Item 1. Financial Statements (Unaudited)
ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
74,262
|
|
|
$
|
71,362
|
|
|
Restricted cash
|
44,189
|
|
|
43,462
|
|
|
Loans held for investment
|
1,046,588
|
|
|
952,796
|
|
|
Less: Allowance for loan losses
|
(124,058
|
)
|
|
(109,015
|
)
|
|
Loans held for investment, net
|
922,530
|
|
|
843,781
|
|
|
Property, equipment and software, net
|
16,939
|
|
|
23,572
|
|
|
Other assets
|
14,264
|
|
|
13,867
|
|
|
Total assets
|
$
|
1,072,184
|
|
|
$
|
996,044
|
|
|
Liabilities and equity
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
$
|
4,087
|
|
|
$
|
2,674
|
|
|
Interest payable
|
2,574
|
|
|
2,330
|
|
|
Funding debt
|
755,720
|
|
|
684,269
|
|
|
Corporate debt
|
—
|
|
|
7,985
|
|
|
Accrued expenses and other liabilities
|
32,115
|
|
|
32,730
|
|
|
Total liabilities
|
794,496
|
|
|
729,988
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 78,189,980 and 77,284,266 shares issued and 74,641,004 and 73,822,001 outstanding at June 30, 2018 and December 31, 2017, respectively.
|
391
|
|
|
386
|
|
|
Treasury stock—at cost
|
(8,406
|
)
|
|
(7,965
|
)
|
|
Additional paid-in capital
|
499,347
|
|
|
492,509
|
|
|
Accumulated deficit
|
(218,960
|
)
|
|
(222,833
|
)
|
|
Accumulated other comprehensive loss
|
(334
|
)
|
|
(52
|
)
|
|
Total On Deck Capital, Inc. stockholders' equity
|
272,038
|
|
|
262,045
|
|
|
Noncontrolling interest
|
5,650
|
|
|
4,011
|
|
|
Total equity
|
277,688
|
|
|
266,056
|
|
|
Total liabilities and equity
|
$
|
1,072,184
|
|
|
$
|
996,044
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
92,371
|
|
|
$
|
83,721
|
|
|
$
|
178,740
|
|
|
$
|
170,832
|
|
|
Gain on sales of loans
|
—
|
|
|
260
|
|
|
—
|
|
|
1,744
|
|
|
Other revenue
|
3,247
|
|
|
2,670
|
|
|
7,158
|
|
|
6,967
|
|
|
Gross revenue
|
95,618
|
|
|
86,651
|
|
|
185,898
|
|
|
179,543
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
33,293
|
|
|
32,733
|
|
|
69,586
|
|
|
78,913
|
|
|
Funding costs
|
12,202
|
|
|
11,616
|
|
|
24,023
|
|
|
22,893
|
|
|
Total cost of revenue
|
45,495
|
|
|
44,349
|
|
|
93,609
|
|
|
101,806
|
|
|
Net revenue
|
50,123
|
|
|
42,302
|
|
|
92,289
|
|
|
77,737
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
11,432
|
|
|
15,368
|
|
|
22,030
|
|
|
30,187
|
|
|
Technology and analytics
|
12,799
|
|
|
14,769
|
|
|
23,806
|
|
|
30,212
|
|
|
Processing and servicing
|
5,041
|
|
|
4,826
|
|
|
10,262
|
|
|
9,361
|
|
|
General and administrative
|
16,034
|
|
|
9,590
|
|
|
33,759
|
|
|
21,477
|
|
|
Total operating expense
|
45,306
|
|
|
44,553
|
|
|
89,857
|
|
|
91,237
|
|
|
Income (loss) from operations
|
4,817
|
|
|
(2,251
|
)
|
|
2,432
|
|
|
(13,500
|
)
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
43
|
|
|
318
|
|
|
94
|
|
|
671
|
|
|
Total other expense
|
43
|
|
|
318
|
|
|
94
|
|
|
671
|
|
|
Income (loss) before provision for income taxes
|
4,774
|
|
|
(2,569
|
)
|
|
2,338
|
|
|
(14,171
|
)
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income (loss)
|
4,774
|
|
|
(2,569
|
)
|
|
2,338
|
|
|
(14,171
|
)
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
(1,016
|
)
|
|
(1,071
|
)
|
|
(1,535
|
)
|
|
(1,615
|
)
|
|
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
|
$
|
5,790
|
|
|
$
|
(1,498
|
)
|
|
$
|
3,873
|
|
|
$
|
(12,556
|
)
|
|
Net income (loss) per share attributable to On Deck Capital, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.08
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Diluted
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
74,385,446
|
|
|
72,688,815
|
|
|
74,182,929
|
|
|
72,276,734
|
|
|
Diluted
|
78,288,267
|
|
|
72,688,815
|
|
|
77,786,748
|
|
|
72,276,734
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
4,774
|
|
|
$
|
(2,569
|
)
|
|
$
|
2,338
|
|
|
$
|
(14,171
|
)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
(396
|
)
|
|
36
|
|
|
(509
|
)
|
|
436
|
|
|
Comprehensive income (loss)
|
4,378
|
|
|
(2,533
|
)
|
|
1,829
|
|
|
(13,735
|
)
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interests
|
(178
|
)
|
|
16
|
|
|
(229
|
)
|
|
196
|
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
(1,016
|
)
|
|
(1,071
|
)
|
|
(1,535
|
)
|
|
(1,615
|
)
|
|
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders
|
$
|
5,572
|
|
|
$
|
(1,478
|
)
|
|
$
|
3,593
|
|
|
$
|
(12,316
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ON DECK CAPITAL, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
Net income (loss)
|
2,338
|
|
|
(14,171
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Provision for loan losses
|
69,586
|
|
|
78,913
|
|
|
Depreciation and amortization
|
4,218
|
|
|
5,172
|
|
|
Amortization of debt issuance costs
|
3,756
|
|
|
1,874
|
|
|
Stock-based compensation
|
6,004
|
|
|
6,465
|
|
|
Amortization of net deferred origination costs
|
26,197
|
|
|
24,648
|
|
|
Changes in servicing rights, at fair value
|
188
|
|
|
1,093
|
|
|
Gain on sales of loans
|
—
|
|
|
(1,744
|
)
|
|
Unfunded loan commitment reserve
|
640
|
|
|
267
|
|
|
Gain on extinguishment of debt
|
—
|
|
|
(272
|
)
|
|
Loss on disposal of fixed assets
|
5,713
|
|
|
—
|
|
|
Gain on lease termination
|
(1,481
|
)
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Other assets
|
(1,999
|
)
|
|
374
|
|
|
Accounts payable
|
1,413
|
|
|
298
|
|
|
Interest payable
|
244
|
|
|
284
|
|
|
Accrued expenses and other liabilities
|
1,676
|
|
|
(7,569
|
)
|
|
Originations of loans held for sale
|
—
|
|
|
(41,421
|
)
|
|
Capitalized net deferred origination costs of loans held for sale
|
—
|
|
|
(950
|
)
|
|
Proceeds from sale of loans held for sale
|
—
|
|
|
42,730
|
|
|
Principal repayments of loans held for sale
|
—
|
|
|
1,004
|
|
|
Net cash provided by operating activities
|
118,493
|
|
|
96,995
|
|
|
Cash flows from investing activities
|
|
|
|
|
Purchases of property, equipment and software
|
(695
|
)
|
|
(1,081
|
)
|
|
Proceeds from sale of fixed assets
|
(45
|
)
|
|
—
|
|
|
Capitalized internal-use software
|
(2,464
|
)
|
|
(1,824
|
)
|
|
Originations of term loans and lines of credit, excluding rollovers into new originations
|
(1,009,626
|
)
|
|
(857,841
|
)
|
|
Proceeds from sale of loans held for investment
|
—
|
|
|
10,008
|
|
|
Payments of net deferred origination costs
|
(29,642
|
)
|
|
(21,317
|
)
|
|
Principal repayments of term loans and lines of credit
|
865,537
|
|
|
804,875
|
|
|
Purchase of loans
|
(801
|
)
|
|
(13,730
|
)
|
|
Net cash used in investing activities
|
(177,736
|
)
|
|
(80,910
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
Investments by noncontrolling interests
|
3,403
|
|
|
3,443
|
|
|
Purchase of treasury shares
|
(441
|
)
|
|
(644
|
)
|
|
Proceeds from exercise of stock options and warrants
|
39
|
|
|
347
|
|
|
Issuance of common stock under employee stock purchase plan
|
668
|
|
|
1,246
|
|
|
Proceeds from the issuance of funding debt
|
397,184
|
|
|
105,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
|
Proceeds from the issuance of corporate debt
|
10,000
|
|
|
7,000
|
|
|
Payments of debt issuance costs
|
(3,748
|
)
|
|
(3,284
|
)
|
|
Repayments of funding debt principal
|
(324,828
|
)
|
|
(111,023
|
)
|
|
Repayments of corporate debt principal
|
(18,000
|
)
|
|
(10,000
|
)
|
|
Distribution to noncontrolling interest
|
—
|
|
|
(1,000
|
)
|
|
Net cash provided by (used in) financing activities
|
64,277
|
|
|
(8,748
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(1,407
|
)
|
|
779
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
3,627
|
|
|
8,116
|
|
|
Cash, cash equivalents, and restricted cash at beginning of year
|
114,824
|
|
|
123,986
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
118,451
|
|
|
$
|
132,102
|
|
|
|
|
|
|
|
Reconciliation to amounts on consolidated balance sheets
|
|
|
|
|
Cash and cash equivalents
|
$
|
74,262
|
|
|
$
|
77,936
|
|
|
Restricted cash
|
44,189
|
|
|
54,166
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
118,451
|
|
|
$
|
132,102
|
|
|
|
|
|
|
|
Supplemental disclosure of other cash flow information
|
|
|
|
|
Cash paid for interest
|
$
|
21,445
|
|
|
$
|
21,300
|
|
|
Supplemental disclosures of non-cash investing and financing activities
|
|
|
|
|
Stock-based compensation included in capitalized internal-use software
|
$
|
130
|
|
|
$
|
140
|
|
|
Unpaid principal balance of term loans rolled into new originations
|
$
|
167,687
|
|
|
$
|
138,115
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ON DECK CAPITAL, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
On Deck Capital, Inc.’s principal activity is providing financing to small businesses located throughout the United States, as well as Canada and Australia, through term loans and lines of credit. We use technology and analytics to aggregate data about a business and then quickly and efficiently analyze the creditworthiness of the business using our proprietary credit-scoring model. We originate most of the loans in our portfolio and also purchase loans from an issuing bank partner. We subsequently transfer most of our loan volume into one of our wholly-owned subsidiaries and also have the option to sell them through
OnDeck Marketplace
®
.
Basis of Presentation and Principles of Consolidation
We prepare our condensed consolidated financial statements and footnotes in accordance with accounting principles generally accepted in the United States of America, or GAAP, as contained in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. All intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. When used in these notes to condensed consolidated financial statements, the terms "we," "us," "our" or similar terms refers to On Deck Capital, Inc. and its consolidated subsidiaries.
We consolidate the financial position and results of operations of these entities. The noncontrolling interest, which is presented as a separate component of our consolidated equity, represents the minority owners' proportionate share of the equity of the jointly owned entities. The noncontrolling interest is adjusted for the minority owners' share of the earnings, losses, investments and distributions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Significant estimates include allowance for loan losses, stock-based compensation expense, capitalized software development costs, the useful lives of long-lived assets, servicing assets/liabilities, loans purchased, and valuation allowance for deferred tax assets. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. These estimates and assumptions are inherently subjective in nature; actual results may differ from these estimates and assumptions.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue Recognition
, which creates ASC 606,
Revenue from Contracts with Customers
, and supersedes ASC 605,
Revenue Recognition
. ASU 2014-09 requires revenue to be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services and also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. The FASB subsequently issued numerous amendments including ASU 2016-08 -
Principal versus Agent Considerations
, ASU 2016-10 -
Identifying Performance Obligations and Licensing
, and ASU 2016-12 -
Narrow-Scope Improvements and Practical Expedients
. Each amendment has the same effective date and transition requirements as the new revenue recognition standard. We adopted the new standard effective January 1, 2018 and applied the modified retrospective method of adoption. The adoption of ASC 606 did not have a material effect on our condensed consolidated financial statements and disclosures, nor did it result in a cumulative effect adjustment at the date of initial application.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 clarifies that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents are not part of the entity’s operating, investing, and financing activities, and details of those transfers should not be reported as cash flow activities in the statement of cash flows. It requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the new standard effective January 1, 2018 and no longer present restricted cash as a reconciling item in our consolidated statement of cash flows. For the
six months ended June 30, 2017
, cash flows from investing activities increased
$9.7 million
and the net decrease in cash and cash equivalents of
$1.6 million
became a net increase in cash, cash equivalents and restricted cash of
$8.1 million
.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases
, which creates ASC 842,
Leases
, and supersedes ASC 840,
Leases
. ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
. ASU 2016-13 will change the impairment model and how entities measure credit losses for most financial assets. The standard requires entities to use the new expected credit loss impairment model which will replace the incurred loss model used today. The new guidance will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted, but not prior to December 15, 2018. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.
2. Earnings Per Common Share
Basic and diluted net income (loss) per common share is calculated as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
$
|
4,774
|
|
|
$
|
(2,569
|
)
|
|
$
|
2,338
|
|
|
$
|
(14,171
|
)
|
|
Less: Net Income (loss) attributable to noncontrolling interest
|
(1,016
|
)
|
|
(1,071
|
)
|
|
(1,535
|
)
|
|
(1,615
|
)
|
|
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
|
$
|
5,790
|
|
|
$
|
(1,498
|
)
|
|
$
|
3,873
|
|
|
$
|
(12,556
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
74,385,446
|
|
|
72,688,815
|
|
|
74,182,929
|
|
|
72,276,734
|
|
|
Net income (loss) per common share, basic
|
$
|
0.08
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Effect of dilutive securities
|
3,902,821
|
|
|
—
|
|
|
3,603,819
|
|
|
—
|
|
|
Weighted-average common shares outstanding, diluted
|
78,288,267
|
|
|
72,688,815
|
|
|
77,786,748
|
|
|
72,276,734
|
|
|
Net income (loss) per common share, diluted
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Anti-dilutive securities excluded
|
5,174,846
|
|
|
12,018,301
|
|
|
5,351,219
|
|
|
12,069,791
|
|
The difference between basic and diluted income per common share has been calculated using the Treasury Stock Method based on the assumed exercise of outstanding stock options, the vesting of restricted stock awards, and the issuance of stock under our employee stock purchase plan. The following common share equivalent securities have been included in the calculation of dilutive weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Dilutive Common Share Equivalents
|
|
|
|
|
|
|
|
|
Weighted Average common shares outstanding
|
74,385,446
|
|
|
72,688,815
|
|
|
74,182,929
|
|
|
72,276,734
|
|
|
Restricted stock units
|
1,018,066
|
|
|
—
|
|
|
768,172
|
|
|
—
|
|
|
Stock options
|
2,860,430
|
|
|
—
|
|
|
2,830,587
|
|
|
—
|
|
|
Employee stock purchase program
|
24,325
|
|
|
—
|
|
|
5,060
|
|
|
—
|
|
|
Total dilutive common share equivalents
|
78,288,267
|
|
|
72,688,815
|
|
|
77,786,748
|
|
|
72,276,734
|
|
The following number of shares of common stock were excluded from the calculation of diluted net income per share attributable to common stockholders. Their effect would have been antidilutive for the three and six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Anti-Dilutive Common Share Equivalents
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
22,000
|
|
|
22,000
|
|
|
22,000
|
|
|
22,000
|
|
|
Restricted stock units
|
429,942
|
|
|
2,757,192
|
|
|
600,632
|
|
|
2,757,192
|
|
|
Stock options
|
4,722,904
|
|
|
9,159,794
|
|
|
4,728,587
|
|
|
9,159,794
|
|
|
Employee stock purchase program
|
—
|
|
|
79,315
|
|
|
—
|
|
|
130,805
|
|
|
Total anti-dilutive common share equivalents
|
5,174,846
|
|
|
12,018,301
|
|
|
5,351,219
|
|
|
12,069,791
|
|
The weighted-average exercise price for warrants to purchase
2,007,846
shares of common stock was
$10.70
as of
June 30, 2018
. For
the three months and six months ended June 30, 2018 and 2017
, a warrant to purchase
1,985,846
and
1,985,846
shares of common stock, respectively, was excluded from anti-dilutive common share equivalents as performance conditions had not been met.
