GREENSKY, INC. (United States dollars in thousands, except per share data and unless otherwise indicated) 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 related notes included elsewhere in this Form 10-Q, as well as the Audited Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in theGreenSky, Inc. 2020 Form 10-K filed with theSecurities and Exchange Commission onMarch 10, 2021 ("2020 Form 10-K"). This discussion and analysis contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under Part I, Item 1A. "Risk Factors" in the Company's 2020 From 10-K. Unless the context requires otherwise, "we," "us," "our," "GreenSky" and "the Company" refer toGreenSky, Inc. and its subsidiaries. OrganizationGreenSky, Inc. was formed as aDelaware corporation onJuly 12, 2017 . The Company was formed for the purpose of completing an initial public offering ("IPO") of its Class A common stock and certain Reorganization Transactions, as further described in the 2020 Form 10-K, in order to carry on the business ofGreenSky, LLC ("GSLLC"), aGeorgia limited liability company, which is an operating entity.GS Holdings, LLC ("GS Holdings "), a holding company with no operating assets or operations, was organized as a wholly-owned subsidiary ofGreenSky, Inc. inAugust 2017 . OnAugust 24, 2017 ,GS Holdings acquired a 100% interest in GSLLC. Common membership interests ofGS Holdings are referred to as "Holdco Units." OnMay 24, 2018 , the Company's Class A common stock commenced trading on the Nasdaq Global Select Market in connection with its IPO. Executive Summary Covid-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization designated the novel coronavirus disease (referred to as "COVID-19") as a global pandemic. In the second half ofMarch 2020 , the impact of COVID-19 and related actions to mitigate its spread within theU.S. began to impact our consolidated operating results. As ofMay 5, 2021 , the date of filing this Quarterly Report on Form 10-Q, the duration and severity of the effects of COVID-19 remain unknown. Likewise, we do not know the duration and severity of the impact of COVID-19 on members of the GreenSky ecosystem - our merchants,Bank Partners , and GreenSky program borrowers - or our associates. In addition to instituting a Company-wide work-at-home program to ensure the safety of all GreenSky associates and their families, we formed a GreenSky Continuity Team that is tasked with communicating to employees on a regular basis regarding such efforts as planning for contingencies related to the COVID-19 pandemic, providing updated information and policies related to the safety and health of all GreenSky associates, and monitoring the pandemic for new developments that may impact GreenSky, our work locations and our associates. Our GreenSky Continuity Team is generally following the requirements and protocols as published by theU.S. Centers for Disease Control and Prevention and theWorld Health Organization , as well as state and local governments. As of the date of this filing, we have not begun to lift the actions put in place as part of our business continuity strategy, including work-at-home requirements and travel restrictions, and we do not believe that these protocols have materially adversely impacted our internal controls or financial reporting processes. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law. While we do not believe the impacts of the CARES Act were material during the three months endedMarch 31, 2021 and 2020, we continue to examine both the direct and indirect impacts that the CARES Act, and additional government relief measures, may have on our business, including impacts associated with the expiration of select CARES Act provisions. 42 -------------------------------------------------------------------------------- Table of
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The following are key impacts of COVID-19 on our business and response initiatives taken by the Company, in coordination with our network partners, to mitigate such impacts: Transaction Volume. Our transaction volume began to be impacted significantly by COVID-19 inmid-March 2020 and continues to be impacted through the first quarter of 2021. For the three months endedMarch 31, 2021 , our transaction volume decreased 6% compared to the three months endedMarch 31, 2020 . We ended the first quarter of 2021 with significant momentum in our home improvement vertical with month-over-month increases in both the number of new applications and the number of new customer accounts from February toMarch 2021 , representing the highest such increase for a February to March period in our history. While our elective healthcare services vertical continues to be more significantly impacted by COVID-19, we nevertheless achieved impactful transaction volume growth in the first quarter of 2021 compared to the fourth quarter of 2020. Our elective healthcare transactions currently are not a material portion of our business. Portfolio Credit Losses. We entered the COVID-19 pandemic with historically strong credit performance and we believe our home improvement sector program borrowers, particularly in concert with our focus on promotional credit, are strongly resilient. To maintain our strong credit position in this uncertain economic environment, we continue to emphasize our super-prime promotional loan programs with our merchants. Additionally, in partnership with ourBank Partners , GreenSky program borrowers impacted by COVID-19who requested hardship assistance have received temporary relief from payments. As ofMarch 31, 2021 , approximately 0.21% of the total servicing portfolio was in payment deferral. While our efforts (and those of ourBank Partners ) have thus far been effective in mitigating substantial credit losses, the potential remains for increased portfolio credit losses in 2021 as compared to 2020. The timing and extent of these future portfolio credit losses are not yet known given the ongoing COVID-19 pandemic. These potential credit losses would reduce our incentive payments from ourBank Partners . As the impact of COVID-19 continues to persist and evolve, GreenSky remains committed to serving GreenSky program borrowers, ourBank Partners and merchants, while caring for the safety of our associates and their families. The potential impact that COVID-19 could have on our financial condition and results of operations remains highly uncertain. For more information, refer to Part I, Item 1A. "Risk Factors" in our 2020 10-K and, in particular, "- The global outbreak of the novel coronavirus, or COVID-19, has caused severe disruptions in theU.S. economy, and may have an adverse impact on our performance and results of operations." Key Developments GreenSky continues to execute its strategy to diversify its funding to include a combination of commitments fromBank Partners and alternative funding structures. Specific key developments during the three months endedMarch 31, 2021 include: •We executed an arrangement with a leading life insurance company that included an initial sale of loan participations totaling approximately$135 million and a forward flow commitment for up to$1.0 billion in additional loan participation sales over a one-year period. InApril 2021 , this arrangement was increased by$500 million , to$1.5 billion , in connection with the inclusion of an additional loan product type to the forward flow arrangement. •GreenSky executed sales of approximately$315 million in loan participations and whole loans (inclusive of the sale referenced above). A portion of these transactions included the sale of participations previously purchased by the Warehouse SPV, and the related proceeds from the sale of such participations were used to pay down amounts previously borrowed under the Warehouse Facility. Our Warehouse Facility liability decreased by a net$207.0 million in the first quarter. •InFebruary 2021 , one of the institutional investors that purchased loan participations in 2020, completed a securitization of the loan participations, constituting the first securitization of GreenSky program assets. 43 -------------------------------------------------------------------------------- Table of
