On Deck Capital (ONDK) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO

Commission File Number 001-36779

On Deck Capital, Inc.

(Exact name of registrant as specified in its charter)

Delaware	42-1709682
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1400 Broadway, 25th Floor

New York, New York 10018

(Address of principal executive offices)

(888) 269-4246

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.005 per share	ONDK	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ý    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	x
		If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý

The number of shares of the registrant’s common stock outstanding as of October 31, 2019 was 71,849,670.

On Deck Capital, Inc.

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	4
	Unaudited Condensed Consolidated Statements of Changes in Equity and Redeemable Noncontrolling Interest	5
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	57
Item 6.	Exhibits	58
	Signatures	57

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

ON DECK CAPITAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

	September 30,			December 31,
	2019			2018
Assets
Cash and cash equivalents	$	59,440		$	59,859
Restricted cash	49,900			37,779
Loans and finance receivables	1,227,811			1,169,407
Less: Allowance for credit losses	(148,045		)	(140,040		)
Loans and finance receivables held for investment, net	1,079,766			1,029,367
Property, equipment and software, net	18,584			16,700
Other assets	67,963			18,115
Total assets	$	1,275,653		$	1,161,820
Liabilities, mezzanine equity and stockholders' equity
Liabilities:
Accounts payable	$	3,673		$	4,011
Interest payable	2,631			2,385
Debt	870,625			816,231
Accrued expenses and other liabilities	65,775			36,708
Total liabilities	942,704			859,335
Commitments and contingencies (Note 12)
Mezzanine equity:
Redeemable noncontrolling interest	15,007			—
Stockholders’ equity:
Common stock—$0.005 par value, 1,000,000,000 shares authorized and 79,798,075 and 78,412,291 shares issued and 73,556,663 and 75,375,341 outstanding at September 30, 2019 and December 31, 2018, respectively.	404			396
Treasury stock—at cost	(16,680		)	(5,656		)
Additional paid-in capital	511,857			502,003
Accumulated deficit	(178,313		)	(196,959		)
Accumulated other comprehensive loss	(2,004		)	(1,832		)
Total On Deck Capital, Inc. stockholders' equity	315,264			297,952
Noncontrolling interest	2,678			4,533
Total stockholders' equity	317,942			302,485
Total liabilities, mezzanine equity and stockholders' equity	$	1,275,653		$	1,161,820

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

3

ON DECK CAPITAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

(in thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue:
Interest and finance income	$	108,211		$	99,317		$	319,651		$	277,755
Other revenue	4,339			3,523			13,120			10,681
Gross revenue	112,550			102,840			332,771			288,436
Cost of revenue:
Provision for credit losses	43,096			39,102			129,338			108,688
Interest expense	11,264			11,728			33,977			35,845
Total cost of revenue	54,360			50,830			163,315			144,533
Net revenue	58,190			52,010			169,456			143,903
Operating expense:
Sales and marketing	12,261			10,845			37,528			32,875
Technology and analytics	16,277			13,418			49,764			37,224
Processing and servicing	6,670			5,302			17,768			15,564
General and administrative	16,472			13,107			46,854			46,866
Total operating expense	51,680			42,672			151,914			132,529
Income (loss) from operations, before provision for income taxes	6,510			9,338			17,542			11,374
Provision for (Benefit from) income taxes	(1,632		)	—			1,904			—
Net income (loss)	8,142			9,338			15,638			11,374
Less: Net income (loss) attributable to noncontrolling interest	(542		)	(272		)	(3,007		)	(1,807		)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,684		$	9,610		$	18,645		$	13,181
Net income (loss) per share attributable to On Deck Capital, Inc. common stockholders:
Basic	$	0.12		$	0.13		$	0.25		$	0.18
Diluted	$	0.11		$	0.12		$	0.24		$	0.17
Weighted-average common shares outstanding:
Basic	75,433,008			74,715,592			75,722,117			74,362,211
Diluted	77,758,281			79,372,491			78,576,899			78,314,719
Comprehensive income (loss):
Net income (loss)	$	8,142		$	9,338		$	15,638		$	11,374
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instrument	215			—			(651		)	—
Foreign currency translation adjustment	(577		)	(306		)	194			(815		)
Comprehensive income (loss)	7,780			9,032			15,181			10,559
Less: Comprehensive income (loss) attributable to noncontrolling interests	(252		)	(138		)	(284		)	(367		)
Less: Net income (loss) attributable to noncontrolling interest	(542		)	(272		)	(3,007		)	(1,807		)
Comprehensive income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,574		$	9,442		$	18,472		$	12,733

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

4

ON DECK CAPITAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity and Redeemable Noncontrolling Interest

(in thousands, except share data)

	On Deck Capital, Inc.'s stockholders' equity
	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity			Noncontrolling interest			Total Equity			Redeemable Noncontrolling Interest
	Shares	Amount
Balance at December 31, 2017	73,822,001	$	386	$	490,200		$	(224,047	)	$	(5,656	)	$	(52	)	$	260,831		$	4,011		$	264,842		$	—
Stock-based compensation	—	—		3,122			—			—			—			3,122			—			3,122			—
Issuance of common stock through vesting of restricted stock units and option exercises	246,130	2		39			—			—			—			41			—			41			—
Employee stock purchase plan	196,360	1		918			—			—			—			919			—			919			—
Tax withholding related to vesting of restricted stock units	—	—		(118		)	—			—			—			(118		)	—			(118		)	—
Currency translation adjustment	—	—		—			—			—			(63		)	(63		)	(50		)	(113		)	—
Other	—	—		—			(1		)	—			(3		)	(4		)	—			(4		)	—
Net Income (loss)	—	—		—			(2,058		)	—			—			(2,058		)	(518		)	(2,576		)	—
Balance-March 31, 2018	74,264,491	$	389	$	494,161		$	(226,106	)	$	(5,656	)	$	(118	)	$	262,670		$	3,443		$	266,113		$	—
Stock-based compensation	—	—		2,712			—			—			—			$	2,712		—			$	2,712		—
Issuance of common stock through vesting of restricted stock units and option exercises	376,513	2		(2		)	—			—			—			—			—			—			—
Employee stock purchase plan	—	—		49			—			—			—			49			—			49			—
Tax withholding related to vesting of restricted stock units	—	—		(323		)	—			—			—			(323		)	—			(323		)	—
Investment by noncontrolling interests	—	—		—			—			—			—			—			3,402			3,402			—
Currency translation adjustment	—	—		—			—			—			(216		)	(216		)	(179		)	(395		)	—
Net Income (loss)	—	—		—			5,628			—			—			5,628			(1,016		)	4,612			—
Balance-June 30, 2018	74,641,004	$	391	$	496,597		$	(220,478	)	$	(5,656	)	$	(334	)	$	270,520		$	5,650		$	276,170		$	—
Stock-based compensation	—	—		2,740			—			—			—			$	2,740		—			$	2,740		—
Issuance of common stock through vesting of restricted stock units and option exercises	215,668	1		36			—			—			—			37			—			37			—
Employee stock purchase plan	172,338	1		971			—			—			—			972			—			972			—
Tax withholding related to vesting of restricted stock units	—	—		(360		)	—			—			—			(360		)	—			(360		)	—
Investment by noncontrolling interests	—	—		—			—			—			—			—			—			—			—
Currency translation adjustment	—	—		—			—			—			(168		)	(168		)	(138		)	(306		)	—
Other	—	—		—			2			—			(1		)	1			—			1			—
Net Income (loss)	—	—		—			9,610			—			—			9,610			(272		)	9,338			—
Balance-September 30, 2018	75,029,010	$	393	$	499,984		$	(210,866	)	$	(5,656	)	$	(503	)	$	283,352		$	5,240		$	288,592		$	—

5

	On Deck Capital, Inc.'s stockholders' equity
	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity			Noncontrolling interest			Total Equity			Redeemable Noncontrolling Interest
	Shares		Amount
Balance at December 31, 2018	75,375,341		$	396	$	502,003		$	(196,959	)	$	(5,656	)	$	(1,832	)	$	297,952		$	4,533		$	302,485		$	—
Stock-based compensation	—		—		2,743			—			—			—			2,743			—			2,743			—
Issuance of common stock through vesting of restricted stock units and option exercises	264,364		2		45			—			—			—			47			—			47			—
Employee stock purchase plan	267,688		1		1,659			—			—			—			1,660			—			1,660			—
Tax withholding related to vesting of restricted stock units	—		—		(291		)	—			—			—			(291		)	—			(291		)	—
Currency translation adjustment	—		—		—			—			—			340			340			26			366			—
Cash flow hedge	—		—		—			—			—			(742		)	(742		)	—			(742		)	—
Net Income (loss)	—		—		—			5,666			—			—			5,666			(338		)	5,328			—
Balance-March 31, 2019	75,907,393		$	399	$	506,159		$	(191,293	)	$	(5,656	)	$	(2,234	)	$	307,375		$	4,221		$	311,596		$	—
Stock-based compensation	—		—		2,965			—			—			—			$	2,965		$	—		$	2,965		—
Issuance of common stock through vesting of restricted stock units and option exercises	393,994		2		26			—			—			—			28			—			28			—
Employee stock purchase plan	—		—		335			—			—			—			335			—			335			—
Tax withholding related to vesting of restricted stock units	—		—		(844		)	—			—			—			(844		)	—			(844		)	—
Fair value of redeemable noncontrolling interest resulting from business combination	—		—		—			—			—			—			—			—			—			16,444
Currency translation adjustment	—		—		—			—			—			463			463			(49		)	414			(9		)
Cash flow hedge	—		—		—			—			—			(124		)	(124		)	—			(124		)	—
Other	—		—		(11		)	1			—			1			(9		)	—			(9		)	—
Net Income (loss)	—		—		—			4,295			—			—			4,295			(814		)	3,481			(1,313		)
Balance-June 30, 2019	76,301,387		$	401	$	508,630		$	(186,997	)	$	(5,656	)	$	(1,894	)	$	314,484		$	3,358		$	317,842		$	15,122
Stock-based compensation	—		—		2,143			—			—			—			$	2,143		$	—		$	2,143		—
Issuance of common stock through vesting of restricted stock units and option exercises	156,456		1		23			—			—			—			24			—			24			—
Employee stock purchase plan	303,282		2		1,233			—			—			—			1,235			—			1,235			—
Repurchases of Common Stock	(3,204,462	)	—		—			—			(11,024		)	—			(11,024		)				(11,024		)	—
Tax withholding related to vesting of restricted stock units	—		—		(172		)	—			—			—			(172		)	—			(172		)	—
Investment by noncontrolling interests	—		—		—			—			—			—			—			—			—			—
Currency translation adjustment	—		—		—			—			—			(325		)	(325		)	(122		)	(447		)	(130		)
Cash flow hedge	—		—		—			—			—			215			215			—			215			—
Other	—		—		—			—			—			—			—			—			—			(1		)
Net Income (loss)	—		—		—			8,684			—			—			8,684			(558		)	8,126			16
Balance-September 30, 2019	73,556,663		$	404	$	511,857		$	(178,313	)	$	(16,680	)	$	(2,004	)	$	315,264		$	2,678		$	317,942		$	15,007

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

6

ON DECK CAPITAL, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net income (loss)	$	15,638		$	11,374
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for credit losses	129,338			108,688
Depreciation and amortization	5,182			6,232
Amortization of debt issuance costs	2,297			5,575
Stock-based compensation	8,692			8,852
Amortization of net deferred origination costs	51,708			41,641
Changes in servicing rights, at fair value	69			223
Unfunded loan commitment reserve	297			829
Gain on lease termination	—			(1,481		)
Loss on disposal of fixed assets	1,537			5,667
Amortization of intangibles	359			—
Changes in operating assets and liabilities:
Other assets	(10,122		)	(7,064		)
Accounts payable	(587		)	2,977
Interest payable	249			(198		)
Accrued expenses and other liabilities	2,022			(638		)
Net cash provided by operating activities	206,679			182,677
Cash flows from investing activities
Purchases of property, equipment and software	(3,044		)	(677		)
Capitalized internal-use software	(5,159		)	(3,738		)
Originations of term loan, lines of credit and finance receivable, excluding rollovers into new originations	(1,556,960		)	(1,566,889		)
Payments of net deferred origination costs	(51,798		)	(47,149		)
Principal repayments of term loans, lines of credit and finance receivables	1,411,788			1,324,078
Purchase of loans	—			(801		)
Acquisition of shares in business combination	(3,009		)	$	—
Net cash used in investing activities	(208,182		)	(295,176		)
Cash flows from financing activities
Investments by noncontrolling interests	—			3,403
Tax withholding related to vesting of restricted stock units	(1,310		)	(801		)
Repurchases of common stock	(11,024		)	—
Proceeds from exercise of stock options and warrants	99			76
Issuance of common stock under employee stock purchase plan	2,228			1,435
Proceeds from the issuance of debt	461,626			697,522
Payments of debt issuance costs	(3,282		)	(5,460		)
Repayments of debt principal	(434,704		)	(577,586		)
Net cash (used in) provided by financing activities	13,633			118,589
Effect of exchange rate changes on cash and cash equivalents	(428		)	(691		)
Net increase in cash, cash equivalents and restricted cash	11,702			5,399
Cash, cash equivalents, and restricted cash at beginning of year	97,638			114,824

7

	Nine Months Ended September 30,
	2019		2018
Cash, cash equivalents, and restricted cash at end of period	$	109,340	$	120,223
Reconciliation to amounts on consolidated balance sheets
Cash and cash equivalents	$	59,440	$	71,304
Restricted cash	49,900		48,919
Total cash, cash equivalents and restricted cash	$	109,340	$	120,223
Supplemental disclosure of other cash flow information
Cash paid for interest	$	30,248	$	21,445
Supplemental disclosures of non-cash investing and financing activities
Stock-based compensation included in capitalized internal-use software	$	179	$	130
Unpaid principal balance of term loans rolled into new originations	$	299,892	$	167,687

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

8

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, and additionally in Canada through merchant cash advances. 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 for financing purposes.

In October 2018, we announced the launch of ODX, a wholly-owned subsidiary that helps banks digitize their small business lending process. ODX offers a combination of software, analytic insights, and professional services that allow banks to bring their small business lending process online.