3. Loans Held for Investment and Allowance for Loan Losses
Loans Held for Investment and Allowance for Loan Losses
Loans held for investment consisted of the following as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Term loans
|
$
|
871,956
|
|
|
$
|
804,227
|
|
|
Lines of credit
|
154,630
|
|
|
132,012
|
|
|
Total unpaid principal balance
|
1,026,586
|
|
|
936,239
|
|
|
Net deferred origination costs
|
20,002
|
|
|
16,557
|
|
|
Total loans held for investment
|
$
|
1,046,588
|
|
|
$
|
952,796
|
|
During the
six months ended June 30, 2018 and 2017
, we paid
$0.8 million
and
$13.7 million
, respectively, to purchase term loans that we previously sold to a third party.
We include both loans we originate and loans originated by our issuing bank partner and later purchased by us as part of our originations. During
the three months ended June 30, 2018 and 2017
we purchased loans from our issuing bank partner in the amount of
$109.3 million
and
$120.7 million
, respectively. During the
six months ended June 30, 2018 and 2017
we purchased loans from our issuing bank partner in the amount of
$248.5 million
and
$265.7 million
, respectively.
The change in the allowance for loan losses for
the three months and six months ended June 30, 2018 and 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
$
|
118,921
|
|
|
$
|
118,075
|
|
|
$
|
109,015
|
|
|
$
|
110,162
|
|
|
Recoveries of loans previously charged off
|
3,206
|
|
|
4,226
|
|
|
6,551
|
|
|
6,843
|
|
|
Loans charged off
|
(31,362
|
)
|
|
(49,817
|
)
|
|
(61,094
|
)
|
|
(90,701
|
)
|
|
Provision for loan losses
|
33,293
|
|
|
32,733
|
|
|
69,586
|
|
|
78,913
|
|
|
Allowance for loan losses at end of period
|
$
|
124,058
|
|
|
$
|
105,217
|
|
|
$
|
124,058
|
|
|
$
|
105,217
|
|
When loans are charged-off, we typically continue to attempt to recover amounts from the respective borrowers and guarantors, including, when we deem it appropriate, through formal legal action. Alternatively, we may sell previously charged-off loans to a third-party debt collector. The proceeds from these sales are recorded as a component of the recoveries of loans previously charged off. For
the three months ended June 30, 2018 and 2017
, previously charged-off loans sold accounted for
$0.2
million
and
$1.9 million
, respectively, of recoveries of loans previously charged off. For the
six months ended June 30, 2018 and 2017
, previously charged-off loans sold accounted for
$0.7 million
and
$3.8 million
, respectively, of recoveries of loans previously charged off.
As of
June 30, 2018 and December 31, 2017
, our off-balance sheet credit exposure related to the undrawn line of credit balances was
$228.0 million
and
$204.6 million
, respectively. The related reserve on unfunded loan commitments was
$5.1 million
and
$4.4 million
as of
June 30, 2018 and December 31, 2017
, respectively. Net adjustments to the accrual for unfunded loan commitments are included in general and administrative expense.
The following table contains information, on a combined basis, regarding the unpaid principal balance of loans we originated and the amortized cost of loans purchased from third parties other than our issuing bank partner related to current, paying and non-paying delinquent loans as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Current loans
|
$
|
938,369
|
|
|
$
|
850,060
|
|
|
Delinquent: paying (accrual status)
|
52,071
|
|
|
49,252
|
|
|
Delinquent: non-paying (non-accrual status)
|
36,146
|
|
|
36,927
|
|
|
Total
|
$
|
1,026,586
|
|
|
$
|
936,239
|
|
The portion of the allowance for loan losses attributable to current loans was
$81.9 million
and
$74.0 million
as of
June 30, 2018 and December 31, 2017
, respectively, while the portion of the allowance for loan losses attributable to delinquent loans was
$42.2 million
and
$35.0 million
as of
June 30, 2018 and December 31, 2017
, respectively.
The following table shows an aging analysis of the unpaid principal balance related to loans held for investment by delinquency status as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
By delinquency status:
|
|
|
|
|
Current loans
|
$
|
938,369
|
|
|
$
|
850,060
|
|
|
1-14 calendar days past due
|
18,466
|
|
|
23,611
|
|
|
15-29 calendar days past due
|
12,722
|
|
|
12,528
|
|
|
30-59 calendar days past due
|
17,788
|
|
|
22,059
|
|
|
60-89 calendar days past due
|
14,320
|
|
|
12,809
|
|
|
90 + calendar days past due
|
24,921
|
|
|
15,172
|
|
|
Total unpaid principal balance
|
$
|
1,026,586
|
|
|
$
|
936,239
|
|
4. Servicing Rights
As of
June 30, 2018 and December 31, 2017
, the remaining unpaid principal balance of term loans we serviced that previously were sold was $
160.0 million
and
$181.0 million
, respectively.
No
loans were sold during the three and six months ended June 30, 2018. During
the three months and six months ended June 30, 2017
, we sold through OnDeck
Marketplace
loans with an unpaid principal balance of
$9.1 million
and
$50.2 million
, respectively.
For
the three months ended June 30, 2018 and 2017
, we earned
$0.2 million
and
$0.6 million
of servicing revenue, respectively. For the
six months ended June 30, 2018 and 2017
, we earned
$0.5 million
and
$0.9 million
of servicing revenue, respectively.
The following table summarizes the activity related to the fair value of our servicing assets for
the three months and six months ended June 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Fair value at the beginning of period
|
$
|
75
|
|
|
$
|
860
|
|
|
$
|
154
|
|
|
$
|
1,131
|
|
|
Addition:
|
|
|
|
|
|
|
|
|
Servicing resulting from transfers of financial assets
|
11
|
|
|
233
|
|
|
63
|
|
|
663
|
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Change in inputs or assumptions used in the valuation model
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other changes in fair value
(1)
|
(57
|
)
|
|
(392
|
)
|
|
(188
|
)
|
|
(1,093
|
)
|
|
Fair value at the end of period (Level 3)
|
$
|
29
|
|
|
$
|
701
|
|
|
$
|
29
|
|
|
$
|
701
|
|
(1)
Represents changes due to collection of expected cash flows through
June 30, 2018 and 2017
.
5. Debt
The following table summarizes our outstanding debt as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Type
|
|
Maturity Date
|
|
Weighted Average Interest Rate at June 30, 2018
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Funding Debt:
|
|
|
|
|
|
|
|
|
|
|
ODAST II
|
Securitization
|
|
April 2022
(1)
|
|
3.8%
|
|
$
|
225,000
|
|
|
$
|
250,000
|
|
|
ODART
|
Revolving
|
|
March 2019
|
|
4.7%
|
|
87,446
|
|
|
102,058
|
|
|
RAOD
|
Revolving
|
|
November 2018
|
|
5.5%
|
|
92,644
|
|
|
86,478
|
|
|
ODAC
|
Revolving
|
|
May 2019
|
|
9.3%
|
|
73,599
|
|
|
62,350
|
|
|
ODAF
|
Revolving
|
|
February 2020
(2)
|
|
9.2%
|
|
75,000
|
|
|
75,000
|
|
|
PORT II
|
Revolving
|
|
December 2018
|
|
4.7%
|
|
68,442
|
|
|
63,851
|
|
|
LAOD
|
Revolving
|
|
October 2022
(3)
|
|
4.0%
|
|
72,220
|
|
|
—
|
|
|
Other Agreements
|
Various
|
|
Various
(4)
|
|
8.0%
|
|
67,543
|
|
|
50,706
|
|
|
|
|
|
|
|
5.6%
|
|
761,894
|
|
|
690,443
|
|
|
Deferred debt issuance cost
|
|
|
|
|
|
|
(6,174
|
)
|
|
(6,174
|
)
|
|
Total Funding Debt
|
|
|
|
|
|
|
755,720
|
|
|
684,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Debt:
|
|
|
|
|
|
|
|
|
|
|
Square 1
|
Revolving
|
|
October 2018
|
|
6.0%
|
|
—
|
|
|
8,000
|
|
|
Deferred debt issuance cost
|
|
|
|
|
|
|
—
|
|
|
(15
|
)
|
|
Total Corporate Debt
|
|
|
|
|
|
|
—
|
|
|
7,985
|
|
(1)
The period during which new borrowings may be made under this facility expires in March 2020.
(2)
The period during which new borrowings may be made under this debt facility expires in February 2019.
(3)
The period during which new borrowings may be made under this debt facility expires in April 2022.
(4)
Maturity dates range from July 2018 through November 2020.
On April 13, 2018, our wholly-owned subsidiary, Loan Assets of OnDeck, LLC, established a new asset-backed revolving debt facility with a commitment amount of
$100 million
and an interest rate of 1-month LIBOR +
2.0%
. The period during which new borrowings may be made under this facility expires on April 13, 2022 and the final maturity date is October 13, 2022.
On April 17, 2018, our wholly-owned subsidiary, OnDeck Asset Securitization Trust II LLC, issued
$225 million
in initial principal amount of fixed-rate asset backed offered notes in a securitization transaction. The notes were issued in
four
classes
with a weighted average fixed interest rate of
3.75%
. The revolving period expires on March 31, 2020 and the final maturity date is April 2022. The net proceeds of this transaction were used, together with other available funds, to voluntarily prepay in full all
$250 million
of notes from a prior securitization.
On June 27, 2018, our wholly-owned subsidiary, Canada OnDeck Asset Funding, L.P, established a new asset-backed revolving debt facility with a commitment amount of CAD
25 million
and an additional CAD
25 million
of capacity available at the discretion of the lenders. The interest rate for the facility is a commercial paper rate +
4%
. The period during which new borrowings may be made under this facility expires on June 27, 2020 and the final maturity date is June 27, 2021.
On June 28, 2018, OnDeck Funding Trust No. 2, a wholly-owned subsidiary of On Deck Capital Australia Pty Ltd, established a new asset-backed revolving debt facility with a commitment amount of AUD
75 million
. The interest rate for the facility is 1-month BBSW+
3.75%
. The period during which new borrowings may be made under this facility expires on December 28, 2019 and the final maturity date is June 28, 2020.
Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled
$941.2 million
and
$852.3 million
as of
June 30, 2018 and December 31, 2017
, respectively. Our corporate debt facility is collateralized by substantially all of our assets.
6. Fair Value of Financial Instruments
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to the lack of transparency and quantity of transactions related to trades of servicing rights of comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made.
The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
:
|
|
|
|
|
|
|
|
|
Servicing assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
29
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
:
|
|
|
|
|
|
|
|
|
Servicing assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
$
|
154
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
154
|
|
|
$
|
154
|
|
There were no transfers between levels for the
six months ended June 30, 2018
or
December 31, 2017
.
The following tables presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement as of
June 30, 2018 and December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Unobservable input
|
|
Minimum
|
|
Maximum
|
|
Weighted Average
|
|
Servicing assets
|
Discount rate
|
|
30.00
|
%
|
|
30.00
|
%
|
|
30.00
|
%
|
|
|
Cost of service
(1)
|
|
0.04
|
%
|
|
0.13
|
%
|
|
0.13
|
%
|
|
|
Renewal rate
|
|
41.06
|
%
|
|
51.83
|
%
|
|
51.01
|
%
|
|
|
Default rate
|
|
10.63
|
%
|
|
10.92
|
%
|
|
10.67
|
%
|
|
(1)
Estimated cost of servicing a loan as a percentage of unpaid principal balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Unobservable input
|
|
Minimum
|
|
Maximum
|
|
Weighted Average
|
|
Servicing assets
|
Discount rate
|
|
30.00
|
%
|
|
30.00
|
%
|
|
30.00
|
%
|
|
|
Cost of service
(1)
|
|
0.04
|
%
|
|
0.13
|
%
|
|
0.12
|
%
|
|
|
Renewal rate
|
|
41.06
|
%
|
|
51.83
|
%
|
|
49.59
|
%
|
|
|
Default rate
|
|
10.63
|
%
|
|
10.92
|
%
|
|
10.70
|
%
|
|
(1)
Estimated cost of servicing a loan as a percentage of unpaid principal balance.