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Additional key developments thus far in the second quarter of 2021 include: •InApril 2021 , an existing Bank Partner increased its revolving commitment by$500 million to$2.0 billion and extended its commitment for an additional two years into the fourth quarter of 2023. •InApril 2021 , the Company entered into a binding memorandum of understanding to settle the IPO litigation. Substantially all amounts payable under the proposed settlement will be paid by the Company's insurers. See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information related to the proposed settlement. First Quarter 2021 Results The following are key business metrics and financial measures as of and for the three months endedMarch 31, 2021 : Business Metrics •Transaction volume (as defined below) was$1.30 billion during the three months endedMarch 31, 2021 compared to$1.37 billion during the three months endedMarch 31, 2020 , a decrease of 6%; •Total revenue was$125.2 million during the three months endedMarch 31, 2021 compared to$121.9 million during the three months endedMarch 31, 2020 , an increase of 3%; •The outstanding balance of loans serviced by our platform totaled$9.32 billion as ofMarch 31, 2021 compared to$9.26 billion as ofMarch 31, 2020 , an increase of 1%; •We maintained a strong consumer profile. GreenSky program borrowers with credit scores at origination over 780 comprised 40% of the loan servicing portfolio as ofMarch 31, 2021 , and 89% of the loan servicing portfolio as ofMarch 31, 2021 consisted of GreenSky program borrowers with credit scores at origination over 700; and •As ofMarch 31, 2021 , 30-day delinquencies of loans in the GreenSky program were 0.76%, an improvement of 47 basis points overMarch 31, 2020 and 23 basis points overDecember 31, 2020 . That delinquency rate includes accounts that received COVID-19 assistance that are no longer in payment deferral. Approximately 0.21% of the total loans serviced by our platform as ofMarch 31, 2021 were in deferral status, compared to approximately 0.80% as ofDecember 31, 2020 and 4% at the peak in the second quarter of 2020. Financial Measures We had net income of$12.1 million during the three months endedMarch 31, 2021 compared to a net loss of$10.9 million during the three months endedMarch 31, 2020 . The higher earnings in the 2021 period was primarily due to: •A$3.9 million non-cash benefit to financial guarantee expense in the three months endedMarch 31, 2021 , compared to a$18.4 million expense in the same period in 2020. Refer to "Three Months EndedMarch 31, 2021 and 2020-Financial guarantee expense (benefit)" in this Part I, Item 2 as well as Note 1 and Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional discussion of our financial guarantee. •Our cost of revenue decreased$8.3 million for the first quarter compared to a year ago, despite the impact of an$8.6 million mark-to-market expense in 2021 related to sales facilitation obligations. We did not have this mark-to-market-expense or sales facilitation obligations in the first quarter of 2020. •These amounts were partially offset by sales, general and administrative costs that increased$4.7 million , including$6.3 million of non-recurring costs in 2021 primarily associated with legal and regulatory matters. For additional information, see Results of Operations within this Part I, Item 2. 44 -------------------------------------------------------------------------------- Table of
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Adjusted EBITDA (as defined below) of$35.1 million during the three months endedMarch 31, 2021 increased from$17.1 million during the three months endedMarch 31, 2020 . Information regarding our use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP (as defined below) measure, is included in "-Non-GAAP Financial Measure." Seasonality. Historically, our business has generally been subject to seasonality in consumer spending and payment patterns. We cannot yet predict the impacts of COVID-19 on the seasonality of our business for the remainder of 2021 or future periods. For example, we have observed supply chain impacts on materials costs and project completion times, which can lead to increased consumer complaints. Increased project completion times can also increase variability from historical seasonality patterns. Given that our home improvement vertical is a significant contributor to our overall revenue, our revenue growth generally has been higher during the second and third quarters of the year as the weather improves, the residential real estate market becomes more active and consumers begin home improvement projects. Conversely, our revenue growth generally has been relatively slower during the first and fourth quarters of the year, as consumer spending on home improvement projects tends to slow leading up to the holiday season and through the winter months. Historically, the elective healthcare vertical has been susceptible to seasonality during the fourth quarter of the year, as the licensed healthcare providers take more vacation time around the holiday season. Our seasonality trends may vary in the future as we introduce our program to new industry verticals and the GreenSky program becomes less concentrated in the home improvement industry. The origination-related and finance charge reversal components of our cost of revenue also have been subject to these same seasonal factors, while the servicing-related component of cost of revenue, in particular customer service staffing, printing and postage costs, has not been as closely correlated to seasonal volume patterns. As prepayments on deferred interest loans, which trigger finance charge reversals, typically are highest towards the end of the promotional period, and promotional periods are most commonly 12, 18 or 24 months, finance charge reversal settlements follow a similar seasonal pattern as transaction volumes over the course of a calendar year. Lastly, we historically have observed seasonal patterns in consumer credit, driven to an extent by income tax refunds, resulting in lower charge-offs and thus, higher loan repayments during the second and third quarters of the year. Non-GAAP Financial Measure In addition to financial measures presented in accordance withUnited States generally accepted accounting principles ("GAAP"), we monitor Adjusted EBITDA to manage our business, make planning decisions, evaluate our performance and allocate resources. We define "Adjusted EBITDA" as net income (loss) before interest expense, taxes, depreciation and amortization, adjusted to eliminate equity-based compensation and payments and certain non-cash and non-recurring expenses. We believe that Adjusted EBITDA is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business. We believe that this methodology for determining Adjusted EBITDA can provide useful supplemental information to help investors better understand the economics of our platform. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, such as net income. Some of the limitations of Adjusted EBITDA include: •It does not reflect our current contractual commitments that will have an impact on future cash flows; •It does not reflect the impact of working capital requirements or capital expenditures; and •It is not a universally consistent calculation, which limits its usefulness as a comparative measure. Management compensates for the inherent limitations associated with using the measure of Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with GAAP 45 -------------------------------------------------------------------------------- Table of
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and reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, net income, as presented below.
Three Months Ended March 31,
2021 2020
Net income (loss) $ 12,125 $ (10,919)
Interest expense(1) 6,614 5,620
Income tax expense (benefit) 1,872 (895)
Depreciation and amortization 3,316 2,445
Share-based compensation expense(2) 3,712 3,499
Financial guarantee liability - Escrow(3) - 18,408
Servicing asset and liability changes(4) (7,505) (2,306)
Mark-to-market on sales facilitation obligations(5) 8,608 -
Transaction and non-recurring expenses(6) 6,340 1,233
Adjusted EBITDA $ 35,082 $ 17,085
(1)Interest expense on the Warehouse Facility and interest income on the loan
receivables held for sale are not included in the adjustment above as amounts
are components of cost of revenue and revenue, respectively.
(2)See Note 12 to the Notes to Unaudited Condensed Consolidated Financial
Statements included in Part I, Item 1 for additional discussion of share-based
compensation.
(3)Includes non-cash charges related to our financial guarantee arrangements
with our ongoing Bank Partners , which are primarily a function of new loans
facilitated on our platform during the period increasing the contractual escrow
balance and the associated financial guarantee liability. In the fourth quarter
of 2020, due to expectations that some of these financial guarantees may require
cash settlement, the Company discontinued adjusting EBITDA for financial
guarantees.
(4)Includes the non-cash changes in the fair value of servicing assets and
liabilities related to our servicing arrangements with Bank Partners and other
contractual arrangements.
(5)Mark-to-market on sales facilitation obligations reflects changes in the fair
value in the embedded derivative for sales facilitation obligations. The changes
in fair value are recognized as a mark-to-market expense in cost of revenue for
the period. See Note 3 to the Notes to Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 for additional discussion.
(6)The three months ended March 31, 2021 primarily includes legal fees
associated with IPO litigation and regulatory matter. The three months ended
March 31, 2020 , includes legal fees associated with IPO litigation and
professional fees associated with our strategic alternatives review process.
