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Edited Transcript of ONDK earnings conference call or presentation 24-Oct-19 12:00pm GMT

Q3 2019 On Deck Capital Inc Earnings Call

New York Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of On Deck Capital Inc earnings conference call or presentation Thursday, October 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth A. Brause

On Deck Capital, Inc. - CFO

* Noah Breslow

On Deck Capital, Inc. - Chairman & CEO

* Stephen Klimas

On Deck Capital, Inc. - Head of IR

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Conference Call Participants

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* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* John J. Rowan

Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance

* Melissa Marie Wedel

JP Morgan Chase & Co, Research Division - Analyst

* Steven Matthew Wald

Morgan Stanley, Research Division - Equity Analyst

* Trevor Ellis Williams

Jefferies LLC, Research Division - Equity Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the On Deck third quarter earnings call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Steve Klimas, Head of Investor Relations. Please go ahead, sir.

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Stephen Klimas, On Deck Capital, Inc. - Head of IR [2]

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Thank you, Carol. Good morning, everyone, and welcome to On Deck's third quarter earnings call. I'm here this morning with Noah Breslow, our Chief Executive Officer; and Ken Brause, our Chief Financial Officer.

Our earnings release was issued earlier this morning and is available with our earnings presentation and financial supplement in the Investor Relations section of our website. Certain statements, including those related to our 2019 financial guidance and our outlook for 2020, are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them except as required by law.

Today's discussion is also subject to the forward-looking statement limitations in the earnings release and our actual results could differ materially and adversely from those anticipated.

During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For certain definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release and the appendix of the earnings presentation posted on our website.

With that, I'll turn the call over to Noah.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [3]

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Thank you, Steve, and thank you all for joining us. We had a solid third quarter as origination volume increased, credit quality improved, and we commenced our share repurchase program; clearly steps in the right direction as we advance our strategic initiatives.

This morning I will touch on some of the quarter's highlights and provide a general business update. Then I'll turn the call over to Ken, who will walk you through the financials in detail and update you on our full year guidance and initial outlook for 2020. And finally, I'll come back and provide some closing thoughts before opening the call for questions.

Starting with the quarter's results. Total revenue, net income and adjusted net income were all at or above the upper ends of our guidance ranges driven by solid results from the core U.S. lending business. Origination volume increased as expected from the seasonally softer second quarter. Our loan and finance receivable portfolio grew 2% sequentially and 10% from a year ago to over $1.2 billion. Total revenue increased with portfolio growth and our portfolio yield was essentially unchanged sequentially. Our net interest margin remains very strong and increased from the prior quarter to 29.2% as our cost of funds rate continued to improve. Our credit quality metrics normalized from last quarter's elevated levels, with improvements in both the provision and net charge-off rates. Delinquency was largely unchanged from the prior quarter as the impacts from changes in our collection strategies are now largely in the run rate.

These factors led to a $2.5-million sequential increase in pretax income. And when we layer on the quarter's tax benefit and improved international performance, both of which Ken will discuss later, net income doubled from the prior quarter to $8.7 million, and our EPS growth rate slightly exceeded our income growth as we are starting to see benefit from our share repurchase program.

Turning to the core U.S. lending franchise, which continues to be the main driver of our results. Originations increased 6% sequentially as term loan volume accelerated, but were down 3% from the prior year as we tightened underwriting and competition intensified from a year ago. We remain focused on the higher end of our target demographic by offering slightly larger loans and longer maturities to our most qualified term loan applicants. Accordingly, our weighted average term loan size increased to $56,000 this quarter and the average maturity increased to 13.5 months, while our small business owners' average FICO score remained above 700.

Our line of credit offering continues to experience good growth and accounted for 21% of the quarter's origination volume. We now have over $250 million outstanding line of credit balances, and credit performance has been strong.

We continue to see solid volume across all origination channels and the breadth and diversity of our distribution network is clearly a strategic and competitive differentiator. We continue to source the largest share of our volume, about 40%, through the direct channel, which comes through direct mail and internet search, although competition in this channel remains elevated, with the number of targeted small business mailings increasing and the bidding up of keyword search beyond where we see value.