|
Changes in certain of the unobservable inputs noted above may have a significant impact on the fair value of our servicing asset. The following table summarizes the effect adverse changes in estimate would have on the fair value of the servicing asset as of
June 30, 2018 and December 31, 2017
given a hypothetical changes in default rate and cost to service (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
Servicing Assets
|
|
Default rate assumption:
|
|
|
|
|
Default rate increase of 25%
|
$
|
(9
|
)
|
|
$
|
(40
|
)
|
|
Default rate increase of 50%
|
$
|
(16
|
)
|
|
$
|
(76
|
)
|
|
Cost to service assumption:
|
|
|
|
|
Cost to service increase by 25%
|
$
|
(14
|
)
|
|
$
|
(63
|
)
|
|
Cost to service increase by 50%
|
$
|
(28
|
)
|
|
$
|
(126
|
)
|
Assets and Liabilities Disclosed at Fair Value
Because our loans held for investment and fixed-rate debt are not measured at fair value, we are required to disclose their fair value in accordance with ASC 825. Due to the lack of transparency and comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made. The following tables summarize the carrying value and fair value of our loans held for investment and fixed-rate debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
$
|
922,530
|
|
|
$
|
1,024,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,024,712
|
|
|
Total assets
|
$
|
922,530
|
|
|
$
|
1,024,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,024,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
$
|
271,367
|
|
|
$
|
261,717
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
261,717
|
|
|
Total fixed-rate debt
|
$
|
271,367
|
|
|
$
|
261,717
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
261,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
$
|
843,781
|
|
|
$
|
932,343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
932,343
|
|
|
Total assets
|
$
|
843,781
|
|
|
$
|
932,343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
932,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
$
|
300,706
|
|
|
$
|
293,512
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,512
|
|
|
Total fixed-rate debt
|
$
|
300,706
|
|
|
$
|
293,512
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
293,512
|
|
7. Noncontrolling Interest
The following tables summarize changes in equity, including the equity attributable to noncontrolling interests, for the
six months ended June 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
On Deck Capital, Inc.'s stockholders' equity
|
|
Noncontrolling interest
|
|
Total
|
|
Balance as of January 1, 2018
|
|
262,045
|
|
|
4,011
|
|
|
266,056
|
|
|
Net income (loss)
|
|
3,873
|
|
|
(1,535
|
)
|
|
2,338
|
|
|
Stock based compensation
|
|
5,834
|
|
|
—
|
|
|
5,834
|
|
|
Exercise of options and warrants
|
|
39
|
|
|
—
|
|
|
39
|
|
|
Employee Stock Purchase Plan
|
|
968
|
|
|
—
|
|
|
968
|
|
|
Cumulative translation adjustment
|
|
(280
|
)
|
|
(229
|
)
|
|
(509
|
)
|
|
Purchase of treasury shares
|
|
(441
|
)
|
|
—
|
|
|
(441
|
)
|
|
Investments by noncontrolling interests
|
|
—
|
|
|
3,403
|
|
|
3,403
|
|
|
Balance at June 30, 2018
|
|
272,038
|
|
|
5,650
|
|
|
277,688
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
3,873
|
|
|
(1,535
|
)
|
|
2,338
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
(280
|
)
|
|
(229
|
)
|
|
(509
|
)
|
|
Comprehensive income (loss):
|
|
3,593
|
|
|
(1,764
|
)
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
On Deck Capital, Inc.'s stockholders' equity
|
|
Noncontrolling interest
|
|
Total
|
|
Balance as of January 1, 2017
|
|
$
|
259,525
|
|
|
$
|
4,072
|
|
|
$
|
263,597
|
|
|
Net income (loss)
|
|
(12,556
|
)
|
|
(1,615
|
)
|
|
(14,171
|
)
|
|
Stock based compensation
|
|
6,134
|
|
|
—
|
|
|
6,134
|
|
|
Exercise of options and warrants
|
|
347
|
|
|
—
|
|
|
347
|
|
|
Employee stock purchase plan
|
|
1,618
|
|
|
—
|
|
|
1,618
|
|
|
Cumulative translation adjustment
|
|
240
|
|
|
196
|
|
|
436
|
|
|
Purchase of treasury shares
|
|
(644
|
)
|
|
—
|
|
|
(644
|
)
|
|
Investments by noncontrolling interests
|
|
—
|
|
|
3,443
|
|
|
3,443
|
|
|
Return of equity to noncontrolling interest
|
|
—
|
|
|
(960
|
)
|
|
(960
|
)
|
|
Balance at June 30, 2017
|
|
254,664
|
|
|
5,136
|
|
|
259,800
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
|
(12,556
|
)
|
|
(1,615
|
)
|
|
(14,171
|
)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
240
|
|
|
196
|
|
|
436
|
|
|
Comprehensive income (loss):
|
|
$
|
(12,316
|
)
|
|
$
|
(1,419
|
)
|
|
(13,735
|
)
|
In the third quarter of 2015, we acquired a
67%
interest in an entity, with the remaining
33%
owned by an unrelated third party strategic partner, for the purpose of providing small business loans to customers of the third party. We consolidate the financial position and results of operations of that entity. On June 29, 2017, OnDeck purchased the loans owned by that entity for an immaterial amount. That entity made a liquidating distribution to us of approximately
$2 million
and to the unrelated
third party of approximately
$1 million
representing our respective proportionate share of the equity in that entity. The loan sale and distribution effectively ended the operations of that entity. No material gain or loss was recorded.
8. Stock-Based Compensation and Employee Benefit Plans
Options
The following is a summary of option activity for the
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at January 1, 2018
|
7,918,853
|
|
|
$
|
5.75
|
|
|
—
|
|
|
—
|
|
|
Granted
|
1,031,550
|
|
|
$
|
5.41
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
(380,151
|
)
|
|
$
|
0.55
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
(211,743
|
)
|
|
$
|
8.16
|
|
|
—
|
|
|
—
|
|
|
Expired
|
(93,402
|
)
|
|
$
|
11.81
|
|
|
—
|
|
|
—
|
|
|
Outstanding at June 30, 2018
|
8,265,107
|
|
|
$
|
5.82
|
|
|
6.1
|
|
|
$
|
22,721
|
|
|
Exercisable at June 30, 2018
|
6,393,532
|
|
|
$
|
5.62
|
|
|
5.4
|
|
|
$
|
20,300
|
|
|
Vested or expected to vest as of June 30, 2018
|
8,142,643
|
|
|
$
|
5.82
|
|
|
6.1
|
|
|
$
|
22,521
|
|
Total compensation cost related to nonvested option awards not yet recognized as of
June 30, 2018
was
$4.3 million
and will be recognized over a weighted-average period of approximately
2.0
years. The aggregate intrinsic value of employee options exercised during the
six months ended June 30, 2018 and 2017
was
$2.0 million
and
$3.6 million
, respectively.
Restricted Stock Units
The following table summarizes our Restricted Stock Units ("RSUs") and Performance Restricted Stock Units ("PRSUs") activity during the
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted-Average Grant Date Fair Value
|
|
Unvested at January 1, 2018
|
3,342,640
|
|
|
$
|
6.18
|
|
|
RSUs and PRSUs granted
|
1,037,461
|
|
|
$
|
5.33
|
|
|
RSUs vested
|
(365,198
|
)
|
|
$
|
7.05
|
|
|
RSUs forfeited/expired
|
(328,328
|
)
|
|
$
|
6.42
|
|
|
Unvested at June 30, 2018
|
3,686,575
|
|
|
$
|
5.84
|
|
|
Expected to vest after June 30, 2018
|
3,129,517
|
|
|
$
|
5.94
|
|
As of
June 30, 2018
, there was
$15 million
of unrecognized compensation cost related to unvested RSUs and PRSUs, which is expected to be recognized over a weighted-average period of
2.6
years.
Stock-based compensation expense related to stock options, RSUs, PRSUs and the Employee Stock Purchase Plan ("ESPP") are included in the following line items in our accompanying consolidated statements of operations for
the three months and six months ended June 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Sales and marketing
|
$
|
505
|
|
|
$
|
521
|
|
|
$
|
1,040
|
|
|
$
|
1,292
|
|
|
Technology and analytics
|
657
|
|
|
542
|
|
|
1,253
|
|
|
1,325
|
|
|
Processing and servicing
|
94
|
|
|
157
|
|
|
201
|
|
|
330
|
|
|
General and administrative
|
1,538
|
|
|
1,754
|
|
|
3,510
|
|
|
3,518
|
|
|
Total
|
$
|
2,794
|
|
|
$
|
2,974
|
|
|
$
|
6,004
|
|
|
$
|
6,465
|
|
9. Commitments and Contingencies
Commitments under Operating Leases
Effective February 1, 2018, we terminated our lease obligation for the 12th floor of our New York office which accounted for approximately
32%
of our total New York office space. The lease of the 12th floor was previously scheduled to continue through December 2026. As part of the termination, we paid the landlord a cash surrender fee of approximately
$2.6 million
and recorded a net charge of approximately
$3.2 million
in the quarter ending March 31, 2018. The net charge includes the surrender fee and approximately
$4.0 million
related to the impairment of leasehold improvements and other fixed assets in the surrendered space, which were partially offset by other deferred credits.
On March 29, 2018, we terminated our lease obligation with respect to a portion of our Denver office which accounted for approximately
38%
of our total Denver office space. Our lease of that space was previously scheduled to continue through April 2026. As part of the termination, we paid a surrender fee and related charges of approximately
$900,000
and recorded a net charge of approximately
$1 million
in the quarter ended March 31, 2018. The net charge includes the surrender fee and the impairment of leasehold improvements and other fixed assets in the surrendered space, which were partially offset by other deferred credits.
The net charges related to these lease terminations were allocated to each of our operating expense line items on our condensed consolidated statement of operations with the exception of the aggregate impairment charges of leasehold improvements and other fixed assets in the surrendered spaces of approximately
$5.7 million
which were included in general and administrative expense.
In the aggregate, the termination of these
two
leases reduced future required rental payments by approximately
$23 million
through 2026.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and loans. We hold cash, cash equivalents and restricted cash in accounts at regulated domestic financial institutions in amounts that exceed or may exceed FDIC insured amounts and at non-U.S. financial institutions where deposited amounts may be uninsured. We believe these institutions to be of recognized standing and we have not experienced any related losses to date.
We are exposed to default risk on loans we originate and hold and that we purchase from our issuing bank partner. We perform an evaluation of each customer's financial condition and during the term of the customer's loan(s), we have the contractual right to limit a customer's ability to take working capital loans or other financing from other lenders that may cause a material adverse change in the financial condition of the customer.
Contingencies
From time to time we are subject to legal proceedings and claims in the ordinary course of business. The results of such matters cannot be predicted with certainty. However, we believe that the final outcome of any such current matters will not result in a material adverse effect on our consolidated financial condition, consolidated results of operations or consolidated cash flows.
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes, and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” and Part II - Item 1A. "“Risk Factors” sections of this report for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, objectives, plans and current expectations.
Forward-looking statements appear throughout this report including in Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II - Item 1. Legal Proceedings and Part II - Item 1A. Risk Factors. Forward-looking statements can generally be identified by words such as “will,” “enables,” “expects,”
“
intends,”
“
may,” “allows,”
“
plan,” “continues,” “believes,” “anticipates,” “estimates” or similar expressions.
Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. As such, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and in many cases outside our control. Therefore, you should not rely on any of these forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations.
Important factors that could cause or contribute to such differences include risks relating to: our ability to attract potential customers to our platform and broaden our distribution capabilities and offerings; the degree to which potential customers apply for loans, are approved and borrow from us; anticipated trends, growth rates, loan originations, volume of loans sold and challenges in our business and in the markets in which we operate; the ability of our customers to repay loans and our ability to accurately assess creditworthiness; our ability to adequately forecast and reserve for loan losses; the impact of our decision to tighten our credit policies; our liquidity and working capital requirements,
including the availability and pricing of new debt facilities, extensions and increases to existing debt facilities, increases in our corporate line of credit, securitizations and
OnDeck Marketplace
®
sales to fund our existing operations and planned growth, including the consequences of having inadequate resources to fund additional loans or draws on lines of credit; our reliance on our third-party service providers and the effect on our business of originating loans without third-party funding sources; the impact of
increased utilization of cash or incurred debt to fund originations;
the effect on our business of utilizing cash for voluntary loan purchases from third parties
; the effect on our business of the current credit environment and increases in interest rate benchmarks; our ability to hire and retain necessary qualified employees in a competitive labor market; practices and behaviors of members of our funding advisor channel and other third parties who may refer potential customers to us; changes in our product distribution channel mix and/or our funding mix; our ability to anticipate market needs and develop new and enhanced offerings to meet those needs; lack of customer acceptance of possible increases in interest rates and origination fees on loans; maintaining and expanding our customer base; the impact of competition in our industry and innovation by our competitors; our anticipated and unanticipated growth and growth strategies, including the introduction of new products or features, expanding the availability of our platform to other lenders through OnDeck-as-a-Service and possible expansion in new or existing international markets, and our ability to effectively manage that growth; our reputation and possible adverse publicity about us or our industry; the availability and cost of our funding,
including challenges in replacing existing debt facilities and arranging funding for new types of loans; the impact of funding loans from our cash reserves; locating funding sources for new types of loans that are ineligible for funding under our existing credit or securitization facilities and the possibility of reducing originations of these loan types; the effect of potential selective pricing increases; our expected utilization of OnDeck
Marketplace
and the available OnDeck
Marketplace
premiums
; our failure to anticipate or adapt to future changes in our industry;
the impact of the Tax Cuts and Jobs Act of 2017 and any related Treasury regulations, rules or interpretations, if and when issued;
our ability to offer loans to our small business customers that have terms that are competitive with alternative sources of capital; our ability to issue new loans to existing customers that seek additional capital; the evolution of technology affecting our offerings and our markets; our compliance with applicable local, state and federal and non-U.S. laws, rules and regulations and their application and interpretation, whether existing, modified or new; our ability to adequately protect our intellectual property; the effect of litigation or other disputes to which we are or may be a party; the increased expenses and administrative workload associated with being a public company;
the unenforceability of choice of law provisions in our loan agreements and any potential violation of state interest rate limit laws; our ability to successfully evaluate, consummate and
integrate acquisitions;
failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; the estimates and estimate methodologies used in preparing our consolidated financial statements; the future trading prices of our common stock, and the impact of securities analysts’ reports and shares eligible for future sale on these prices; our ability to prevent or discover security breaches, disruption in service and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of our platform or adversely impact our ability to service our loans
; the impact of our cost rationalization programs; and other risks, including those described in Part I - Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are or will be available on the SEC website at
www.sec.gov
.
Except as required by law, we undertake no duty to update any forward-looking statements. Readers are also urged to carefully review and consider all of the information in this report, as well as the other documents we make available through the SEC’s website.
When we use the terms “OnDeck,” the “Company,” “we,” “us” or “our” in this report, we are referring to On Deck Capital, Inc. and its consolidated subsidiaries unless the context requires otherwise.
Overview
We are a leading online small business lender. We make it efficient and convenient for small businesses to access financing. Enabled by our proprietary technology and analytics, we aggregate and analyze thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately. Small businesses can apply for a term loan or line of credit on our website in minutes and, using our loan decision process, including our proprietary
OnDeck Score
®, we can make a funding decision immediately and, if approved, transfer funds as fast as the same day. Qualified customers may have both a term loan and line of credit concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers. We originated more than
$9 billion
of loans since we made our first loan in 2007.
We generate the majority of our revenue through interest income and fees earned on the loans we make to our customers. Our term loans, which we offer in principal amounts ranging from $5,000 to $500,000 and with maturities of 3 to 36 months, feature fixed dollar repayments. Our lines of credit range from $6,000 to $100,000, and are generally repayable within six months of the date of the most recent draw. We earn interest on the balance outstanding and lines of credit are subject to a monthly fee unless the customer makes a qualifying minimum draw, in which case the fee is waived for the first six months. The balance of our other revenue primarily comes from our servicing and other fee income, most of which consists of marketing fees from our issuing bank partner, fees generated by OnDeck-as-a-Service, and monthly fees earned from lines of credit.
We rely on a diversified set of funding sources for the loans we make to our customers. Our primary source of this financing has historically been debt facilities with various financial institutions. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. As of
June 30, 2018
, we had
$761.9 million
of funding debt principal outstanding and
$1.2 billion
total borrowing capacity under such debt facilities. No loans were sold through OnDeck
Marketplace
during the
six months ended June 30, 2018
. During
the three months and six months ended June 30, 2017
, we sold loans with an unpaid principal balance of
$9.1 million
and
$50.2 million
, respectively. Of the total principal outstanding as of
June 30, 2018
, including our loans held for investment, plus loans sold to OnDeck
Marketplace
purchasers which had a balance remaining as of
June 30, 2018
,
66%
were funded via our debt facilities,
25%
were financed via proceeds raised from our securitization transaction,
8%
were funded via cash on hand and
1%
were funded via OnDeck
Marketplace
purchasers.
We originate loans throughout the United States, Canada and Australia, although, to date, substantially all of our revenue has been generated in the United States. These loans are originated through our direct marketing, including direct mail, social media and other online marketing channels, outbound sales team, referrals from our strategic partners, including banks, payment processors and small business-focused service providers, and through funding advisors who advise small businesses on available funding options.
Key Financial and Operating Metrics
We regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of for the Three Months Ended June 30,
|
|
As of and for the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Originations
|
$586,728
|
|
$464,362
|
|
$1,177,313
|
|
$1,037,377
|
|
Effective Interest Yield
|
36.1
|
%
|
|
33.5
|
%
|
|
35.9
|
%
|
|
33.7
|
%
|
|
Cost of Funds Rate
|
6.6
|
%
|
|
6.2
|
%
|
|
6.7
|
%
|
|
6.1
|
%
|
|
Net Interest Margin*
|
32.0
|
%
|
|
29.3
|
%
|
|
31.7
|
%
|
|
29.8
|
%
|
|
Marketplace
Gain on Sale Rate
|
N/A
|
|
|
2.8
|
%
|
|
N/A
|
|
|
3.4
|
%
|
|
Reserve Ratio
|
12.1
|
%
|
|
11.0
|
%
|
|
12.1
|
%
|
|
11.0
|
%
|
|
Provision Rate
|
5.7
|
%
|
|
7.2
|
%
|
|
5.9
|
%
|
|
8.0
|
%
|
|
15+ Day Delinquency Ratio
|
6.8
|
%
|
|
7.2
|
%
|
|
6.8
|
%
|
|
7.2
|
%
|
|
Net Charge-off Rate
|
11.2
|
%
|
|
18.5
|
%
|
|
11.1
|
%
|
|
16.8
|
%
|
*Non-GAAP measure. Refer to "Non-GAAP Financial Measures" below for an explanation and reconciliation to GAAP.