Business Metrics
We review a number of operating and financial metrics to evaluate our business,
measure our performance, identify trends, formulate plans and make strategic
decisions, including the following.
Three Months Ended March 31,
2021 2020
Transaction Volume
Dollars (in millions) $ 1,296 $ 1,372
Percentage decrease (6) %
Loan Servicing Portfolio
Dollars (in millions, at end of period) $ 9,323 $ 9,260
Percentage increase 1 %
Cumulative Consumer Accounts
Number (in millions, at end of period) 3.87 3.21
Percentage increase 21 %
Transaction Volume. We define transaction volume as the dollar value of loans facilitated on our platform during a given period. Transaction volume is an indicator of revenue and overall platform profitability.
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Loan Servicing Portfolio. We define our loan servicing portfolio as the aggregate outstanding consumer loan balance (principal plus accrued interest and fees) serviced by our platform at the date of measurement. The average loan servicing portfolio for the three months endedMarch 31, 2021 and 2020 was$9,434 million and$9,214 million , respectively. Cumulative Consumer Accounts. We define cumulative consumer accounts as the aggregate number of consumer accounts approved on our platform since our inception, including accounts with both outstanding and zero balances. Factors Affecting our Performance Robust Network of Merchants and Transaction Volume. We derive transaction volumes from our robust network of merchants. Our revenues and financial results are heavily dependent on our transaction volume, which represents the dollar amount of loans facilitated on our platform and, therefore, impacts the fees that we earn and the per-unit cost of the services that we provide. Bank Partner Relationships; Other Funding. "Bank Partners " are the federally insured banks that originate loans under the consumer financing and payments program that we administer for use by merchants on behalf of such banks in connection with which we provide point-of-sale financing, payments technology and related marketing, servicing, collection and other services. Our ability to generate and increase transaction volume and expand our loan servicing portfolio is, in part, dependent on (a) retaining our existingBank Partners and having them renew and expand their commitments, (b) adding newBank Partners and/or (c) adding complementary funding arrangements to increase funding capacity. Our failure to do so could materially and adversely affect our business and our ability to grow. A Bank Partner's funding commitment typically has an initial multi-year term, after which the commitment is either renewed (typically on an annual basis) or expires. As ofMarch 31, 2021 , we had aggregate funding commitments from ourBank Partners of approximately$9.7 billion , a substantial majority of which are "revolving" commitments that replenish as outstanding loans are paid down. Of the funding commitments available atMarch 31, 2021 for use in the next 12 months, approximately$1.9 billion was unused and we anticipate approximately$2.4 billion of additional funding capacity will become available as loans pay-down under revolving commitments during this period. Additionally, inApril 2021 , an existing Bank Partner increased its revolving commitment by$500 million to$2.0 billion and extended its commitment for an additional two years into the fourth quarter of 2023. As we add newBank Partners , their full commitments are typically subject to a mutually agreed upon onboarding schedule. From time to time, certain of ourBank Partners have requested adjustments to the volume or type of loans that they originate, including, on occasion, temporary increases, decreases or suspensions of originations. We have generally honored these requests in the ordinary course of our relationships with ourBank Partners and, to date, they have not had a meaningful impact on the GreenSky program. In addition to customary expansion of commitments from existingBank Partners and the periodic addition of newBank Partners to our funding group, we have diversified our funding to also include alternative structures with institutional investors, financial institutions and other financing sources. In the first quarter of 2021, the Company executed an arrangement with a leading insurance company that included an initial sale of loan participations totaling approximately$135 million and a forward flow commitment for the sale of up to$1.0 billion in additional loan participations over a one-year period. InApril 2021 , that commitment was increased by$500 million to$1.5 billion . During the three months endedMarch 31, 2021 , GreenSky executed approximately$315 million of sales of loan participations and whole loans (inclusive of the sale referenced above). A portion of these transactions included the sale of participations previously purchased by the Warehouse SPV, and the related proceeds from such sales were used to pay down amounts previously borrowed under the Warehouse Facility. We anticipate whole loan and loan participation sales to continue to be important to our funding capacity. If we do not timely consummate our anticipated whole loan or loan participation sales or if these sales combined with funding commitments from ourBank Partners are not sufficient to support expected loan originations, it could limit our ability to facilitate GreenSky program loans and our ability to generate revenue at or above current levels. 47 -------------------------------------------------------------------------------- Table of
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Performance of the Loans in ourBank Partners' Portfolios. While ourBank Partners bear substantially all of the credit risk on their wholly-owned loan portfolios, Bank Partner credit losses and prepayments impact our profitability in the following ways: •Our contracts with ourBank Partners entitle us to incentive payments when the finance charges billed to borrowers exceed the sum of an agreed-upon portfolio yield, a fixed servicing fee and realized credit losses. This incentive payment varies from month to month, primarily due to the amount of realized credit losses. •With respect to deferred interest loans, the GreenSky program borrowers are billed for interest throughout the deferred interest promotional period, but these borrowers are not obligated to pay any interest if the loans are repaid in full before the end of the promotional period. We are obligated to remit this accumulated billed interest to ourBank Partners to the extent the loan principal balances are paid off within the promotional period (each event, a finance charge reversal or "FCR") even though the interest billed to the GreenSky program borrowers is reversed. Our maximum FCR liability is limited to the gross amount of finance charges billed during the promotional period, offset by (i) the collection of incentive payments from ourBank Partners during such period, (ii) proceeds received from transfers of charged-off receivables, and (iii) recoveries on unsold charged-off receivables. Our profitability is impacted by the difference between the cash collected from these items and the cash to be remitted on a future date to settle our FCR liability. Our FCR liability quantifies our expected future obligation to remit previously billed interest with respect to deferred interest loans. •Under our Bank Partner agreements, if credit losses exceed an agreed-upon threshold, we make limited payments to ourBank Partners from the escrow accounts we establish for them. Our related maximum financial exposure is contractually limited to those escrow amounts, which represented a weighted average target rate of 2.1% of the total outstanding loan balance as ofMarch 31, 2021 . Cash set aside to meet this requirement is classified as restricted cash in our Unaudited Condensed Consolidated Balance Sheets. As ofMarch 31, 2021 , the financial guarantee liability associated with our escrow arrangements represented approximately 70% of the contractual escrow that we have established with each Bank Partner. Performance of Loan Participations. We bear substantially all the credit risk of loan receivables held for sale. However, our intent is that our holding period for such loan receivables is brief. For further discussion of our sensitivity to the credit risk exposure of ourBank Partners , see Part I, Item 3 "Quantitative and Qualitative Disclosures About Market Risk-Credit risk." InJanuary 2020 , ourBank Partners also became subject to ASU 2016-13, which may affect how they reserve for losses on loans. General Economic Conditions and Industry Trends. Our results of operations are impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending behavior and consumer demand for our merchants' products and services. In addition, trends within the industry verticals in which we operate affect consumer spending on the products and services our merchants offer in those industry verticals. For example, the strength of the national and regional real estate markets and trends in new and existing home sales impact demand for home improvement goods and services and, as a result, the volume of loans originated to finance these purchases. In addition, trends in healthcare costs, advances in medical technology and increasing life expectancy are likely to impact demand for elective medical procedures and services. Refer to "Executive Summary" above for a discussion of the expected impacts on our business from the COVID-19 pandemic. 48 -------------------------------------------------------------------------------- Table of
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Results of Operations Summary
Three Months Ended
2021 2020 $ Change % Change
Revenue
Transaction fees $ 85,657 $ 89,884 $ (4,227) (5) %
Servicing 34,667 31,283 3,384 11 %
Interest and other 4,848 690 4,158 N/M
Total revenue 125,172 121,857 3,315 3 %
Costs and expenses
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 63,997 72,305 (8,308) (11) %
Compensation and benefits 22,473 22,164 309 1 %
