OnDeck Capital (NYSE:ONDK) Q3 2017 Earnings Conference Call November 6, 2017 8:00 AM ET
Robert Zuccaro - Deputy General Counsel
Noah Breslow - Chief Executive Officer
Howard Katzenberg - Chief Financial Officer
David Scharf - JMP Securities LLC
John Davis - Stifel Financial Corp.
Vasundhara Govil - Morgan Stanley
Melissa Wedel - JPMorgan Chase & Co.
Lloyd Walmsley - Deutsche Bank
Michael Tarkan - Compass Point Research & Trading
Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the OnDeck Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to Mr. Robert Zuccaro, Deputy General Counsel. Please go ahead.
Good morning. Welcome to OnDeck's third quarter 2017 earnings conference call. I'm here with Noah Breslow, our Chief Executive Officer; and Howard Katzenberg, our Chief Financial Officer. Today's conference call is being webcast live. Our earnings release was issued earlier today and is available on the Investor Relations section of our website.
Certain statements made during this call, including those concerning our business and financial outlook for the full year 2017, our expected loan growth and operating expense levels, earned interest yield and net charge-off rates, the timing and impact of GAAP profitability, the impact of our credit tightening and the recent hurricanes, and our target provision rate are not facts and are forward-looking statements.
These statements are subject to a number of risks and uncertainties and assumptions described in our SEC filings, including the Risk Factors in our most recent Forms 10-K and 10-Q. If any of the risks or uncertainties materialize or any of our assumptions prove to be inaccurate, actual results could differ materially and adversely from those anticipated. These statements are based on currently available information, we undertake no duty to update them except as required by law. Today's discussion is also subject to limitations of forward-looking statements in today's press release.
During this call, we will refer to non-GAAP financial measures. For information about these non-GAAP measures and reconciliation to GAAP, please refer to today's press release and the appendix of the Investor Presentation posted today on the Investor Relations section of our website.
With that, I will turn the call over to Noah.
Thanks, Robert, and thank you all for joining us today. Our third quarter results reflect the continued solid progress we're making on both our near- and long-term strategic priorities. In 2017, we have taken several major steps to accelerate our near-term priority of achieving GAAP profitability. These actions primarily focused on tightening credit and reducing our expense base were intended to improve our financial performance and hence our capital efficiency, and increase our resiliency across economic cycles.
In short, they were intended to make OnDeck a stronger company and I'm pleased to report that they have done just that. From a credit perspective, our credit performance is benefiting from the adjustments we made earlier in the year. Vintage performance for 2017 loans has generally improved over last year's cohort, and loan [ph] rates have recovered meaningfully since the beginning of the year.
In addition, excluding the impact to hurricanes, both our provision rate and delinquencies improved sequentially in the third quarter. On expenses, we have now completed our $45 million cost rationalization plan, which has produced significant operating leverage. Third quarter operating expense was down nearly 25% year-over-year, and was under our $40 million target. And we reduced expenses and improved credit performance, while continuing to invest in our long-term priorities of growth, innovation and market leadership.
We grew originations sequentially by 14% and our team delivered over 20 major technology initiatives this quarter that enhance the customer experience, as well as our risk management and technology infrastructure. As a result of the strong progress, we are on track to achieve GAAP profitability next quarter and are well positioned to build on our momentum to deliver profitable growth in 2018.
Now, let me turn to this quarter's results. Gross revenue increased 8% year-over-year to $83.7 million, which was consistent with our guidance range and was driven primarily by higher interest income. Our GAAP net loss attributable to OnDeck shareholders for the quarter was $4.1 million, a significant improvement over the $16.6 million loss recorded in the prior year period.
The bottom-line results would have been even better, but for the negative impacts from hurricanes Harvey and Irma, which caused us to increase loss reserves by $3.5 million. Let me take a moment to address the hurricanes, their impact on our customers and how we handled them as a company. Customers representing approximately 11% of our loan balances were located in the counties designated by FEMA as disaster areas. While the majority of our customers in the FEMA disaster areas were either unaffected or only temporarily impaired by the Hurricanes.