Originations
Originations represent the total principal amount of the term loans we made during the period, plus the total amount drawn on lines of credit during the period. Many of our repeat term loan customers renew their term loan before their existing term loan is fully repaid. In accordance with industry practice, originations of such repeat term loans are presented as the full renewal loan principal, rather than the net funded amount, which would be the renewal term loan’s principal net of the unpaid principal balance on the existing term loan. Loans referred to, and originated by, our issuing bank partner and later purchased by us are included as part of our originations.
Effective Interest Yield
Effective Interest Yield is the rate of interest we achieve on loans outstanding during a period. It is calculated as our calendar day-adjusted annualized interest income divided by average Loans. Prior to the first quarter of 2018, annualization was based on 252 business days per year. Beginning with the three months ended March 31, 2018, annualization is based on 365 days per year and is calendar day-adjusted. All revisions have been applied retrospectively.
Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination fees and costs. Deferred origination fees include fees paid up front to us by customers when loans are originated and decrease the carrying value of loans, thereby increasing Effective Interest Yield. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination and increase the carrying value of loans, thereby decreasing Effective Interest Yield.
Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”
Cost of Funds Rate
Cost of Funds Rate is the interest expense, fees and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our funding debt facilities. For full years, it is calculated as our funding cost divided by average funding debt outstanding and for interim periods it is calculated as our annualized funding cost for the period divided by average funding debt outstanding. Annualization is based on four quarters per year and is not business or calendar day-adjusted.
Net Interest Margin
Net Interest Margin is calculated as annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding costs during the period. Interest income is net of fees on loans held for investment and held for sale. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination costs as offset by corresponding deferred origination fees. Deferred origination fees include fees paid up front to us by customers when loans are funded. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination.
Funding costs are the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our debt facilities. Annualization is based on 365 days per year and is calendar day-adjusted.
Marketplace Gain on Sale Rate
Marketplace
Gain on Sale Rate equals our gain on sale revenue from loans sold through OnDeck
Marketplace
divided by the carrying value of loans sold, which includes both unpaid principal balance sold and the remaining carrying value of the net deferred origination costs. A portion of any loans sold through OnDeck
Marketplace
may be loans which were initially designated as held for investment upon origination. The portion of such loans sold, if any, in a given period may vary materially depending upon market conditions and other circumstances.
Reserve Ratio
Reserve Ratio is our allowance for loan losses as of the end of the period divided by the Unpaid Principal Balance as of the end of the period.
Provision Rate
Provision Rate equals the provision for loan losses divided by the new originations volume of loans held for investment, net of originations of sales of such loans within the period. Because we reserve for probable credit losses inherent in the portfolio upon origination, this rate is significantly impacted by the expectation of credit losses for the period’s originations volume. This rate may also be impacted by changes in loss estimates for loans originated prior to the commencement of the period.
All other things equal, an increased volume of loan rollovers and line of credit repayments and re-borrowings in a period will reduce the Provision Rate.
The Provision Rate is not directly comparable to the net cumulative lifetime charge-off ratio because (i) the Provision Rate reflects estimated losses at the time of origination while the net cumulative lifetime charge-off ratio reflects actual charge-offs, (ii) the Provision Rate includes provisions for losses on both term loans and lines of credit while the net cumulative lifetime charge-off ratio reflects only charge-offs related to term loans and (iii) the Provision Rate for a period reflects the provision for losses related to all loans held for investment while the net cumulative lifetime charge-off ratio reflects lifetime charge-offs of term loans related to a particular cohort of term loans.
15+ Day Delinquency Ratio
15+ Day Delinquency Ratio equals the aggregate Unpaid Principal Balance for our loans that are 15 or more calendar days past due as of the end of the period as a percentage of the Unpaid Principal Balance. The Unpaid Principal Balance for our loans that are 15 or more calendar days past due includes loans that are paying and non-paying. Because our loans require weekly or daily repayments, excluding weekends and holidays, they may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments.
15+ Day Delinquency Ratio is not annualized, but reflects balances as of the end of the period.
Net Charge-off Rate
Net Charge-off Rate is calculated as our annualized net charge-offs for the period divided by the average Unpaid Principal Balance outstanding. Annualization is based on four quarters per year and is not business or calendar day-adjusted. Net charge-offs are charged-off loans in the period, net of recoveries.
On Deck Capital, Inc. and Subsidiaries
Consolidated Average Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,516
|
|
|
$
|
61,104
|
|
|
$
|
50,128
|
|
|
$
|
60,824
|
|
|
Restricted cash
|
|
54,859
|
|
|
68,530
|
|
|
55,251
|
|
|
58,956
|
|
|
Loans held for investment
|
|
1,025,143
|
|
|
1,003,103
|
|
|
1,003,655
|
|
|
1,020,727
|
|
|
Less: Allowance for loan losses
|
|
(121,899
|
)
|
|
(110,542
|
)
|
|
(118,290
|
)
|
|
(112,355
|
)
|
|
Loans held for investment, net
|
|
903,244
|
|
|
892,561
|
|
|
885,365
|
|
|
908,372
|
|
|
Loans held for sale
|
|
—
|
|
|
561
|
|
|
—
|
|
|
660
|
|
|
Property, equipment and software, net
|
|
17,182
|
|
|
27,776
|
|
|
19,248
|
|
|
28,298
|
|
|
Other assets
|
|
15,782
|
|
|
18,030
|
|
|
14,773
|
|
|
18,940
|
|
|
Total assets
|
|
$
|
1,046,583
|
|
|
$
|
1,068,562
|
|
|
$
|
1,024,765
|
|
|
$
|
1,076,050
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,627
|
|
|
$
|
3,412
|
|
|
$
|
3,269
|
|
|
$
|
3,862
|
|
|
Interest payable
|
|
2,519
|
|
|
2,461
|
|
|
2,407
|
|
|
2,347
|
|
|
Funding debt
|
|
735,123
|
|
|
747,009
|
|
|
715,110
|
|
|
750,761
|
|
|
Corporate debt
|
|
1,976
|
|
|
24,723
|
|
|
2,552
|
|
|
26,114
|
|
|
Accrued expenses and other liabilities
|
|
29,856
|
|
|
31,347
|
|
|
30,795
|
|
|
34,336
|
|
|
Total liabilities
|
|
773,101
|
|
|
808,952
|
|
|
754,133
|
|
|
817,420
|
|
|
|
|
|
|
|
|
|
|
|
|
Total On Deck Capital, Inc. stockholders' equity
|
|
268,060
|
|
|
253,260
|
|
|
265,857
|
|
|
253,271
|
|
|
Noncontrolling interest
|
|
5,422
|
|
|
6,350
|
|
|
4,775
|
|
|
5,359
|
|
|
Total equity
|
|
273,482
|
|
|
259,610
|
|
|
270,632
|
|
|
258,630
|
|
|
Total liabilities and equity
|
|
$
|
1,046,583
|
|
|
$
|
1,068,562
|
|
|
$
|
1,024,765
|
|
|
$
|
1,076,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo:
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
$
|
1,006,133
|
|
|
$
|
984,812
|
|
|
$
|
985,321
|
|
|
$
|
1,001,231
|
|
|
Interest Earning Assets
|
|
$
|
1,006,133
|
|
|
$
|
985,370
|
|
|
$
|
985,321
|
|
|
$
|
1,001,887
|
|
|
Loans
|
|
$
|
1,025,143
|
|
|
$
|
1,003,664
|
|
|
$
|
1,003,654
|
|
|
$
|
1,021,387
|
|
Average Balance Sheet Items for the period represent monthly averages based on the beginning and the ending period balances.
Non-GAAP Financial Measures
We believe that the non-GAAP metrics can provide useful supplemental measures for period-to-period comparisons of our core business and useful supplemental information to investors and others in understanding and evaluating our operating results. However, non-GAAP metrics are not calculated in accordance with GAAP, and should not be considered an alternative to any measures of financial performance calculated and presented in accordance with GAAP. Other companies may calculate these non-GAAP metrics differently than we do. The reconciliations below reconcile each of our non-GAAP metrics to their most comparable respective GAAP metric.
Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share
Adjusted Net Income (Loss) represents our net income (loss) adjusted to exclude net income (loss) attributable to noncontrolling interest, stock-based compensation expense, real estate disposition charges, and severance and executive transition expenses. Stock-based compensation includes employee compensation as well as compensation to third-party service providers. Adjusted Net Income (Loss) per Share is calculated by dividing Adjusted Net Income (Loss) by the weighted average common shares outstanding during the period.
Our use of Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
|
|
|
|
•
|
Adjusted Net Income does not reflect the potentially dilutive impact of stock-based compensation; and
|
|
|
|
|
•
|
Adjusted Net Income excludes charges we are required to incur in connection with real estate dispositions, severance obligations and debt extinguishment costs.
|
The following table presents a reconciliation of net loss to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Reconciliation of Net Income Attributable to OnDeck to Adjusted Net Income (Loss)
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to On Deck Capital, Inc. common stockholders
|
$
|
5,790
|
|
|
$
|
(1,498
|
)
|
|
$
|
3,873
|
|
|
$
|
(12,556
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
2,794
|
|
|
2,974
|
|
|
6,004
|
|
|
6,465
|
|
|
Real estate disposition charges
|
—
|
|
|
—
|
|
|
4,187
|
|
|
—
|
|
|
Severance and executive transition expenses
|
—
|
|
|
3,183
|
|
|
911
|
|
|
3,183
|
|
|
Debt Extinguishment Costs
|
1,384
|
|
|
—
|
|
|
1,384
|
|
|
—
|
|
|
Adjusted Net income (loss)
|
$
|
9,968
|
|
|
$
|
4,659
|
|
|
$
|
16,359
|
|
|
$
|
(2,908
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.13
|
|
|
$
|
0.06
|
|
|
$
|
0.22
|
|
|
$
|
(0.04
|
)
|
|
Diluted
|
$
|
0.13
|
|
|
$
|
0.06
|
|
|
$
|
0.21
|
|
|
$
|
(0.04
|
)
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
74,385,446
|
|
|
72,688,815
|
|
|
74,182,929
|
|
|
72,276,734
|
|
|
Diluted
|
78,288,267
|
|
|
72,688,815
|
|
|
77,786,748
|
|
|
72,276,734
|
|
Below are reconciliations of the Adjusted Net income (loss) per basic and diluted share to the most directly comparable measures calculated in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(per share)
|
|
(per share)
|
|
Net income (loss) per basic share attributable to On Deck Capital, Inc. common shareholders
|
$
|
0.08
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Add/ (Subtract):
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
0.03
|
|
|
0.04
|
|
|
0.08
|
|
|
0.09
|
|
|
Real estate disposition charges
|
—
|
|
|
—
|
|
|
0.06
|
|
|
—
|
|
|
Severance and executive transition expenses
|
—
|
|
|
0.04
|
|
|
0.01
|
|
|
0.04
|
|
|
Debt Extinguishment Costs
|
0.02
|
|
|
—
|
|
|
0.02
|
|
|
—
|
|
|
Adjusted Net income (loss) per basic share
|
$
|
0.13
|
|
|
$
|
0.06
|
|
|
$
|
0.22
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(per share)
|
|
(per share)
|
|
Net income (loss) per diluted share attributable to On Deck Capital, Inc. common shareholders
|
$
|
0.07
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.17
|
)
|
|
Add/ (Subtract):
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
0.04
|
|
|
0.04
|
|
|
0.08
|
|
|
0.09
|
|
|
Real estate disposition charges
|
—
|
|
|
—
|
|
|
0.05
|
|
|
—
|
|
|
Severance and executive transition expenses
|
—
|
|
|
0.04
|
|
|
0.01
|
|
|
0.04
|
|
|
Debt Extinguishment Costs
|
0.02
|
|
|
—
|
|
|
0.02
|
|
|
—
|
|
|
Adjusted Net income (loss) per diluted share
|
$
|
0.13
|
|
|
$
|
0.06
|
|
|
$
|
0.21
|
|
|
$
|
(0.04
|
)
|
Net Interest Margin
Net Interest Margin, is calculated as annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding costs during the period. Interest income is net of fees on loans held for investment and held for sale. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination costs as offset by corresponding deferred origination fees. Deferred origination fees include fees paid up front to us by customers when loans are funded. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination. Funding costs are the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our lending activities across all of our debt facilities. Annualization is based on 365 days per year and is calendar day-adjusted.
Our use of Net Interest Margin has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
|
|
|
|
•
|
Net Interest Margin is the rate of net return we achieve on our Average Interest Earning Assets outstanding during a period. It does not reflect the return from loans sold through OnDeck
Marketplace
, specifically our gain on sale revenue. Similarly, Average Interest Earning Assets does not include the unpaid principal balance of loans sold through OnDeck
Marketplace
. Further, Net Interest Margin does not include servicing revenue related to loans previously sold, fair value adjustments to servicing rights, monthly fees charged to customers for our line of credit, and marketing fees earned from our issuing bank partners, which are recognized as the related services are provided.
|
|
|
|
|
•
|
Funding costs do not reflect interest associated with debt used for corporate purposes.
|
The following table presents a reconciliation of interest income to Net Interest Margin for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Reconciliation of Interest Income to Net Interest Margin (NIM)
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
92,371
|
|
|
$
|
83,721
|
|
|
$
|
178,740
|
|
|
$
|
170,832
|
|
|
Less: Funding costs
|
(12,202
|
)
|
|
(11,616
|
)
|
|
(24,023
|
)
|
|
(22,893
|
)
|
|
Net interest income
|
80,169
|
|
|
72,105
|
|
|
154,717
|
|
|
147,939
|
|
|
Divided by: calendar days in period
|
91
|
|
|
91
|
|
|
181
|
|
|
181
|
|
|
Net interest income per calendar day
|
881
|
|
|
792
|
|
|
855
|
|
|
817
|
|
|
Multiplied by: calendar days per year
|
365
|
|
|
365
|
|
|
365
|
|
|
365
|
|
|
Annualized net interest income
|
321,565
|
|
|
289,080
|
|
|
312,075
|
|
|
298,205
|
|
|
Divided by: Average Interest Earning Assets
|
$
|
1,006,133
|
|
|
$
|
985,370
|
|
|
$
|
985,321
|
|
|
$
|
1,001,887
|
|
|
Net Interest Margin (NIM)
|
32.0
|
%
|
|
29.3
|
%
|
|
31.7
|
%
|
|
29.8
|
%
|
Key Factors Affecting Our Performance
Investment in Long-Term Growth
The core elements of our growth strategy include expanding our financing offerings, acquiring new customers, broadening our distribution capabilities through strategic partners and funding advisors, enhancing our technology, data and analytics capabilities, and extending customer lifetime value. We plan to continue to invest significant resources to accomplish these goals. We anticipate that our total operating expense will increase during 2018 as we plan to continue investing in marketing, technology and analytics, portfolio management and our collection capabilities. These investments are intended to contribute to our long-term growth, but they may affect our near-term operating performance.