In April 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, to create a new holding company in which we own a 58.5% majority interest. We have accounted for this transaction as a business combination and have consolidated the financial position and results of operations of the holding company. The noncontrolling interest has been classified as mezzanine equity because it was deemed to be a redeemable noncontrolling interest. See Note 2 for further discussion.

Basis of Presentation and Principles of Consolidation

We prepare our consolidated financial statements and footnotes in accordance with accounting principles generally accepted in the United States of America, or GAAP, as contained in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. All intercompany transactions and accounts have been eliminated in consolidation. When used in these notes to consolidated financial statements, the terms "we," "us," "our" or similar terms refer to On Deck Capital, Inc. and its consolidated subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Significant estimates include allowance for credit losses, stock-based compensation expense, capitalized software development costs, interest rate cap, the useful lives of long-lived assets, our effective income tax rate and valuation allowance for deferred tax assets. We base our estimates on historical experience, current events and other factors we believe to be reasonable under the circumstances. These estimates and assumptions are inherently subjective in nature; actual results may differ from these estimates and assumptions.

Recently Adopted Accounting Standards

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The effective date for the standard was for fiscal years beginning after December 15, 2018. We elected to early adopt this ASU in fiscal year 2018. See Note 10 for a discussion of our derivatives.

In February 2016, the FASB issued ASU 2016-02, Leases, which creates ASC 842, Leases, and supersedes ASC 840, Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The new standard became effective for us on January 1, 2019. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. We elected the prospective transition option provided by the ASU that would not require earlier periods to be restated upon adoption. We elected the package of practical expedients afforded under the standard which permit an entity not to: (i) reassess whether existing or expired contracts are or contain a lease, (ii) reassess the lease classification, and (iii) reassess any initial direct costs for any existing leases. Our operating lease commitments, which were primarily real estate leases, were recognized as a $37.5 million lease liability when we adopted the new standard. The balance, which is included in Other Liabilities on the Consolidated Balance Sheet, was $39.0 million at September 30, 2019. We simultaneously recognized a $37.5 million right-of-use asset when we adopted the standard. Our right-of-use asset was partially offset by $10.1 million of existing deferred rent and lease incentives resulting in a net right-of-use asset of $27.6 million which is included in Other Assets on the Consolidated Balance Sheet. Our total operating lease cost for the three months ended September 30, 2019 was $1.5 million and allocated within operating expenses. The weighted average remaining lease term was 7.2 years and we utilized a weighted average discount rate of approximately 7%.

9

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 will change the impairment model and how entities measure credit losses for most financial assets. The standard requires entities to use the new expected credit loss impairment model which will replace the incurred loss model used today. The new guidance will be effective for us on January 1, 2020. Early adoption is permitted, although we do not intend to do so. We continue to assess the impact of adoption on January 1, 2020. We have substantially completed the key requirements for adoption including model development, data acquisition and economic forecasts and we have completed a parallel run of the new process. The results of those simulations indicate that the adoption of the standard will not have a material impact on our allowance for credit losses. The actual impact at adoption will depend on the outstanding balances, characteristics of our portfolio, macroeconomic conditions and forecasted information at the date of adoption.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard will become effective for us January 1, 2020. Early adoption is permitted, although we do not intend to do so. We are currently evaluating the impact the new standard may have on our disclosures, but we do not expect it to have a material impact.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements under ASC 820, Fair Value Measurement. The new guidance will be effective for us on January 1, 2020. We are currently evaluating the impact the new standard may have on our disclosures, but we do not expect it to have a material impact.

Revision of Prior Period Financial Statements

During the second quarter of 2019, we identified an immaterial error in our historical financial statements relating to the accrual of commissions on a portion of our renewal loans. The aggregate amount of the under-accrual was $2.4 million, approximately 90% of which relates to 2015 and subsequent periods, and represents less than 1%, of our total stockholders’ equity at March 31, 2019. The amount of the error in each of the impacted annual and interim periods was less than 1% of total commissions paid for such period.

In accordance with the SEC’s SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” we evaluated the error and concluded that the impact was not material to our financial statements for any prior annual or interim period. Accordingly, we have revised our previously reported financial information to correct the immaterial error contained in our Quarterly Report on Form 10-Q for the three-months ended and nine-months ended September 30, 2018. We will also revise previously reported financial information for this immaterial error in our future filings, as applicable.

A summary of revisions to certain previously reported financial information is presented in Note 11.

2. Business Combination

On April 1, 2019, we combined our Canadian operations with Evolocity Financial Group, or Evolocity, a Montreal-based online small business lender. The purpose of the transaction was to accelerate the growth of our Canadian operations and to enable us to provide a broader range of financing options to Canadian small businesses nationwide. In the transaction, Evolocity contributed its business to a holding company, and we contributed our Canadian business plus cash to that holding company such that we own a 58.5% majority interest in the holding company. The remainder is owned by former Evolocity stockholders. We have accounted for this transaction as a business combination.

The transaction has a preliminary purchase price for accounting purposes of approximately $16.7 million. Our provisional valuation of the assets acquired and liabilities assumed, including but not limited to loans, intangible assets and goodwill, is preliminary and the fair values are subject to change within the measurement period of up to one year from the business combination date. During the three and nine months ended September 30, 2019, we recorded measurement period adjustments which resulted in an increase of $0.7 million to goodwill. Goodwill arising from the business combination is not amortized, but is subject to impairment testing at least annually or more frequently if there is an indicator of impairment.

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The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the business combination (in thousands):

	Fair Value
Loans and finance receivables	$	36,763
Intangibles and other assets (1)	2,810
Debt and other liabilities	(34,437		)
Goodwill (1)	11,585
Net assets acquired	$	16,721

⁽¹⁾ Goodwill, and Intangibles and other assets were included in Other Assets on the Consolidated Balance Sheet as of September 30, 2019.

We consolidate the financial position and results of operations of the holding company.

As part of this business combination, the noncontrolling interest was deemed to be a redeemable noncontrolling interest. These interests are classified as mezzanine equity and measured at the greater of fair value at the end of each reporting period or the historical cost basis of the noncontrolling interest adjusted for cumulative earnings allocations.

3. Net Income (Loss) Per Common Share

Basic and diluted net income (loss) per common share is calculated as follows (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator:
Net income (loss)	$	8,142		$	9,338		$	15,638		$	11,374
Less: Net income (loss) attributable to noncontrolling interest	(542		)	(272		)	(3,007		)	(1,807		)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,684		$	9,610		$	18,645		$	13,181
Denominator:
Weighted-average common shares outstanding, basic	75,433,008			74,715,592			75,722,117			74,362,211
Net income (loss) per common share, basic	$	0.12		$	0.13		$	0.25		$	0.18
Effect of dilutive securities	2,325,273			4,656,899			2,854,782			3,952,508
Weighted-average common shares outstanding, diluted	77,758,281			79,372,491			78,576,899			78,314,719
Net income (loss) per common share, diluted	$	0.11		$	0.12		$	0.24		$	0.17
Anti-dilutive securities excluded	8,184,291			3,020,562			6,628,241			5,169,484

The difference between basic and diluted net income per common share has been calculated using the Treasury Stock Method based on the assumed exercise of outstanding stock options, the vesting of restricted stock units, or RSUs, performance restricted stock units, or PRSUs, and the issuance of stock under our employee stock purchase plan. Changes in the average market price of our stock can impact when stock equivalents are considered dilutive or anti-dilutive. For example, in periods of a declining stock price, stock equivalents have a greater likelihood of being recharacterized from dilutive to anti-dilutive. The following common share equivalent securities have been included in the calculation of dilutive weighted-average common shares outstanding:

	Three Months Ended September 30,		Nine Months Ended September 30,
Dilutive Common Share Equivalents	2019	2018	2019	2018
Weighted-average common shares outstanding	75,433,008	74,715,592	75,722,117	74,362,211
RSUs and PRSUs	254,262	1,616,072	562,381	1,083,237
Stock options	2,071,011	3,040,827	2,286,727	2,869,271
Employee stock purchase plan	—	—	5,674	—
Total dilutive common share equivalents	77,758,281	79,372,491	78,576,899	78,314,719

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The following common share equivalent securities were excluded from the calculation of diluted net income per share attributable to common stockholders. Their effect would have been antidilutive for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Anti-Dilutive Common Share Equivalents
Warrants to purchase common stock	—	22,000	—	22,000
RSUs and PRSUs	3,099,262	124,582	1,890,242	527,326
Stock options	4,498,581	2,840,298	4,151,551	4,586,476
Employee stock purchase plan	586,448	33,682	586,448	33,682
Total anti-dilutive common share equivalents	8,184,291	3,020,562	6,628,241	5,169,484

Our Board of Directors authorized the repurchase of up to $50 million of common stock with the repurchased shares to be retained as treasury stock and available for possible reissuance. Any share repurchases under the program will be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any share repurchases will be subject to market conditions and other factors as we may determine. The repurchase authorization expires August 31, 2020, however, we may suspend, modify or discontinue the program at any time in our discretion without prior notice. During the three months ended September 30, 2019 we repurchased 3,204,462 shares of common stock for $11.0 million.

4. Interest Income

Interest income was comprised of the following components for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Interest and finance income	$	124,365		$	114,392		$	370,599		$	319,236
Amortization of net deferred origination costs	(16,456		)	(15,109		)	(51,800		)	(41,568		)
Interest and finance income, net	107,909			99,283			318,799			277,668
Interest on deposits and investments	302			34			852			87
Total interest and finance income	$	108,211		$	99,317		$	319,651		$	277,755

5. Loans and Finance Receivables Held for Investment and Allowance for Credit Losses

Loans and finance receivables held for investment consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Term loans	$	937,883	$	956,755
Lines of credit	253,908		188,199
Other loans and finance receivables (1)	11,531		—
Total Unpaid Principal Balance	1,203,322		1,144,954
Net deferred origination costs	24,489		24,453
Total loans and finance receivables held for investment	$	1,227,811	$	1,169,407

⁽¹⁾  Includes loans secured by equipment and merchant cash advances.

As part of the business combination with Evolocity, on April 1, 2019 we purchased $36.8 million of term loans and finance receivables. No other loans or finance receivables from third parties were purchased during 2019. During the nine months ended September 30, 2018, we paid $0.8 million to purchase term loans that we previously sold to a third party.

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We include both loans we originate and loans funded by our issuing bank partner and later purchased by us as part of our originations. During the three months ended September 30, 2019 and 2018 we purchased loans from our issuing bank partner in the amount of $102.4 million and $112.1 million, respectively. During the nine months ended September 30, 2019 and 2018 we purchased loans from our issuing bank partner in the amount of $309.5 million and $360.6 million, respectively.

The change in the allowance for credit losses for the three and nine months ended September 30, 2019 and 2018 consisted of the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Balance at beginning of period	$	145,739		$	124,058		$	140,040		$	109,015
Recoveries of previously charged off amounts	4,652			3,306			13,089			9,857
Loans and finance receivables charged off	(45,442		)	(32,822		)	(134,422		)	(93,916		)
Provision for credit losses	43,096			39,102			129,338			108,688
Allowance for credit losses at end of period	$	148,045		$	133,644		$	148,045		$	133,644

When loans and finance receivables 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 third-party debt buyers.  The proceeds from these sales are recorded as a component of the recoveries of loans previously charged off. We did not sell any previously charged-off loans for the three and nine months ended September 30, 2019. For the three and nine months ended September 30, 2018 loans sold accounted for $0.2 million and $0.9 million of recoveries of loans previously charged off.

As of September 30, 2019 and December 31, 2018, our off-balance sheet credit exposure related to undrawn line of credit balances was $290.3 million and $264.2 million, respectively. The related reserve on unfunded loan commitments was $6.2 million and $5.9 million as of September 30, 2019 and December 31, 2018, respectively. Net adjustments to the liability for unfunded loan commitments are included in general and administrative expense.

The following table contains information, regarding the unpaid principal balance we originated related to non-delinquent, paying and non-paying delinquent loans and finance receivables as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Current loans and finance receivables	$	1,078,904	$	1,031,449
Delinquent: paying (accrual status)	34,888		54,427
Delinquent: non-paying (non-accrual status)	89,530		59,078
Total	$	1,203,322	$	1,144,954

The portion of the allowance for credit losses attributable to current loans and finance receivables was $71.3 million and $85.7 million as of September 30, 2019 and December 31, 2018, respectively, while the portion of the allowance for credit losses attributable to delinquent loans and finance receivables was $76.7 million and $54.3 million as of September 30, 2019 and December 31, 2018, respectively.

The following table shows an aging analysis of the unpaid principal balance related to loans and finance receivables by delinquency status as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
By delinquency status:
Current loans and finance receivables	$	1,078,904	$	1,031,449
1-14 calendar days past due	21,951		27,655
15-29 calendar days past due	15,363		14,665
30-59 calendar days past due	22,745		21,470
60-89 calendar days past due	18,624		19,031
90 + calendar days past due	45,735		30,684
Total unpaid principal balance	$	1,203,322	$	1,144,954

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6. Debt

The following table summarizes our outstanding debt as of September 30, 2019 and December 31, 2018 (in thousands):

				Outstanding
	Type	Maturity Date		Weighted Average Interest Rate at September 30, 2019	September 30, 2019			December 31, 2018
Debt:
OnDeck Asset Securitization Trust II	Securitization	April 2022	(1)	3.8%	$	225,000		$	225,000
OnDeck Account Receivables Trust 2013-1	Revolving	March 2022	(2)	3.9%	115,353			117,664
Receivable Assets of OnDeck, LLC	Revolving	September 2021	(3)	4.4%	103,432			113,631
OnDeck Asset Funding II LLC	Revolving	August 2022	(4)	5.1%	113,391			109,568
Prime OnDeck Receivable Trust II	Revolving	March 2022	(5)	4.0%	112,593			108,816
Loan Assets of OnDeck, LLC	Revolving	October 2022	(6)	3.9%	115,981			100,000
Corporate Debt	Revolving	January 2021		5.1%	20,000			—
Other Agreements	Various	Various	(7)	6.5%	71,796			47,318
				4.3%	877,546			821,997
Deferred debt issuance cost					(6,921		)	(5,766		)
Total Debt					$	870,625		$	816,231

⁽¹⁾  The period during which new loans may be purchased under this securitization transaction expires in March 2020.