However, the strategic partner channel is an area where we are seeing value and winning more business. In fact, this channel has our lowest customer acquisition cost and the affinity we continue to build based on the quality and consistency of the On Deck approach has resulted in steady application flows. We are working with some great brand names today, including Intuit and LendingTree, and we expect to add others in 2020 to drive continued growth in this channel.

We continue to make progress rolling out our equipment finance offering. We are broadening the universe of partners from whom we are accepting applications and we are expanding our capabilities to underwrite and service a wider variety of equipment classes. Our equipment finance volume has been growing each quarter, but the business is still in its early stages and we are being prudent with respect to growing the book.

Moving on to the international business. Our integration with Evolocity in Canada is proceeding well. We relaunched the OnDeck Canada brand in August, and now originate transactions in all provinces and document and service loans in English and French. We believe we're now the second largest online small business lender in Canada, and see a path forward to becoming #1. Likewise, we continue to see good growth opportunities in Australia. The portfolio has grown approximately 30% from a year ago and portfolio quality, which did soften a little earlier this year, has improved. As we think about our international operations more holistically, we have built leading franchises in each region with the leadership, talent and capabilities in-house to scale efficiently.

Turning now to ODX. Earlier this week, Investors Bank announced it will be using ODX's loan origination platform to digitize its small business lending operations. Investors is a full-service bank with over $27 billion in assets headquartered in New Jersey. Similar to other ODX programs, our revenue stream will include fixed and variable components, with the greater opportunity coming on the latter as we scale the relationship over time.

The PNC program is progressing well and we are working together to enhance functionality and broaden reach in order to increase application flow through the platform. Our new bank pipeline continues to build, and we expect to sign more customers by year-end.

Finally, a quick update on 2 strategic initiatives we announced last quarter, starting with our $50-million share repurchase program. We've been active since early August, and through quarter-end we repurchased 3.2 million shares for just over $11 million. We are pleased with the execution to date and at current price levels will look to repurchase as many shares as possible.

And finally, regarding our pursuit of the bank charter. In short, work is very much under way, and we remain open to either a de novo or a transaction path. We have retained professional service firms to help with the process and we are moving the ball forward, including engaging in dialogue with potential regulators and others. While still early in the process, our work to date is validating our thesis behind the strategic benefits of becoming a bank.

With that, I'll turn it over to Ken to walk through the financials.

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [4]

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Well, thank you, Noah, and good morning, everyone. Our solid third quarter results reflected several factors, including a general reversion to the mean on some of the metrics that stood out last quarter, particularly with respect to credit, and we continue to grow book value per share.

Net income for the quarter was $9 million, or $0.11 per diluted share. This quarter includes a $2.8 million discrete tax benefit related to research and development costs in prior years. Excluding that benefit, and the roughly $2 million of stock-based compensation expense, our adjusted net income this quarter was $8 million, or $0.10 per diluted share.

Getting into the details. We continue to grow the portfolio. Portfolio assets grew 10% from last year and 2% sequentially to $1.2 billion. While we saw growth in both term loans and lines of credit, the growth was primarily driven by locks. This growth reflects strong demand for this offering as well as the benefit from the lengthening of amortization periods that occurred over the past year. Likewise, our strategy to slightly lengthen term loan maturities should bolster the growth rate in that portfolio next year.

We also grew revenue. Gross revenue of $113 million came in slightly above our guidance range, reflecting increased interest income, which grew at a rate commensurate with the sequential and year-over-year portfolio growth. Portfolio yield increased slightly from last quarter to 35.1%, largely reflecting mix shift, as pricing was down slightly across channels in line with market dynamics and our decision to improve offers for better-quality customers. Interest expense at just over $11 million has been relatively stable over the last year, as higher debt balances have been offset by improvements in cost of funds. Our cost of funds rate is now 5.3%, an improvement of 20 basis points sequentially and 80 basis points from a year ago. Most of the sequential improvement was driven by lower base rates and the annual improvement also reflected lower spreads on debt we refinanced. Net interest margin remains strong at 29.2%, up 20 basis points sequentially, reflecting both the higher yield and lower funding costs, and was unchanged from a year ago.

