aggregate provision for loan losses to increase in absolute dollars as the amount of term loans and lines of credit we originate and hold for investment increases.
Interest Expense. Interest expense consists of the interest expense we incur on our debt, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker fees, origination fees and legal fees and, in applicable periods, certain costs associated with our interest rate hedging activity. Our interest expense and Cost of Funds Rate will vary based on a variety of external factors, such as credit market conditions, general interest rate levels and spreads, as well as OnDeck-specific factors, such as origination volume and credit quality. We expect interest expense will increase in absolute dollars as we increase borrowings to fund portfolio growth.


Operating Expense

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Operating expense consists of sales and marketing, technology and analytics, processing and servicing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of each of these expense categories. All operating expense categories also include an allocation of overhead, such as rent and other overhead, which is based on employee headcount. We believe that continuing to invest in our business is essential to growing the business and maintaining our competitive position, and therefore, we expect the absolute dollars of operating expenses to increase.
Sales and Marketing. Sales and marketing expense consists of salaries and personnel-related costs of our sales and marketing and business development employees, as well as direct marketing and advertising costs, online and offline CACs (such as direct mail, paid search and search engine optimization costs), public relations, promotional event programs and sponsorships, corporate communications and allocated overhead.
Technology and Analytics. Technology and analytics expense co