⁽²⁾  The period during which new borrowings may be made under this facility expires in March 2021.

⁽³⁾  The period during which new borrowings of Class A revolving loans may be made under this debt facility expires in December 2020. The $19.7 million of Class B borrowing capacity matures in December 2019. 

⁽⁴⁾  The period during which new borrowings may be made under this facility expires in August 2021.

⁽⁵⁾  The period during which new borrowings may be made under this facility expires in March 2021.

⁽⁶⁾  The period during which new borrowings may be made under this debt facility expires in April 2022.

⁽⁷⁾  Other Agreements include our local currency debt facilities in Australia and Canada. The periods during which new borrowings may be made under the various agreements expire between December 2019 and June 2021. Maturity dates range from December 2019 through December 2022. In October 2019 we prepaid in full and terminated a CAD $20.0 million mezzanine debt facility with a 12% interest rate.

Certain of our loans held for investment are pledged as collateral for borrowings in our funding debt facilities. These loans totaled $1.1 billion and $1.0 billion as of September 30, 2019 and December 31, 2018, respectively. Our corporate debt facility includes a blanket lien on substantially all of our assets.

Recent Amendments to Debt Facilities

On July 19, 2019, we added a new lender to our corporate revolving debt facility and increased the commitment under the facility by $20 million to an aggregate commitment amount of $105 million. Neither the facility's interest rate of 1­-month LIBOR plus 3.0% nor the final maturity date in January 2021 changed.

On July 2, 2019, we amended our Australian debt facility. The commitment increased from AUD $75 million to AUD $150 million. The period during which new borrowings may be made under this facility expires in June 2021 and the final maturity is in December 2021.

7. Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Our interest rate cap is reported at fair value utilizing Level 2 inputs. The fair value is determined using third party valuations that are based on discounted cash flow analysis using observed market inputs.

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The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Interest rate cap	—		6		—		6
Total assets	$	—	$	6	$	—	$	6

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Interest rate cap	$	—	$	1,253	$	—	$	1,253
Total assets	$	—	$	1,253	$	—	$	1,253

There were no transfers between levels for thethree months ended September 30, 2019 and December 31, 2018.

Assets and Liabilities Disclosed at Fair Value

Because our loans and finance receivables 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 and finance receivables, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made. The following tables summarize the carrying value and fair value of our loans held for investment and fixed-rate debt (in thousands):

	September 30, 2019
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Loans and finance receivables, net	$	1,079,766	$	1,212,824	$	—	$	—	$	1,212,824
Total assets	$	1,079,766	$	1,212,824	$	—	$	—	$	1,212,824
Liabilities:
Fixed-rate debt	$	240,105	$	234,532	$	—	$	—	$	234,532
Total fixed-rate debt	$	240,105	$	234,532	$	—	$	—	$	234,532

	December 31, 2018
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Loans and finance receivables, net	$	1,029,367	$	1,155,464	$	—	$	—	$	1,155,464
Total assets	$	1,029,367	$	1,155,464	$	—	$	—	$	1,155,464
Liabilities:
Fixed-rate debt	$	232,972	$	226,965	$	—	$	—	$	226,965
Total fixed-rate debt	$	232,972	$	226,965	$	—	$	—	$	226,965

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8. Income Taxes

For interim periods, the income tax provision is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We use an estimated annual effective tax rate which is based on expected annual income and statutory tax rates to determine our quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Our provision for (benefit from) income taxes for the three and nine months ended September 30, 2019 was $(1.6) million and $1.9 million, respectively, representing a quarterly effective income tax rate of (25)% for the three months ended September 30, 2019 and a year to date effective income tax rate of 11%. We recorded a tax benefit in the third quarter of 2019 due to a $2.8 million discrete tax benefit related to a Research and Development tax credit for the years 2010 to 2018. The effective income tax rate for the full year 2018 was 0% due to the availability of net operating loss carryforwards. A valuation allowance of $37.6 million was recorded against our net deferred tax assets of approximately $44.4 million as of September 30, 2019.

9. Stock-Based Compensation and Employee Benefit Plans

Options

The following is a summary of option activity for the nine months ended September 30, 2019:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2019	7,932,782		$	5.86	—	—
Exercised	(456,256	)	$	2.30	—	—
Expired	(535,557	)	$	11.21	—	—
Outstanding at September 30, 2019	6,940,969		$	5.68	5.3	$	6,810
Exercisable at September 30, 2019	6,124,370		$	5.68	4.9	$	6,810
Vested or expected to vest as of September 30, 2019	6,898,053		$	5.68	5.3	$	6,810

Total compensation cost related to nonvested option awards not yet recognized as of September 30, 2019 was $1.6 million and will be recognized over a weighted-average period of 2.0 years. The aggregate intrinsic value of employee options exercised during the nine months ended September 30, 2019 and 2018 was $1.6 million and $2.9 million, respectively.

Restricted Stock Units

The following table is a summary of activity in RSUs and PRSUs for the nine months ended September 30, 2019:

	Number of RSUs and PRSUs		Weighted-Average Grant Date Fair Value Per Share
Unvested at January 1, 2019	3,307,561		$	6.00
RSUs and PRSUs granted	2,491,789		$	5.22
RSUs and PRSUs vested	(729,174	)	$	6.97
RSUs and PRSUs forfeited/expired	(519,932	)	$	5.87
Unvested at September 30, 2019	4,550,244		$	5.43
Expected to vest after September 30, 2019	3,688,130		$	5.46

As of September 30, 2019, 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 2.7 years.

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Stock-based compensation expense related to stock options, RSUs, PRSUs and the employee stock purchase plan are included in the following line items in our accompanying consolidated statements of operations for the three months and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Sales and marketing	$	334	$	452	$	1,367	$	1,492
Technology and analytics	692		621		2,409		1,874
Processing and servicing	199		77		338		278
General and administrative	1,136		1,698		4,578		5,208
Total	$	2,361	$	2,848	$	8,692	$	8,852

10. Derivatives and Hedging

We are subject to interest rate risk in connection with borrowings under our debt agreements which are subject to variable interest rates. In December 2018 we entered into an interest rate cap, which is a derivative instrument, to manage our interest rate risk on a portion of our variable-rate debt. We do not use derivatives for speculative purposes. The interest rate cap is designated as a cash flow hedge. In exchange for our up-front premium, we would receive variable amounts from a counterparty if interest rates rise above the strike rate on the contract. The interest rate cap agreement is for a notional amount of $300 million and has a maturity date of January 2021.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income, or AOCI, and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $1.0 million will be reclassified as an increase to interest expense over the next 12 months.

The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as ofSeptember 30, 2019 and December 31, 2018 (in thousands):

Derivative Type	Classification	September 30, 2019		December 31, 2018
Assets:
Interest rate cap agreement	Other Assets	$	6	$	1,253

The table below presents the effect of cash flow hedge accounting on AOCI as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Amount Recognized in OCI on Derivative:
Interest rate cap agreement	$	651	$	456

The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Interest expense	$	(250	)	$	—	$	(588	)	$	—

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11. Revision of Prior Period Financial Statements

During the second quarter of 2019, we revised prior period financial statements to correct an immaterial error related to the channel attribution of certain loans and the commissions associated with those loans. Commissions become due upon the closing of a loan. Those commissions are capitalized as a component of the loan balance and are amortized as an adjustment to interest income over the life of the loan. A summary of those revisions is as follows:

Revised Consolidated Balance Sheet as of December 31, 2018 (in thousands):

	As Reported			Adjustment			As Revised
Loans and finance receivables	$	1,169,157		$	250		$	1,169,407
Total assets	$	1,161,570		$	250		$	1,161,820
Accrued expenses and other liabilities	$	34,654		$	2,054		$	36,708
Total liabilities	$	857,281		$	2,054		$	859,335
Accumulated deficit	$	(195,155	)	$	(1,804	)	$	(196,959	)
Total On Deck Capital, Inc. stockholders' equity	$	299,756		$	(1,804	)	$	297,952
Total stockholders' equity	$	304,289		$	(1,804	)	$	302,485

Revised Consolidated Statements of Operations and Comprehensive Income (in thousands):

	Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
	As Reported		Adjustment	As Revised	As Reported		Adjustment	As Revised
Interest and finance income	$99,476		$(159)	$99,317	$278,216		$(461)	$277,755
Gross revenue	$102,999		$(159)	$102,840	$288,897		$(461)	$288,436
Net revenue	$52,169	(1)	$(159)	$52,010	$144,364	(1)	$(461)	$143,903
Income (loss) from operations, before provision for income taxes	$9,497	(1)	$(159)	$9,338	$11,835	(1)	$(461)	$11,374
Net income (loss)	$9,497		$(159)	$9,338	$11,835		$(461)	$11,374

⁽¹⁾ Includes a prior period reclassification to include interest expense as funding costs.

There was no impact to earnings per share for any period presented.

Revised Consolidated Statements of Cash Flows

We revised our condensed consolidated statement of cash flows for the nine months ended September 30, 2018 to reflect the correction of the error, which had no impact to net cash provided by operating activities, net cash used in investing activities and net cash provided by financing activities in the period.

12. Commitments and Contingencies

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and loans. We hold cash, cash equivalents and restricted cash in accounts at regulated domestic financial institutions in amounts that exceed or may exceed FDIC insured amounts and at non-U.S. financial institutions where deposited amounts may be uninsured. We believe these institutions to be of acceptable credit quality and we have not experienced any related losses to date.

We are exposed to default risk on loans we originate and hold and that we purchase from our issuing bank partner. We perform an evaluation of each customer's financial condition and during the term of the customer's loan(s), we have the contractual right to limit a customer's ability to take working capital loans or other financing from other lenders that may cause a material adverse change in the financial condition of the customer.

Contingencies

We are involved in lawsuits, claims and proceedings incidental to the ordinary course of our business.  We review the need for any loss contingency accruals and establishes an accrual when, in the opinion of management, it is probable that a matter would

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result in liability, and the amount of loss, if any, can be reasonably estimated.  When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time. We believe that the ultimate resolution of its current matters will not have a material adverse effect on our condensed consolidated financial statements.

13. Subsequent Events

Subsequent to September 30, 2019, we repurchased approximately 5.9 million shares of our common stock for an aggregate purchase price of approximately $26.4 million under our previously announced $50 million share repurchase program.  Those subsequent activities included a 4,054,250 share block we repurchased for approximately $18.6 million on November 5, 2019 from an institutional investor in a transaction the seller initiated. Prior to that transaction, the seller had beneficially owned more than 5% of our outstanding common stock.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes, and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Cautionary Note Regarding Forward-Looking Statements” below for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other legal authority. These forward-looking statements concern our operations, economic performance, financial condition, goals, beliefs, future growth strategies, objectives, plans and current expectations.

Forward-looking statements appear throughout this report including in Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II - Item 1. Legal Proceedings and Part II - Item 1A. Risk Factors. Forward-looking statements can generally be identified by words such as “will,” “enables,” “expects,” "intends," "may," “allows,” "plan," “continues,” “believes,” “anticipates,” “estimates” or similar expressions.

Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on our current beliefs, expectations and assumptions regarding the future of our business, anticipated events and trends, the economy and other future conditions. As such, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and in many cases outside our control. Therefore, you should not rely on any of these forward-looking statements. Our expected results may not be achieved, and actual results may differ materially from our expectations.

Important factors that could cause or contribute to such differences include risks relating to: (1) our ability to achieve consistent profitability in the future in light of our prior loss history and competition; (2) our growth strategies, including the introduction of new products or features, expanding our platform to other lenders through ODX, maintaining ODX’s current clients or losing a significant ODX client, expansion into international markets, offering equipment financing and our ability to effectively manage and fund our growth; (3) possible future acquisitions of complementary assets, businesses, technologies or products with the goal of growing our business, and the integration of any such acquisitions including Evolocity Financial Group; (4) any material reduction in our interest rate spread and our ability to successfully mitigate this risk through interest rate hedging or raising interest rates or other means; (5) worsening economic conditions that may result in decreased demand for our loans or services and increase our customers’ default rates; (6) supply and demand driven changes in credit and increases in the availability of capital for our competitors that negatively impacts our loan pricing; (7) our ability to accurately assess creditworthiness and forecast and provision for credit losses; (8) our ability to prevent or discover security breaches, disruptions in service and comparable events that could compromise confidential information held in our data systems or adversely impact our ability to service our loans; (9) incorrect or fraudulent information provided to us by customers causing us to misjudge their qualifications to receive a loan or other financing; (10) the effectiveness of our efforts to identify, manage and mitigate our credit, market, liquidity, operational and other risks associated with our business and strategic objectives; (11) our ability to continue to innovate or respond to evolving technological changes and protect our intellectual property; (12) our reputation and possible adverse publicity about us or our industry; (13) failure of operating controls, including customer or partner experience degradation, and related legal expenses, increased regulatory cost, significant fraud losses and vendor risk; (14) changes in federal or state laws or regulations, or judicial decisions involving licensing or supervision of commercial lenders, interest rate limitations, the enforceability of choice of law provisions in loan agreements, the validity of bank sponsor partnerships, the use of brokers or other significant changes; (15) risks associated with pursuing a bank charter, either de novo or in a transaction, and risks associated with either failing to obtain or obtaining a bank charter; 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, 2018, Part II - Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, Part II - Item 1A. Risk Factors in this report and in other documents that we file with the Securities and Exchange Commission, or SEC, from time to time which are or will be available on the SEC website at www.sec.gov.

Except as required by law, we undertake no duty to update any forward-looking statements. Readers are also urged to carefully review and consider all of the information in this report, as well as the other documents we make available through the SEC’s website.

In this report, when we use the terms “OnDeck,” the “Company,” “we,” “us” or “our,” we are referring to On Deck Capital, Inc. and its consolidated subsidiaries, and when we use the term "ODX" we are referring to our wholly-owned subsidiary ODX, LLC, in each case unless the context requires otherwise.