Some small business owners were impacted on a longer-term basis, due to structural damage to their businesses, significant supply chain disruptions or reduced economic activity. For impacted customers in these areas, we offered temporary payment relief due to forbearance in workout plans.
Small business owners are resilient, and these actions made it easier for our customers to get their businesses up and running again. I'm very proud of the tireless efforts put forth by OnDeck employees to support our customers during this time.
As of the end of October, I'm also pleased to report that most of our impacted customers who're back in business had resumed making payments on their loans. As a result, we believe the effects of the hurricane will be transitory, consisting of higher delinquency levels and charge-offs over the next few quarters from those customers, who are most adversely affected by the storms. Hence, our $3.5 million reserve build in Q3.
Longer term, we're optimistic that we'll be investing, going back into the areas, most damaged from the storms. And OnDeck looks forward to supporting small businesses in these rebuilding efforts.
Returning to our financial performance, excluding the impact of hurricanes Harvey and Irma on our results, our GAAP net loss would have been closer to breakeven for the period and adjusted EBITDA would have been near the top-end of our guidance range.
Here are the drivers of our improved performance. Just beginning of the year, we've significantly strengthen our credit management, under the leadership of our Chief Risk Officer, Nick Brown, we've raised our underwriting standards, improved offer terms to reduce risk and enhance returns, and added operational measures to improve credit performance pre and post origination.
Prior to origination, we're asking for more financial information from perspective borrowers upfront, and testing product features and offer structures designed to promote positive selection. Post-origination, we're optimizing each stage of collections and applying treatments appropriate to customer circumstances. For instance, we continue to litigate more of our charged-off loans, which have increased recoveries.
Altogether, new strategies helped us to increase gross write-off volumes by more than $4.5 million quarter-over-quarter, and achieve a record quarter for recoveries. In some, we're in a substantially more stable credit position than we were beginning of this year and our credit outlook is much improved.
Now let me move on to operating expenses. In the third quarter operating expense was $37.3 million, which was below the expectation we outlined last quarter and down nearly 25% year-over-year. In the third quarter, we completed our $45 million cost rationalization plan producing significant operating leverage and we expect operating expenses to be below $40 million for the fourth quarter of 2017. While, we are pleased with this progress, we'll continue working to drive operating leverage in the business, and we'll do this while we continue to invest in driving growth and further extending our market leadership.
Over the next year, we expect to continue investing in initiatives to strengthen our risk management capabilities, improve the flexibility and utilization of our prime term loan and line of credit offerings, and accelerate the release of new products that serve more of our small business customers financing needs.
As I mentioned earlier, one of our other key areas of focus has been enhancing our ability to grow originations responsively and profitably. Originations grew to $531 million in the third quarter, up 14% sequentially. And credit quality of new originations, as measured by both the OnDeck Score and personal credit scores, remained near historic highs. Each of our three distribution channels grew sequentially driven primarily by increases in returning customer volume.
Originations were also driven by initiatives to reaccelerate growth in a responsible manner. These include enhancing the features of our existing offerings to attract more high-quality borrowers and increasing conversion rates. For instance, in the third quarter, we enhance some features of our line of credit product to broaden this overall appeal in our partner channels, and began testing different payment amortization options for our line of credit that should improve booking rates and reduced payment stress for customers. We're encouraged by the initial results of both these efforts.
I'd now like to spend a few minutes discussing our OnDeck as service offering. In August, we announced the JPMorgan Chase and OnDeck entered into a four-year agreement, where OnDeck will continue providing the underlying technology supporting Chase's online lending solution to its small business customers, including expanding access and enhancing features.
On the heels of this extension, the program set another origination record in the third quarter. We're very impressed with the rapid growth we're seeing, and still believe we're in the early innings of what we can accomplish with Chase. As you've heard me say before, we believe our Chase partnership further validates our asset class, our platform and our broader partnership opportunity with banks.
To this end, I'm pleased to report the partnership interest from banks continues to increase. And we expect to announce our second major bank partnership in the first half of 2018. We continue to believe our OnDeck as a service offering remains a key strategic differentiator and a very promising driver of long-term growth. And we look forward to providing additional update as we progress.