Turning to credit. Overall portfolio quality was stable with our provision and net charge-off rates normalizing from last quarter's elevated levels and delinquency holding steady. Getting into the specific metrics, our net charge-off rate was 13.7%, down from 15.1% last quarter and back within our 12% to 14% target range. Our provision rate of 6.8% was in line with the outlook we provided last quarter, and the total 15-plus delinquency rate was essentially flat sequentially at 8.5%, with a slight improvement in the 15- to 89-day rate and a slight increase in the 90-plus rate. The impact from our changes to collection practices, namely the retention of 90-day-plus delinquencies in-house for collection, is now largely reflected into our delinquency run rate.

Those factors all contributed to a provision expense that was unchanged from the prior quarter as the favorable impact from improved loan quality in international was offset by reserves for increased originations. Our allowance for credit losses increased value to $148 million, while our reserve ratio was unchanged at 12.3%. In fact, our reserve ratio has remained in the relatively tight range of 12% to 12.5% since March of 2018.

Moving on, total operating expense remained steady at $52 million, and our adjusted efficiency ratio was unchanged at 44%. In terms of some of the underlying dynamics, stock-based compensation was down due to lower incentive accruals, but offsetting that were increased legal costs as well as professional service fees related to our bank charter efforts.

Turning to income taxes. We reported a net benefit of $1.6 million this quarter. As mentioned earlier, we booked a $2.8-million R&D tax credit related to prior years. Excluding that benefit, the tax provision would have been $1.2 million, with an effective tax rate for the quarter of around 18%, as we bring the year-to-date provision in line with the full year effective tax rate estimate of between 25% and 30%.

And finally, a few thoughts around noncontrolling interest. As a reminder, the NCI represents third-party owners' pro rata share of the results in our international operations, which is a bit over 40% in both geographies. Losses from our international operations declined from the prior quarter as we saw improvements in both Canada and Australia. However, most of the improvements stem from Canada, where we refined our loss forecasting model.

Turning to the balance sheet. Our liquidity and capital position has remained strong and we continue to refinance debt at improved terms. Cash and equivalents were unchanged from June 30 at $59 million. Our third quarter financing activities included the doubling of our borrowing facility in Australia to AUD 150 million and a $20-million additional commitment to our syndicated corporate debt facility, bringing to the total to $105 million. Our committed debt facilities now total $1.3 billion, of which approximately $420 million are over 30% what's available at quarter-end.

On Deck stockholders' equity increased slightly to $315 million at September 30, as the $11 million of share repurchases was more than offset by retained earnings and new issuance for stock-based compensation and benefit programs. As Noah mentioned, we repurchased 3.2 million shares for just over $11 million through quarter-end, which represents an average cost of roughly $3.45 per share. Most of the repurchases were executed in the open market, including to our 10b5 plan, and we also purchased a block of 700,000 shares in a private transaction with an institutional investor who contacted us. We remain on track to complete the full $50-million program before the authorization expires next September, and we will opportunistically accelerate the buyback at these price levels if we can. Basic shares outstanding therefore decreased from 76.3 million at June 30 to 73.6 million at September 30.

And our capital levels remain robust, with equity representing 26% of total assets and a debt-to-total-equity ratio of just 2.6x at quarter-end. Our book value per diluted share increased from $3.98 at June 30 to $4.15. That book value per share grew 17% from $3.56 a year ago.

Switching gears to discuss guidance updates for the balance of 2019. With another quarter behind us, we are narrowing the ranges and raising the midpoints of our guidance metrics. For the full year, we now expect gross revenue between $442 million and $446 million, net income attributable to On Deck between $21 million and $25 million, and adjusted net income between $28 million and $32 million. That's roughly a $4-million increase to the midpoint of our adjusted net income range, which was driven by slightly better than expected credit performance in the third quarter, slightly lower funding costs and improved results from our international operations. In terms of our full year 2019 key performance indicator trends, we continue to expect the portfolio to grow with a high-single-digit rate, net interest margin to remain stable, our adjusted efficiency ratio to increase, and a provision rate of approximately 7%.

We'll provide our 2020 earnings guidance when we release our fourth quarter results. We want to provide you with some initial high-level expectations on how some of the key performance drivers will evolve next year. We currently expect our portfolio growth rate to be consistent with this year, modest compression in net interest margin reflecting lower portfolio yield and slightly higher leverage partially mitigated by an improved cost of funds rate, an improved adjusted efficiency ratio as revenue growth outpaces expenses growth, generally stable credit quality with a lower net charge-off rate and increased reserve ratio, and a continued execution of our share repurchase program. Underlying these expectations is our assumption that economic and capital market environments remain favorable.