OnDeck, the OnDeck logo, OnDeck Score, OnDeck Marketplace, ODX and other trademarks or service marks of OnDeck appearing in this report are the property of OnDeck. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders, including FICO®, a registered trademark of Fair Issac Corporation. We have generally omitted the ® and ^TM designations, as applicable, for the trademarks used in this report.

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Overview

We are a leading online small business lender. We make it efficient and convenient for small businesses to access financing. Enabled by our proprietary technology and analytics, we aggregate and analyze thousands of data points from dynamic, disparate data sources to assess the creditworthiness of small businesses rapidly and accurately. Small businesses can apply for financing on our website in minutes and, using our loan decision process, including our proprietary OnDeck Score®, we can make a funding decision immediately and, if approved, fund as fast as 24 hours. We have originated more than $12 billion of loans since we made our first loan in 2007.

We have offered term loans since we made our first loan in 2007, lines of credit since 2013 and this year have begun offering equipment finance loans and, in Canada, merchant cash advances through Evolocity Financial Group with whom we combined operations on April 1, 2019. Our term loans range from $5,000 to $500,000, have maturities of 3 to 36 months and feature fixed dollar repayments. Our lines of credit range from $6,000 to $100,000, and are generally repayable within 6 or 12 months of the date of the most recent draw. We are generally targeting equipment finance loans from $5,000 to $150,000, with maturities of 2 to 5 years as we develop this offering, although we may offer larger loans in cases we deem appropriate. Qualified customers may have multiple financings with us concurrently, which we believe provides opportunities for repeat business, as well as increased value to our customers.

We originate loans throughout the United States, Canada and Australia, although, to date, the majority of our revenue has been generated in the United States. These loans are originated through our direct marketing channel, including direct mail, our outbound sales team, our social media and other online marketing channels; referrals from our strategic partner channel, including small business-focused service providers, payment processors, and other financial institutions; and through independent funding advisor program partners, or FAPs, who advise small businesses on available funding options.

We generate the majority of our revenue through interest income and fees earned on the loans we make to our customers. We earn interest on the balance outstanding and lines of credit are subject to a monthly fee unless the customer makes a qualifying minimum draw, in which case the fee is waived for the first six months. The balance of our other revenue primarily comes from our servicing and other fee income, most of which consists of marketing fees from our issuing bank partner, fees generated by ODX, and monthly fees earned from lines of credit.

We rely on a diversified set of funding sources for the loans we make to our customers. Our primary source of this financing has historically been debt facilities with various financial institutions and securitizations. We have also used proceeds from operating cash flow to fund loans in the past and continue to finance a portion of our outstanding loans with these funds. As of September 30, 2019, we had $877.5 million of debt principal outstanding and $1.3 billion of total borrowing capacity.

Recent Developments

On July 29, 2019 we announced that our Board of Directors authorized the repurchase of up to $50 million of common stock, with the repurchased shares to be retained as treasury stock and available for possible reissuance. Any share repurchases under the program will be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any share repurchases will be subject to market conditions and other factors as we may determine. The repurchase authorization expires August 31, 2020, however, we may suspend, modify or discontinue the program at any time in our discretion without prior notice. During the three months ended September 30, 2019 we purchased 3,204,462 shares of common stock for $11.0 million.

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Key Financial and Operating Metrics

We regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.

	As of or for the Three Months Ended September 30,						As of or for the Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)						(dollars in thousands)
Originations	$	629,250		$	647,796		$	1,856,604		$	1,825,109
Portfolio Yield (a)	35.1		%	36.4		%	35.2		%	36.0		%
Cost of Funds Rate	5.3		%	6.1		%	5.4		%	6.5		%
Net Interest Margin (a)	29.2		%	29.2		%	29.2		%	28.5		%
Provision Rate	6.8		%	6.0		%	7.0		%	6.0		%
Reserve Ratio	12.3		%	12.2		%	12.3		%	12.2		%
15+ Day Delinquency Ratio	8.5		%	6.4		%	8.5		%	6.4		%
Net Charge-off Rate	13.7		%	11.1		%	13.6		%	11.1		%
Efficiency Ratio (a)	45.9		%	41.5		%	45.7		%	45.9		%
Adjusted Efficiency Ratio* (a)	43.8		%	38.2		%	43.0		%	40.4		%
Return on Assets (a)	2.8		%	3.5		%	2.0		%	1.7		%
Adjusted Return On Assets* (a)	2.5		%	4.8		%	2.5		%	3.7		%
Return on Equity (a)	11.0		%	13.9		%	8.1		%	6.5		%
Adjusted Return On Equity* (a)	9.9		%	18.8		%	9.8		%	14.4		%

^(a) The prior period metrics have been updated to reflect the impact of the revision. We believe the impact of the revision to each affected KPI is not meaningful with no impact being greater than 10 basis points. See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements.

*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 Loans made during the period plus the total amount advanced on other finance receivables. 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 partner and later purchased by us are included as part of our originations.

Unpaid Principal Balance represents the total amount of principal outstanding on Loans held for investment, plus outstanding advances relating to other finance receivables and the amortized cost of loans purchased from other than our issuing bank partner at the end of the period. It excludes net deferred origination costs, allowance for credit losses and any loans sold or held for sale at the end of the period.

Portfolio Yield

Portfolio Yield is the rate of return we achieve on Loans and finance receivables outstanding during a period. It is calculated as annualized Interest and finance income on Loans and finance receivables including amortization of net deferred origination costs divided by average loans and finance receivables. Annualization is based on 365 days per year and is calendar day-adjusted. Loans and finance receivables represents the sum of term loans, lines of credit, equipment finance loans and finance receivables. Portfolio Yield replaces our previous metric, Loan Yield, in order to include other finance receivables.

Net deferred origination costs in Loans and finance receivables 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 and finance receivables are originated and decrease the carrying value of Loans and finance receivables, thereby increasing Portfolio Yield. Deferred origination costs are limited to costs directly attributable to originating loans and finance receivables such as commissions, vendor costs and personnel costs directly related to the time spent by the personnel performing activities related to originations and increase the carrying value of loans and finance receivables, thereby decreasing Portfolio Yield.

Recent pricing trends are discussed under the subheading “Key Factors Affecting Our Performance - Pricing.”

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Cost of Funds Rate

Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

Net Interest Margin

Net Interest Margin is calculated as annualized net interest and finance income divided by average Interest Earning Assets. Net interest and finance income represents Interest and finance receivable income less Interest expense during the period. Annualization is based on 365 days per year and is calendar day-adjusted. Interest and finance receivable income is net of fees on loans held for investment and loans held for sale. Interest expense is the interest expense, fees, and amortization of deferred debt issuance costs we incur in connection with our debt facilities. Interest Earning Assets represents the sum of Loans and finance receivables plus Cash and cash equivalents plus Restricted cash.

Reserve Ratio

Reserve Ratio is our allowance for credit losses at the end of the period divided by the Unpaid Principal Balance at the end of the period.

Provision Rate

Provision Rate equals the provision for credit losses for the period divided by originations for the period. Because we reserve for probable credit losses inherent in the portfolio upon origination, this rate is significantly impacted by the expectation of credit losses for the period’s originations volume. This rate is also impacted by changes in loss expectations for loans and finance receivables 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 Loans and finance receivables 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 and finance receivables 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 contractually past due and for our finance receivables that are 15 or more payments behind schedule, as a percentage of the Unpaid Principal Balance at the end of the period. The Unpaid Principal Balance for our loans and finance receivables that are 15 or more calendar days or payments past due includes Loans and finance receivables that are paying and non-paying. Because term and line of credit loans require daily and weekly repayments, excluding weekends and holidays, they may be deemed delinquent more quickly than loans from traditional lenders that require only monthly payments. 15+ Day Delinquency Ratio is not annualized, but reflects balances at the end of the period.

Net Charge-off Rate

Net Charge-off Rate is calculated as our annualized net charge-offs for the period divided by the average Unpaid Principal Balance outstanding during the period. Net charge-offs are charged-off loans and finance receivables in the period, net of recoveries of prior charged-off loans and finance receivables in the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

Efficiency Ratio

Efficiency Ratio is a measure of operating efficiency and is calculated as Total operating expense for the period divided by Gross revenue for the period.

Adjusted Efficiency Ratio

Adjusted Efficiency Ratio is non-GAAP measure calculated as total operating expense divided by gross revenue for the period, adjusted to exclude (a) stock-based compensation expense and (b) items management deems to be non-representative of operating results or trends, all as shown in the non-GAAP reconciliation presentation of this metric. We believe Adjusted Efficiency Ratio is useful because it provides investors and others with a supplemental operating efficiency metric to present our operating efficiency across multiple periods without the effects of stock-based compensation, which is a non-cash expense based on equity grants made to participants in our equity plans at specified prices and times but which does not necessarily reflect how our business is performing, and items which may only affect our operating results periodically. Our use of Adjusted Efficiency Ratio has limitations as an analytical tool and you should not consider it in isolation, as a substitute for or superior to our Efficiency Ratio,

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which is the most comparable GAAP metric. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures for a discussion and reconciliation.

Return on Assets

Return on Assets is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total assets for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

Adjusted Return on Assets

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

Return on Equity

Return on Equity is calculated as annualized net income (loss) attributable to On Deck Capital, Inc. common stockholders for the period divided by average total On Deck Capital, Inc. stockholders’ equity for the period. For periods of less than one year, the metric is annualized based on four quarters per year and is not business day or calendar day-adjusted.

Adjusted Return on Equity

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

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On Deck Capital, Inc. and Subsidiaries

Consolidated Average Balance Sheets

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Assets
Cash and cash equivalents	$	52,438		$	55,851		$	48,950		$	50,004
Restricted cash	46,688			53,024			47,421			55,466
Loans and finance receivables	1,218,363			1,081,464			1,210,260			1,030,598
Less: Allowance for credit losses	(148,150		)	(129,804		)	(146,887		)	(122,319		)
Loans and finance receivables held for investment, net	1,070,213			951,660			1,063,373			908,279
Property, equipment and software, net	17,784			16,591			17,350			18,416
Other assets	66,722			15,967			53,855			15,302
Total assets	$	1,253,845		$	1,093,093		$	1,230,949		$	1,047,467
Liabilities, mezzanine equity and stockholders' equity
Liabilities:
Accounts payable	$	4,416		$	4,318		$	4,769		$	3,607
Interest payable	2,722			2,402			2,723			2,388
Debt	850,997			771,483			841,386			735,384
Accrued expenses and other liabilities	63,151			33,361			60,602			32,547
Total liabilities	921,286			811,564			909,480			773,926
Mezzanine equity:
Redeemable noncontrolling interest (1)	14,807			—			9,064			—
Stockholders’ equity:
Total On Deck Capital, Inc. stockholders' equity	314,749			276,059			308,645			268,576
Noncontrolling interest	3,003			5,470			3,760			4,965
Total stockholders' equity	317,752			281,529			312,405			273,541
Total liabilities, mezzanine equity and stockholders' equity	$	1,253,845		$	1,093,093		$	1,230,949		$	1,047,467
Memo:
Unpaid Principal Balance	$	1,194,773		$	1,060,222		$	1,185,978		$	1,011,155
Interest Earning Assets	$	1,317,489		$	1,190,339		$	1,306,631		$	1,136,068
Loans and Finance Receivables	$	1,218,363		$	1,081,464		$	1,210,260		$	1,030,598

⁽¹⁾ The nine months ended balance only includes a balance for six months related to the Evolocity business combination which occurred on April 1, 2019.

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

Non-GAAP Financial Measures

We believe that the non-GAAP metrics can provide useful supplemental measures for period-to-period comparisons of our core business and useful supplemental information to investors and others in understanding and evaluating our operating results.

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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 net income (loss) attributable to OnDeck adjusted to exclude the items shown in the table below. Stock-based compensation includes employee compensation as well as compensation to third-party service providers. Adjusted Net Income (Loss) per Share is calculated by dividing Adjusted Net Income (Loss) by the weighted average common shares outstanding during the period.

Our use of Adjusted Net Income (Loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• Adjusted Net Income (Loss) does not reflect the potentially dilutive impact of stock-based compensation; and

• Adjusted Net Income (Loss) excludes charges we are required to incur in connection with real estate dispositions, severance obligations, debt extinguishment costs and sales tax refunds.

The following tables present reconciliations of net income (loss) to Adjusted Net Income (Loss) and net income (loss) per share to Adjusted Net Income (Loss) per Share for each of the periods indicated:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
	(in thousands, except shares and per share data)					(in thousands, except shares and per share data)
Reconciliation of Net Income (Loss) Attributable to OnDeck to Adjusted Net Income (Loss)
Net income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,684		$	9,610	$	18,645		$	13,181
Adjustments (after tax):
Stock-based compensation expense	1,923			2,848		6,940			8,852
Real estate disposition charges	—			—		—			4,187
Severance and executive transition expenses	—			—		—			911
Debt extinguishment costs	—			550		—			1,934
Discrete tax benefit	(2,800		)	—		(2,800		)	—
Adjusted Net Income (Loss)	$	7,807		$	13,008	$	22,785		$	29,065
Adjusted Net Income (Loss) per share:
Basic	$	0.10		$	0.17	$	0.30		$	0.39
Diluted	$	0.10		$	0.16	$	0.29		$	0.37
Weighted-average common shares outstanding:
Basic	75,433,008			74,715,592		75,722,117			74,362,211
Diluted	77,758,281			79,372,491		78,576,899			78,314,719

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.