Property, office and technology 4,459 3,921 538 14 %
Depreciation and amortization 3,316 2,445 871 36 %
Sales, general and administrative 14,642 9,929 4,713 47 %
Financial guarantee expense (benefit) (3,883) 18,408 (22,291) N/M
Related party 452 477 (25) (5) %
Total costs and expenses 105,456 129,649 (24,193) (19) %
Operating profit 19,716 (7,792) 27,508 N/M
Other income (expense), net (5,719) (4,022) (1,697) 42 %
Income (loss) before income tax expense (benefit) 13,997 (11,814) 25,811 N/M
Income tax expense (benefit) 1,872 (895) 2,767 N/M
Net income (loss) $ 12,125 $ (10,919) $ 23,044 N/MLess: Net income (loss) attributable to noncontrolling interests
8,327 (7,585) 15,912 N/M
Net income (loss) attributable to
$ (3,334) $ 7,132 N/M Earnings per share of Class A common stock Basic$ 0.05 $ (0.05) Diluted$ 0.05 $ (0.05)
N/M denotes that the percentage change is not meaningful
Three Months EndedMarch 31, 2021 and 2020 Total Revenue We generate a substantial majority of our total revenue from transaction fees paid by merchants each time a consumer utilizes our platform to finance a purchase and, to a lesser extent, from fixed servicing fees on our loan servicing portfolio and interest income from loan receivables held for sale. Transaction fees During the three months endedMarch 31, 2021 , transaction fees revenue decreased 5% compared to the same period in 2020, primarily attributable to a 6% decline in transaction volume. Additionally, as a result of an increase in transaction volume from a significant merchant group, related price concessions reduced transaction fees by$3.7 million during the three months endedMarch 31, 2021 compared to$2.4 million offered to the same merchant group during the same period in 2020. The impact of lower transaction volume was mitigated by an increase in the transaction fees earned per dollar originated ("transaction fee rate") which were 6.61% during the three months endedMarch 31, 2021 compared to 6.55% during the same period in 2020. The year-over-year transaction fee rate increase is related to the mix of promotional terms of loans originated on our platform. Loans with lower interest rates, longer stated maturities and longer promotional periods generally carry relatively higher transaction fee rates. Conversely, loans with higher interest rates, shorter stated terms and shorter promotional periods generally carry relatively lower 49 -------------------------------------------------------------------------------- Table of
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transaction fee rates. In addition, the mix of loans offered by merchants generally varies by merchant category, and is dependent on merchant and consumer preference. Therefore, shifts in merchant mix have a direct impact on our transaction fee rates. Servicing We earn a specified servicing fee for providing professional services to manage loan portfolios on behalf of ourBank Partners , including servicing participated loans for a Bank Partner that retains the loan and servicing rights. Servicing fees are paid monthly and are typically based upon an annual fixed percentage of the average outstanding loan portfolio balance. Servicing revenue is also impacted by the fair value change in our servicing assets associated with the servicing arrangements with ourBank Partners . See Note 3 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on our servicing assets. The following table presents servicing revenue earned from servicing fees and the fair value change in servicing assets included in our servicing revenue. Three Months Ended March 31, 2021 2020 Servicing fee$ 27,527 $ 29,494 Fair value change in servicing asset 7,140 1,789 Total servicing revenue$ 34,667 $ 31,283 During the three months endedMarch 31, 2021 , servicing revenue increased$3.4 million , or 11%, compared to the same period in 2020. This increase was primarily attributable to the$7.1 million increase from the additions and changes in the fair value of our servicing asset in 2021, as compared to the$1.8 million net increase in our servicing asset during the same period in 2020. The servicing revenue increase during the three months endedMarch 31, 2021 is a result of the improvement in the portfolio delinquency rate and credit forecast relative toDecember 31, 2020 , which was partially offset by the lower servicing fee rate of 1.17%, compared to 1.29% for the periods endedMarch 31, 2021 andMarch 31, 2020 , respectively, largely related to the diversification of funding and loan participations held by the Warehouse SPV in 2021. Interest and other We earn interest income from loan receivables held for sale, including loan participations purchased by the Warehouse SPV. With the formation and use of the Warehouse SPV, the magnitude of loan receivables held for sale has increased on our Unaudited Condensed Consolidated Balance Sheets. As a result, for prior periods, we have reclassified interest income for loan receivables held for sale that were previously included within other income (expense), net to interest and other revenue in the Unaudited Condensed Consolidated Statements of Operations. During the three months endedMarch 31, 2021 , interest income increased$4.2 million compared to the same period in 2020, primarily due to the use of the Warehouse SPV, formed in the second quarter of 2020, which resulted in an increase in loan receivables held for sale. Cost of revenue (exclusive of depreciation and amortization expense) Three Months Ended March 31, 2021 2020 Origination related $ 5,304$ 6,642 Servicing related 13,542 13,159 Fair value change in FCR liability 26,417 52,504 Loan and loan participation sales costs 10,126 - Mark-to-market on sales facilitation obligations 8,608 - Total cost of revenue (exclusive of depreciation and amortization expense)$ 63,997 $ 72,305 50
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Origination related During the three months endedMarch 31, 2021 , origination related expenses decreased 20% compared to the same period in 2020, largely driven by operational efficiencies in loan processing as origination related expenses as a percent of transaction volume decreased to 0.41% from 0.48% and lower customer protection expenses of$587 thousand during the three months endedMarch 31, 2021 compared to the same period in 2020. Servicing related During the three months endedMarch 31, 2021 , servicing related expenses increased 3% compared to the same period in 2020, which resulted from our 2% period-over-period average loan servicing portfolio growth. The increase in servicing related expenses associated with the increase in loans serviced were primarily for personnel costs within our collections and operations functions. Servicing related expenses as a percent of our average loan servicing portfolio was 0.57% during both the first quarter of 2021 and 2020. Fair value change in FCR liability Under our contracts withBank Partners , we receive incentive payments fromBank Partners based on the surplus of finance charges billed to borrowers over an agreed-upon portfolio yield, a fixed servicing fee and realized net credit losses. We reduce these incentive payments based on estimated future reversals of previously billed interest on deferred interest loan products that we will be obligated to remit toBank Partners in future periods. These estimated future reversals are recorded as a liability on our Unaudited Condensed Consolidated Balance Sheets. See Note 3 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on our finance charge reversal liability, including a qualitative discussion of the impact to the fair value of our liability resulting from changes in the finance charge reversal rate and discount rate. See Part I, Item 3 "Quantitative and Qualitative Disclosures About Market Risk-Credit risk." The following table reconciles the beginning and ending measurements of our FCR liability and highlights the activity that drove the fair value change in FCR liability included in our cost of revenue. With the implementation of our whole loan and loan participation sales program in mid-2020, the portion of our servicing portfolio subject to an FCR liability has decreased to approximately 85% of our total servicing portfolio atMarch 31, 2021 versus 100% of our servicing portfolio atMarch 31, 2020 . Three Months Ended March 31, 2021 2020 Beginning balance$ 185,134 $ 206,035 Receipts(1) 51,266 44,708 Settlements(2) (95,381) (90,089) Fair value changes recognized in cost of revenue(3) 26,417 52,504 Ending balance$ 167,436 $ 213,158 (1)Includes: (i) incentive payments fromBank Partners , which is the surplus of finance charges billed to borrowers over an agreed-upon portfolio yield, a fixed servicing fee and realized net credit losses and (ii) cash received from recoveries on previously charged-off Bank Partner loans. We consider all monthly incentive payments fromBank Partners during the period to be related to billed finance charges on deferred interest products until monthly incentive payments exceed total billed finance charges on deferred products, which did not occur during any of the periods presented. (2)Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that were repaid within the promotional period. The three months endedMarch 31, 2021 also includes$2.6 million of billed finance charges related to loan participations held by the Warehouse SPV that were not yet collected and subject to potential future finance charge reversal at the time of purchase, which were paid to the Bank Partner in full as of the participation purchase dates. (3)A fair value adjustment is made based on the expected reversal percentage of billed finance charges (expected settlements), which is estimated at each reporting date. The fair value adjustment is recognized in cost of revenue in the Unaudited Condensed Consolidated Statements of Operations. 51 -------------------------------------------------------------------------------- Table of
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Further detail regarding our receipts is provided below for the periods
indicated.
