OnDeck Reports Third Quarter 2017 Financial Results

On Deck Capital, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

September 30, 2017

December 31, 2016

Assets

Cash and cash equivalents

$

64,292

$

79,554

Restricted cash

56,729

44,432

Loans held for investment

957,203

1,000,445

Less: Allowance for loan losses

(104,872)

(110,162)

Loans held for investment, net

852,331

890,283

Loans held for sale

—

373

Property, equipment and software, net

24,975

29,405

Other assets

17,069

20,044

Total assets

$

1,015,396

$

1,064,091

Liabilities and equity

Liabilities:

Accounts payable

$

2,918

$

5,271

Interest payable

2,213

2,122

Funding debt

702,998

726,639

Corporate debt

17,180

27,966

Accrued expenses and other liabilities

30,987

38,496

Total liabilities

756,296

800,494

Stockholders' equity (deficit):

Common stock—$0.005 par value, 1,000,000,000 shares authorized and 77,002,976 and 74,801,825 shares issued and 73,623,312 and 71,605,708 outstanding at September 30, 2017 and December 31, 2016, respectively.

385

374

Treasury stock—at cost

(7,561)

(6,697)

Additional paid-in capital

489,465

477,526

Accumulated deficit

(227,973)

(211,299)

Accumulated other comprehensive loss

(6)

(379)

Total On Deck Capital, Inc. stockholders' equity

254,310

259,525

Noncontrolling interest

4,790

4,072

Total equity

259,100

263,597

Total liabilities and equity

$

1,015,396

$

1,064,091

Memo:

Unpaid Principal Balance¹

$

940,881

$

980,451

Interest Earning Assets²

$

940,881

$

980,821

Loans³

$

957,203

$

1,000,818

Loans Under Management⁴

$

1,082,296

$

1,202,791

On Deck Capital, Inc. and Subsidiaries

Consolidated Average Balance Sheets⁵

(in thousands, except share and per share data)

Average

Average

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Assets

Cash and cash equivalents

$

59,530

$

72,309

$

58,595

$

90,321

Restricted cash

58,659

46,478

59,316

38,884

Loans held for investment

960,587

851,457

1,001,697

739,946

Less: Allowance for loan losses

(103,397)

(81,118)

(109,486)

(68,775)

Loans held for investment, net

857,190

770,339

892,211

671,171

Loans held for sale

—

4,846

462

9,051

Property, equipment and software, net

25,919

30,328

27,480

29,636

Other assets

17,843

19,676

18,483

21,376

Total assets

$

1,019,141

$

943,976

$

1,056,547

$

860,439

Liabilities and equity

Liabilities:

Accounts payable

$

3,077

$

3,332

$

3,377

$

4,203

Interest payable

2,300

1,313

2,322

1,060

Funding debt

710,601

597,678

737,864

505,406

Corporate debt

11,078

7,699

20,213

4,698

Accrued expenses and other liabilities

32,276

32,876

33,786

32,460

Total liabilities

759,332

642,898

797,562

547,827

Total On Deck Capital, Inc. stockholders' equity

254,731

295,989

253,716

306,913

Noncontrolling interest

5,077

5,089

5,269

5,699

Total equity

259,808

301,078

258,985

312,612

Total liabilities and equity

$

1,019,140

$

943,976

$

1,056,547

$

860,439

Memo:

Unpaid Principal Balance

$

944,372

$

836,542

$

983,230

$

727,038

Interest Earning Assets

$

944,372

$

841,270

$

983,689

$

735,825

Loans

$

960,587

$

856,303

$

1,002,159

$

748,997

Loans Under Management

$

1,089,406

$

1,087,641

$

1,159,438

$

1,015,768

On Deck Capital, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Revenue:

Interest income

$

80,122

$

71,361

$

250,954

$

188,726

Gain on sales of loans

146

2,670

1,890

12,594

Other revenue

3,398

3,340

10,365

8,168

Gross revenue

83,666

77,371

263,209

209,488

Cost of revenue:

Provision for loan losses

39,582

36,586

118,495

94,294

Funding costs

11,330

8,452

34,223

22,548

Total cost of revenue

50,912

45,038

152,718

116,842

Net revenue

32,754

32,333

110,491

92,646

Operating expense:

Sales and marketing

11,903

16,789

42,090

50,094

Technology and analytics

11,748

15,050

41,960

42,894

Processing and servicing

4,160

5,181

13,521

14,261

General and administrative

9,440

12,375

30,917

34,233

Total operating expense

37,251

49,395

128,488

141,482

Loss from operations

(4,497)

(17,062)

(17,997)

(48,836)

Other expense:

Interest expense

(35)

(111)

(706)

(186)

Total other expense

(35)

(111)

(706)

(186)

Loss before provision for income taxes

(4,532)

(17,173)

(18,703)

(49,022)

Provision for income taxes

—

—

—

—

Net loss

(4,532)

(17,173)

(18,703)

(49,022)

Net loss attributable to noncontrolling interest

458

539

2,073

1,920

Net loss attributable to On Deck Capital, Inc. common stockholders

$

(4,074)

$

(16,634)

$

(16,630)

$

(47,102)

Net loss per share attributable to On Deck Capital, Inc. common shareholders:

Basic and diluted

$

$

(0.23)

$

(0.23)

$

(0.67)

Weighted-average common shares outstanding:

Basic and diluted

73,272,085

70,971,895

72,613,221

70,750,037

Supplemental Information

Key Performance Metrics

(in thousands, except percentage data)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Originations⁶

$

530,926

$

612,557

$

1,568,303

$

1,771,906

Effective Interest Yield⁷

33.4

%

32.8

%

33.4

%

33.4

%

Net Interest Margin⁸

29.1

%

29.4

%

29.4

%

30.0

%

Marketplace Gain on Sale Rate⁹

2.7

%

3.0

%

3.3

%

4.3

%

Cost of Funds Rate¹⁰

6.4

%

5.7

%

6.2

%

5.9

%

Provision Rate¹¹

7.5

%

6.9

%

7.8

%

6.4

%

Reserve Ratio¹²

11.1

%

9.8

%

11.1

%

9.8

%

15+ Day Delinquency Ratio¹³

7.5

%

6.2

%

7.5

%

6.2

%

Net Charge-off Rate¹⁴

16.9

%

11.0

%

16.8

%

11.0

%

Net Interest Margin After Credit Losses (NIMAL)¹⁵

12.2

%

18.7

%

12.6

%

19.1

%

Adjusted Expense Ratio (AER)¹⁶

12.6

%

16.5

%

13.7

%

17.0

%

Adjusted Operating Yield (AOY)¹⁷

(0.4)

%

2.2

%

(1.1)

%

2.1

%

Marketplace Gain on Sale Rate⁹

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Gain on sales of loans^(a)

$

146

$

2,670

$

1,890

$

12,594

Carrying value of loans sold

$

5,463

$

89,867

$

56,682

$

292,920

Marketplace Gain on Sale Rate^(a)

2.7

%

3.0

%

3.3

%

4.3

%

^(a) Three months ended September 30, 2016 and 2017 include amounts resulting from transfers of financial assets as shown in the following table.

Activity in Servicing Rights

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Fair value at the beginning of period

$

701

$

1,989

$

1,131

$

3,489

Addition:

Servicing resulting from transfers of financial assets

275

717

938

2,272

Changes in fair value:

Change in inputs or assumptions used in the valuation model

—

—

—

—

Other changes in fair value^(b)

(347)

(1,019)

(1,440)

(4,074)

Fair value at the end of period

$

629

$

1,687

$

629

$

1,687

^(b) Represents changes due to collection of expected cash flows through September 30, 2017 and 2016.