Originations
During the three months ended
June 30, 2018
and
June 30, 2017
, we originated
$586.7 million
and
$464.4 million
of loans, respectively. During the six months ended
June 30, 2018
and
June 30, 2017
, we originated
$1.2 billion
and
$1.0 billion
of loans, respectively. The increase in originations for the three and six months ended
June 30, 2018
relative to the same periods in 2017 was driven by the tightening of our credit policies in the first half of 2017 which constrained 2017 originations, and in the current year periods, the addition of new customers, including those in newly credit-eligible industries, and the continued growth of our line of credit originations.
The number of weekends and holidays in a period can impact our business. Many small businesses tend to apply for loans on weekdays, and their businesses may be closed at least part of a weekend and on holidays. In addition, our loan fundings and automated customer loan repayments only occur on weekdays (excluding bank holidays).
We anticipate that our future growth will continue to depend in part on attracting new customers. As we continue to aggregate data on customers and prospective customers, we seek to use that data and our increasing knowledge to optimize our marketing spending to attract these customers as well as to continue to focus our analytics resources on better identifying potential customers. We have historically relied on all three of our channels for customer acquisition but remain focused on growing our direct and strategic partner channels. Collective originations through our direct and strategic partner channels made up
71%
and
76%
of total originations from all customers in the
second quarter
of
2018
and
2017
, respectively. We plan to continue investing in direct marketing and sales, increasing our brand awareness and growing our strategic partnerships.
The following table summarizes the percentage of loans made to all customers originated by our three distribution channels for the periods indicated. From time to time management is required to make judgments to determine customers' appropriate channel distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Percentage of Originations (Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Direct and Strategic Partner
|
71%
|
|
76%
|
|
71%
|
|
73%
|
|
Funding Advisor
|
29%
|
|
24%
|
|
29%
|
|
27%
|
We originate term loans and lines of credit to customers who are new to OnDeck as well as to repeat customers. New originations are defined as new term loan originations plus all line of credit draws in the period, including subsequent draws on existing lines of credit. Renewal originations include term loans only. We believe our ability to increase adoption of our loans within our existing customer base will be important to our future growth. A component of our future growth will include increasing the length of our customer life cycle by expanding our product offerings. In both the
second quarter
of
2018
and
2017
, originations from our repeat customers were approximately
50%
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 2015 customer cohort, customers who took at least three loans grew their revenue and bank balance on average by
32%
and
50%
, respectively, from their initial loan to their third loan. Similarly, from our 2016 customer cohort, customers who took at least three loans grew their revenue and bank balance on average by
30%
and
39%
, respectively. In the
second quarter
of
2018
,
25%
of our origination volume from repeat customers was due to unpaid principal balance rolled from existing loans directly into such repeat originations. In order for a current customer to qualify for a new term loan while a term loan payment obligation remains outstanding, the customer must pass the following standards:
|
|
|
|
•
|
the business must be approximately 50% or more 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 June 30,
|
|
Six Months Ended June 30,
|
|
Percentage of Originations (Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
New
|
50%
|
|
49%
|
|
49%
|
|
50%
|
|
Repeat
|
50%
|
|
51%
|
|
51%
|
|
50%
|
Credit Performance
Credit performance refers to how credit losses on a portfolio of loans performs relative to expectations. A certain amount of losses are expected so credit performance must be assessed relative to pricing and expectations. Pricing will be determined with the goal of allowing for estimated losses while still generating the desired rate of return after taking into account those estimated losses. When a portfolio has higher than estimated losses, the desired rate of return may not be achieved and that portfolio would be considered to have underperformed. Conversely, if the portfolio incurred lower than estimated losses, resulting in a higher than expected rate of return, the portfolio would be considered to have overperformed.
We originate and price our loans based on risk. When we originate our loans, we establish a reserve for estimated loan losses. As we gather more data as the portfolio performs, we may increase or decrease that reserve as deemed necessary to reflect our latest loss estimate. Some portions of our loan portfolio may be performing better than expected while other portions may perform below expectations. The net result of the underperforming and overperforming portfolio segments determines if we require an overall increase or decrease to our loan reserve related to those existing loans.
We evaluate and track credit performance primarily through four key financial metrics: 15+Day Delinquency Ratio; Net Charge-off Rate; Reserve Ratio; and Provision Rate.
15+ Day Delinquency Ratio
The 15+ Day Delinquency Ratio, which 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, decreased from
7.2%
at June 30, 2017 to
6.8%
at June 30, 2018. This decrease is driven by continued improvement in credit, partially offset by the impact of our decision to hold certain delinquent loans for a longer period and more actively pursue collections as opposed to selling these loans earlier in our collection cycle.
During the past two years, the 15+ Day Delinquency Ratio peaked at
7.8%
at March 31, 2017 primarily as a result of 2016 originations of term loans that were 15 months or more in term length at origination. This credit deterioration was internally driven as our credit model was under-predicting losses, in the aggregate, for loans of 15 months or more due to our relatively limited experience at that time with loans of similar terms. We took corrective action during the first half of 2017 including tightening of credit policies used to determine eligibility, pricing, loan size and term. This tightening helped reduce the 15+ Day Delinquency Ratio in the subsequent quarters, which was partially offset by the impact of our decision to hold delinquent loans longer as we continue to pursue collections as opposed to selling our delinquent loans earlier in the collection cycle as we used to do.
Net Charge-off Rate
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, declined from
18.5%
during the three months ended June 30, 2017 to
11.2%
during the three months ended June 30, 2018. Generally, the Net Charge-off Rate is expected to trail the 15+ Day Delinquency Ratio because loans become
delinquent before deteriorating further to charged-off status. The reduction in Net Charge-off Rate is also related to credit improvements since early 2017.
Reserve Ratio
The Reserve Ratio, which is the allowance for loan losses divided by the Unpaid Principal Balance as of the end of a specified period, 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
11.0%
as of June 30, 2017 to
12.1%
as of June 30, 2018. This range of Reserve Ratio is in line with our business model objectives given the characteristics of our loan portfolio and other factors.
Provision Rate
The Provision Rate is the provision for loan losses divided by the new originations volume of loans held for investment, net of originations of sales of such loans within the period. Originations include the full renewal loan principal of repeat loans, rather than the net funded amount.
Our Provision Rates decreased from
7.2%
during the three months ended June 30, 2017 to
5.7%
for the three months ended June 30, 2018. The decline in our Provision Rate primarily reflects our internally driven credit improvements resulting from our previously described credit tightening in the first half of 2017.
In 2017, we tightened our credit policies used to determine eligibility, pricing and loan size for certain customers. As additional seasoning took place on our loans and as our predictive model incorporated newer data, our Provision Rate generally improved during 2017. Our Provision Rate improved in the second quarter of 2018 to
5.7%
as compared to
6.1%
in the first quarter of 2018. The decrease was primarily driven by the improved quality of our portfolio. The Provision Rate for the second quarter of 2018 was generally lower than our historical Provision Rates and may not be indicative of the Provision Rate in future periods.
Pricing
Customer pricing is determined primarily based on the customer’s risk level as measured by our decision structure, including the OnDeck
Score
, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. In addition, general market conditions and the competitive environment may broadly influence pricing industry-wide. Loans originated through the direct and strategic partner channels are generally priced lower than loans originated through the funding advisor channel due to the higher commissions paid to funding advisors.
Our customers generally pay between
$0.003
and $
0.042
per month in interest for every dollar they borrow under one of our term loans, with the actual amount typically driven by the length of term of the particular loan. Historically, our term loans have been primarily quoted in “Cents on Dollar,” or COD, and lines of credit in annual percentage rate, or APR. Given the use case and payback period associated with our shorter term loans, we believe many of our customers prefer to understand pricing on a “dollars in, dollars out” basis and are primarily focused on total payback cost. As of
June 30, 2018
, the APRs of our term loans outstanding ranged from
9.4%
to
99.7%
and the APRs of our lines of credit outstanding ranged from
11.0%
to
63.2%
.
“Cents on Dollar” is the total interest to be paid for each dollar of principal borrowed, excluding the origination fee. We believe our customers tend to evaluate our term loans, many of which have terms of a year or less, primarily based on Cents on Dollar rather than APR. Because APR is calculated on an annualized basis, small differences in loan term can cause large changes in APR, making it harder to understand the total interest cost. We believe Cents on Dollar and similar measures of total interest expense are more useful to a borrower in comparing and evaluating shorter term loans. Historically, we have not used APR as an internal metric to evaluate performance of our business, compensate our employees or measure their performance.
We believe that our product pricing has historically fallen between traditional bank loans to small businesses and certain non-bank small business financing alternatives such as merchant cash advances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
For the Quarter
|
|
|
2013
|
2014
|
2015
|
2016
|
|
Q1 2017
|
Q2 2017
|
Q3 2017
|
Q4 2017
|
Q1 2018
|
Q2 2018
|
|
Weighted Average Term Loan "Cents on Dollar" Borrowed, per Month
|
2.65¢
|
2.32¢
|
1.95¢
|
1.82¢
|
|
1.95¢
|
1.94¢
|
1.96¢
|
1.97¢
|
2.08¢
|
2.15¢
|
|
Weighted Average APR - Term Loans and Lines of Credit
|
63.4%
|
54.4%
|
44.5%
|
41.4%
|
|
44.0%
|
43.2%
|
43.8%
|
43.8%
|
46.0%
|
47.1%
|
The pricing decrease between 2013 and 2016 was due to longer average loan term lengths, increased originations from our lower cost direct and strategic partner channels as a percentage of total originations, the growth of our line of credit product which is priced at a lower APR level than our term loans, the introduction of our customer loyalty program and our efforts to pass savings on to customers. The pricing increases in 2017 and during the
first half
of 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, are passing on to our customers. Additionally, in the past year we have increased our originations in the Funding Advisor channel, which typically have higher APRs than the Direct and Strategic Partner channels.
We consider Effective Interest Yield, or EIY, as a key pricing metric. EIY is the rate of return we achieve on loans outstanding during a period. Our EIY differs from APR in that it takes into account deferred origination fees and deferred origination costs. Deferred origination fees include fees paid up front to us by customers when loans are originated and decrease the carrying value of loans, thereby increasing the EIY. Deferred origination costs are limited to costs directly attributable to originating loans such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to loan origination and increase the carrying value of loans, thereby decreasing EIY.
In addition to individual loan pricing and the number of days in a period, there are many other factors that can affect EIY, including:
|
|
|
|
•
|
Channel Mix
- In general, loans originated from the direct and strategic partner channels have lower EIYs than loans from the funding advisor channel. This is primarily due to the lower pricing of loans in the direct and strategic partner channels, which reflect lower acquisition costs and lower loss rates compared to loans in the funding advisor channel. The direct and strategic partner channels have, in the aggregate, made up
71%
and
76%
of total originations during the
second quarter
ended
June 30,
2018
and
2017
, respectively. We expect the percentage of Originations attributable to the combined direct and strategic partner channels and the funding advisor channel in 2018 to remain generally comparable to 2017 levels.
|
|
|
|
|
•
|
Term Mix
- In general, term loans with longer durations have lower annualized interest rates. Despite lower EIYs, total revenues from customers with longer loan durations are typically higher than the revenue of customers with shorter-term, higher EIY loans because total payback is typically higher compared to a shorter length term for the same principal loan amount. Following the introduction of our 24-month and 36-month term loans, the average length of new term loan originations had increased from
10.8
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
June 30, 2018
, the average length of new term loan originations had decreased to
11.3
months.
|
|
|
|
|
•
|
Customer Type Mix
- In general, loans originated from repeat customers historically have had lower EIYs 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 EIYs.
|
|
|
|
|
•
|
Product Mix
- In general, lines of credit have lower EIYs than term loans. For the
second quarter
of
2018
, the weighted average line of credit APR was
32.5%
, compared to
49.3%
for term loans. Draws by line of credit customers decreased to
20.7%
of total originations in the second quarter of
2018
from
22.0%
in the second quarter of
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Interest Yield
|
|
For the Year
|
|
For the Quarter
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
Q1 2017
|
|
Q2 2017
|
|
Q3 2017
|
|
Q4 2017
|
|
Q1 2018
|
|
Q2 2018
|
|
42.7%
|
|
40.4%
|
|
35.4%
|
|
33.2%
|
|
33.8%
|
|
33.5%
|
|
33.1%
|
|
34.8%
|
|
35.6%
|
|
36.1%
|
Prior to the first quarter of 2018, annualization was based on 252 business days per year. Beginning with the three months ended March 31, 2018, annualization is based on 365 days per year and is calendar day-adjusted. All revisions have been applied retrospectively.
Sale of Whole Loans through OnDeck
Marketplace
We may sell whole loans to institutional investors through OnDeck
Marketplace. Marketplace
originations are defined as loans that are sold through OnDeck
Marketplace
in the period or are held for sale at the end of the period. No loans were sold during the three or six months ended
June 30, 2018
. During the three and six months ended
June 30, 2017
, we sold through OnDeck
Marketplace
loans with an unpaid principal balance of
$9.1 million
and
$50.2 million
, respectively. We have the ability to fund our originations through a variety of funding sources, including OnDeck
Marketplace
. Due to the flexibility of our diversified funding model, management has the ability to exercise judgment to adjust the percentage of term loans originated through OnDeck
Marketplace
considering numerous factors including the premiums, if any, available to us. For the three and six months ended
June 30, 2018
, we elected not to sell any loans through OnDeck
Marketplace.
Although premiums being offered and demand to purchase loans were consistent with prior quarters, our cash position, our available liquidity and our volume of loans eligible for debt financing permitted us to make the strategic decision not to utilize OnDeck
Marketplace.
We may elect to make OnDeck
Marketplace
loan sales in the future to provide us an additional source of liquidity and to maintain active relationships with our institutional loan purchasers. Our use of OnDeck
Marketplace,
regardless of whether premiums increase or decrease, may fluctuate subject to our overall financing and liquidity needs as well as the eligibility to finance new originations under our existing debt facilities.
To the extent our use of OnDeck
Marketplace
as a funding source fluctuates in the future, our gross revenue and net revenue could be materially affected. The sale of whole loans generates gain on sales of loans which is recognized in the period the loan is sold. In contrast, holding loans on balance sheet generates interest income and funding costs over the term of the loans and generally generates a provision for loan loss expense in the period of origination. Typically, over the life of a loan, we generate more total revenue and income from loans we hold on our balance sheet to maturity as compared to loans we sell through OnDeck
Marketplace
.
Our OnDeck
Marketplace
originations come from one of the following two origination sources:
|
|
|
|
•
|
New loans that are designated at origination to be sold, referred to as “Originations of loans held for sale;” and
|
|
|
|
|
•
|
Loans that were originally designated as held for investment that are subsequently designated to be sold at the time of their renewal and which are considered modified loans, referred to as “Originations of loans held for investment, modified."
|
The following table summarizes the initial principal of originations of the aforementioned two sources as it relates to the statement of cash flows during the periods shown for
2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Originations of loans held for sale
|
—
|
|
|
$
|
8,379
|
|
|
—
|
|
|
$
|
41,421
|
|
|
Originations of loans held for investment, modified
|
—
|
|
|
—
|
|
|
—
|
|
|
9,204
|
|
|
Marketplace
originations
|
—
|
|
|
$
|
8,379
|
|
|
—
|
|
|
$
|
50,625
|
|
Customer Acquisition Costs
Our customer acquisition costs, or CACs, differ depending upon the acquisition channel. CACs in our direct channel include the commissions paid to our internal sales force and expenses associated with items such as direct mail, social media and other online marketing activities. CACs in our strategic partner channel include commissions paid to our internal sales force and strategic partners. CACs in our funding advisor channel include commissions paid to our internal sales force and funding advisors. CACs in all channels include new originations as well as renewals.