Three Months Ended March 31,
2021 2020
Incentive payments $ 44,078 $ 42,453
Recoveries on unsold charged-off receivables(1) 7,188 2,255
Total receipts $ 51,266 $ 44,708
(1)Represents recoveries on previously charged-off Bank Partner loans. We
collected recoveries on previously charged-off and transferred Bank Partner
loans on behalf of our charged-off receivables investors of $5.3 million and
$5.8 million during the three months ended March 31, 2021 and 2020,
respectively. These collected recoveries are excluded from receipts, as they do
not impact our fair value change in FCR liability.
The decrease of $26.1 million , or 50%, in the fair value change in FCR liability
recognized in cost of revenue during the three months ended March 31, 2021 ,
compared to the same period in 2020, was primarily a function of higher
performance fees attributable to lower charge-offs and due to a lower balance of
deferred interest loans subject to FCR as a result of our funding
diversification that began in mid-2020.
Loan and loan participations sales costs
Loan and loan participation sales costs primarily include interest expense on
the Warehouse Facility, lower of cost or fair value adjustments on sold loan
participations or currently owned loan participations ("Warehouse Loan
Participations"), certain fees and the amortization of deferred debt issuance
costs incurred in connection with obtaining the Warehouse Facility.
During the three months ended March 31, 2021 , the loan and loan participations
sales costs were $10.1 million , inclusive of a $1.8 million realized loss on
Warehouse Loan Participations sold. As the Facility Bank Partner Agreements and
the Warehouse Facility were new arrangements beginning in the second quarter of
2020, there were no Warehouse SPV related expenses during the three months ended
March 31, 2020 .
Mark-to-market on sales facilitation obligations
The mark-to-market on sales facilitation obligations reflects the changes in the
fair value in the embedded derivative for loan participation commitments and is
recognized as a mark-to-market in cost of revenue for the period.
While our Bank Partner funding costs are recognized over the life of the loan,
the fair value adjustments on Warehouse Loan Participations and sales
facilitation obligations are recognized in the period of the purchase of the
loan participations by the Warehouse SPV or entering into of the loan
participation commitment. Thus, the fair value adjustments will create a benefit
in the form of reducing Bank Partner funding costs over the life of the loan.
During the three months ended March 31, 2021 , the mark-to-market on sales
facilitation obligations was $8.6 million . As the first sales facilitation
obligations were entered into in the third quarter of 2020, there were no such
amounts during the three months ended March 31, 2020 . See Note 3 to the Notes to
Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for
further information.
Compensation and benefits
Compensation and benefits expenses primarily consist of salaries, benefits and
share-based compensation for all cost centers not already included in cost of
revenue, such as information technology, sales and marketing, product management
and all overhead related activities.
For the three months ended March 31, 2021 , compensation and benefits expense
increased $309 thousand compared to the same period in 2020 as a result of a
$343 thousand decrease in capitalized information technology costs and higher
stock-based compensation expense of $94 thousand , partially offset by lower
salary expense of $129 thousand .
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Property, office and technology During the three months endedMarch 31, 2021 , property, office and technology expense increased$538 thousand , or 14%, compared to the same period in 2020, primarily due to a$749 thousand increase in software, hardware and hosting costs, partially offset by a$179 thousand decrease in consulting expenses associated with additional technology process innovation costs in the 2020 period. Depreciation and amortization During the three months endedMarch 31, 2021 , depreciation and amortization expense increased$871 thousand , or 36%, compared to the same period in 2020 primarily driven by increases over time in capitalized internally-developed software from our growing infrastructure, resulting in increased amortization expense. Sales, general and administrative Sales, general and administrative expenses primarily consist of legal, accounting, consulting and other professional services, recruiting, non-sales and marketing travel costs and promotional activities. During the three months endedMarch 31, 2021 , sales, general and administrative expense increased$4.7 million , or 47%, compared to the same period in 2020 primarily related to increased legal and regulatory costs of$7.1 million , partially offset by a decrease in provision for losses for loan receivables held for sale of$1.6 million . See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further information on our legal proceedings. Financial guarantee expense (benefit) Financial guarantee expense (benefit) primarily consists of changes in our non-cash charges and actual cash escrow used byBank Partners . Upon our adoption of the provisions of ASU 2016-13 onJanuary 1, 2020 , our financial guarantee liability associated with our escrow arrangements with ourBank Partners was recognized in accordance with ASC 326, Financial Instruments - Credit Losses ("CECL"). Changes in the financial guarantee liability each period as measured under CECL are recorded as non-cash charges in the Unaudited Condensed Consolidated Statements of Operations. During the three months endedMarch 31, 2021 , the Company recognized a financial guarantee benefit of$3.9 million , compared to a financial guarantee expense of$18.4 million in the same period in 2020. The financial guarantee benefit this period is primarily due to an improved credit forecast and lower delinquency rates while the same period last year was largely impacted by the onset of the COVID-19 pandemic and the decreased expectations of Bank Partner loan credit performance. The financial guarantee benefit recognized in the first quarter of 2021 is also attributable to accelerated prepayments on loans within our Bank Partner portfolios and sales of whole loans and loan participations from our existing bank partner arrangements into alternative structures that are not subject to our financial guarantee. See Note 1 and Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information regarding the measurement of our financial guarantees. Related party Related party expenses, on a recurring basis, primarily consist of rent expense, as we lease office space from a related party. During the three months endedMarch 31, 2021 , related party expenses decreased$25 thousand , or 5%, compared to the same period in 2020, due to decreased equity and transaction-based payments to certain related parties. 53 -------------------------------------------------------------------------------- Table of
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Other income (expense), net During the three months endedMarch 31, 2021 , other expense, net increased$1.7 million , or 42%, compared to the same period in 2020. The increase was primarily due to (i)$949 thousand increase in interest expense from our incremental term loan entered intoJune 2020 (the "2020 Amended Credit Agreement"); (ii)$485 thousand decrease in interest income; and (iii) a net$152 thousand lower income from the change in the fair value of our servicing liabilities. Income tax expense (benefit) Income tax expense recorded during the three months endedMarch 31, 2021 of$1.9 million reflected the expected income tax expense of$1.3 million on the net earnings for the period related toGreenSky, Inc.'s economic interest inGS Holdings , which was combined with$599 thousand tax expense arising from discrete items, which primarily consisted of stock-based compensation shortfall as a result of restricted stock award vesting during the period and the tax expense impact of a nondeductible regulatory matter incurred during the period. Income tax benefit recorded during the three months endedMarch 31, 2020 of$895 thousand reflected the expected income tax benefit of$1.1 million on the net loss for the period related toGreenSky, Inc.'s economic interest inGS Holdings , partially offset by$215 thousand of tax expense arising from discrete items, which primarily consisted of a stock-based compensation shortfall as a result of restricted stock award vesting during the period. The income tax expense during the three months endedMarch 31, 2021 , as compared to the income tax benefit in the same period in 2020, was primarily related to an increase in overall net earnings attributable toGreenSky, Inc.'s economic interest inGS Holdings in 2021, as compared to a net loss attributable toGreenSky, Inc.'s economic interest inGS Holdings in 2020. Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests for the three months endedMarch 31, 2021 and 2020 reflects income attributable to theContinuing LLC Members for the entire periods based on their weighted average ownership interest inGS Holdings , which was 59.5% and 63.8% for the three months endedMarch 31, 2021 and 2020, respectively. Financial Condition Summary Significant changes in the composition and balance of our assets and liabilities as ofMarch 31, 2021 compared toDecember 31, 2020 were principally attributable to the following: •a$29.1 million increase in cash and cash equivalents and restricted cash. See "Liquidity and Capital Resources" in this Part I, Item 2 for further discussion of our cash flow activity; •a$228.5 million decrease in loan receivables held for sale, net, primarily due to the sale of Warehouse Loan Participations previously purchased by the Warehouse SPV during the three months endedMarch 31, 2021 ; •a$17.7 million decrease in the FCR liability primarily due to a smaller portion of the loans subject to FCR liability which increased our performance fees as loans paid-off, and a decline in deferred interest loans in Bank Partner portfolios, primarily attributable to the diversification of our funding strategy and purchases of deferred interest loans by the Warehouse SPV. This activity is analyzed in further detail throughout this Part I, Item 2; •a$7.7 million decrease in our financial guarantee liability primarily driven by prepayments of loans in the first quarter and to both an improved delinquency rate and forecasted credit performance of our portfolio relative toDecember 31, 2020 . The decrease in the liability also reflects approximately$2.2 million in escrow payments during the period related to a Bank Partner that is no longer originating loans. There was no utilization of escrow by any ongoingBank Partners in the first quarter of 2021; 54 -------------------------------------------------------------------------------- Table of
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•a$15.7 million increase in accounts payable primarily due to monthly settlements withBank Partners related to their portfolio activity, as well as an increase in accrued merchant rebates; •a$2.1 million decrease in the interest rate swap liability due to an increase in interest rates in the first quarter. See Note 8 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information; •a$207.0 million decrease in notes payable resulting from repayments of the Warehouse Facility; and •an increase in total equity of$13.3 million primarily due to: (i) net income of$12.1 million , (ii) share-based compensation of$3.7 million and (iii) other comprehensive income, net of tax of$1.9 million associated with our interest rate swap, partially offset by distributions of$3.9 million , which were primarily tax distributions. Liquidity and Capital Resources We are a holding company with no operations and depend on our subsidiaries for cash to fund all of our consolidated operations, including future dividend payments, if any. We depend on the payment of distributions by our current subsidiaries, includingGS Holdings and GSLLC, which distributions may be restricted as a result of regulatory restrictions, state law regarding distributions by a limited liability company to its members, or contractual agreements, including agreements governing their indebtedness. For a discussion of those restrictions, refer to Part I, Item 1A. "Risk Factors-Risks Related to Our Organizational Structure" in the 2020 10-K. In particular, the Credit Facility (as defined below) contains certain negative covenants prohibitingGS Holdings and GSLLC from making cash dividends or distributions unless certain financial tests are met. In addition, while there are exceptions to these prohibitions, such as an exception that permitsGS Holdings to pay our operating expenses, these exceptions apply only when there is no default under the Credit Facility. We currently anticipate that such restrictions will not impact our ability to meet our cash obligations. Our principal source of liquidity is cash generated from operations. Our transaction fees are the most substantial source of our cash flows and follow a relatively predictable, short cash collection cycle. Our short-term liquidity needs primarily include setting aside restricted cash for Bank Partner escrow balances and interest payments onGS Holdings' Credit Facility, funding the portion of the Warehouse Loan Participations that is not financed by the Warehouse Facility, interest payments and unused fees on the Warehouse Facility, as defined and discussed in "-Borrowings-Term loan and revolving facility" and "-Borrowings-Warehouse Facility" within this Item 2, and sales facilitation obligations as discussed within this Item 2 and Note 3 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1. Further, in the near term, we expect our capital expenditures to be small relative to our unrestricted cash and cash equivalents balance. We currently generate sufficient cash from our operations to meet these short-term needs. In addition, we expect to use cash for: (i) FCR liability settlements, which are not fully funded by the incentive payments we receive from ourBank Partners , but for which$74.5 million is held for certainBank Partners in restricted cash as ofMarch 31, 2021 , and for payments under our financial guarantees (see Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion), and (ii) sales facilitation obligations (see Note 3 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion on our sales facilitation obligations). Our$100 million revolving loan facility is also available to supplement our cash flows from operating activities to satisfy our short-term liquidity needs. InFebruary 2021 , Moody's Investors Services ("Moody's") downgraded our senior secured credit facility rating from B1 to B2 and, inApril 2021 ,Standard & Poor's Global Ratings ("S&P") downgraded our senior secured credit facility rating from B+ to B. We do not expect these downgrades to have a material impact on our operations or ability to meet our cash obligations. The Warehouse Facility finances purchases by the Warehouse SPV of participations in loans originated through the GreenSky program. The Warehouse Facility provides committed financing of$555.0 million and provides financing for a significant portion of the principal balance of such participations and the Company funds the remainder. Although the portion financed by the Warehouse Facility varies based on the composition of the pool of participations being purchased, we expect such portion to be approximately 84% on average. From time to time, the Company purchases participations in loans that have future funding obligations. Such future funding obligations 55 -------------------------------------------------------------------------------- Table of
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will be funded by the Bank Partner that owns the loan; however, the Company is required to purchase a participation in the future funding amount, which the Company intends to finance through the Warehouse Facility at similar rates. As ofMarch 31, 2021 , the Warehouse SPV held$334.3 million of loan participations and the Warehouse Facility had an outstanding balance of$295.9 million . In addition, the Warehouse SPV conducts periodic sales of the loan participations and may in the future issue asset-backed securities to third parties, which sales or issuances would allow additional purchases to be financed at similar rates. Our most significant long-term liquidity need involves the repayment of our term loan upon maturity inMarch 2025 , which assuming no prepayments, will have an expected remaining unpaid principal balance of$444.6 million at that time, as well as the repayment of our revolving Warehouse Facility upon maturity inDecember 2023 . Assuming no extended impact of the COVID-19 pandemic, we anticipate that our significant cash generated from operations will allow us to service these debt obligations. Should operating cash flows be insufficient for this purpose, we will pursue other financing options. We have not made any material commitments for capital expenditures other than those disclosed in the "Contractual Obligations" table in Part II, Item 7 of our 2020 Form 10-K, which did not change materially during the three months endedMarch 31, 2021 . Significant Changes in Capital Structure There were no significant changes in the Company's capital structure during the three months endedMarch 31, 2021 and 2020. Cash flows We prepare our Unaudited Condensed Consolidated Statements of Cash Flows using the indirect method, under which we reconcile net income (loss) to cash flows provided by (used in) operating activities by adjusting net income (loss) for those items that impact net income (loss), but may not result in actual cash receipts or payments during the period. The following table provides a summary of our operating, investing and financing cash flows for the periods indicated. Three Months Ended March 31, 2021 2020 Net cash provided by operating activities$ 245,135 $ 41,047 Net cash used in investing activities $ (3,452)$ (3,354) Net cash used in financing activities$ (212,625)