Finally, we've been doing a lot of work for the adoption of CECL on January 1 of next year. While our analysis is ongoing, we currently expect a de minimis impact on our reserves upon adoption and in the current loss emergence period assumed in our existing reserves and the profile of our loan portfolio. Similarly, we do not foresee a significant impact to our ongoing reserve requirements, although this may change as the equipment finance portfolio becomes a more significant part of the total or we update our assumed economic forecast.

With that, I'll turn the call back to Noah for some closing thoughts.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [5]

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Thanks, Ken. In summary, our third quarter results were a step in the right direction. Our business model is strong, and we have solid opportunities for profitable growth as we fulfill our mission of helping small businesses succeed. We are excited about the benefits of a bank charter, as we believe it would both de-risk the business and further facilitate the expansion of our product offerings. And, as we pursue a bank charter, we remain focused on driving positive operating leverage in our core U.S. franchise and advancing our strategic initiatives, which will provide us with additional opportunities to accelerate growth, enhance profitability and improve shareholder value.

With that, we'll turn the call back over to Carol for your questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions) Our first question this morning comes from John Rowan from Janney.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [2]

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So I was just real happy to see a new partner on the ODX platform, but can you -- I know you've talked a lot over time about the modular make-up of that platform and how that enables you to sell down through smaller banking institutions. Where do we stand -- if you want to use a baseball analogy, give me an inning -- in terms of that rollout?

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [3]

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Sure. Thanks, John, yes. So you're absolutely right. I mean we did the original relationship with Chase as kind of a one-off, and then as we saw the business opportunity, began to move towards a more modular approach. PNC was a step in that direction in a pretty big way, and investors will continue to migrate that forward. So maybe, I don't know, third or fourth inning of the baseball game. I don't want to claim we're all the way there yet, but I think what was encouraging about the Investors Bank relationship is the sales cycle. So what we've found is that by selling into a slightly smaller bank than the top 10, we were able to sort of start a process, go through the diligence and evaluation part, and get to a signed deal in a dramatically shorter time than it took at a larger institution. So we're encouraged by that, and hopefully that translates to a faster rollout as well.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [4]

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Okay. And then the repurchases, were they back-end-loaded? You said you repurchased 3.2 million shares, but the diluted share count came down by a little over 1 million, so I'm trying to understand how that flows through in terms of share count for the fourth quarter.

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [5]

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Yes, so it's Ken, John, and that's right because we didn't start the program till August. So that's why the average would reflect that as opposed to the total from point to point.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [6]

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Okay. And then what's the ongoing tax rate? Obviously, I don't think 18% adjusted for the quarter is the correct one going forward, so just, what should we use for 4Q and for '20?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [7]

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Yes, I thought I may have said in my remarks that we are currently estimating the full year effective tax rate at 25% to 30%.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [8]

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But that includes the true-up in 3Q, right?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [9]

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No, no. That would be the normalized tax rate ex the R&D tax credit, which was a discrete item.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [10]

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Okay. And then just lastly, obviously servicing fees were up. I think you said in the prepared remarks that that was a function of the bank charter. Is that onetime in nature or will those stay there?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [11]

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You're referring to the processing and servicing in the . . .

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [12]

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Correct.

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [13]

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Yes. So there's a bunch of things that go in there, actually. I would attribute more of that to some of the build we're doing around the equipment finance offering. And I'd say some of the bank charter cost you'd probably see more in G&A. Those were the 2 lines that were a little bit elevated this quarter.

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Operator [14]

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Our next question comes from Melissa Wedel from JPMorgan.

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Melissa Marie Wedel, JP Morgan Chase & Co, Research Division - Analyst [15]

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Going back to the tax items, are there any additional expected sort of adjustments, similar to what we saw this quarter, that we should be thinking about?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [16]

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Hi, Melissa, it's Ken. So we are always looking for opportunities to manage our tax [amount] effectively. Obviously we can't talk about anything until it's done, just like this R&D tax credit was in the works for several quarters, and it's only when you get final resolution that you can acknowledge, recognize and talk about it. So at this point in time, I would not build anything more into the tax rate, and again, as we gave our comments, there's nothing that we should assume that would materially move the effective tax rate other than the normal variability that we'll see in the consolidated rate based on the proportion of U.S. versus international results.