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	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
	(per share)					(per share)
Reconciliation of Net Income (Loss) per Basic Share to Adjusted Net Income (Loss) per Basic Share
Net income (loss) per basic share attributable to On Deck Capital, Inc. common stockholders	$	0.12		$	0.13	$	0.25		$	0.18
Add / (Subtract):
Stock-based compensation expense	0.02			0.03		0.09			0.11
Real estate disposition charges	—			—		—			0.06
Severance and executive transition expenses	—			—		—			0.01
Debt extinguishment costs	—			0.01		—			0.03
Discrete tax benefit	(0.04		)	—		(0.04		)	—
Adjusted Net Income (Loss) per Basic Share	$	0.10		$	0.17	$	0.30		$	0.39

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
	(per share)					(per share)
Reconciliation of Net Income (Loss) per Diluted Share to Adjusted Net Income (Loss) per Diluted Share
Net income (loss) per diluted share attributable to On Deck Capital, Inc. common stockholders	$	0.11		$	0.12	$	0.24		$	0.17
Add / (Subtract):
Stock-based compensation expense	0.03			0.03		0.09			0.11
Real estate disposition charges	—			—		—			0.05
Severance and executive transition expenses	—			—		—			0.01
Debt extinguishment costs	—			0.01		—			0.03
Discrete tax benefit	(0.04		)	—		(0.04		)	—
Adjusted Net Income (Loss) per Diluted Share	$	0.10		$	0.16	$	0.29		$	0.37

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Adjusted Efficiency Ratio

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)						(in thousands)
Reconciliation of Efficiency Ratio to Adjusted Efficiency Ratio
Total operating expense	$	51,680		$	42,672		$	151,914		$	132,529
Gross revenue	$	112,550		$	102,840		$	332,771		$	288,436
Efficiency Ratio	45.9		%	41.5		%	45.7		%	45.9		%
Adjustments (pre-tax):
Stock-based compensation expense	$	2,361		$	2,848		$	8,692		$	8,852
Real estate disposition charges	—			—			—			4,187
Severance and executive transition expenses	—			—			—			911
Debt extinguishment costs	—			550			—			1,934
Operating expenses less noteworthy items	$	49,319		$	39,274		$	143,222		$	116,645
Gross revenue	$	112,550		$	102,840		$	332,771		$	288,436
Adjusted Efficiency Ratio	43.8		%	38.2		%	43.0		%	40.4		%

Adjusted Return on Assets

Adjusted Return on Assets represents net income (loss) attributable to OnDeckadjusted to exclude the items shown in the table below divided by average total assets.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)						(in thousands)
Reconciliation of Return on Assets to Adjusted Return on Assets
Net income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,684		$	9,610		$	18,645		$	13,181
Average total assets	$1,253,845			$1,093,093			$1,230,949			$1,047,467
Return on Assets	2.8		%	3.5		%	2.0		%	1.7		%
Adjustments (after tax):
Stock-based compensation expense	$	1,923		$	2,848		$	6,940		$	8,852
Real estate disposition charges	—			—			—			4,187
Severance and executive transition expenses	—			—			—			911
Debt extinguishment costs	—			550			—			1,934
Discrete tax benefit	(2,800		)	—			(2,800		)	—
Adjusted Net Income (Loss)	$	7,807		$	13,008		$	22,785		$	29,065
Average total assets	$1,253,845			$1,093,093			$1,230,949			$1,047,467
Adjusted Return on Assets	2.5		%	4.8		%	2.5		%	3.7		%

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Adjusted Return on Equity

Adjusted Return on Equity represents net income (loss) attributable to OnDeckadjusted to exclude the items shown in the table below divided by average total On Deck Capital, Inc. stockholders' equity.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)						(in thousands)
Reconciliation of Return on Equity to Adjusted Return on Equity
Net income (loss) attributable to On Deck Capital, Inc. common stockholders	$	8,684		$	9,610		$	18,645		$	13,181
Average OnDeck stockholders' equity	$	314,749		$	276,059		$	308,645		$	268,576
Return on Equity	11.0		%	13.9		%	8.1		%	6.5		%
Adjustments (after tax):
Stock-based compensation expense	$	1,923		$	2,848		$	6,940		$	8,852
Real estate disposition charges	—			—			—			4,187
Severance and executive transition expenses	—			—			—			911
Debt extinguishment costs	—			550			—			1,934
Discrete tax benefit	(2,800		)	—			(2,800		)	—
Adjusted Net Income (Loss)	$	7,807		$	13,008		$	22,785		$	29,065
Average total On Deck Capital, Inc. stockholders' equity	$	314,749		$	276,059		$	308,645		$	268,576
Adjusted Return on Equity	9.9		%	18.8		%	9.8		%	14.4		%

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Key Factors Affecting Our Performance

2019 Strategic Priorities

Our primary focus remains to prudently grow our business while increasing profitability. The core elements of our growth strategy include:

•Expanding the scale and efficiency of our U.S. lending franchise;

•Investing in growth adjacencies, including ODX, equipment finance and international;

•Innovating on our core strengths in risk, technology and funding;

•Increasing our capital efficiencies, including a common stock repurchase program of up to $50 million; and

•Actively pursuing a bank charter, either de novo or through a transaction.

We plan to continue to invest significant resources to accomplish these goals. We anticipate that our total operating expense will continue to increase in absolute dollars through 2019 relative to 2018. These investments are intended to contribute to our long-term growth, but they may affect our near-term financial results.

In October 2018, we announced the launch of ODX, a wholly-owned subsidiary that helps banks digitize their small business lending process.  ODX offers a combination of software, analytic insights, and professional services that allow banks to bring their small business lending process online. We believe ODX can help banks improve customer experiences, increase portfolio growth, and reduce processing costs.  We expect ODX results to reflect a period of net investment as it builds its infrastructure and capabilities to grow existing and develop additional bank relationships.

Originations

During the three months ended September 30, 2019 and 2018, we originated $629 million and $648 million of loans, respectively. The decrease in originations in the three months ended September 30, 2019 relative to the same period in 2018 was primarily driven by tightening of underwriting and market dynamics in the US. The above-mentioned decrease of originations was primarily due to a decline in our direct and FAP channels, which was partially offset by growth in the strategic partner channel. Originations in the second and third quarter of 2019 include the originations of Evolocity due to the business combination transaction that occurred in April 2019. The average term loan size originated for the three months ended September 30, 2019 and September 30, 2018 was $56 thousand.

Originations increased approximately $37 million or 6.3% as compared to the second quarter of 2019. Originations increased in both our FAP and strategic partner channels, partially offset by a decrease in our direct channel.

We anticipate that our future growth will continue to depend in part on attracting new customers. As we continue to aggregate data on existing customers and prospective customers, we seek to use that data to optimize our marketing spending and business development efforts to retain existing customers as well as to identify and attract prospective customers. We have historically

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relied on all three of our channels for customer acquisition. We plan to continue to utilize direct marketing, while increasing our brand awareness and growing our strategic partnerships.

The following table summarizes the percentage of loans and finance receivables made to all customers originated by our three distribution channels for the periods indicated. From time to time management may proactively adjust our originations channel mix based on market conditions. Our direct channel remains our largest channel as a percentage of origination dollars. Our strategic partner channel increased as a percentage of originations from the third quarter of 2018 compared to the third quarter of 2019, while our direct and FAP channel percentage of originations decreased.

	Three Months Ended September 30,				Nine Months Ended September 30,
Percentage of Originations (Dollars)	2019		2018		2019		2018
Direct	38	%	43	%	41	%	44	%
Strategic Partner	32	%	26	%	32	%	26	%
Funding Advisor	30	%	31	%	28	%	30	%

We originate term loans and lines of credit to customers who are new to OnDeck as well as to existing customers. New originations are defined as new term loan originations plus all line of credit draws in the period, including subsequent draws on existing lines of credit. Renewal originations include term loans only. We believe our ability to increase adoption of our loans within our existing customer base will be important to our future growth. A component of our future growth will include increasing the length of our customer life cycle by expanding our loan offerings and features. In the three months ended September 30, 2019 and 2018 originations from our repeat customers were 55% and 52% respectively, of total originations to all customers. We believe our significant number of repeat customers is primarily due to our high levels of customer service and continued improvement in our loan features and services. Repeat customers generally show improvements in several key metrics. We believe the decrease in volume from new customers is indicative of the increased competition. In the nine months ended September 30, 2019, 31% of our origination volume from repeat customers was due to unpaid principal balance rolled from existing loans directly into such repeat originations. In order for a current customer to qualify for a renewal term loan while a term loan payment obligation remains outstanding, the customer must pass the following standards:

• the business must be approximately 50% paid down on its existing loan;

• the business must be current on its outstanding OnDeck loan with no material delinquency history; and

• the business must be fully re-underwritten and determined to be of adequate credit quality.

The extent to which we generate repeat business from our customers will be an important factor in our continued revenue growth and our visibility into future revenue. In conjunction with repeat borrowing activity, many of our customers also tend to increase their subsequent loan size compared to their initial loan size.

The following table summarizes the percentage of loans originated by new and repeat customers. Loans from cross-selling efforts are classified in the table as repeat loans.

	Three Months Ended September 30,				Nine Months Ended September 30,
Percentage of Originations (Dollars)	2019		2018		2019		2018
New	45	%	48	%	47	%	49	%
Repeat	55	%	52	%	53	%	51	%

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Loans

Loans and finance receivables held for investment consist of term loans, lines of credit, merchant cash advances and secured equipment finance loans that require daily, weekly or monthly repayments. We have both the ability and intent to hold these loans to maturity. Loans and finance receivables held for investment are carried at amortized cost. The amortized cost of a loan and finance receivable is the unpaid principal balance plus net deferred origination costs. Net deferred origination costs are comprised of certain direct origination costs, net of all loan origination fees received. Loan and finance receivable origination fees include fees charged to the borrower related to origination that increase the loan yield. Loan origination costs are limited to direct costs attributable to originating a loan, including commissions and personnel costs directly related to the time spent by those individuals performing activities related to origination. Direct origination costs in excess of origination fees received are included in the loan and finance receivable balance and for term loans and finance receivables are amortized over the life of the term loan using the effective interest method, while for lines of credit principal amounts drawn are amortized using the straight line method over an average of 12 months. Loans and finance receivables held for investment increased from $1.1 billion at September 30, 2018 to $1.2 billion at September 30, 2019, reflecting the increase in originations over the period as well as the addition of the portfolio acquired as a result of combining our Canadian operations with Evolocity in April 2019.

Pricing

Customer pricing is determined primarily based on credit risk assessment generated by our proprietary data and analytics engine and cash flow assessments of the customer's ability to repay the loan. Our decision structure also considers the OnDeck Score,FICO^®Score, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. OnDeck assesses credit risk across several dimensions, including assessing the stability and credit worthiness of both the business and the personal guarantor and of the borrower's industry. Some of the most important factors assessed relate to the borrower's ability to pay, overall levels of indebtedness, cash flow and business outlook, and their personal and commercial credit history. These factors are assessed against certain minimum requirements in our underwriting standards, as well as through multivariate regressions and statistical models. In addition, general market conditions may broadly influence pricing industry-wide. Loans originated through the direct and strategic partner channels are generally priced lower than loans originated through the funding advisor channel due to thecommission structure of the FAP program as well as the relative higher risk profile of the borrowers in the FAP channel.

As of the three months ended September 30, 2019, our customers pay between 0.004 and 0.042 cents per month in interest for every dollar they borrow under one of our term loans. Historically, our term loans have been primarily quoted in Cents on Dollar, or COD, which reflects the monthly interest paid by a customer to us per dollar borrowed for a loan. Lines of credit have been historically quoted in APR. As of the three months ended September 30, 2019, the APRs of our term loans outstanding ranged from 9.0% to 98.3% and the APRs of our lines of credit outstanding ranged from 19.9% to 61.9%.

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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
	2016	2017	2018	Q1 2018	Q2 2018	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Q3 2019
Weighted Average Term Loan "Cents on Dollar" Borrowed, per Month	1.82¢	1.95¢	2.14¢	2.08¢	2.15¢	2.17¢	2.17¢	2.19¢	2.12¢	2.08¢
Weighted Average APR - Term Loans and Lines of Credit	41.4%	43.7%	46.9%	46.0%	47.2%	47.5%	47.0%	46.9%	45.4%	45.0%

The pricing increases in 2017 and 2018 were primarily a reflection of past and expected future increases in the underlying market interest rates that we, like many other lenders in the market, were passing on to our customers. Additionally, in 2017 and 2018 we increased our originations in the funding advisor channel, which typically have higher APRs than the direct and strategic partner channels. The decrease in COD and APR over the three quarters of 2019 compared to the fourth quarter of 2018 reflected market dynamics and our shift in strategy to offer longer term loans at lower yields to select customers with higher credit scores.

We consider Portfolio Yield as a key pricing measure. Portfolio Yield is the rate of return we earn on loans and finance receivables outstanding during a period. Our Portfolio Yield differs from APR in that it takes into account deferred origination fees and deferred origination costs. Deferred origination fees include fees paid up front to us by customers when loans are originated and decrease the carrying value of loans, thereby increasing the Portfolio Yield. Deferred origination costs are limited to costs directly attributable to originating loans and finance receivables such as commissions, vendor costs and personnel costs directly related to the time spent performing activities related to originations and increase the carrying value of loans and finance receivables, thereby decreasing the Portfolio Yield. Our decision to hold more delinquent loans on balance sheet forcollection rather than sell those loans to third parties reduces Portfolio Yield.

Portfolio Yield
For the Year		For the Quarter
2016	2017	Q1 2018		Q2 2018		Q3 2018		Q4 2018		Q1 2019	Q2 2019	Q3 2019
33.1%	33.7%	35.5	%	36.1	%	36.4	%	36.5	%	35.6%	35.0%	35.1%

In addition to individual loan pricing, and the number of days in a period, there are many other factors that can affect Portfolio Yield, including:

• Channel Mix - In general, loans originated from the strategic partner channel have lower Portfolio Yields than loans from the direct and funding advisor channel. This is primarily due to the strategic partner channel's higher commissions as compared to the direct channel, and lower pricing as compared to the funding advisor channel.

• Term Mix - In general, term loans with longer durations have lower annualized interest rates.  Despite lower Portfolio Yields, total revenues from customers with longer loan durations are typically higher than the revenue of customers with shorter-term, higher Portfolio Yield loans because total payback is typically higher compared to a shorter length term for the same principal loan amount. For the three months ended September 30, 2019, the average length of new term loan originations was 13.9 months which increased from 12.3 months for the three months ended June 30, 2019 and 11.3 months for the three months ended September 30, 2018. The increase in average term length reflects the increased booking rate of longer term loans with larger balances of higher credit quality loans as our credit policy has recently been further optimized for loans with those specific characteristics.