Our CACs, on a combined basis for all three acquisition channels and evaluated as a percentage of originations, increased for the three months ended
June 30, 2018
as compared to the three months ended
June 30, 2017
. The increase was primarily attributable to an increase in CACs in our funding advisor channel driven by an increase in external commissions and a decrease in the average size loan. The increase was partially offset by a decline in CACs in our direct channel resulting from improvements in customer targeting in the direct channel and a decrease in commission rates.
Increased competition for customer response could require us to incur higher customer acquisition costs and make it more difficult for us to grow our loan originations in both unit and volume for both new as well as repeat customers.
Historical Charge-Offs
We illustrate below our historical loan losses by providing information regarding our net lifetime charge-off ratios by cohort. Net lifetime charge-offs are the Unpaid Principal Balance charged off less recoveries of loans previously charged off, and a given cohort’s net lifetime charge-off ratio equals the cohort’s net lifetime charge-offs through
June 30, 2018
divided by the cohort’s total original loan volume. Repeat loans in the denominator include the full renewal loan principal, rather than the net funded amount, which is the renewal loan’s principal net of the unpaid principal balance on the existing loan. Loans are typically charged off after 90 days of nonpayment. Loans originated and charged off between January 1, 2013 and
June 30, 2018
were on average charged off near the end of their loan term. The chart immediately below includes all term loan originations, regardless of funding source, including loans sold through OnDeck
Marketplace
or held for sale on our balance sheet.
Lifetime Net Charge-off Ratios by Cohort Through
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
For the Quarter
|
|
|
2013
|
2014
|
2015
|
2016
|
|
Q1 2017
|
Q2 2017
|
Q3 2017
|
Q4 2017
|
Q1 2018
|
Q2 2018
|
|
Principal Outstanding as of June 30, 2018 by Period of Origination
|
0.0%
|
0.0%
|
0.0%
|
0.4%
|
|
1.4%
|
3.5%
|
10.5%
|
26.9%
|
56.1%
|
86.5%
|
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, regardless of funding source, including loans sold through our OnDeck
Marketplace
or held for sale on our balance sheet. The data is shown as a static pool for each cohort, illustrating how the cohort has performed given equivalent months of seasoning.
Given that the originations in the first and second quarter of 2018 cohorts are relatively unseasoned as of
June 30, 2018
, these cohorts reflect low lifetime charge-off ratios in the chart below. Further, given our loans are typically charged off after 90 days of nonpayment, all cohorts reflect approximately 0% charge offs for the first three months in the chart below.
Net Cumulative Lifetime Charge-off Ratios
All Loans
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 third quarter of 2017 are not yet seasoned enough for meaningful comparison.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
For the Quarter
|
|
|
Originations
|
2013
|
2014
|
2015
|
2016
|
|
Q1 2017
|
Q2 2017
|
Q3 2017
|
Q4 2017
|
Q1 2018
|
Q2 2018
|
|
All term loans (in millions)
|
$459
|
$1,158
|
$1,874
|
$2,404
|
|
$573
|
$464
|
$531
|
$546
|
$591
|
$587
|
|
Weighted average term (in months)
|
10.0
|
11.2
|
12.4
|
13.2
|
|
12.3
|
11.8
|
12.1
|
12.2
|
11.8
|
11.8
|
Economic Conditions
Changes in the overall economy may impact our business in several ways, including demand for our loans, credit performance, and funding costs.
|
|
|
|
•
|
Demand for Our Loans
. Generally, we believe a strong economic climate tends to increase demand for our loans as consumer spending increases and small businesses seek to expand and more potential customers may meet our underwriting requirements, although some small businesses may generate enough additional cash flow that they no longer require a loan. In that climate, traditional lenders may also approve loans for a higher percentage of our potential customers.
|
|
|
|
|
•
|
Credit Performance
. In a strong economic climate, our customers may experience improved cash flow and liquidity, which may result in lower loan losses. In a weakening economic climate or recession, the opposite may occur. We factor economic conditions into our loan underwriting analysis and reserves for loan losses, but changes in economic conditions, particularly sudden changes, may affect our actual loan losses. These effects may be partially mitigated by the short-term nature and repayment structure of our loans, which should allow us to react more quickly than if the terms of our loans were longer.
|
|
|
|
|
•
|
Loan Losses
. Our underwriting process is designed to limit our loan losses to levels consistent with our risk tolerance and financial model. Our aggregate loan loss rates from 2013 through 2015 were consistent with our financial targets while 2016 was higher than our financial target as we incurred higher than estimated loss rates on certain larger and longer-term loans. Our 2017 loan loss levels were also higher than our financial targets largely because we were taking corrective action throughout the first half of the year to address the higher 2016 loan losses. Our
first half
of 2018 loan loss levels are consistent with our financial targets. Our overall loan losses are affected by a variety of factors, including external factors such as prevailing economic conditions, general small business sentiment and unusual events such as natural disasters, as well as internal factors such as the accuracy of the OnDeck
Score
, the effectiveness of our underwriting process and the introduction of new types of loans, such as our line of credit, with which we have less experience to draw upon when forecasting their loss rates. Our loan loss rates may vary in the future.
|
|
|
|
|
•
|
Funding Costs.
Changes in monetary and fiscal policy may affect generally prevailing interest rates. Interest rates may also change for reasons unrelated to economic conditions. To the extent that interest rates rise, our funding costs will increase and the spread between our Effective Interest Yield and our Cost of Funds Rate may narrow to the extent we cannot correspondingly increase the interest rates we charge our customers or reduce the credit spreads in our borrowing facilities.
|
Components of Our Results of Operations
Revenue
Interest Income
. We generate revenue primarily through interest and origination fees earned on the term loans and lines of credit we originate. Interest income also includes interest income earned on loans held for sale from the time the loan is originated until it is ultimately sold, as well as other miscellaneous interest income. Our interest and origination fee revenue is amortized over the term of the loan using the effective interest method. Origination fees collected but not yet recognized as revenue are netted with direct origination costs and recorded as a component of loans held for investment or loans held for sale, as appropriate, on our consolidated balance sheets and recognized over the term of the loan. Direct origination costs include costs directly attributable to originating a loan, including commissions, vendor costs and personnel costs directly related to the time spent by those individuals performing activities related to loan origination.
Gain on Sales of Loans
. We may sell term loans to third-party institutional investors through OnDeck
Marketplace
. We recognize a gain or loss on the sale of such loans as the difference between the proceeds received, adjusted for initial recognition of servicing assets or liabilities obtained at the date of sale, and the outstanding principal and net deferred origination costs.
Other Revenue
. Other revenue includes servicing revenue related to loans serviced for others, fair value adjustments to servicing rights, platform fees, monthly fees charged to customers for our line of credit, and marketing fees earned from our issuing bank partner, which are recognized as the related services are provided.
Cost of Revenue
Provision for Loan Losses
. Provision for loan losses consists of amounts charged to income during the period to maintain an allowance for loan losses, or ALLL, estimated to be adequate to provide for probable credit losses inherent in our existing loan portfolio. Our ALLL represents our estimate of the credit losses inherent in our portfolio of term loans and lines of credit and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, delinquency levels, our historical charge-off and loss experience and general economic conditions. We expect our aggregate provision for loan losses to increase in absolute dollars as the amount of term loans and lines of credit we originate and hold for investment increases.
Funding Costs
. Funding costs consist of the interest expense we pay on the debt we incur to fund our lending activities, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker fees, origination fees and legal fees. Our Cost of Funds Rate will vary based on a variety of external factors, such as credit market conditions, general interest rate levels and spreads, as well as OnDeck-specific factors, such as origination volume and credit quality. We expect funding costs will continue to increase in absolute dollars as we increase borrowings to fund portfolio growth and expected increases in market interest rates.
Operating Expense
Operating expense consists of sales and marketing, technology and analytics, processing and servicing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of each of these expense categories. The number of employees was
528
,
502
and
475
at
June 30, 2018
, March 31, 2018 and
December 31, 2017
, respectively. All operating expense categories also include an allocation of overhead, such as rent and other overhead, which is based on employee headcount. We believe that continuing to invest in our business is essential to maintaining our competitive position, and therefore, we expect the absolute dollars of operating expenses to increase in 2018, excluding charges related to real estate dispositions, severance and executive transitions and debt extinguishment costs, but to remain relatively constant as a percentage of revenue.
Sales and Marketing
. Sales and marketing expense consists of salaries and personnel-related costs of our sales and marketing and business development employees, as well as direct marketing and advertising costs, online and offline CACs (such as direct mail, paid search and search engine optimization costs), public relations, promotional event programs and sponsorships, corporate communications and allocated overhead. We expect our sales and marketing expense in terms of absolute dollars to remain generally consistent with 2017 levels but to decrease as a percentage of revenue in the near term as we continue to optimize marketing spend.
Technology and Analytics
. Technology and analytics expense consists primarily of the salaries and personnel-related costs of our engineering and product employees as well as our credit and analytics employees who develop our proprietary credit-scoring models. Additional expenses include third-party data acquisition expenses, professional services, consulting costs, expenses related to the development of new types of loans and technologies and maintenance of existing technology assets, amortization of capitalized internal-use software costs related to our technology platform and allocated overhead.
Processing and Servicing
. Processing and servicing expense consists primarily of salaries and personnel related costs of our credit analysis, underwriting, funding, fraud detection, customer service and collections employees. Additional expenses include vendor costs associated with third-party credit checks, lien filing fees and other costs to evaluate, close and fund loans and overhead costs.
General and Administrative
. General and administrative expense consists primarily of salary and personnel-related costs for our executive, finance and accounting, legal and people operations employees. Additional expenses include a provision for the unfunded portion of our lines of credit, consulting and professional fees, insurance, legal, travel, gain or loss on foreign exchange, other corporate expenses and costs associated with the early extinguishment of debt. These expenses also include costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, directors’ and officers’ liability insurance and increased accounting costs.
Other Expense
Interest Expense
. Interest expense consists of interest expense and amortization of deferred debt issuance costs incurred on debt associated with our corporate activities. It does not include interest expense incurred on debt associated with our lending activities.
Provision for Income Taxes
We have not recorded any provision for U.S. federal, state and foreign income taxes. Through December 31, 2016, we have not been required to pay U.S. federal or state income taxes nor any foreign taxes because of our current and accumulated net operating losses. As of
December 31, 2017
, we had
$82.1 million
of federal net operating loss carryforwards and
$81.3 million
of state net operating loss carryforwards available to reduce future taxable income, unless limited due to historical or future ownership changes. The federal net operating loss carryforwards will begin to expire at various dates beginning in 2029.
The Internal Revenue Code of 1986, as amended, or the Code, imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Events which may cause limitation in the amount of the net operating losses and other tax attributes that are able to be utilized in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period, which has occurred as a result of historical ownership changes. Accordingly, our ability to use pre-change net operating loss and certain other attributes are limited as prescribed
under Sections 382 and 383 of the Code. Therefore, if we earn net taxable income in the future, our ability to reduce our federal income tax liability with our existing net operating losses is subject to limitation. Future offerings, as well as other future ownership changes that may be outside our control could potentially result in further limitations on our ability to utilize our net operating loss and tax attributes. Accordingly, achieving profitability may not result in a full release of the valuation allowance.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act that was codified through the issuance of ASU No. 2018-05. This pronouncement permits us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We recorded the impact of the Tax Cuts and Jobs Act for the year ended December 31, 2017, which included a provisional amount associated with our deferred tax asset. We did not revise our initial provisional estimate during the
six months ended June 30, 2018
, and continue to assess the income tax effects of the tax reform. Because a full valuation allowance has been and will continue to be recorded against our deferred tax asset, any change in our provisional amounts is expected to be offset by a corresponding change in our valuation allowance, resulting in no net impact to our results of operations.
As of
December 31, 2017
, a full valuation allowance of
$37.8 million
was recorded against our net deferred tax assets.
Results of Operations
The consolidated statements of operations data as a percentage of gross revenue for each of the periods indicated.
Comparison of the
Three Months Ended June 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
92,371
|
|
|
96.6
|
%
|
|
$
|
83,721
|
|
|
96.6
|
%
|
|
$
|
8,650
|
|
|
10.3
|
%
|
|
Gain on sales of loans
|
—
|
|
|
—
|
|
|
260
|
|
|
0.3
|
|
|
(260
|
)
|
|
(100.0
|
)
|
|
Other revenue
|
3,247
|
|
|
3.4
|
|
|
2,670
|
|
|
3.1
|
|
|
577
|
|
|
21.6
|
|
|
Gross revenue
|
95,618
|
|
|
100.0
|
|
|
86,651
|
|
|
100.0
|
|
|
8,967
|
|
|
10.3
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
33,293
|
|
|
34.8
|
|
|
32,733
|
|
|
37.8
|
|
|
560
|
|
|
1.7
|
|
|
Funding costs
|
12,202
|
|
|
12.8
|
|
|
11,616
|
|
|
13.4
|
|
|
586
|
|
|
5.0
|
|
|
Total cost of revenue
|
45,495
|
|
|
47.6
|
|
|
44,349
|
|
|
51.2
|
|
|
1,146
|
|
|
2.6
|
|
|
Net revenue
|
50,123
|
|
|
52.4
|
|
|
42,302
|
|
|
48.8
|
|
|
7,821
|
|
|
18.5
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
11,432
|
|
|
12.0
|
|
|
15,368
|
|
|
17.7
|
|
|
(3,936
|
)
|
|
(25.6
|
)
|
|
Technology and analytics
|
12,799
|
|
|
13.4
|
|
|
14,769
|
|
|
17.0
|
|
|
(1,970
|
)
|
|
(13.3
|
)
|
|
Processing and servicing
|
5,041
|
|
|
5.3
|
|
|
4,826
|
|
|
5.6
|
|
|
215
|
|
|
4.5
|
|
|
General and administrative
|
16,034
|
|
|
16.8
|
|
|
9,590
|
|
|
11.1
|
|
|
6,444
|
|
|
67.2
|
|
|
Total operating expenses
|
45,306
|
|
|
47.5
|
|
|
44,553
|
|
|
51.4
|
|
|
753
|
|
|
1.7
|
|
|
Income (loss) from operations
|
4,817
|
|
|
4.9
|
|
|
(2,251
|
)
|
|
(2.6
|
)
|
|
7,068
|
|
|
314.0
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
43
|
|
|
—
|
|
|
318
|
|
|
0.4
|
|
|
(275
|
)
|
|
(86.5
|
)
|
|
Total other expense:
|
43
|
|
|
—
|
|
|
318
|
|
|
0.4
|
|
|
(275
|
)
|
|
(86.5
|
)
|
|
Loss before provision for income taxes
|
4,774
|
|
|
4.9
|
|
|
(2,569
|
)
|
|
(3.0
|
)
|
|
7,343
|
|
|
285.8
|
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income (loss)
|
$
|
4,774
|
|
|
4.9
|
%
|
|
$
|
(2,569
|
)
|
|
(3.0
|
)%
|
|
$
|
7,343
|
|
|
285.8
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Revenue:
|
|
|
Interest income
|
$
|
92,371
|
|
|
96.6
|
%
|
|
$
|
83,721
|
|
|
96.6
|
%
|
|
$
|
8,650
|
|
|
10.3
|
%
|
|
Gain on sales of loans
|
—
|
|
|
—
|
|
|
260
|
|
|
0.3
|
|
|
(260
|
)
|
|
(100.0
|
)
|
|
Other revenue
|
3,247
|
|
|
3.4
|
|
|
2,670
|
|
|
3.1
|
|
|
577
|
|
|
21.6
|
|
|
Gross revenue
|
$
|
95,618
|
|
|
100.0
|
%
|
|
$
|
86,651
|
|
|
100.0
|
%
|
|
$
|
8,967
|
|
|
10.3
|
%
|
Gross revenue
increased
by
$9.0 million
, or
10.3%
, from
$86.7 million
to
$95.6 million
. This
increase
was in part attributable to an
$8.7 million
, or
10.3%
,
increase
in interest income, which was primarily driven by the
increase
in weighted average APR on term loans and lines of credit. The increase in interest income was also driven by higher volume of loans being held on our balance sheet as evidenced by the
3%
increase in Average Loans to
$1.03 billion
from
$1 billion
.