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Melissa Marie Wedel, JP Morgan Chase & Co, Research Division - Analyst [17]

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Okay. And given the focus that you guys have had on relaunching the Canada business, and as regards that you're seeing in Australia, can you remind us of the relative size of those books compared to the U.S. business, understanding that U.S. is driving most of the results at this point, but can you size that?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [18]

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I can start, and Noah can chime in. It is very small relative to the total. So it doesn't really move the needle in terms of the balances. It's under 10% of the total loan portfolio outstanding at period-end.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [19]

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Yes, although I will say, the growth rate, if you look year-over-year, is higher than the growth rate in the U.S., so I would expect it to cross over the 10% mark next year and become a more material part of our results.

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Operator [20]

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Our next question comes from Giuliano Bologna from BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [21]

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Really wanted to have -- going on a couple of different points. One of the things, then, is the run-off rate for the duration of the portfolio seemed to extend this quarter. Is that driven mostly by the equipment finance product or is that really kind of an extension in the core products?

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [22]

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It's really more the extension of the core products. So as we've talked about the last couple quarters, we've really been focused on offer quality. So call it the top third of approved customers, making sure they get high-quality offers in terms of the loan amounts they seek and slightly longer terms than we've offered historically. Again, we're not going outside of a range that On Deck has historically been in before, but call it the proportion of 18- and 24-month offers are slightly higher than they were kind of in, say, 2018. So that really is what drove the lengthening of the book. But you're absolutely right, as the equipment finance business grows, and we did have really nice, basically double the volume in that product quarter-over-quarter, but it's still on a very small base, but we expect as we go to next year we'll start to move our duration a little bit as well as it gets bigger.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [23]

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That sounds good. And then kind of shifting a little bit to the international side, in the past, I remember that you guys had said that you expected international to go profitable next year. Obviously we can kind of back out the impact of what international is running through the income statement, but are there opportunities there to refinance on the Canadian facility specifically? Because you have that mezz piece, as an example, at 12%, and even bringing that down to kind of the average would save $1 million a year.

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [24]

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You're absolutely right. So you're absolutely right, and I guess, I mean, we should have highlighted it, but it was a post-third-quarter thing, so we didn't. If you actually read the footnote in the earnings presentation on that page, we did pay down that mezz piece in early October. So we've now removed that mezz piece in Canada, which was, as you can see from the schedule, the highest-cost debt that we had outstanding, and we are working on the refinancing of the other piece in Canada.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [25]

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That sounds good. And then, like I said, just thinking about 2020, you mentioned in the note a slight improvement in the efficiency ratio. Obviously there's also a little bit of benefit in the interest cost considering some of the transactions. How should we think about kind of magnitude of the impacts flowing to the bottom line?

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [26]

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So I think the comment was that we thought there would be a little bit of a decline in net interest margin as a more conservative view on yield would somewhat mitigate some of the improvements on the cost of funds side. And obviously we can't predict what the fed will do and what market interest rates will be. As you know, we're largely a floating-rate borrower tied primarily to one-month LIBOR. So obviously a move in base rates would impact that assumption as well.

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Operator [27]

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Our next question comes from John Hecht from Jefferies.

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Trevor Ellis Williams, Jefferies LLC, Research Division - Equity Associate [28]

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This is actually Trevor Williams on for John. I guess a bit more on the macro environment. I appreciate that credit's stable. The 2020 guide looks like it's assuming a consistent macro environment. But just curious if you could give us any additional color on the underlying revenue and EBITDA trends at your borrowers, if there's anything worth calling out there.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [29]

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Yes. Look, I think -- this is Noah, and thanks for the question, Trevor. 2018 obviously was a year where there were a lot of tailwinds for our borrowers and for the U.S. economy in general. I think 2019 was seeing a little bit slower growth overall, and obviously some of the trade issues do impact some of the categories we lend to. So as we look ahead to 2020, we're kind of in our core

(technical difficulty)

just assuming a slower growth environment, but that said, unemployment remains very low, consumer spending and optimism remains reasonably strong, business optimism is down a bit from its historical high but still quite strong as well. So overall, I think, we lend to 700 different industries; we have a lot of diversification there; some industries get stronger and weaker every quarter, but overall it's a sort of a stable but maybe slightly slower growth environment next year.