Recently, we also announced partnership with Ingo Money and VISA to enable real-time funding of loans to small businesses via their debit cards, powered by Visa Direct. We're the first company in the online lending industry to offer real time access to capital via customer's existing small business debit card.
By partnering with Ingo Money and VISA to deliver real time capital to our customer, we're providing small business owners with one of the fastest and most flexible credit solutions in the market. We expect our instant funding service to be available to line of credit customer beginning in early 2018 with availability for term-loan customer coming later in the year.
Over the past decade, we've grown to be the largest online lender to small businesses by relentlessly innovating and deploying new technology that benefits small business owners. Substantial progress, we've made in our strategic priorities this year, now only put us on track to achieve GAAP profitability, but also allows us to renew our focus on the innovation that is truly as a core of our company.
Accordingly, while GAAP profitability is our immediate goal, the actions we've taken are designed to give our company greater financial strength, flexibility and market reach. So, we can capitalize on our promising long-term market opportunities and build shareholder value.
With that, I'll turn the call over to Howard.
Thank you, Noah. During the third quarter, we continue to benefit from the significant actions we have taken during the year to improve our financial results. We strengthened our credit performance, delivered operating efficiencies, and optimized originations for profitable growth going forward.
Our financial results in the third quarter reflect this progress. Gross revenue was approximately $84 million, which was up 8% year-over-year and in line with our expectations. This growth was driven primarily by higher interest income, which increased 12% year-over-year. Please note that the hurricanes affected this quarter. We do think interest cautions [ph] a few hundred thousand dollars as well.
Effective Interest Yield or EIY was 33.4% in the quarter, up 55 basis points from last year's level and up from 32.8% in the second quarter. On a related note, loans originated in Q3 had an average APR of 43.8%, continuing this year's upward trend in loan pricing. Reflecting the trend, we believe EIY will continue increasing and be between 34% and 35% in Q4.
Gain on sale revenue was approximately $150,000 in the period, reflecting about 1% of term loan origination sold through OnDeck marketplace in the quarter. Additionally, other revenue increased to $3.4 million, up $700,000 from the second quarter. The increase was largely due to the extension of our relationship with Chase. We expect other revenues to continue growing gradually from Q3 levels. Provision expense in the third quarter was approximately $40 million, which translated into a provision rate of 7.5%.
This provision expense primarily reflected our originations growth in the quarter, but also included the $3.5 million charge Noah mentioned, related to anticipated losses from hurricanes Harvey and Irma. Backing out the $3.5 million charge, our provision rate would have been between 6.8% and 6.9% in the third quarter. With respect to our other credit metrics, our 15-day delinquency rate was 7.5%, which results from 7.2% in Q2, solely due to the impact of the hurricanes.
Our next point, please note that from a reporting perspective, loans that were granted temporary payment relief, continued accumulating days past due during the relief period and were included in our delinquency rate calculations. This inclusion was reflected in the delinquency metrics reported today and was the major driver of the increase in the 15-day delinquency rate for customers in the FEMA designated disaster areas.
That said, for the approximately 90% of our loan balances outside of the FEMA disaster areas, delinquency rates improved to 6.6% from 7.2% last quarter. This improvement resulted primarily from the improved credit performance of recent originations and the better [classes of] [ph] execution that Noah described in his remarks.
Net charge-off rate was 16.9% in the quarter, down from 18.5% in the second quarter. Net charge-off rates were likely to remain elevated in the near-term as loans for which we built loss reserves in prior periods continue to charge off. Overall, though the environment remains favorable for small businesses across the country and our credit outlook is strong.
Moving on, our Cost of Funds Rate was 6.4% in Q3, up from 6.2% in Q2, primarily reflecting the impact of the Fed's rate increase in June. Altogether, our net revenue was $33 million. Operating expense was approximately $37 million in the quarter. We have now completed our $45 million cost reduction plan, which has driven significant gains in operating leverage, particularly in the areas of compensation and marketing.
Specifically, on the marketing side, as we pull back and optimize acquisition spend, we've been successful driving improved marketing efficiencies. In fact, our sales and marketing cost as a percent of total originations was 2.2% in Q3, 50 basis points lower than a year ago. And the lowest level since we went public. We look forward to continuing to build on this momentum going forward. Altogether, operating expense as a percent of revenue was 45% in the quarter, down significantly from 64% in the prior-year quarter.