Cash and cash equivalents and restricted cash totaled$496.7 million as ofMarch 31, 2021 , an increase of$29.1 million fromDecember 31, 2020 . Restricted cash, which had a balance of$300.4 million as ofMarch 31, 2021 compared to a balance of$319.9 million as ofDecember 31, 2020 , is not available to us to fund operations or for general corporate purposes. Our restricted cash balances as ofMarch 31, 2021 andDecember 31, 2020 were comprised of four components: (i)$175.3 million and$173.2 million , respectively, which represented the amounts that we have escrowed withBank Partners as limited protection to theBank Partners in the event of certain Bank Partner portfolio credit losses or in the event that the finance charges billed to borrowers do not exceed the sum of an agreed-upon portfolio yield, a fixed servicing fee and realized credit losses; (ii)$74.5 million and$84.6 million , respectively, which represented an additional restricted cash balance that we maintained for certainBank Partners related to our FCR liability; (iii)$32.0 million and$27.7 million , respectively, which represented certain custodial in-transit loan funding and consumer borrower payments that we were restricted from using for our operations; and (iv)$18.6 million and$34.4 million , respectively, which represented temporarily restricted cash related to collections in connection with Warehouse Loan Participations (which is released from restrictions in accordance with the terms of the Warehouse Facility). The restricted cash balances related to our FCR liability and our custodial balances are not included in our evaluation of restricted cash usage, as these balances are not held as part of a financial guarantee arrangement. See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on our restricted cash held as escrow withBank Partners . 56 -------------------------------------------------------------------------------- Table of
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Cash provided by operating activities Three Months EndedMarch 31, 2021 . Cash flows provided by operating activities were$245.1 million during the three months endedMarch 31, 2021 . The largest source of operating cash flow for the first quarter of 2021 was a$225.0 million decrease in loan receivables held for sale as a result of completed sales in the period. Net income and other working capital benefits also contributed as sources of operating cash flows. These were partially offset by the use of$17.7 million of cash related to previously billed finance charges that reversed in the period. Three Months EndedMarch 31, 2020 . Cash flows provided by operating activities were$41.0 million during the three months endedMarch 31, 2020 . Net loss of$10.9 million was adjusted favorably for certain non-cash items of$21.5 million , which were predominantly related to financial guarantee losses, depreciation and amortization, and equity-based expense, partially offset by the fair value changes in servicing assets and liabilities and deferred tax benefit. Primary sources of operating cash during the three months endedMarch 31, 2020 were: (i) an excess of proceeds from sales of loan receivables held for sale compared to purchases, (ii) an increase in billed finance charges on deferred interest loans that are expected to reverse in future periods, and (iii) an increase in accounts payable largely driven by Bank Partner settlements related to their portfolio activity and payables for price concessions to a significant merchant group. These increases were offset by uses of cash associated with transaction processing liabilities, which is reflective of the reduction in custodial in-transit loan funding requirements. Cash used in investing activities Detail of the cash used in investing activities is included below for each period. Three Months Ended March 31, 2021 2020 Software$ 3,446 $ 2,955 Computer hardware 6 261 Furniture - 143 Purchases of property, equipment and software $
3,452
Cash used in financing activities Our financing activities in the periods presented consisted of equity and debt related transactions and distributions.GS Holdings makes tax distributions based on the estimated tax payments that its members are expected to have to make during any given period (based upon various tax rate assumptions), which are typically paid in January, April, June and September of each year. We had net cash used in financing activities of$212.6 million during the three months endedMarch 31, 2021 compared to net cash used of$33.9 million during the same period in 2020. In the 2021 period, the cash used primarily related to net repayments on the Warehouse Facility as a result of sales of loan participations. In the 2020 period, our use of cash was primarily related to (i) tax and non-tax distributions to members of$31.1 million and$1.7 million , respectively, and (ii) repayments of the principal balance of our term loan (net of original issuance discount) of$1.0 million . Borrowings See Note 7 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for further information about our borrowings, including the use of term loan proceeds, as well as our interest rate swap. 57 -------------------------------------------------------------------------------- Table of
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Term loan and revolving facility OnMarch 29, 2018 ,GS Holdings amended itsAugust 25, 2017 Credit Agreement ("2018 Amended Credit Agreement") to provide for a$400.0 million term loan, the proceeds of which were used, in large part, to settle the outstanding principal balance on the$350.0 million term loan previously executed under the Credit Agreement inAugust 2017 , and includes a$100.0 million revolving loan facility. The revolving loan facility also includes a$10.0 million letter of credit. The Credit Facility is guaranteed byGS Holdings' significant subsidiaries, including GSLLC, and is secured by liens on substantially all of the assets ofGS Holdings and the guarantors. Interest on the loans can be based either on a "Eurodollar rate" or a "base rate" and fluctuates depending upon a "first lien net leverage ratio." The 2018 Amended Credit Agreement contains a variety of covenants, certain of which are designed in certain circumstances to limit the ability ofGS Holdings to make distributions on, or redeem, its equity interests. In addition, during any period when 25% or more of our revolving facility is utilized,GS Holdings is required to maintain a "first lien net leverage ratio" no greater than 3.50 to 1.00. There are various exceptions to these restrictions, including, for example, exceptions that enable us to pay our operating expenses and to make certainGS Holdings tax distributions. The$400.0 million term loan matures onMarch 29, 2025 , and the revolving loan facility matures onMarch 29, 2023 . OnJune 10, 2020 , we entered into a Second Amendment to our Credit Agreement ("2020 Amended Credit Agreement"), which provided for an additional$75.0 million term loan ("incremental term loan"). The term loan and revolving loan facility under the 2018 Amended Credit Agreement and incremental term loan under the 2020 Amended Credit Agreement are collectively referred to as the "Credit Facility." The modified term loan and the incremental term loan are collectively referred to as the "term loan." The incremental term loan, incurs interest, due monthly in