• Customer Type Mix - In general, loans originated from repeat customers historically have had lower Portfolio Yields than loans from new customers.  This is primarily because repeat customers typically have a higher OnDeck Score and are therefore deemed to be lower risk.  In addition, repeat customers are more likely to be approved for longer terms than new customers given their established payment history and lower risk profiles. Finally, origination fees can be reduced or waived for repeat customers, contributing to lower Portfolio Yields. 

• Loan Mix - In general, lines of credit have lower Portfolio Yields than term loans. For the three months ended September 30, 2019, the weighted average line of credit APR was 34.6%, compared to 47.4% for term loans.  Draws by line of credit customers increased to 20.8% of total originations for the three months ended September 30, 2019 from 19.8% in three months ended September 30, 2018.

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Interest Expense

We obtain outside financing principally through debt facilities and securitizations with a diverse group of banks, insurance companies and other institutional lenders and investors. Interest expense consists of the interest expense we incur on our debt, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker fees, origination fees and legal fees and, in applicable periods, certain costs associated with our interest rate hedging activity. Cost of Funds Rate is calculated as interest expense divided by average debt outstanding for the period. Our Cost of Funds Rate decreased to 5.3% for the three months ended September 30, 2019 as compared to 6.1% for the three months ended September 30, 2018. The decrease in our Cost of Funds Rate was driven by the decrease in our weighted average interest rate on debt outstanding. That decrease was attributable to decreases in interest rate spread (the applicable percentage rate above the benchmark interest rate charged by the lender).

Credit Performance

Credit performance refers to how credit losses on a portfolio of loans and finance receivables perform relative to expectations. Generally speaking, perfect credit performance is a loan that is repaid in full and in accordance with the terms of the agreement, meaning that all amounts due were repaid in full and on time. However, no portfolio is without risk and a certain amount of losses are expected. In this respect, credit performance must be assessed relative to pricing and expectations. Because a certain degree of losses are expected, pricing will be determined with the goal of allowing for estimated losses while still generating the desired rate of return after taking into account those estimated losses. When a portfolio has higher than estimated losses, the desired rate of return may not be achieved, and that portfolio would be considered to have underperformed. Conversely, if the portfolio incurred lower than estimated losses, resulting in a higher than expected rate of return, the portfolio would be considered to have overperformed.

We originate and price our loans and finance receivables expecting that we will incur a degree of losses. When we originate our loans and finance receivables, we record a provision for estimated credit 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 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 reserve related to the existing portfolio. A net decrease to the reserve related to the existing portfolio reduces provision expense, while a net increase to the loan reserve increases provision expense.

In accordance with our strategy to expand the range of our loan offerings, over time, we have expanded the offerings of our term loans by making available longer terms and larger amounts. When we begin to offer a new type of loan, we typically extrapolate our existing data to create an initial version of a credit model to permit us to underwrite and price the new type of loan. Thereafter, we begin to collect actual performance data on these new loans which allows us to refine our credit model based on actual data as opposed to extrapolated data. It often takes several quarters after we begin offering a new type of loan for that loan to be originated in sufficient volume to generate a critical mass of performance data. In addition, for loans with longer terms, it takes longer to acquire significant amounts of data because the loans take longer to season.

Each loan cohort is unique. A loan cohort refers to loans originated in the same specified time period. For a variety of reasons, one cohort may exhibit different performance characteristics over time compared to other cohorts at similar months of seasoning.

We evaluate and track portfolio credit performance primarily through four key financial metrics: 15+ Day Delinquency Ratio; Net Charge-off Rate; Reserve Ratio; and Provision Rate.

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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, increased from 11.1% in three months ended September 30, 2018 to 13.7% in three months ended September 30, 2019, driven by credit expansion, channel mix changes and changes in small business sentiment and behavior. Since 2018, we have held delinquent loans longer as we expanded our in-house pre-charge-off collection efforts to maximize returns. While collections on those more severely delinquent loans have proven to be successful and have increased our recoveries and profitability, some portion of those loans ultimately remain uncollectible. Allowing several quarters to continue collection efforts delayed charge-off of some loans, which have now accumulated. This quarter's increase net charge-off rate reflects the increased charge-off rate as some of those accumulated loans are charged-off. In addition, the Net Charge-off Rate in the three months ended September 30, 2018 was unusually low by historical standards reflecting our decision to tighten our credit policies in the first half of 2017.

Historical Charge-Offs

We illustrate below our historical loan losses by providing information regarding our net lifetime charge-off ratios by cohort. Net lifetime charge-offs are the unpaid principal balance charged off less recoveries of loans previously charged off. A given cohort’s net lifetime charge-off ratio is the cohort’s net lifetime charge-offs through September 30, 2019 divided by the cohort’s total original loan volume. Repeat loans in the denominator include the full renewal loan principal, rather than the net funded amount, which is the renewal loan’s principal net of the unpaid principal balance on the existing loan. Loans are typically charged off after 90 days of nonpayment and 30 days of inactivity. The chart immediately below includes all term loan originations, including, if applicable, loans sold through OnDeck Marketplace or held for sale on our balance sheet.

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Net Charge-off Ratios by Cohort Through September 30, 2019

	For the Year			For the Quarter
	2015	2016	2017	Q1 2018	Q2 2018	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Q3 2019
Principal Outstanding as of September 30, 2019 by Period of Origination	—%	—%	0.1%	0.5%	1.2%	3.5%	9.7%	24.6%	57.5%	87.1%

The following chart displays the historical lifetime cumulative net charge-off ratio by cohort for the origination periods shown. The chart reflects all term loan originations, including, if applicable, loans sold through OnDeck Marketplace or held for sale on our balance sheet. The data is shown as a static pool for each cohort, illustrating how the cohort has performed given equivalent months of seasoning.

Given that the originations in the second and third quarter of 2019 cohorts are relatively unseasoned as of September 30, 2019, these cohorts reflect low lifetime charge-off ratios in the total loans chart below. Further, given our loans are typically charged off after 90 days of nonpayment and 30 days of inactivity, all cohorts reflect minimal charge offs for the first three months in the chart below.

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Net Cumulative Lifetime Charge-off Ratios

All Loans

	For the Year						For the Quarter
Originations	2015		2016		2017		Q1 2018		Q2 2018		Q3 2018		Q4 2018		Q1 2019		Q2 2019		Q3 2019
All term loans (in millions)	$	1,704	$	2,052	$	1,697	$	469	$	465	$	520	$	517	$	486	$	457	$	499
Weighted average term (months) at origination	12.4		13.2		12.1		11.8		11.8		11.9		11.8		11.7		12.2		13.5

Loans we originated in 2016 demonstrated higher than historical net cumulative lifetime charge-off ratios, which were primarily related to lower credit quality loans of longer terms and larger 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 2019 are not yet seasoned enough for meaningful comparison.

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15+ Day Delinquency Ratio

The 15+ Day Delinquency Ratio is the aggregate Unpaid Principal Balance for our portfolio that is 15 or more calendar days past due as of the end of the period as a percentage of the Unpaid Principal Balance.

The 15+ Day Delinquency ratio increased from 6.4% at September 30, 2018 to 8.5% at September 30, 2019 driven by our decision in 2018 to hold, and collect on, delinquent loans longer, credit tests we performed in 2018, and a normalizing credit environment in 2019. The increase in loans 15-89 days past due was primarily driven by the credit testing we performed in 2018, while the increase in loans 90+ days past due primarily reflects the change in our collection strategy.

The increase in the third quarter of 2019 of the percentage of 90+ days past due loans as compared to the second quarter of 2019 reflects the charge-off of delinquent loans accumulated over the past several quarters as we expanded our internal collection efforts and the increase in delinquencies which resulted from our credit expansion in the third and fourth quarter of 2018. The decrease of the percentage of 15-89 days past due loans over the same period reflects the improved credit performance of our more current cohorts.

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Reserve Ratio

The Reserve Ratio, which is the allowance for credit losses divided by the Unpaid Principal Balance as of a specific date, is a comprehensive measurement of our allowance for credit 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 remained relatively unchanged from 12.2% at September 30, 2018, to 12.3% at September 30, 2019.

Provision Rate

The Provision Rate is the provision for credit losses divided by the new originations volume of loans and finance receivables held for investment. Originations include the full renewal loan principal of repeat loans, rather than the net funded amount.

Our Provision Rate increased in the third quarter of 2019 to 6.8% from 6.0% in the third quarter of 2018. This increase in Provision Rate was primarily driven by the deterioration of loans originated in the second half of 2018, and a normalizing credit environment.

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Economic Conditions

Changes in the overall economy may impact our business in several ways, including demand for our loans, credit performance, and interest expense.

• Demand for Our Loans. Generally, we believe a strong economic climate tends to increase demand for our loans as consumer spending increases and small businesses seek to expand and more potential customers may meet our underwriting requirements, although some small businesses may generate enough additional cash flow that they no longer require a loan. In that climate, traditional lenders may also approve loans for a higher percentage of our potential customers.

• Credit Performance. In a strong economic climate, our customers may experience improved cash flow and liquidity, which may result in lower loan losses. In a weakening economic climate or recession, the opposite may occur. We factor economic conditions into our loan underwriting analysis and reserves for loan losses, but changes in economic conditions, particularly sudden changes, may affect our actual loan losses. These effects may be partially mitigated by the short-term nature and repayment structure of our loans, which should allow us to react more quickly than if the terms of our loans were longer.

• Loan Losses. Our underwriting process is designed to limit our loan losses to levels consistent with our risk tolerance and financial model. Our 2017 loan loss levels were higher than our financial targets largely because we were taking corrective action throughout the first half of the year to address the higher 2016 loan losses. Our 2018 loan loss levels were consistent with our financial targets. Our overall loan losses are affected by a variety of factors, including external factors such as prevailing economic conditions, general small business sentiment and unusual events such as natural disasters, as well as internal factors such as the accuracy of our loan decisioning, the effectiveness of our underwriting process and the introduction of new loan types or features with which we have less experience to draw upon when forecasting their loss rates. Our loan loss rates may vary in the future.

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

Customer Acquisition Costs

Our customer acquisition costs, or CACs, differ depending upon the acquisition channel. CACs in our direct channel include the commissions paid to our internal sales force and expenses associated with items such as direct mail, and online marketing activities. CACs in our strategic partner channel and FAP channel include commissions paid. CACs in all channels include new originations. For our United States portfolio, the FAP channel had the highest CAC per unit and our strategic partner channel had the lowest CAC per unit for both the three months ended September 30, 2019 and September 30, 2018.

The total amount of U.S. CACs decreased both in aggregate and for each of the three individual acquisition channels for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.  Our U.S. CACs evaluated as a percentage of originations increased for all three channels period over period. The decrease in absolute dollars was primarily attributable to a decrease in U.S. CACs in our FAP channel driven by a decrease in external commissions and origination volume.

Increased competition for customer response could require us to incur higher customer acquisition costs and make it more difficult for us to grow our originations in both unit and volume for both new as well as repeat customers.

Components of Our Results of Operations

Revenue

Interest and Finance 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 earned on invested cash. We also generate revenue through finance income on our merchant cash advances in Canada.

Our interest and origination fee revenue is amortized over the term of the loan or finance receivable 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 and finance receivables held for investment or loans held for sale, as appropriate, on our consolidated balance sheets and recognized over the term of the loan or finance receivable. Direct origination costs include costs directly

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attributable to originating a loan or finance receivable, including commissions, vendor costs and personnel costs directly related to the time spent by those individuals performing activities related to loan origination.

Other Revenue. Other revenue includes fees generated by ODX, marketing fees earned from our issuing bank partner, monthly fees charged to customers for our line of credit, and referral fees from other lenders.

Cost of Revenue

Provision for Credit Losses. Provision for credit losses consists of amounts charged to income during the period to maintain an allowance for credit losses, or ALLL, estimated to be adequate to provide for probable credit losses inherent in our loan and finance receivable portfolio. Our ALLL represents our estimate of the credit losses inherent in our portfolio of loans and finance receivables and is based on a variety of factors, including the composition and quality of the portfolio, loan specific information gathered through our collection efforts, delinquency levels, our historical charge-off and loss experience and general economic conditions. In general, we expect our aggregate provision for credit losses to increase in absolute dollars as the amount of loans and finance receivables we originate and hold for investment increases.

Interest Expense. Interest expense consists of the interest expense we incur on our debt, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining this debt, such as banker fees, origination fees and legal fees and, in applicable periods, certain costs associated with our interest rate hedging activity. Our interest expense and Cost of Funds Rate will vary based on a variety of external factors, such as credit market conditions, general interest rate levels and spreads, as well as OnDeck-specific factors, such as origination volume and credit quality. We expect interest expense will increase in absolute dollars as we increase borrowings to fund portfolio growth.

Operating Expense

Operating expense consists of sales and marketing, technology and analytics, processing and servicing, and general and administrative expenses. Salaries and personnel-related costs, including benefits, bonuses, stock-based compensation expense and occupancy, comprise a significant component of each of these expense categories. All operating expense categories also include an allocation of overhead, such as rent and other overhead, which is based on employee headcount. We believe that continuing to invest in our business is essential to growing the business and maintaining our competitive position, and therefore, we expect the absolute dollars of operating expenses to increase.

Sales and Marketing. Sales and marketing expense consists of salaries and personnel-related costs of our sales and marketing and business development employees, as well as direct marketing and advertising costs, online and offline CACs (such as direct mail, paid search and search engine optimization costs), public relations, promotional event programs and sponsorships, corporate communications and allocated overhead.

Technology and Analytics. Technology and analytics expense 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 and other corporate expenses. 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.

Provision for Income Taxes

Our provision for income taxes includes tax expense for our global operations, including the tax expense incurred by our non-U.S. entities, and our annual effective tax rate is an estimated, blended rate of all jurisdictions; federal, state and foreign. We expect to incur U.S. income tax expense for the remainder of 2019 and thereafter as we currently estimate that we will be profitable and will fully utilize our net operating losses. We may release portions of our valuation allowance in the future if our actual or forecasted profitability levels are deemed sufficient to support the realizability of the net deferred tax assets.