Gain on sales of loans
decreased
by
$0.3 million
to zero as no loans were sold in the quarter ending
June 30, 2018
.
Other revenue
increased
by
$0.6 million
, or
21.6%
, primarily attributable to an increase of
$1.1 million
in platform fees. This was offset by a decrease of
$0.5 million
in loan servicing fees which was driven by the decrease in OnDeck
Marketplace
loan sales.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
$
|
33,293
|
|
|
34.8
|
%
|
|
$
|
32,733
|
|
|
37.8
|
%
|
|
$
|
560
|
|
|
1.7
|
%
|
|
Funding costs
|
12,202
|
|
|
12.8
|
|
|
11,616
|
|
|
13.4
|
|
|
586
|
|
|
5.0
|
|
|
Total cost of revenue
|
$
|
45,495
|
|
|
47.6
|
%
|
|
$
|
44,349
|
|
|
51.2
|
%
|
|
$
|
1,146
|
|
|
2.6
|
%
|
Provision for loan losses
increased
by
$0.6 million
, or
1.7%
, from
$32.7 million
to
$33.3 million
. In accordance with GAAP, we recognize revenue on loans over their term, but provide for probable credit losses on the loans at the time they are originated. We then periodically adjust our estimate of those probable credit losses based on actual performance and changes in loss estimates. As a result, we believe that analyzing provision for loan losses as a percentage of originations held for investment, rather than as a percentage of gross revenue, provides more useful insight into our operating performance. Our provision for loan losses as a percentage of originations held for investment, or the Provision Rate,
decreased
from
7.2%
to
5.7%
. The
decrease
in the Provision Rate is largely attributable to the tightening of our credit policies used to determine eligibility, pricing and loan size for certain customers. The tightening of our credit policies began in early 2017.
Funding costs
increased
by
$0.6 million
, or
5.0%
, from
$11.6 million
to
$12.2 million
. As a percentage of gross revenue, funding costs decreased from
13.4%
to
12.8%
. The
increase
in funding costs was primarily attributable to the increase in interest expense and unused fees in our facilities. Interest expense increased due to benchmark interest rates increases, which were partially offset by decreases in the interest rate margins (the applicable percentage rate above the benchmark interest rate charged by the lender) on our outstanding debt. The increase of unused fees was driven by decreased utilization of our more expensive facilities.
Average Funding Debt Outstanding decreased from
$747.0 million
to
$735.1 million
while our Cost of Funds Rate increased from
6.2%
to
6.6%
.
Operating Expense
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Sales and marketing
|
$
|
11,432
|
|
|
12.0
|
%
|
|
$
|
15,368
|
|
|
17.7
|
%
|
|
$
|
(3,936
|
)
|
|
(25.6
|
)%
|
Sales and marketing expense
decreased
by
$3.9 million
, or
26%
, from
$15.4 million
to
$11.4 million
. The
decrease
was primarily attributable to a
$1.4 million
decrease in customer acquisition costs, a decrease of
$1.1 million
in personnel-related costs, and a
$0.3 million
decrease in occupancy costs due to the lease terminations which occurred during the first quarter of 2018. Additionally, syndication program costs decreased by
$0.6 million
, radio/television advertising decreased by
$0.4 million
, and general marketing spend decreased by
$0.2 million
.
Technology and analytics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Technology and analytics
|
$
|
12,799
|
|
|
13.4
|
%
|
|
$
|
14,769
|
|
|
17.0
|
%
|
|
$
|
(1,970
|
)
|
|
(13.3
|
)%
|
Technology and analytics expense
decreased
by
$2.0 million
, or
13%
, from
$14.8 million
to
$12.8 million
. The
decrease
was primarily attributable to a
$1.8 million
decrease in personnel-related costs.
Processing and servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Processing and servicing
|
$
|
5,041
|
|
|
5.3
|
%
|
|
$
|
4,826
|
|
|
5.6
|
%
|
|
$
|
215
|
|
|
4.5
|
%
|
Processing and servicing expense
increased
by
$0.2 million
, or
5%
, from
$4.8 million
to
$5.0 million
. The increase was primarily attributable to an
increase
in costs associated with the increase of originations.
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
General and administrative
|
$
|
16,034
|
|
|
16.8
|
%
|
|
$
|
9,590
|
|
|
11.1
|
%
|
|
$
|
6,444
|
|
|
67.2
|
%
|
General and administrative expense
increased
by
$6.4 million
, or
67%
, from
$9.6 million
to
$16.0 million
. The
increase
was in part attributable to a
$1.8 million
increase in personnel-related costs and by a
$1.5 million
increase in loss on foreign currency transactions and holdings driven by the decreased value of foreign currencies relative to the US Dollar in the
second quarter of 2018
compared to the
second quarter of 2017
. Additionally, we recorded a
$1.4 million
loss on the extinguishment of debt resulting from the write- off of the remaining balance of deferred issuance costs in connection with the prepayment of the ODAST II 2016-1 debt during the second quarter of 2018. Professional fees
increased
by
$0.9 million
due to increased legal and finance consultant spend and recruiting fees increased by
$0.6 million
.
Comparison of the
Six Months Ended June 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
178,740
|
|
|
96.1
|
%
|
|
$
|
170,832
|
|
|
95.1
|
%
|
|
$
|
7,908
|
|
|
4.6
|
%
|
|
Gain on sales of loans
|
—
|
|
|
—
|
|
|
1,744
|
|
|
1.0
|
|
|
(1,744
|
)
|
|
(100.0
|
)
|
|
Other revenue
|
7,158
|
|
|
3.9
|
|
|
6,967
|
|
|
3.9
|
|
|
191
|
|
|
2.7
|
|
|
Gross revenue
|
185,898
|
|
|
100.0
|
|
|
179,543
|
|
|
100.0
|
|
|
6,355
|
|
|
3.5
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
69,586
|
|
|
37.4
|
|
|
78,913
|
|
|
44.0
|
|
|
(9,327
|
)
|
|
(11.8
|
)
|
|
Funding costs
|
24,023
|
|
|
12.9
|
|
|
22,893
|
|
|
12.8
|
|
|
1,130
|
|
|
4.9
|
|
|
Total cost of revenue
|
93,609
|
|
|
50.4
|
|
|
101,806
|
|
|
56.8
|
|
|
(8,197
|
)
|
|
(8.1
|
)
|
|
Net revenue
|
92,289
|
|
|
49.6
|
|
|
77,737
|
|
|
43.2
|
|
|
14,552
|
|
|
18.7
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
22,030
|
|
|
11.9
|
|
|
30,187
|
|
|
16.8
|
|
|
(8,157
|
)
|
|
(27.0
|
)
|
|
Technology and analytics
|
23,806
|
|
|
12.8
|
|
|
30,212
|
|
|
16.8
|
|
|
(6,406
|
)
|
|
(21.2
|
)
|
|
Processing and servicing
|
10,262
|
|
|
5.5
|
|
|
9,361
|
|
|
5.2
|
|
|
901
|
|
|
9.6
|
|
|
General and administrative
|
33,759
|
|
|
18.2
|
|
|
21,477
|
|
|
12.0
|
|
|
12,282
|
|
|
57.2
|
|
|
Total operating expenses
|
89,857
|
|
|
48.4
|
|
|
91,237
|
|
|
50.8
|
|
|
(1,380
|
)
|
|
(1.5
|
)
|
|
Income (loss) from operations
|
2,432
|
|
|
1.3
|
|
|
(13,500
|
)
|
|
(7.6
|
)
|
|
15,932
|
|
|
118.0
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
94
|
|
|
0.1
|
|
|
671
|
|
|
0.4
|
|
|
(577
|
)
|
|
(86.0
|
)
|
|
Total other expense:
|
94
|
|
|
0.1
|
|
|
671
|
|
|
0.4
|
|
|
(577
|
)
|
|
(86.0
|
)
|
|
Loss before provision for income taxes
|
2,338
|
|
|
1.3
|
|
|
(14,171
|
)
|
|
(8.0
|
)
|
|
16,509
|
|
|
116.5
|
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income (loss)
|
$
|
2,338
|
|
|
1.3
|
%
|
|
$
|
(14,171
|
)
|
|
(8.0
|
)%
|
|
$
|
16,509
|
|
|
116.5
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Revenue:
|
|
|
Interest income
|
$
|
178,740
|
|
|
96.1
|
%
|
|
$
|
170,832
|
|
|
95.1
|
%
|
|
$
|
7,908
|
|
|
4.6
|
%
|
|
Gain on sales of loans
|
—
|
|
|
—
|
|
|
1,744
|
|
|
1.0
|
|
|
(1,744
|
)
|
|
(100.0
|
)
|
|
Other revenue
|
7,158
|
|
|
3.9
|
|
|
6,967
|
|
|
3.9
|
|
|
191
|
|
|
2.7
|
|
|
Gross revenue
|
$
|
185,898
|
|
|
100.0
|
%
|
|
$
|
179,543
|
|
|
100.0
|
%
|
|
$
|
6,355
|
|
|
3.5
|
%
|
Gross revenue
increased
by
$6.4 million
, or
3.5%
, from
$179.5 million
to
$185.9 million
. This
increase
was in part attributable to a
$7.9 million
, or
4.6%
,
increase
in interest income, driven by the
increase
in weighted average APR on term loans and lines of credit, which was partially offset by the decrease of Average Loans from
$1.02 billion
to
$1 billion
.
Gain on sales of loans
decreased
by
$1.7 million
to
zero
as no loans were sold in the
six months ended
June 30, 2018
.
Other revenue
increased
by
$0.2 million
, or
2.7%
, primarily attributable to an
increase
of
$1.4 million
in platform fees. This was partially offset by a decrease of
$0.5 million
in marketing fees from our issuing bank partner and a
$0.5 million
decrease in other income due to a payment we received in 2017 for vacating office space in Australia.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
$
|
69,586
|
|
|
37.4
|
%
|
|
$
|
78,913
|
|
|
44.0
|
%
|
|
$
|
(9,327
|
)
|
|
(11.8
|
)%
|
|
Funding costs
|
24,023
|
|
|
12.9
|
|
|
22,893
|
|
|
12.8
|
|
|
1,130
|
|
|
4.9
|
|
|
Total cost of revenue
|
$
|
93,609
|
|
|
50.4
|
%
|
|
$
|
101,806
|
|
|
56.8
|
%
|
|
$
|
(8,197
|
)
|
|
(8.1
|
)%
|
Provision for loan losses
. Provision for loan losses
decreased
by
$9.3 million
, or
11.8%
, from
$78.9 million
to
$69.6 million
. In accordance with GAAP, we recognize revenue on loans over their term, but provide for probable credit losses on the loans at the time they are originated. We then periodically adjust our estimate of those probable credit losses based on actual performance and changes in loss estimates. As a result, we believe that analyzing provision for loan losses as a percentage of originations held for investment, rather than as a percentage of gross revenue, provides more useful insight into our operating performance. Our provision for loan losses as a percentage of originations held for investment, or the Provision Rate, decreased from
8.0%
to
5.9%
. The
decrease
in the Provision Rate is largely attributable to the tightening of our credit policies used to determine eligibility, pricing and loan size for certain customers. The tightening of our credit policies began in early 2017.
Funding costs
. Funding costs
increased
by
$1.1 million
, or
4.9%
, from
$22.9 million
to
$24 million
. As a percentage of gross revenue, funding costs
increased
from
12.8%
to
12.9%
. The
increase
in funding costs was primarily attributable to the increases of interest expense, unused fees on our facilities and interest expense from the amortization of deferred debt issuance fees. Interest expense increased due to benchmark interest rates increases, which were partially offset by decreases in the interest rate margins (the applicable percentage rate above the benchmark interest rate charged by the lender) on our outstanding debt. The increase of unused fees was driven by decreased utilization of our more expensive facilities. We increased the borrowing
capacity of several debt facilities during 2017, which led to an increase in the unused portion of our facilities in the first half of 2018. Additionally, interest expense from the amortization of our deferred debt issuance costs increased, as we incurred additional deferred debt issuance costs when amending several of the facilities during 2017. The Average Funding Debt Outstanding decreased from
$750.8 million
to
$715.1 million
while our Cost of Funds Rate increased from
6.1%
to
6.7%
.
Operating Expense
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Sales and marketing
|
$
|
22,030
|
|
|
11.9
|
%
|
|
$
|
30,187
|
|
|
16.8
|
%
|
|
$
|
(8,157
|
)
|
|
(27.0
|
)%
|
Sales and marketing expense
decreased
by
$8.2 million
, or
27%
, from
$30.2 million
to
$22.0 million
. The
decrease
was primarily attributable to a
$2.8 million
decrease in customer acquisition costs, a decrease of
$1.7 million
in personnel-related costs, and a
$0.9 million
decrease in occupancy costs due to the lease terminations which occurred during the first quarter of 2018. Additionally, radio/television advertising decreased by
$0.9 million
, syndication program costs decreased by
$0.9 million
and general marketing spend decreased by
$0.4 million
.
Technology and analytics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Technology and analytics
|
$
|
23,806
|
|
|
12.8
|
%
|
|
30,212
|
|
|
16.8
|
%
|
|
$
|
(6,406
|
)
|
|
(21.2
|
)%
|
Technology and analytics expense
decreased
by
$6.4 million
, or
21.2%
, from
$30.2 million
to
$23.8 million
. The
decrease
was primarily attributable to a
$5.1 million
decrease in personnel-related costs. Additionally, there was a
$0.7 million
decrease in occupancy costs due to the lease terminations which occurred during the first quarter of 2018, a
$0.8 million
decrease in technology depreciation and a
$0.4 million
decrease in credit marketing data expense. This was offset by a
$0.6 million
increase in technology consultant spend.
Processing and servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
Processing and servicing
|
$
|
10,262
|
|
|
5.5
|
%
|
|
$
|
9,361
|
|
|
5.2
|
%
|
|
$
|
901
|
|
|
9.6
|
%
|
Processing and servicing expense
increased
by
$0.9 million
, or
9.6%
, from
$9.4 million
to
$10.3 million
. The
increase
was primarily attributable to an increase in costs associated with the increase of originations.