As Noah mentioned, we will continue to be vigilant in driving margin improvement in our business. In Q4, we expect operating expense to remain under $40 million. But it will lightly increase from Q3 levels.
Putting it altogether, GAAP net loss attributable to common shareholders in Q3 was negative $4.1 million, while adjusted EBITDA was positive $1 million. Considering the impact of the hurricanes, we believe this is very strong financial performance. There is no doubt, we're a significantly stronger company now as a result of the actions we've taken this year to improve our financial profile.
Moving over to the balance sheet, our Unpaid Principal Balance or UPB was $941 million at the end of Q3. Ending UPB was 1% lower than last quarter's balance, primarily due to our strategic decision to tighten credit management earlier this year. Likewise, our funding debt declined 2% sequentially, primarily reflecting the decline in UPB balances.
During the quarter, we also took advantage of our strong cash position and pay down more than $10 million on our corporate debt line. This is the main driver of the sequential reduction of our cash balance, which was $64 million at the end of Q3. Overall, our capital access remains strong, and we remain confident in our ability to fund our expected growth for the foreseeable future.
Moving on to guidance for the full-year 2017, we are reiterating our expectation that gross revenue will be between $342 million and $352 million, and adjusted EBITDA will be between $5 million and $15 million. Given the impact of the hurricanes in the third quarter, we'll likely now be on the lower end of this range.
And we're excited to reiterate that we continue to be on track to achieve GAAP profitability in Q4 2017. And although, we're not providing specific numbers for 2018 yet, we're encouraged by the prospects for higher loan growth and continued operating leverage as well as ongoing opportunities to improve price and loss-yields [ph]. We believe these dynamics will lead to solid bottom line improvement in 2018.
Finally, please note that with respect to our guidance, as we continue considering additional step to lower our cost structure. We are actively pursuing that subleasing of a portion of our overall real estate footprint. We are hopeful that we can accomplish a transaction or transactions later this year or in early 2018. This will produce meaningful multiyear savings, but will likely require us to recognize certain onetime charges in the quarter as the transaction is commenced.
Due to the timing and structural uncertainties around such transactions, we've not included any potential charges in our guidance or forecast of GAAP profitability in the fourth quarter of 2017.
With that, I'll turn it back to Noah for some concluding remarks.
Thanks, Howard. Recently, the OnDeck team celebrated the 10-year anniversary of serving our first customer. We made our first loan in August 2017 with the customer first philosophy and a relentless commitment to providing capital online with speed, efficiency and world-class service. Since then, we've provided over $7 billion of capital to more than 70,000 customers in 700 different industries across the United States, Canada and Australia.
Today, OnDeck is the market leader in online small business lending. And you've heard on the call today a much stronger company as a result of the tangible progress we've made towards our strategic priorities this year. Our work is not done, but we are now much better position both financially and operationally to capitalize on the numerous opportunities we see ahead.
We are confident that the strategic actions we have taken will allow us to drive double-digit originations growth in 2018, deliver innovation that better serves our small business customers and propel significant and sustainable bottom line improvement. I'm excited to work with the entire OnDeck team to achieve this goal and I'm grateful for their continued hard work to drive the company forward.
With that, thank you for joining us today. And I'll now turn the call back to the operator for Q&A.
[Operator Instructions] Thank you. Your first question comes from the line of David Scharf with JMP Securities. Please go ahead.
Hi, good morning. Thanks for taking my questions. Noah, couple of things, first is on the customer acquisition side, the drop in sales marketing expense was much steeper than I had anticipated. As you noted, the expense ratio was ahead of plan. I'm curious, thinking about that figure going forward, is it partially reflecting anything in your targeting? For example, the acquisition cost of targeting, a potential repeat borrower might be less. Is there anything about the product, line of credit versus term, just trying to get a sense for how sustainable that sales and marketing ratio is?