Through December 31, 2018, we had not been required to pay any material U.S. federal or state income taxes nor any foreign income taxes because of accumulated net operating losses. As of December 31, 2018, we had approximately $5 million of federal

42

net operating loss carryforwards and approximately $14.9 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 2028. We expect to use a significant portion of our U.S. net operating losses in 2018 and to fully utilize all remaining net U.S. operating losses in 2019.

Results of Operations

The following table sets forth our consolidated statements of operations data for each of the periods indicated.

Comparison of the three months ended September 30, 2019 and 2018

	Three Months Ended September 30,
	2019					2018				Period-to-Period Change
	Amount			Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
Revenue:
Interest and finance income	$	108,211		96.1	%	$	99,317	96.6	%	$	8,894		9.0	%
Other revenue	4,339			3.9		3,523		3.4		816			23.2
Gross revenue	112,550			100.0		102,840		100.0		9,710			9.4
Cost of revenue:
Provision for credit losses	43,096			38.3		39,102		38.0		3,994			10.2
Interest expense	11,264			10.0		11,728		11.4		(464		)	(4.0	)
Total cost of revenue	54,360			48.3		50,830		49.4		3,530			6.9
Net revenue	58,190			51.7		52,010		50.6		6,180			11.9
Operating expense:
Sales and marketing	12,261			10.9		10,845		10.5		1,416			13.1
Technology and analytics	16,277			14.5		13,418		13.0		2,859			21.3
Processing and servicing	6,670			5.9		5,302		5.2		1,368			25.8
General and administrative	16,472			14.6		13,107		12.7		3,365			25.7
Total operating expense	51,680			45.9		42,672		41.4		9,008			21.1
Income (loss) from operations, before provision for income taxes	6,510			5.8		9,338		9.2		(2,828		)	(30.3	)
Provision for (Benefit from) income taxes	(1,632		)	(1.5	)	—		—		(1,632		)	—
Net income (loss)	$	8,142		7.3	%	$	9,338	9.2	%	$	(1,196	)	(12.8	)%

Net income (loss)

For the three months ended September 30, 2019, net income decreased to $8.1 million from $9.3 million for the three months ended September 30, 2018 while adjusted net income, a non-GAAP measure, decreased to $7.8 million from $13.0 million over the same period. These decreases were primarily attributable to a 6.9% increase in cost of revenue and a 21.1% increase in operating expenses, partially offset by a 9.4% increase in revenue. The decrease in net income was partially offset by a benefit from income taxes in the three months ended September 30, 2019, while we did not record any tax expense in 2018. Basic earnings per share decreased from $0.13 per share to $0.12 per share. Similarly, our Return on Assets decreased to 2.8% from 3.5% and our Return on Equity decreased to 11.0% from 13.9%.Our Adjusted Return on Assets, a non-GAAP measure, decreased to 2.5% from 4.8% and our Adjusted Return on Equity, a non-GAAP measure, decreased to 9.9% from 18.8%. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for a discussion and reconciliation of Non-GAAP measures.

43

Revenue

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Revenue:
Interest and finance income	$	108,211	96.1	%	$	99,317	96.6	%	$	8,894	9.0	%
Other revenue	4,339		3.9		3,523		3.4		816		23.2
Gross revenue	$	112,550	100.0	%	$	102,840	100.0	%	$	9,710	9.4	%

Gross revenue increased by $9.7 million, or 9.4%, from $102.8 million to $112.6 million. This growth was in part attributable to an $8.9 million, or 9.0%, increase in interest income, which was primarily driven by a higher portfolio balance as evidenced by a 13% increase in Average Loans and Finance Receivables. The increase was partially offset by a decrease in Portfolio Yield from the third quarter of 2018 compared to the third quarter of 2019.

Other revenue increased by $0.8 million, or 23.2%, primarily attributable to an increase in prepayment fee revenue and line of credit fees revenue.

Cost of Revenue

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
Cost of revenue:
Provision for credit losses	$	43,096	38.3	%	$	39,102	38.0	%	$	3,994		10.2	%
Interest expense	11,264		10.0		11,728		11.4		(464		)	(4.0	)
Total cost of revenue	$	54,360	48.3	%	$	50,830	49.4	%	$	3,530		6.9	%

Total cost of revenue increased by $3.5 million, or 6.9%, from $50.8 million to $54.4 million. Provision for credit losses increased by $4.0 million, or 10.2%, from $39.1 million to $43.1 million. In accordance with GAAP, we recognize revenue on loans and finance receivables over their term, but provide for probable credit losses on the loans and finance receivables 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. Our provision for credit losses as a percentage of originations, or the Provision Rate, increased from 6.0% to 6.8%. The increase in Provision Rate was primarily driven by the deterioration of loans originated in the second half of 2018, and a normalizing credit environment.

Interest expense decreased by $0.5 million, or 4.0%, from $11.7 million to $11.3 million. As a percentage of gross revenue, interest expense decreased from 11.4% to 10.0%. The decrease in interest expense was primarily attributable to decreases in interest rate spread (the applicable percentage rate above the benchmark interest rate charged by the lender) and was partially offset by increases in Average Debt outstanding. The Average Debt Outstanding during the third quarter of 2019 was $851.0 million, up 10.3%, from $771.5 million during the third quarter of 2018, while our Cost of Funds Rate decreased from 6.1% to 5.3%.

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Operating Expense

Total operating expense increased by $9.0 million, or 21.1%, from $42.7 million to $51.7 million. At September 30, 2019, we had 741 employees compared to 587 at December 31, 2018. Approximately half of the headcount increase reflects the addition of Evolocity employees, with the majority of the other half attributable to Technology and Analytics employees. We increased our headcount and personnel-related costs across our business in order to support our growth strategy and expect headcount to further increase in the remainder of 2019 reflecting our investment in growth initiatives.

Given our focus on profitability, we evaluate trends in our efficiency ratio as a key measure of our progress. Our efficiency ratio for the quarter ended September 30, 2019 was 45.9% which increased from 41.5% for the quarter ended September 30, 2018. Our Adjusted Efficiency Ratio, a non-GAAP measure, increased from 38.2% for the quarter ended September 30, 2018 to 43.8% for the quarter ended September 30, 2019. Both trends reflect investments in our core US lending and strategic adjacencies. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for a discussion and reconciliation of Adjusted Efficiency Ratio.

Sales and Marketing

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	12,261	10.9	%	$	10,845	10.5	%	$	1,416	13.1	%

Sales and marketing expense increased by $1.4 million, or 13.1%, from $10.8 million to $12.3 million. The increase was driven by a $0.4million increase in our general marketing and other marketing spend, in part due to our expansion in Canada. Our non capitalizable commission expense increased by $0.4 million during three months ended September 30, 2019. Additionally, there was a $0.5 million increase in personnel-related and occupancy costs primarily related to the additional personnel related to our business combination with Evolocity.

Technology and Analytics

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Technology and analytics	$	16,277	14.5	%	$	13,418	13.0	%	$	2,859	21.3	%

Technology and analytics expense increased by $2.9 million, or 21.3%, from $13.4 million to $16.3 million. The increase was primarily attributable to $2.3 million of additional personnel-related costs as we continue to invest in our strategic initiatives and build our internal capabilities for the future, as well as higher software license-related costs of $0.6 million in the current quarter.

Processing and Servicing

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Processing and servicing	$	6,670	5.9	%	$	5,302	5.2	%	$	1,368	25.8	%

Processing and servicing expense increased by $1.4 million, or 25.8%, from $5.3 million to $6.7 million. The increase was driven by an increase personnel-related expenses of $0.9 million.

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General and Administrative

	Three Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
General and administrative	$	16,472	14.6	%	$	13,107	12.7	%	$	3,365	25.7	%

General and administrative expense increased by $3.4 million, or 25.7%, from $13.1 million to $16.5 million. The increase was primarily attributable to legal costs and costs related to our pursuit of a bank charter, which resulted in an increase of $3.3 million for the three months ended September 30, 2019 compared to the prior year period. Personnel-related costs increased by $0.6 million due to an increase in headcount as well as the additional personnel related to our business combination with Evolocity. The three months ended September 30, 2018 included $0.5 million of debt extinguishment costs. No such charge was recognized during the current period.

Provision for Income Taxes

	Three Months Ended September 30,
	2019					2018				Period-to-Period Change
	Amount			Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
Provision for Income Taxes	$	(1,632	)	(1.5	)%	$	—	—	%	$	(1,632	)	—	%

During the three months ended September 30, 2019 we recorded an income tax benefit of $1.6 million due to a $2.8 million discrete research and development tax credit recorded in the period. The quarterly effective income tax rate was (25)% for the three months ended September 30, 2019. The quarterly effective income tax rate excluding the discrete tax benefit was 18% for the three months ended September 30, 2019. Through December 31, 2018, we had not been required to pay any material U.S. federal or state income taxes nor any foreign income taxes because of accumulated net operating losses.

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Comparison of the nine months ended September 30, 2019 and 2018

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
Revenue:
Interest and finance income	$	319,651	96.1	%	$	277,755	96.3	%	$	41,896		15.1	%
Other revenue	13,120		3.9		10,681		3.7		2,439			22.8
Gross revenue	332,771		100.0		288,436		100.0		44,335			15.4
Cost of revenue:
Provision for credit losses	129,338		38.9		108,688		37.7		20,650			19.0
Interest expense	33,977		10.2		35,845		12.4		(1,868		)	(5.2	)
Total cost of revenue	163,315		49.1		144,533		50.1		18,782			13.0
Net revenue	169,456		50.9		143,903		49.9		25,553			17.8
Operating expense:
Sales and marketing	37,528		11.3		32,875		11.4		4,653			14.2
Technology and analytics	49,764		15.0		37,224		12.9		12,540			33.7
Processing and servicing	17,768		5.3		15,564		5.4		2,204			14.2
General and administrative	46,854		14.1		46,866		16.2		(12		)	—
Total operating expense	151,914		45.7		132,529		45.9		19,385			14.6
Income (loss) from operations, before provision for income taxes	17,542		5.3		11,374		3.9		6,168			54.2
Provision for (Benefit from) income taxes	1,904		0.6		—		—		1,904			—
Net income (loss)	$	15,638	4.7	%	$	11,374	3.9	%	$	4,264		37.5	%

Net income (loss)

For the nine months ended September 30, 2019, net income increased to $15.6 million from $11.4 million for the nine months ended September 30, 2018, while adjusted net income, a non-GAAP measure, decreased to $22.8 million from $29.1 million over the same period. Additionally, for the nine months ended September 30, 2019 we recorded a provision for income taxes of $1.9 million, while we were not required to pay any material taxes in 2018. Basic earnings per share increased from $0.18 per share to $0.25 per share. Similarly, our Return on Assets increased to 2.0% from 1.7% while our Return on Equity increased to 8.1% from 6.5%.Our Adjusted Return on Assets, a non-GAAP measure, decreased to 2.5% from 3.7% while our Adjusted Return on Equity, a non-GAAP measure, decreased to 9.8% from 14.4%. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for a discussion and reconciliation of Non-GAAP measures.

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Revenue

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Revenue:
Interest and finance income	$	319,651	96.1	%	$	277,755	96.3	%	$	41,896	15.1	%
Other revenue	13,120		3.9		10,681		3.7		2,439		22.8
Gross revenue	$	332,771	100.0	%	$	288,436	100.0	%	$	44,335	15.4	%

Gross revenue increased by $44.3 million, or 15.4%, from $288.4 million to $332.8 million. This growth was primarily attributable to a $41.9 million, or 15.1%, increase in interest income, reflecting a 12.7% growth of loans and financing receivables, partially offset by a decrease in Portfolio Yield from 36.0% to 35.2%. The decrease in Portfolio Yield was driven by a lower blended yield on new originations and higher past due balances.

Other revenue increased by $2.4 million, or 22.8%, primarily attributable to an increase in ODX revenue, prepayment fee revenue and line of credit fee revenue, partially offset by a decrease in marketing fees from our issuing bank partner.

Cost of Revenue

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
Cost of revenue:
Provision for credit losses	$	129,338	38.9	%	$	108,688	37.7	%	$	20,650		19.0	%
Interest expense	33,977		10.2		35,845		12.4		(1,868		)	(5.2	)
Total cost of revenue	$	163,315	49.1	%	$	144,533	50.1	%	$	18,782		13.0	%

Total cost of revenue increased by $18.8 million, or 13.0% from $144.5 million to $163.3 million. Provision for credit losses increased by $20.7 million, or 19.0%, from $108.7 million to $129.3 million. In accordance with GAAP, we recognize revenue on loans and finance receivables over their term, but provide for probable credit losses on the loans and finance receivables 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. Our provision for credit losses as a percentage of originations, or the Provision Rate, increased from 6.0% to 7.0%. The increase in Provision Rate was primarily driven by the deterioration of loans originated in the second half of 2018, and a normalizing credit environment.

Interest expense decreased by $1.9 million, or 5.2%, from $35.8 million to $34.0 million. As a percentage of gross revenue, interest expense decreased from 12.4% to 10.2%. The decrease in interest expense was primarily attributable to decreases in interest rate spread (the applicable percentage rate above the benchmark interest rate charged by the lender) and was partially offset by an increase in Average Debt outstanding. The Average Debt Outstanding during the nine months ended September 30, 2019 was $841.4 million up 14.4% from $735.4 million during the nine months ended September 30, 2018, while our Cost of Funds Rate decreased from 6.5% to 5.4%.

Operating Expense

Total operating expense increased by $19.4 million, or 14.6%, from $132.5 million to $151.9 million. At September 30, 2019, we had 741 employees compared to 587 at December 31, 2018. Approximately half of the headcount increase reflects the additional Evolocity employees, with the majority of the other half attributable to Technology and Analytics employees. We increased our headcount and personnel-related costs across our business in order to support our growth strategy.

Given our focus on profitability, we evaluate trends in our efficiency ratio as a key measure of our progress. Our efficiency ratio for the nine months ended September 30, 2019 decreased to 45.7% from 45.9% for the nine months ended September 30,

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2018. Our Adjusted Efficiency Ratio, a non-GAAP measure, increased from 40.4% for the nine months ended September 30, 2018 to 43.0% for the nine months ended September 30, 2019. Both trends reflect investments in our core US lending and strategic adjacencies. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for a discussion and reconciliation of Adjusted Efficiency Ratio.