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
2018
|
|
2017
|
|
Change
|
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage of
Gross
Revenue
|
|
Amount
|
|
Percentage
|
|
|
(dollars in thousands)
|
|
General and administrative
|
$
|
33,759
|
|
|
18.2
|
%
|
|
$
|
21,477
|
|
|
12.0
|
%
|
|
$
|
12,282
|
|
|
57.2
|
%
|
General and administrative expense
increased
by
$12.3 million
, or
57.2%
, from
$21.5 million
to
$33.8 million
. The
increase
was primarily attributable to a
$5.7 million
charge related to the lease terminations in the New York and Denver offices. We also had a
$2.3 million
increase in personnel-related costs. Additionally, we recorded a
$1.4 million
of debt extinguishment costs to write off the remaining balance of deferred issuance fees in connection with the extinguishment of the ODAST II 2016-1 debt that was prepaid during the second quarter of 2018. The loss related to foreign currency transactions and holdings increased in the
six months ended June 30, 2018
,
increasing
expenses by
$2.5 million
, driven by the driven by the decreased value in exchange rates relative to the US Dollar in the
second quarter of 2018
compared to the
second quarter of 2017
. Consulting fees also increased by
$0.6 million
Liquidity and Capital Resources
During the
second quarter of 2018
, we originated
$586.7 million
of loans and during the
six months ended June 30, 2018
we originated
$1.2 billion
of loans utilizing a diversified set of funding sources, including cash on hand, third-party lenders (through debt facilities and securitization), and the cash generated by our operating, investing and financing activities.
Cash on Hand
At
June 30, 2018
, we had approximately
$74 million
of cash on hand to fund our future operations compared to approximately
$71 million
at
December 31, 2017
.
Current Debt Facilities
The following table summarizes our current debt facilities available for funding our lending activities, referred to as funding debt, and our operating expenditures, referred to as corporate debt, as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
Date
|
|
Weighted
Average
Interest Rate at June 30, 2018
|
|
Borrowing
Capacity
|
|
Principal
Outstanding
|
|
|
|
|
|
|
(in millions)
|
|
Funding Debt:
|
|
|
|
|
|
|
OnDeck Asset Securitization Trust II LLC
|
April 2022
(1)
|
|
3.8%
|
|
$
|
225.0
|
|
|
$
|
225.0
|
|
|
OnDeck Account Receivables Trust 2013-1 LLC
|
March 2019
|
|
4.7%
|
|
214.1
|
|
|
87.4
|
|
|
Receivable Assets of OnDeck, LLC
|
November 2018
|
|
5.5%
|
|
119.7
|
|
|
92.6
|
|
|
On Deck Asset Company, LLC
|
May 2019
|
|
9.3%
|
|
100.0
|
|
|
73.6
|
|
|
OnDeck Asset Funding I, LLC
|
February 2020
(2)
|
|
9.2%
|
|
150.0
|
|
|
75.0
|
|
|
Prime OnDeck Receivable Trust II, LLC
|
December 2018
|
|
4.7%
|
|
125.0
|
|
|
68.4
|
|
|
Loan Assets of OnDeck, LLC
|
October 2022
(3)
|
|
4.0%
|
|
100.0
|
|
|
72.2
|
|
|
Other Agreements
|
Various
(4)
|
|
8.0%
|
|
124.2
|
|
|
67.5
|
|
|
Total Funding Debt
(5)
|
|
|
5.6%
|
|
$
|
1,158.0
|
|
|
$
|
761.9
|
|
|
Corporate Debt:
|
|
|
|
|
|
|
|
|
On Deck Capital, Inc.
|
October 2018
|
|
6.0%
|
|
$
|
30.0
|
|
|
$
|
—
|
|
_________________________
(1)
The period during which new borrowings may be made under this facility expires in March 2020.
(2)
The period during which new borrowings may be made under this debt facility expires in February 2019.
(3)
The period during which new borrowings may be made under this debt facility expires in April 2022.
(4)
Maturity dates range from July 2018 through November 2020.
(5)
May not sum due to rounding.
Our ability to fully utilize the available capacity of our debt facilities may also be impacted by restrictions that limit concentration risk and eligibility. The debt facilities contain thresholds, known as concentration limitations, which restrict a debt facility’s collateral pool from being overly concentrated with loans that share pre-defined loan characteristics. In addition, debt facilities contain restrictions that limit the eligibility criteria of loans that may be financed, such as term length, loan amount and a borrower's home country. Loans that do not meet the criteria to be financed are referred to as ineligible loans. To the extent such concentration limits are exceeded or loans are deemed ineligible, newly originated loans with the pre-defined loan characteristics subject to that concentration limit or eligibility criteria may not be financed despite available capacity under the debt facilities.
OnDeck
Marketplace
OnDec
k Marketplace
is our proprietary whole loan sale platform that allows participating third-party institutional investors to directly purchase small business loans from us. OnDeck
Marketplace
participants enter into whole loan purchase agreements, so as to purchase a pre-determined dollar amount of loans that satisfy certain eligibility criteria. The loans are sold to the participant at a pre-determined purchase price above par. We recognize a gain or loss from OnDeck
Marketplace
loans when sold. We currently act as servicer in exchange for a servicing fee with respect to the loans purchased by the applicable OnDeck
Marketplace
participant. No loans were sold during the
six months ended June 30, 2018
. During the
six months ended June 30, 2017
, we sold
loans with an unpaid principal balance of
$50.2 million
through OnDeck
Marketplace
. The proportion of loans we sell through OnDeck
Marketplace
largely depends on the premiums available to us as well as the cost and availability of other sources of liquidity. During the six months ended June 30, 2018, we did not sell any loans through OnDeck
Marketplace
and relied on liquidity from operating and financing activities. However, we may elect to make OnDeck
Marketplace
loan sales in the future to provide us an additional source of liquidity and to maintain active relationships with our institutional loan purchasers.
Cash and Cash Equivalents, Loans (Net of Allowance for Loan Losses), and Cash Flows
The following table summarizes our cash and cash equivalents, loans (net of ALLL) and cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
$
|
74,262
|
|
|
$
|
77,936
|
|
|
Restricted cash
|
$
|
44,189
|
|
|
$
|
54,166
|
|
|
Loans held for investment, net
|
$
|
922,530
|
|
|
$
|
865,255
|
|
|
Cash provided by (used in):
|
|
|
|
|
Operating activities
|
$
|
118,493
|
|
|
$
|
96,995
|
|
|
Investing activities
|
$
|
(177,736
|
)
|
|
$
|
(80,910
|
)
|
|
Financing activities
|
$
|
64,277
|
|
|
$
|
(8,748
|
)
|
Our cash and cash equivalents at
June 30, 2018
were held primarily for working capital purposes. We may, from time to time, use excess cash and cash equivalents to fund our lending activities. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate working capital requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our excess cash is invested primarily in demand deposit accounts that are currently providing only a minimal return.
Our restricted cash represents funds held in accounts as reserves on certain debt facilities and as collateral for issuing bank partner transactions. We have no ability to draw on such funds as long as they remain restricted under the applicable arrangements.
Cash Flows
Operating Activities
For the
six months ended June 30, 2018
, net cash provided by our operating activities was
$118.5 million
, which was primarily the result of interest payments from our customers of
$211.3 million
, less
$70.7 million
utilized to pay our operating expenses and
$21.4 million
we used to pay the interest on our debt (both funding and corporate). During that same period, accounts payable and accrued expenses and other liabilities increased by approximately
$3.1 million
.
For the
six months ended June 30, 2017
, net cash provided by our operating activities was
$97.0 million
, which was primarily the result of cash received from our customers including interest payments of
$202.4 million
, plus proceeds from sale of loans held for sale of
$42.7 million
, less
$40.4 million
of loans held for sale originations in excess of loan repayments received,
$85.9 million
utilized to pay our operating expenses and
$21.3 million
we used to pay the interest on our debt (both funding and corporate) and
$1.0 million
of origination costs paid in excess of fees collected. During that same period, accounts payable and accrued expenses and other liabilities increased by approximately
$7.3 million
.
Investing Activities
Our investing activities have consisted primarily of funding our term loan and line of credit originations, including payment of associated direct costs and receipt of associated fees, offset by customer repayments of term loans and lines of credit, purchases of property, equipment and software, capitalized internal-use software development costs and proceeds from the sale of term loans which were not specifically identified at origination through our OnDeck
Marketplace
. Purchases of property, equipment and software and capitalized internal-use software development costs may vary from period to period due to the timing of the expansion of our operations, the addition of employee headcount and the development cycles of our internal-use technology.
From time to time in the past, we have voluntarily purchased and may again in the future voluntarily purchase our loans that were previously sold to third parties. The circumstances under which we effect these transactions depends on a variety of factors. In determining whether to engage in a certain voluntary purchase transactions, we consider, among other things, our relationship with the potential seller, the potential purchase price, credit profile of the target loans, our overall liquidity position and possible alternative uses of cash. Although these purchases have not been material in the past, depending upon the circumstances, they could be material in the future, depending on the quantity and timing of these purchases.
For the
six months ended June 30, 2018
, net cash used to fund our investing activities was
$177.7 million
, and consisted primarily of
$144.1 million
of loan originations in excess of loan repayments received,
$29.6 million
of origination costs paid in excess of fees collected and
$3.2 million
for the purchase of property, equipment and software and capitalized internal-use software development costs.
For the
six months ended June 30, 2017
, net cash used to fund our investing activities was
$80.9 million
and consisted primarily of
$66.7 million
of loan originations in excess of loan repayments received,
$21.3 million
of origination costs paid in excess of fees collected,
$13.7 million
for the purchase of loans, a
$9.7 million
increase in restricted cash and
$2.9 million
for the purchase of property, equipment and software and capitalized internal-use software development costs. These uses of cash were partially offset by
$10.0 million
of proceeds from sales of loans held for investment.
Financing Activities
Our financing activities have consisted primarily of net borrowings from our securitization facility and our revolving debt facilities as well as the issuance of common stock.
For the
six months ended June 30, 2018
, net cash provided by our financing activities was
$64.3 million
and consisted primarily of
$64.4 million
in net additional debt drawn down from our debt facilities and
$3.7 million
of payments of debt issuance costs. These uses of cash were partially offset by
$3.4 million
of net cash received from noncontrolling interest, and
$0.7 million
of cash received from the issuance of common stock under the employee stock purchase plan.
For the
six months ended June 30, 2017
, net cash used in financing activities was
$8.7 million
and consisted primarily of
$8.9 million
in net repayments on our securitization and debt facilities and
$3.3 million
of payments of debt issuance costs. These uses of cash were partially offset by
$2.4 million
of net cash received from noncontrolling interest, and
$1.2 million
of cash received from the issuance of common stock under the employee stock purchase plan.
Operating and Capital Expenditure Requirements
We require substantial liquidity to fund our current operating and capital expenditure requirements. We expect these requirements to increase as we pursue our growth strategy.
Our strategy is to continue to grow in a disciplined manner while remaining highly focused on credit quality, operating leverage and profitability. We expect our originations to grow in absolute dollars for the full year 2018 as compared to 2017. We intend to allocate resources to continue to optimize marketing and customer acquisition costs based on targeted returns on investment rather than spending inefficiently in these areas to achieve incremental growth.
We estimate that at
June 30, 2018
, approximately
$305 million
of our own cash had been invested in our loan portfolio, approximately two-thirds of which was used to fund our portfolio's residual value and the remainder was used to fund ineligible loans. While investing in our portfolio's residual value is a requirement of our funding model and will remain a use of cash so long as we continue to grow loan balances, the use of cash to fund ineligible loans may be mitigated if and to the extent we obtain funding capacity that permits the funding of the ineligible loans, either through debt facilities or OnDeck
Marketplace
.
As of
June 30, 2018
, approximately $
572.3 million
of our funding debt capacity was scheduled to expire before June 30, 2019.
On April 13, 2018, our wholly-owned subsidiary, Loan Assets of OnDeck, LLC, established a new asset-backed revolving debt facility with a commitment amount of $100 million and an interest rate of 1-month LIBOR + 2.0%. The period during which new borrowings may be made under this facility expires on April 13, 2022 and the final maturity date is October 13, 2022.
On April 17, 2018, our wholly-owned subsidiary, OnDeck Asset Securitization Trust II LLC, issued $225 million in initial principal amount of fixed-rate asset backed offered notes in a securitization transaction. The notes were issued in four classes with a weighted average fixed interest rate of 3.75%. The revolving period expires on March 31, 2020 and the final maturity date
is April 2022. The net proceeds of this transaction were used, together with other available funds, to voluntarily prepay in full all $250 million of notes from a prior securitization.
On June 27, 2018, our wholly-owned subsidiary of the Company, Canada OnDeck Asset Funding, L.P, established a new asset-backed revolving debt facility with a commitment amount of CAD25 million and an additional CAD25 million of capacity available at the discretion of the lenders. The interest rate for the facility is a commercial paper rate + 4%. The period during which new borrowings may be made under this facility expires on June 27, 2020 and the final maturity date is June 27, 2021.
On June 28, 2018, OnDeck Funding Trust No. 2, a wholly-owned subsidiary of On Deck Capital Australia Pty Ltd, established a new asset-backed revolving debt facility with a commitment amount of AUD75 million. The interest rate for the facility is 1 Month BBSW+ 3.75%. The period during which new borrowings may be made under this facility expires on December 28, 2019 and the final maturity date is June 28, 2020.
In order to maintain or grow our loan originations over the next 12 months, we will be required to extend existing debt facilities that have borrowing period expirations or final maturities during that period and/or secure new funding. We currently expect to be able to do so on market terms.
We expect to use cash flow generated from operations, together with additional cash we may obtain by financing currently ineligible loans, to the extent that we are able to do so, to continue funding residual growth as our financed portfolio grows. In addition, we may also finance our expected residual growth through other unused liquidity sources such as our corporate line of credit or possible additional subordinated notes in our debt facilities.
Historically we have been successful in accessing the asset-backed loan market on terms acceptable to us, and we anticipate that we will be able to do so into the foreseeable future. However, if we deem the cost of accessing the asset-backed loan market to be in excess of an appropriate rate, we may elect to use available cash, seek to increase the use of OnDeck
Marketplace
, or use other financing options available to us. Furthermore, we could decide to alter the types of loans we originate, such that more loans are eligible for credit facilities, or we could decide to slow down the rate of originations.
We believe that our cash flow from operations, available capacity under our revolving lines of credit (and expected extensions or replacements of those lines) and existing cash balances, together with additional financing we expect to be able to obtain on market terms, are sufficient to meet both our existing operating and capital expenditure requirements and our currently planned growth for at least the next 12 months.
It is possible that we may require capital in excess of amounts we currently anticipate. Although it is not currently anticipated, depending upon the circumstances we may seek additional equity financing. The sale of equity may result in dilution to our stockholders, and those securities may have rights senior to those of our common stock. If we raise additional funds through the issuance of additional debt, the agreements governing such debt could contain covenants that would restrict our operations and such debt would rank senior to shares of our common stock. Depending on market conditions and other factors, we may not be able to obtain additional capital for our current operations or anticipated future growth on reasonable terms or at all.
Contractual Obligations
Other than as described under the subheading "Liquidity and Capital Resources," and in Note 5 and Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements, there have been no material changes in our commitments under contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
As a result of the lease terminations described more fully in Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements, our contractual obligations under our operating leases have decreased subsequent to year-end by approximately $23.4 million. Our projected future cash payments related to our operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
2018
|
|
2019-2020
|
|
2021-2022
|
|
Thereafter
|
|
|
|
(in thousands)
|
|
Operating leases
|
|
$ 55,304
|
|
$
|
6,424
|
|
|
$
|
13,386
|
|
|
$
|
12,641
|
|
|
$
|
22,853
|
|
Off-Balance Sheet Arrangements
As of
June 30, 2018
, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Critical Accounting Policies and Significant Judgments and Estimates
There have been no material changes to our critical accounting policies and estimates as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2017.
Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements and JOBS Act Election
Recent Accounting Pronouncements Not Yet Adopted
Refer to Note 1, Organization and Summary of Significant Accounting Policies, contained in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this report for a full description of the recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions.
Under the JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
|
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
There have been no material changes from the information previously reported under "Part II, Item 7A" of our Annual Report on Form 10-K for the year ended December 31, 2017.