Marketplace Originations as Percent of Term Loan Originations

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Marketplace originations

$

5,340

$

85,948

$

55,965

$

292,942

Origination of term loans

$

427,087

$

518,509

$

1,259,229

$

1,520,562

Marketplace originations as percent of term loan originations

1.3

%

16.6

%

4.4

%

19.3

%

Activity in Loans Held for Investment Balances

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Unpaid Principal Balance beginning of period

$

953,809

$

790,421

$

980,451

$

543,790

   + Total Originations^(c)

530,926

612,557

1,568,303

1,771,906

   +  Loans transferred from loans held for sale to loans held for investment and loan purchases

—

—

—

939

   - Marketplace originations

(5,340)

(85,948)

(55,965)

(292,942)

   - Sales of other loans^(d)

—

(306)

(500)

(548)

   + Purchase of Loans

—

—

13,730

6,672

   - Net charge-offs

(39,927)

(23,067)

(123,785)

(60,237)

   - Principal paid down^(c)(e)

(498,588)

(404,354)

(1,441,354)

(1,080,277)

Unpaid Principal Balance end of period

940,880

889,303

940,880

889,303

   + Net deferred origination costs

16,323

16,024

16,323

16,024

Loans held for investment

957,203

905,327

957,203

905,327

   - Allowance for loan losses

(104,872)

(87,368)

(104,872)

(87,368)

Loans held for investment, net

$

852,331

$

817,959

$

852,331

$

817,959

^(c) Includes Unpaid Principal Balance of term loans rolled into new originations of $82.8 million and $70.9 million in the three months ended September 30, 2017 and 2016, respectively, and $220.9 million and $200.6 million for the nine months ended September 30, 2017 and 2016, respectively.

^(d) Includes loans sold that were previously designated as held for investment in at least one fiscal quarter prior to the quarter in which they were sold.

^(e) Excludes principal that was paid down related to renewed loans sold in the period which were designated as held for investment in the amount of $0 and $0.3 million, in the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively

Activity in the Allowance for Loan Losses

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Allowance for loan losses beginning of period

$

105,217

$

73,849

$

110,162

$

53,311

  + Provision for loan losses^(f)

39,582

36,586

118,495

94,294

   - Net charge-offs

(39,927)

(23,067)

(123,785)

(60,237)

Allowance for loan losses end of period

$

104,872

$

87,368

$

104,872

$

87,368

^(f) Excludes an immaterial provision expense and a $0.2 million provision expense for the three months ended September 30, 2017 and 2016, and provision expense of $0.3 million and provision release of $0.4 million for the nine month period ended September 30, 2017 and 2016, respectively, for unfunded loan commitments.  The provision for unfunded loan commitments is included in general and administrative expense.

Notes:

⁽¹⁾ Unpaid Principal Balance represents the total amount of principal outstanding of term loans held for investment, amounts outstanding under lines of credit and the amortized cost of loans purchased from other than issuing bank partners at the end of the period. It excludes net deferred origination costs, allowance for loan losses and any loans sold or held for sale at the end of the period.

⁽²⁾ Interest Earning Assets represents the sum of Unpaid Principal Balance plus the amount of principal outstanding of loans held for sale in the period. It excludes net deferred origination costs, allowance for loan losses and any loans sold or held for sale at the end of the period. Average Interest Earnings Assets is calculated as the average of Interest Earnings Assets at the beginning of the period and the end of each month in the period.

⁽³⁾ Loans represents the sum of loans held for investment and loans held for sale during the period.

⁽⁴⁾ Loans Under Management represents the Unpaid Principal Balance plus the unpaid principal balance of loans held for sale, excluding net deferred origination costs, plus the amount of principal outstanding of term loans we serviced for others at the end of the period. Average Loans Under Management is calculated as the average of Loans Under Management at the beginning of the period and the end of each month in the period.

⁽⁵⁾ Average Balance Sheet Items for the period represent the average as of the beginning of the month in the period and as of the end of each month in the period.

⁽⁶⁾ Originations represent the total principal amount of the term loans we made during the period, plus the total amount drawn on lines of credit during the period. Many of our repeat term loan customers renew their term loans before their existing term loan is fully repaid. In accordance with industry practice, originations of such repeat term loans are presented as the full renewal loan principal, rather than the net funded amount, which would be the renewal term loan's principal net of the unpaid principal balance on the existing term loan. Loans referred to, and funded by, our issuing bank partners and later purchased by us are included as part of our originations.

⁽⁷⁾ Effective Interest Yield is the rate of return we achieve on loans outstanding during a period. It is calculated as our business day adjusted annualized interest income divided by average Loans. Annualization is based on 252 business days per year, which is typical weekdays per year less U.S. Federal Reserve Bank holidays. Net deferred origination costs in loans held for investment and loans held for sale consist of deferred origination fees and costs. 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 the Effective Interest Yield earned.