Sales and Marketing

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	37,528	11.3	%	$	32,875	11.4	%	$	4,653	14.2	%

Sales and marketing expense increased by $4.7 million, or 14.2%, from $32.9 million to $37.5 million. The increase was primarily attributable to a $2.4 million increase in personnel-related costs as well as a $0.7 million increase in occupancy costs, as our sales and marketing headcount grew since the nine months ended September 30, 2018. In addition, our non capitalizable commission expense grew by $0.8 million, and our general marketing spend increased by $0.5 million in the current period.

Technology and Analytics

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Technology and analytics	$	49,764	15.0	%	$	37,224	12.9	%	$	12,540	33.7	%

Technology and analytics expense increased by $12.5 million, or 33.7%, from $37.2 million to $49.8 million. The increase was primarily attributable to $8.9 million of additional personnel-related costs and $0.7 million of occupancy costs as we continued to expand headcount and invest in our strategic initiatives and build our internal capabilities for the future. As a result of the expansion of our ODX business as well as our business combination with Evolocity, we incurred an increase in software license expenditures and other software expenses, totaling $2.2 million, during the nine months ended September 30, 2019.

Processing and Servicing

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Processing and servicing	$	17,768	5.3	%	$	15,564	5.4	%	$	2,204	14.2	%

Processing and servicing expense increased by $2.2 million, or 14.2%, from $15.6 million to $17.8 million. The increase was primarily attributable to a $0.8 million increase in costs related to collection initiatives. Additionally, personnel-related expenses increased by $0.7 million.

49

General and Administrative

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount			Percentage
	(dollars in thousands)
General and administrative	$	46,854	14.1	%	$	46,866	16.2	%	$	(12	)	—	%

General and administrative expense was relatively unchanged in the nine months ended September 30, 2019 compared to the 2018 period. Legal costs and costs related to our pursuit of a bank charter resulted in an increase of $3.1 million for the nine months ended September 30, 2019 compared to the prior year period. Personnel-related costs increased by $3.0 million due to increased headcount and a $0.4 million increase in occupancy costs. Additionally, taxes not related to income taxes increased by $0.6 million, and travel spend increased by $0.5 million. The nine months ended September 30, 2018 included a $5.7 million charge related to our lease terminations and $1.9 million of debt extinguishment costs. No such charges were recognized during the current period.

Provision for Income Taxes

	Nine Months Ended September 30,
	2019				2018				Period-to-Period Change
	Amount		Percentage of Gross Revenue		Amount		Percentage of Gross Revenue		Amount		Percentage
	(dollars in thousands)
Provision for (Benefit from) income taxes	$	1,904	0.6	%	$	—	—	%	$	1,904	—	%

During the nine months ended September 30, 2019 we recorded a provision for income taxes of $1.9 million, representing a year to date effective tax rate of 10.9%. Included in our current period's tax provision was a discrete tax benefit related to a $2.8 million research and development tax credit for the years 2010 to 2018, the year to date effective income tax rate excluding the discrete tax benefit was 26.8%. Through December 31, 2018, we were not required to pay any material U.S. federal or state income taxes nor any foreign income taxes because of accumulated net operating losses.

Liquidity and Capital Resources

During the third quarter of 2019, we originated $629 million of loans and during the nine months ended September 30, 2019, we originated $1.9 billion of loans. We funded these originations with 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 September 30, 2019, we had approximately $59 million of cash on hand to fund our future operations, an amount comparable to December 31, 2018.

50

Current Debt Facilities

The following table summarizes our debt facilities as of September 30, 2019.

	Maturity Date		Weighted Average Interest Rate	Borrowing Capacity			Principal Outstanding
				(in millions)
Debt:
OnDeck Asset Securitization Trust II LLC	April 2022	(1)	3.8%	$	225.0		$	225.0
OnDeck Account Receivables Trust 2013-1 LLC	March 2022	(2)	3.9%	180.0			115.4
Receivable Assets of OnDeck, LLC	September 2021	(3)	4.4%	119.7			103.4
OnDeck Asset Funding II LLC	August 2022	(4)	5.1%	175.0			113.4
Prime OnDeck Receivable Trust II, LLC	March 2022	(5)	4.0%	180.0			112.6
Loan Assets of OnDeck, LLC	October 2022	(6)	3.9%	150.0			116.0
Corporate Debt	January 2021		5.1%	105.0		(7)	20.0
Other Agreements	Various	(8)	6.5%	161.7			71.8
Total Debt			4.3%	$	1,296.4		$	877.5

⁽¹⁾  The period during which new loans may be purchased under this securitization transaction expires in March 2020.

⁽²⁾  The period during which new borrowings may be made under this facility expires in March 2021.

⁽³⁾  The period during which new borrowings of Class A revolving loans may be made under this debt facility expires in December 2020. The $19.7 million of Class B borrowing capacity matures in December 2019. 

⁽⁴⁾  The period during which new borrowings may be made under this facility expires in August 2021.

⁽⁵⁾  The period during which new borrowings may be made under this facility expires in March 2021.

⁽⁶⁾  The period during which new borrowings may be made under this debt facility expires in April 2022.

⁽⁷⁾  On July 19, 2019, the Company entered into an agreement which increased the commitment under its corporate revolving debt facility by $20 million, refer to Note 6 of Notes to Consolidated Financial Statements for additional information.

⁽⁸⁾  Other Agreements include our local currency debt facilities in Australia and Canada. The periods during which new borrowings may be made under the various agreements expire between December 2019 and June 2020. Maturity dates range from December 2019 through December 2022. In October 2019 we prepaid in full and terminated a CAD $20.0 million mezzanine debt facility with a 12% interest rate.

Our ability to fully utilize the available capacity of our debt facilities may also be impacted by provisions that limit concentration risk and eligibility.

Cash and Cash Equivalents, Loans (Net of Allowance for Credit Losses), and Cash Flows

The following table summarizes our cash and cash equivalents, loans (net of Allowance for credit losses) and cash flows:

	As of or for the Nine Months Ended September 30,
	2019			2018
	(in thousands)
Cash and cash equivalents	$	59,440		$	71,304
Restricted cash	$	49,900		$	48,919
Loans and finance receivables held for investment, net	$	1,079,766		$	984,400
Cash provided by (used in):
Operating activities	$	206,679		$	182,677
Investing activities	$	(208,182	)	$	(295,176	)
Financing activities	$	13,633		$	118,589

Our cash and cash equivalents at September 30, 2019 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 cash in excess of our immediate working capital requirements in short-term investments, deposit accounts or other arrangements designed to preserve the principal balance and maintain adequate liquidity. Our excess

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cash may be invested primarily in overnight sweep accounts, money market instruments or similar arrangements that provide competitive returns consistent with our polices and market conditions.

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 but have the ability to use these funds to finance loan originations, subject to meeting borrowing base requirements. Our policy is to invest restricted cash held in debt facility related accounts in investments designed to preserve the principal balance and provide liquidity. Accordingly, such cash is invested primarily in money market instruments that offer daily purchase and redemption and provide competitive returns consistent with our policies and market conditions.

Cash Flows

Operating Activities

For the nine months ended September 30, 2019, net cash provided by operating activities was $206.7 million, which was primarily the result of interest payments from our customers of $374.1 million, less $133.3 million utilized to pay our operating expenses and $30.0 million we used to pay the interest on our debt. During that same period, accounts payable and accrued expenses and other liabilities increased by approximately $1.4 million.

For the nine months ended September 30, 2018, net cash provided by our operating activities was $182.7 million, which was primarily the result of our cash received from our customers, including interest payments of $320.4 million, less $107.0 million utilized to pay our operating expenses and $32.3 million we used to pay the interest on our debt. During that same period, accounts payable and accrued expenses and other liabilities increased by approximately $2.3 million.

Investing Activities

Our investing activities have consisted primarily of funding our loans and finance receivable originations, including payment of associated direct costs and receipt of associated fees, offset by customer repayments of term loans, lines of credit and finance receivables, purchases of property, equipment and software, and capitalized internal-use software development costs. 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.

For the nine months ended September 30, 2019, net cash used to fund our investing activities was $208.2 million, and consisted primarily of $145.2 million of loan originations in excess of loan repayments received, $51.8 million of origination costs paid in excess of fees collected and $8.2 million for the purchase of property, equipment and software and capitalized internal-use software development costs.

For the nine months ended September 30, 2018, net cash used to fund our investing activities was $295.2 million, and consisted primarily of $242.8 million of loan originations in excess of loan repayments received, $47.1 million of origination costs paid in excess of fees collected and $4.4 million for the purchase of property, equipment and software and capitalized internal-use software development costs.

Financing Activities

Our financing activities have consisted primarily of net borrowings from our securitization facility and our revolving debt facilities.

For the nine months ended September 30, 2019, net cash provided by in our financing activities was $13.6 million and consisted of $26.9 million in net proceeds from the issuance of debt, and $2.2 million of cash received from the issuance of common stock under the employee stock purchase plan. The cash provided was partially offset by the use of $11.0 million for the repurchase of common stock and $3.3 million of payments for debt issuance costs.

For the nine months ended September 30, 2018, net cash provided by our financing activities was $118.6 million and consisted primarily of $119.9 million in net proceeds from debt facilities and $5.5 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 $1.4 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 grow our portfolio.

Our originations for the three months ended September 30, 2019 and 2018 were $629 million and $648 million, respectively. Our originations for the nine months ended September 30, 2019 and 2018 were $1.86 billion and $1.83 billion, respectively.

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Our strategy is to continue to grow in a disciplined manner while remaining highly focused on credit quality and operating leverage. Because we will remain focused on credit quality, we are also prepared to forgo lending opportunities that do not meet our credit, underwriting and pricing standards. In addition, despite the continuing competition for customer response, 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 expect to use cash flow generated from operations for various corporate purposes including to fund a portion of our lending activities including funding residual growth. In addition, we may also finance residual growth through our available liquidly sources such as our corporate line of credit or by introducing additional subordinated notes in our debt facilities.

As of September 30, 2019, only $40 million of our $1.3 billion debt capacity is scheduled to expire before September 30, 2020. In order to maintain and grow our current rate of loan originations over the next twelve months, we may be required to secure additional funding. We plan to do this through one or more of the following sources: new asset-backed securitization transactions, new debt facilities and extensions and increases to existing debt facilities.

Our Board of Directors authorized the repurchase of up to $50 million of common stock with the repurchased shares to be retained as treasury stock and available for possible reissuance. Any share repurchases under the program will be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any share repurchases will be subject to market conditions and other factors as we may determine. The repurchase authorization expires August 31, 2020, however, we may suspend, modify or discontinue the program at any time in our discretion without prior notice. During the three months ended September 30, 2019 we purchased 3,204,462 shares of common stock for $11.0 million.

We believe that our cash 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.

Contractual Obligations

Other than as described under the subheading "Liquidity and Capital Resources," and in Note 6 and Note 10 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, 2018.

Off-Balance Sheet Arrangements

As of September 30, 2019, 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, 2018.

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these 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 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

RecentAccounting 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

JOBS Act

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We became a public company in December 2014, and since that time we have met the definition of an “emerging growth company” under the JOBS Act. 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. Our emerging growth company status will expire effective December 31, 2019.

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, 2018

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.

Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019, the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are subject to legal proceedings and claims in the ordinary course of our 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 1A. Risk Factors

Our current and prospective investors should carefully consider the risks described in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018, "Part II Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, and other documents that we file with the SEC from time to time which are available on the SEC website at www.sec.gov, and all other information contained in this report, including our unaudited condensed consolidated financial statements and the related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Cautionary Note Regarding Forward-Looking Statements,” before making investment decisions regarding our securities. The risks and uncertainties in our above-mentioned Annual Report on Form 10-K and Quarterly Report on Form 10-Q are not the only ones we face, but include the most significant factors then known by us. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of these risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our securities could decline, and you may lose some or all of your investment.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities.

Our Board of Directors authorized the repurchase of up to $50 million of our common stock with the repurchased shares to be retained as treasury stock and available for possible reissuance. During the quarter ended September 30, 2019, we repurchased 3,204,462 shares of our common stock for approximately $11.0 million. The number of shares purchased, the average price paid per share and the remaining availability under our repurchase program are set forth in the following table:

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31, 2019	—	—	—	$50,000,000
August 1 - August 31, 2019	1,434,978	$3.40	1,434,978	$45,120,972
September 1 - September 30, 2019	1,769,484	$3.47	1,769,484	$38,976,107
Total	3,204,462	$3.44	3,204,462

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

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Item 5. Other Information

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	On Deck Capital, Inc.
	/s/    Kenneth A. Brause
	Kenneth A. Brause Chief Financial Officer (Principal Financial Officer)
Date: November 7, 2019

	/s/ Nicholas Sinigaglia
	Nicholas Sinigaglia Chief Accounting Officer (Principal Accounting Officer)
Date: November 7, 2019

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Exhibit Index

Exhibit Number	Description	Filed / Incorporated by Reference from Form *	Incorporated by Reference from Exhibit Number	Date Filed
3.1	Amended and Restated Certificate of Incorporation	8-K	3.1	12/22/2014
3.2	Amended and Restated Bylaws	10-Q	3.2	11/6/2018
4.1	Form of common stock certificate	S-1	4.1	11/10/2014
10.1	Credit Agreement, dated as of January 28, 2019, by and among On Deck Capital, Inc., the Lenders Party hereto, and SunTrust Bank, as Administrative Agent for the Revolving Lenders and Collateral Agent for the Secured Parties.	Filed herewith.
10.2	Lender Joinder Agreement, dated as of July 19, 2019, to the Credit Agreement dated as of January 28, 2019, by and among the Lender party hereto, On Deck CapitaI, Inc., as Borrower, and SunTrust Bank, as Administrative Agent for the Lenders.	Filed herewith.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer	Filed herewith.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Financial Officer	Filed herewith.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer	Filed herewith.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer	Filed herewith.
101.INS	XBRL Instance Document	Filed herewith.
101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	Filed herewith.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

* Exhibit incorporated by reference to the Registrant's Form S-1 Registration Statement, Registration No. 333-200043

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