Yeah, thanks for your question, David. I mean, obviously we were really excited by the sales and marketing efficiency we had this quarter. I do think there is a little bit of something in the sequential comparison, you want to keep an eye on, which we had some one-time charges related to our restructuring last quarter that we - that made probably last quarter's number a little bit higher than it would have been in kind of a steady-state environment. So, I just want to keep that in mind.
But you're absolutely right. I mean, some of the things we did this quarter is with a more narrow credit aperture, we were able to refine our marketing spend and target it more appropriately to make sure the application is coming in. It's actually applications went down a little bit quarter over quarter, but that was by design. We spent less on marketing, especially in channels that have lower credit quality.
And then as you noted, we also made a big push on this quarter on our repeat borrowers. And in particular, there is one population, a win-back population, where customers who have worked with us a couple of years prior, but maybe haven't worked with us recently. It's almost like database marketing. We did make a concerted effort to spend more time with those customers this quarter. And as you noted, those customers have very low acquisition cost.
So, we think some of these improvement is definitely sustainable, and we continue to look for additional ways to improve our efficiency going forward.
Got it, it's helpful. And maybe just a follow-up for Howard, then I'll get back in queue. Thinking about the reserve rate and the improving credit profile, these are obviously loans that just have six-month average duration. Does that mean that the build-up in the reserve for the hurricane impact? I mean, it's pretty much - that that should run its course by the beginning of next year. Should we be thinking about that 11% reserve rate starting to drop noticeably by Q2 of next year or even Q1?
Yeah, so I think the impact of the hurricane, David, should be terminal [ph] in nature and be kind of fully realized within next two or three quarters. Again, as those loans kind of run off the book, I would expect that 11% rate to kind of decrease from where it is today.
Got it. Thank you very much.
Your next question comes from the line of John Davis with Stifel. Please go ahead.
Hey, guys, good morning. I just want to touch on the competitive environment, origination growth was quite a bit better than I expected, so just any commentary there at a higher level. And then, also what loss rate are we kind of underwriting to appreciate losses are going to be a little high in the 17%-ish for the next couple of quarters. But the new loans that are coming on, what is your targeted loss for those loans? Any commentary there will be helpful.
Yes, John, this is Noah. I'll take the first one. Howard will take the second here. So, from a competitive perspective, I think overall, we feel like we're in a more rational competitive environment than we were last year. If you look back, during the course of 2017, four industry players who are competitors to OnDeck, I mean, they stopped originating or dramatically slowed down their volume. And some M&A activity in the space has also curtailed some of the flow of capital towards our customers.
I think we're also seeing that the credit pullbacks that OnDeck did this year, other lenders are pulling back a little bit as well. I think everyone felt like the environment got a bit overheated last year, and certainly our credit results from the prior year will reflect that.
So, I think what you're seeing really is a little bit less competitive intensity out there, a little bit more rational competitive offers. And then as I mentioned in my prior answer, we did focus quite a quite on repeat customers this quarter, so we had worked with either recently or several years prior. And obviously, for those folks it's a little bit less of a competitively intense situation than it would be to acquire a brand new customer. Then I'll turn it over to Howard for the comment on…
Yeah, on the loss rate target, if you correct for the impact of the hurricanes in Q3, our progression rate would have been under 7%. Going forward, I think that trends that you've seen realized in Q3 will continue in terms of reducing credit risk upfront, as well as increasing recoveries on the backend. So, when I look out over the next 12 months, I think the target provision rate is probably between 6.5% and 7%. But we're going to continue focusing on improving credit management.
Okay. Also, just as a follow-up on here on expenses, I think $37 million was quite a bit better than we had hoped for. I know you said under $40 million in 4Q. But is this $37 million a run rate that we can project going into next year or do you expect it to be closer to $40 million a quarter going into next year?
Probably in between. Q4, there is seasonal expenses that we incur like audit fees. But our focus is on continuing to drive operating leverage. We see more opportunity to be efficient. I talked about at the sub-leases in my remarks, and successful there that our results in approximately $1 million of savings per quarter. I think, more work to do on the marketing efficiency side, and we have a lot of contracts for renegotiation in 2018 that couldn't be renegotiated in 2017. So, something we're very, very focused on, and we have great momentum we can build upon from 2017.