arrears, at an adjusted LIBOR, which represents the one-month LIBOR multiplied by the statutory reserve rate, as defined in the 2020 Amended Credit Agreement, with a 1% LIBOR floor, plus 450 basis points. The incremental term loan has the same security, maturity, principal amortization, prepayment, and covenant terms as the 2018 Amended Credit Agreement, maturing onMarch 29, 2025 . There was no amount outstanding under our revolving loan facility as ofMarch 31, 2021 , which is available to fund future needs ofGS Holdings' business. We had no amount drawn under our available letter of credit as ofMarch 31, 2021 . Warehouse Facility OnMay 11, 2020 , the Warehouse SPV entered into the Warehouse Facility to finance purchases by the Warehouse SPV of 100% participation interests in loans originated through the GreenSky program. The Warehouse Facility initially provided a revolving committed financing of$300 million , and an uncommitted$200 million accordion that was accessed inJuly 2020 . OnDecember 18, 2020 , the Warehouse Facility was amended ("Amended Warehouse Facility") to increase the amount of the Warehouse Facility's revolving commitment from$300.0 million to$555.0 million , including$500.0 million under the Class A commitment and$55.0 million under the Class B commitment. With the addition of the Class B commitment, the Company now expects that the advance rate under the Warehouse Facility will be approximately 84% (on average) of the principal balance of the purchased participations, an increase from approximately 70%. As ofMarch 31, 2021 , the outstanding balance on the Warehouse Facility was$295.9 million . The Warehouse Facility is secured by the loan participations held by the Warehouse SPV, and Warehouse Facility Lenders do not have direct recourse to the Company for any loans made under the Warehouse Facility. Expected Replacement of LIBOR The use of the London Interbank Offered Rate ("LIBOR") will be phased out by mid-2023. LIBOR is currently used as a reference rate for certain of our financial instruments, including our$475.0 million term loan under the 2020 Amended Credit Agreement and the related interest rate swap agreement, both of which are set to mature after the expected phase out of LIBOR. Our Warehouse Facility and the related interest rate cap also include certain rates that are impacted by LIBOR; however, the agreement includes LIBOR transition provisions. At this time, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement 58 -------------------------------------------------------------------------------- Table of
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rate; however, we continue to monitor the efforts of various parties, including government agencies, seeking to identify an alternative rate to replace LIBOR. We will work with our lenders and counterparties to accommodate any suitable replacement rate where it is not already provided under the terms of the financial instruments and, going forward, we will use suitable alternative reference rates for our financial instruments. We will continue to assess and plan for how the phase out of LIBOR will affect the Company; however, while the LIBOR transition could adversely affect the Company, we do not currently perceive any material risks and do not expect the impact to be material to the Company. Tax Receivable Agreement Our purchase of Holdco Units from the Exchanging Members using a portion of the net proceeds from the IPO, our acquisition of the equity of certain of theFormer Corporate Investors , and exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement (as such terms are defined in Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1) have resulted and any future exchanges are expected to result in increases in our allocable tax basis in the assets ofGS Holdings . These increases in tax basis are expected to increase (for tax purposes) depreciation and amortization deductions allocable to us and, therefore, reduce the amount of tax that we otherwise would be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets.We and GS Holdings entered into a Tax Receivable Agreement ("TRA") with the "TRA Parties" (the equity holders of theFormer Corporate Investors , the Exchanging Members, the Continuing LLC Members and any other parties receiving benefits under the TRA, as those parties are defined in the 2020 Form 10-K), whereby we agreed to pay to those parties 85% of the amount of cash tax savings, if any, inUnited States federal, state and local taxes that we realize or are deemed to realize as a result of these increases in tax basis, increases in basis from such payments, and deemed interest deductions arising from such payments. Due to the uncertainty of various factors, the likely tax benefits we will realize as a result of our prior purchases of Holdco Units from the Exchanging Members, our acquisition of the equity of certain of theFormer Corporate Investors and prior exchanges and any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement, the resulting amounts we are likely to pay out to the TRA Parties pursuant to the TRA are also uncertain. However, we expect that such payments will be substantial and may substantially exceed the tax receivable liability of$310.6 million as ofMarch 31, 2021 . Because we are the managing member ofGS Holdings , which is the managing member of GSLLC, we have the ability to determine when distributions (other than tax distributions) will be made by GSLLC toGS Holdings and the amount of any such distributions, subject to limitations imposed by applicable law and contractual restrictions (including pursuant to our Amended Credit Agreement or other debt instruments). Any such distributions will be made to all holders ofHoldco Units, including us, pro rata based on the number of Holdco Units. The cash received from such distributions will first be used by us to satisfy any tax liability and then to make any payments required under the TRA. We expect that such distributions will be sufficient to fund both our tax liability and the required payments under the TRA. In the event that we do not make timely payment of all or any portion of a tax benefit payment due under the TRA on or before a final payment date, LIBOR is the base for the default rate used to calculate the required interest. The TRA is anticipated to remain in effect after the expected phase out of LIBOR in 2023. See Part I, Item 2 "Liquidity and Capital Resources-Borrowings" for further discussion of the LIBOR phase out. Contingencies From time to time, we may become a party to civil claims and lawsuits in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated, which requires management judgment. Should any of our estimates or assumptions change or prove to be incorrect, it could have a material adverse impact on our consolidated financial condition, results of operations or cash flows. See Note 14 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for discussion of certain legal proceedings and other contingent matters. 59 -------------------------------------------------------------------------------- Table of
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Contractual Obligations We have future obligations under various contracts relating to debt and interest payments and operating leases. See Note 7 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information regarding changes to the Company's contractual obligations. Recently Adopted or Issued Accounting Standards See "Recently Adopted Accounting Standards" and "Accounting Standards Issued, But Not Yet Adopted" in Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional information. Critical Accounting Policies and Estimates The accounting policies and estimates that we believe are the most critical to an understanding of our results of operations and financial condition as disclosed in our Management's Discussion and Analysis of Financial Condition and Results of Operations as filed in our 2020 Form 10-K include those related to our accounting for finance charge reversals, servicing assets and liabilities, financial guarantees, income taxes and loan receivables held for sale. In the preparation of our Unaudited Condensed Consolidated Financial Statements as of and for the three months endedMarch 31, 2021 , there have been no significant changes to the accounting policies and estimates related to our accounting for finance charge reversals, servicing assets and liabilities, income taxes and loan receivables held for sale.
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