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Operator [30]

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(Operator Instructions)

Our next question comes from James Faucette from Morgan Stanley.

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Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [31]

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It's Steven Wald for James. Just dovetailing off the comment about the environment there, as you talked last quarter about focusing in on, I think it was, the upper third of your target band of customers, maybe you could just update us, domestically, what you're seeing in terms of competitive dynamics. I know that focusing on that, there's more players lending to that space, but then also if you could also provide us with some updated thoughts around Canada and Australia, the health of those borrowers. I think you guys mentioned something about higher past-dues on the acquired loans in Canada, and just maybe any update on the Australian economy, as I think you guys mentioned a small soft spot around the election last quarter.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [32]

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Yes. No, happy to do that. So maybe I'll start with the competitive dynamics in the U.S. and then Ken can talk a little bit about the dynamic in Canada. So basically our view is that the competitive landscape in 2019 is an elevated level of competition versus 2018. That said, we thought third quarter was pretty similar to second quarter. So sequentially, we don't think much changed in the competitive environment. But you're right, I mean, it continues to be a competitive environment here in the U.S. You sort of have closed-loop players coming to payment processors who now provide loans to their customers. You've got the online lenders, and obviously you've got the banks, and since we're kind of later in the cycle, this is the point in the cycle where banks are leaning in as well. So we're seeing all those forces there. That being said, we grew originations 6% sequentially and that was largely driven by our core product, the U.S. term loan there. So I think it's an environment where we continue to grow prudently and responsibly in. But again, it is a bit elevated this year versus last year. Ken, maybe you can comment on the Canadian sort of view on loss rates.

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Kenneth A. Brause, On Deck Capital, Inc. - CFO [33]

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Sure, sure. I will actually address both Canada and Australia. So in Australia, last quarter, we talked about some elevated delinquencies and some trends that were a little bit weaker, and we actually saw those reverse themselves this quarter. And in the Canada situation, that was the case where we talked last quarter about building some reserves, as we had just integrated those 2 portfolios, and as time has gone on we've been able to improve our analysis around the [effective] loss rates on that portfolio. We have taken our expected loss expectations and therefore the reserves around, and that's what we think is the appropriate and more sustainable level.

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Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [34]

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Okay, great. And then maybe just one more on -- sorry, I don't know if I heard something.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [35]

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Yes, go ahead, go ahead, go ahead.

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Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [36]

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Okay. Yes, just maybe switching gears toward the bank charter. I know this is, like, a touchy area. It's hard to really talk in any specificity around it. But just so we have an understanding of how you guys are thinking about the concept of approaching a de novo or a transaction-related process for becoming a bank, can you just walk us through what you're sort of weighing in terms of the pros and cons and how we should think about, okay, well, if the regulators are looking for X, maybe you're more likely to do a transaction versus going organically. And obviously they're very different processes.

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Noah Breslow, On Deck Capital, Inc. - Chairman & CEO [37]

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Yes, they are. So this is Noah. We unfortunately are not in the position where we can say too much here about where we are in the process. We haven't yet said publicly which of the 2 paths we're going to pursue. We are examining both. I think there are pros and cons; obviously, de novo is, in a way, cheaper up front, but it's more of a lift and more of a build and it plays out over time. Clearly through a transaction, it might be a little bit faster, but obviously there's the complexities of any kind of M&A transaction coupled with the regulatory process and 2 parties going through that process together as opposed to one. But look, we've done a lot of research into this. Before, on the last call, we made our announcement about pursuing this charter. We are under way, as we mentioned. Some of the G&A lift this quarter is around our professional services firms that we've engaged around this process. And so as more developments happen, we'll certainly be able to talk more about this. But either way, it's going to take a lot of time.

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Operator [38]

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(Operator Instructions)

And as we have no one else in queue at this time, we will conclude today's conference call. Thank you for participating. You may all now disconnect.