⁽⁸⁾ Net Interest Margin, is calculated as business day adjusted annualized Net Interest Income divided by average Interest Earning Assets. Net Interest Income represents interest income less funding cost 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 cost is 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 252 business days per year, which is typical weekdays per year less U.S. Federal Reserve Bank holidays.

⁽⁹⁾ Marketplace Gain on Sale Rate equals our gain on sale revenue from loans sold through OnDeck Marketplace divided by the carrying value of loans sold, which includes both unpaid principal balance sold and the remaining carrying value of the net deferred origination costs. A portion of loans regularly sold through OnDeck Marketplace are or may be loans which were initially designated as held for investment upon origination. The portion of such loans sold in a given period may vary materially depending upon market conditions and other circumstances.

⁽¹⁰⁾ Cost of Funds Rate is our funding cost, which is 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. 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 4 quarters per year and is not business day adjusted.

⁽¹¹⁾ 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 expectations for loans originated prior to the commencement of the period. The denominator of the Provision Rate formula includes the full amount of originations in a period.

⁽¹²⁾ 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.

⁽¹³⁾ 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 for such period. The Unpaid Principal Balance for our loans that are 15 or more calendar days past due includes loans that are paying and non-paying. Because our loans require daily and weekly repayments, excluding weekends and holidays, they may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments. 15+ Day Delinquency Ratio is not annualized, but reflects balances as of the end of the period.

⁽¹⁴⁾ 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 4 quarters per year and is not business day adjusted. Net charge-offs are charged-off loans in the period, net of recoveries. 

⁽¹⁵⁾ Net Interest Margin After Credit Losses (NIMAL), is calculated as our business day adjusted annualized Net Interest Income After Credit Losses divided by average Interest Earning Assets. Net Interest Income After Credit Losses represents interest income less funding cost and net charge-offs during the period. Interest income is net of deferred costs and 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 cost is 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. Net charge-offs are charged-off loans in the period, net of recoveries. Annualization is based on 252 business days per year, which is typical weekdays per year less U.S. Federal Reserve Bank holidays.

⁽¹⁶⁾ Adjusted Expense Ratio (AER) represents our annualized operating expense, adjusted to exclude the impact of stock-based compensation, divided by average Loans Under Management. Annualization is based on 252 business days per year, which is typical weekdays per year less U.S. Federal Reserve Bank holidays.

⁽¹⁷⁾ Adjusted Operating Yield (AOY) represents our Net Interest Margin After Credit Losses (NIMAL) less the Adjusted Expense Ratio (AER).

⁽¹⁸⁾ Due to the uncertainty regarding and variability of certain items that will affect our expected U.S. GAAP net income (loss) for the fourth quarter of 2017 and full year 2017, such as stock-based compensation and other items, we are currently unable to provide a reasonable estimate of our U.S. GAAP net income (loss) for these future periods or a corresponding reconciliation to U.S. GAAP net income (loss). Our U.S. GAAP net income (loss) for these future periods will be less favorable than our Adjusted EBITDA for these periods.

⁽¹⁹⁾ Adjusted EBITDA represents our net income (loss), adjusted to exclude interest expense associated with debt used for corporate purposes (rather than funding costs associated with lending activities), income tax expense, depreciation and amortization and stock-based compensation expense. Our use of Adjusted EBITDA 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: Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; Adjusted EBITDA does not reflect interest associated with debt used for corporate purposes or tax payments that may represent a reduction in cash available to us.

⁽²⁰⁾ Adjusted Net Income (Loss) represents our net loss adjusted to exclude net loss attributable to non-controlling interest and stock-based compensation expense, each on the same basis and with the same limitations as described above for Adjusted EBITDA.

⁽²¹⁾ Adjusted Net Income (Loss) per share represents our net loss adjusted to exclude net loss attributable to non-controlling interest and stock-based compensation expense, each on the same basis and with the same limitations as described above for Adjusted EBITDA, divided by the weighted average common shares outstanding during the period.

⁽²²⁾ Number of loans, or units, equals the total number of term loans funded, plus the total number of lines of credit drawn on for the first time during the period.