Okay. Thanks, guys.
And your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.
Hi, this is Vasu Govil for James. Thanks for taking our question. I guess, following up on the origination growth comment, it was quite a bit better than what we were expecting as well. Can you talk about where it was versus your internal expectations and then based on the trends you've seen this quarter? Is there any update to your growth outlook for 2018? I know, you guys have said double-digit origination growth next year, are you seeing - worse about it, just any updated thoughts there?
Yeah, so I can't comment on what we're seeing in the current quarter, but I think, we were encouraged by the trends we saw during Q3. So, it was a little bit ahead of our internal projections for sure. But we did feel, as we noted on the prepared remarks that our credit quality was excellent. And I think, we were pleasantly surprised by competitive environment our last quarter.
So, we feel good, we reiterated the double-digit comment for next year, but we haven't sort of adjusted that forward outlook at this time. But again, overall, very pleased with the traction in the quarter, credit quality as measured by OnDeck Score and personal credit score was at near historical highs.
And the other thing, I'll mention is, when you look at the originations makes in Q3 versus a year prior. The proportion of originations in the lowest OnDeck Score bond [ph] riskiest originations that we make is dramatically lower. So, I think, not only are the averages kind of the portfolio better. But I think the shape of the distribution, in particular, the amount of riskiest credits that we originate is much lower than it was one year prior.
That's helpful. And then just one question for Howard. I know, there's just one more quarter to go, but you guys haven't adjusted the adjusted EBITDA guide, it's still a pretty wide range of $5 million to $15 million. So, can you talk a little bit about what needs to happen to get to be high end of the range versus the low end?
Well, I guided in my remarks to the low end of the range, given the impact of the hurricanes. Despite the $30.5 million impact on credit plus a couple of hundred thousand dollar impact in revenue, we didn't take down the EBITDA range, but nonetheless we'll have an influence over full year results.
As I think - Q4, I think, what needs to happen is really just a continuation of our current strategy and resulting trends that you're seeing. So, our UPB balance only declined $30 million versus over $70 quarter-over-quarter decline last quarter. And that's the result of the originations momentum that we have in the business. EIY, the Effective Interest Yield increased quarter-over-quarter. As I said in my remarks, we expect that to be between 34% and 35% as the end of - in Q4. We expect provision rates to remain below 7%, and OpEx, as I said to be under $40 million.
To be honest, I think the biggest uncertainty is actually originations growth. To the extent, we are over originating you have to book that provision expense. But nonetheless, we feel good about achieving GAAP profitability and building a strong foundation of even more profitable growth in 2018.
Thanks very much.
And your next question comes from the line of Melissa Wedel with JPMorgan. Please go ahead.
Thanks for taking our question, guys. Most of mine have already been answered, but I want to go back to the impact of hurricane for just a moment. I'm wondering, if there any particular industry concentration in those impacted areas?
Yeah. Hi, Melissa. It was pretty broad-based in terms of this kind of where we saw the impact. It's just based on really the force of the weather event on the locations. So, we had businesses that their business has destroyed in areas of Key West [ph] We also had businesses that had some structural damage where they can't open for a couple of weeks.
I'm really proud of the work our team did work with these customers. Really - to work with them through the - their hardships. And as Noah said, the majority of the customers that we put on some payment clients were paying us back at the end of September, to be more specific over 80% of those customers were paying us back.
Got it. And can you elaborate a little bit on - I think, you - in reference something about lower interest income related to kind of the restructuring of the repayment plans? Can you elaborate a little bit more on that and how they're suffering with those businesses?
Sure. Yeah, basically the partnership came in two forms. One, just on the payment holiday, where we proactively reached out to both customers in the Houston areas as well as in the Florida in Southaltan [ph] you anticipate problems with your loans, please call us, we are here to help. So, we saw some good response to that. And basically, the remedy was one or two things: one, reducing their daily payment or weekly payment, or just putting them on some type of forbearance or payment holiday.
So, given the impact of both, we don't accrue interest, we only actually recognize interest, when it's collected. So as a result, where there is about - probably about couple of hundred thousand dollars of revenues that wasn't recognized in September as a result of the storms.
Got it. So, it wasn't reduction in rates, per se?
No. In fact, the EIY too, just because of the calculations, interest rate come over the average balances, but we didn't modify any of the terms, we just kind of provided these payment relief, and we expect to collect most of back over time.
Got it. Thanks so much.
[Operator Instructions] Your next question comes from the line Lloyd Walmsley with Deutsche Bank. Please go ahead.
Thanks. Can you talk a little bit more about the decision to litigate more on your collections process, and kind of how you focus this differently in different channels, and balance the customer service aspect versus better collections, and maybe how you're able to litigate given the smaller loan balances you have cost effectively?
Sure. Yeah, happy to address that Lloyd. So, I think, historically OnDeck is primarily relied on third party debt sales. So once a loan was charged-off, we would then find a third-party debt buyer, who would handle that longer-term litigations and collection strategy. And we had a certain level of yield for that, call it, high-single-digit cents on the dollar.
And ultimately, we were able to build up our own team internally, who had expertise in that area, and we've been testing our way now over the last year or so into litigating ourselves a higher and higher percentage of loans, we were highly encouraged by that, while initially may not get as much upfront, we are able, actually, we think about a year's time to recover the same amount we were getting in the debt sale. And we actually believe that within two years' time, we'll recover substantially more.
So, as we continue to test into that strategy, I think, that's going to have a major impacts on recovery rate and our - kind of sort of net loss percentage, if you will, heading into next year. In terms of the deal size, and when we chose to litigate make sure that's cost effective. I remember - I would just remind folks, this is not consumer lending. So, your average loan between $50,000 and $60,000 clearly, on the smaller loans, you employ a different strategy than you do to larger loans.
But so far, I would also mention that a lot of the firms we work with to handle the cases, work on a contingency basis. So, it's not like we have a huge upfront cost from an OnDeck perspective. So, we think, this is a cost-effective strategy that yield better results for OnDeck shareholders, of course, customer service is critical, as you do anything like this.
And so, in our case, again, because our loans are collected daily or weekly, or in touch with borrowers, it's a very early stages of their delinquency much more than a traditional lender would be, but clearly, in certain situations, the borrower is not responsive or the willingness to pay is not there. I think, we have an opportunity to improve the way we handle those cases in the past.
Okay. If can ask other one. Wondering, if you can just talk a little bit more about just enhancements in the Chase deal, and then what are you seeing in terms of volume growth trends as that deal expands? And how we should think about that impact, and perhaps future deals or some of these things setting the stage for future deals to start perhaps more broadly?
Yeah, now happy to, so again, we're very pleased with the Chase program, and we have now - that we've renewed our contract here for four years. There is really a steady stream of enhancements to the product offering to the customer experience. Opening up new populations to the top of the funnel, renewals are even starting to kick in a little bit. So, we're seeing very strong double-digit quarter-over-quarter growth in this program. And I think as Howard mentioned, we still feel like we're in the early innings of what we can do here with Chase.
We also mentioned on the call, we do continue to see a lot of traction in our discussions with major banks. The huge push now towards not only digital lending and banks, but really banks partnering with fintechs across the board. So, we do expect to announce our next major bank partnership in the first half of 2018 and we're encouraged by the traction we're seeing there.
So, our belief is that, in five years' time every single bank will have a digital lending strategy and a platform. And our goal is to really partner with the major banks in the U.S. to help them accelerate their online digital lending capabilities.
All right. Thank you.
[Operator Instructions] Your next question comes from the line of Michael Tarkan with Compass Point. Please go ahead.
Thanks for taking my question. Just back on the repeat borrower dynamic there, can you tell us sort of what percentage of new originations came from repeat borrowers? I know they were sort of tracking around the 50% level, just wondering where that is now.
Hey, Michael, it was higher than 50% - lower than 50% in the quarter.
Okay. Are you seeing that your repeat borrowers are taking out larger loan balances just on average? And then, any way to sort of frame the customer acquisition cost for a repeat borrower? What kind of magnitude it is for a new borrower versus a repeat borrower?
Yeah, so, I think with repeat borrowers, overall - structurally they have a much lower customer acquisition cost. So, it really depends on the channel. But particularly on our direct channel, we spend money on direct marketing upfront to acquire the new customer, that repeat customer, there is a very low customer acquisition cost, simply just our internal cost to process the transaction. So that's where the biggest difference is in our partner channels. So, the funding advisor and the platform channel like our major corporate partners, there is a commission that's paid out on repeat borrowers. Generally, that commission is lower than the commission that is paid out for new borrowers.
In terms of loan size, it's actually been true for OnDeck historically since we started doing repeat loans eight or nine years ago, is that generally the repeat loans you have a lower loss rate, which allows them to be less risky from a credit perspective. And in turn, we extend them a little bit more capital. But I wouldn't say the trends in the third quarter were dramatically different on that front than they have been for years.
Okay, thanks. And then last one just on this topic, any sense for how many loans your borrowers take out on average per year or how many repeat borrowers they got and one of your competitors has talked four to five loans generally per year per borrower. I'm just kind of curious where you guys sit on that. Thank you.
Yeah, historically, we disclosed this in investor presentation, and the customer lifetime value slide that we have. But for customers acquired in 2015 for instance, through the third quarter of 2017 they've taken out two loans over that 11-quarter period.
And the only thing I'll add Michael is it does depend a little bit on the product. So, for our term loan product that, absolutely the number - it's a less frequent product in the frequency you mentioned. A lot of credit product is designed kind of for everyday use. And so, there we're seeing, call it, six draws per year or so on average from customers. But those draws are much smaller in size than our term loan.
Overall, this is definitely something we watch. And we continue to update and develop what we call our service-ability frameworks, making sure our customers are taking on the appropriate levels of indebtedness. So, we definitely watch this trend closely, but I don't think the positive growth we saw in the business in the third quarter is in anyway a reflection of customers sort of going too far on the renewal side into taking out additional loans.
Understood. Thank you.
And your next question comes from the line John Davis with Stifel. Please go ahead.
Hey, guys. Just got quick follow-ups, one around the yield, Howard, I think you're expecting the yield to go up in the fourth quarter despite credit getting better. So maybe just some high-level comments on price elasticity and why you think you can get improvement in yield while underwriting to a better credit quality loans.
Yeah, I think it's mostly reflective of the price increases that we've been implementing over the last several quarters. So, as we reported, the average APR of a loan originated in Q3 was 43.8%. That was up from last quarter. And from a yield perspective or effective interest yield perspective, we're having some loans underwritten in 2015 kind of fall off the bad book and they're being replaced with these higher priced new originations.
And as that trend continues, we should see effective interest yield to rise for those structural reasons.
Okay. That makes sense. And then maybe one last one for you, Noah, to follow-up on your comments about banks starting to partner with fintech, we're seeing and hearing a lot about it here. So maybe has it shifted your strategic thinking or how you treat the business on a go-forward basis? Does it make sense to continue to use the balance sheet? How do you look at OnDeck as a service? Basically, has it shifted your thinking on strategic rational and maybe even if it makes sense to continue to go as standalone?
Yes, I think we feel great about our standalone opportunity as a company. I think we did a lot of heavy lifting earlier this year. I think the third quarter with the solid originations growth, with the positive credit trends, with the rationalized cost structure, all that points to building a profitable business in 2018 and beyond, so we like that opportunity.
Look, I think even as the banks start to partner, it will be several years before those programs where we gained scale and traction. So, we think it's not a short-run kind of gain that we're playing here. It's really much more of a long-term, where do you we think the industry is in five or ten years. But we don't see as bank necessarily being open to changing their risk tolerance. So OnDeck historically has been the market leader in serving the less well-served small business in the market. And we think we have a huge opportunity for the lending business there.
So, I would say overall, we're thinking strategically about how best to execute in kind of the bank opportunity as well as in our core business. But I would say is not one being at the expense of the other, given our outlook on both.
Okay. Thanks, guys.
And we have no further questions in the queue at this time. I will now turn the call back over to the presenters.
Thanks, everyone, for joining us today. I will see you next quarter. Have a great day.
Thank you, everyone, for attending today. This will conclude today's call and you may now disconnect.