unless otherwise indicated)
You should read the following discussion and analysis of our financial condition
and results of operations together with our Consolidated Financial Statements
and related notes included in Item 8 of this Form 10-K. This
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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 this Form 10-K.
Unless the context requires otherwise, "we," "us," "our," "GreenSky" and "the
Company" refer to GreenSky, Inc. and its subsidiaries.
Organization
GreenSky, Inc. was formed as a Delaware corporation on July 12, 2017. The
Company was formed for the purpose of completing an IPO of its Class A common
stock and certain Reorganization Transactions in order to carry on the business
of GS Holdings and its consolidated subsidiaries. GS Holdings, a holding company
with no operating assets or operations, was organized in August 2017. On
August 24, 2017, GS Holdings acquired a 100% interest in GSLLC, a Georgia
limited liability company, which is an operating entity. Common membership
interests of GS Holdings are referred to as "Holdco Units." See Note 1 to the
Notes to Consolidated Financial Statements in Item 8 for a detailed discussion
of the Reorganization Transactions (as defined in that note) and the IPO.
Executive Summary
For a Company overview, see Part I, Item 1 "Business."
2019 Developments
Specific key developments during the year ended December 31, 2019 include:
•As announced in August 2019, the Company's Board of Directors (the "Board"),
working together with its senior management team and legal and financial
advisors, has commenced a process to explore, review and evaluate a range of
potential strategic alternatives focused on maximizing stockholder value.
•The Board has not made any decisions related to strategic alternatives at this
time, and there is no assurance that the Board's exploration of strategic
alternatives will result in any change of strategy or transaction being entered
into or consummated or, if a transaction is undertaken, as to its terms,
structure or timing.
•The Board's review is ongoing, and the Company does not intend to make further
public comment regarding these matters unless and until the Board has approved a
specific transaction or alternative or otherwise concludes its review.
•In December 2019, we reached an agreement in principle for a three-year, $6
billion forward flow arrangement with a leading institutional asset manager,
which would complement our current Bank Partner commitments. See "-Factors
Affecting our Performance-Bank Partner Relationships; Other Funding" for
additional discussion of this proposed forward flow arrangement.
•We entered into a $350.0 million notional, four-year interest rate swap
agreement to hedge changes in cash flows attributable to interest rate risk on
$350.0 million of our variable-rate term loan.
•We purchased 8.7 million shares of our Class A common stock at an incremental
cost of $102.2 million under our share repurchase program and placed such shares
in treasury.
2019 Results
As of and for the year ended December 31, 2019, we achieved growth in many of
our key business metrics and financial measures:
•Transaction volume (as defined below) was $5.95 billion during the year ended
December 31, 2019 compared to $5.03 billion during the year ended December 31,
2018 (increase of 18%) and $3.77 billion during the year ended December 31, 2017
(increase of 34%);
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•The outstanding balance of loans serviced by our platform totaled $9.15 billion
as of December 31, 2019 compared to $7.34 billion as of December 31, 2018
(increase of 25%) and $5.39 billion as of December 31, 2017 (increase of 36%);
•Active merchants totaled 17,216 as of December 31, 2019 compared to 14,907 as
of December 31, 2018 (increase of 15%) and 10,891 as of December 31, 2017
(increase of 37%);
•We maintained an attractive consumer profile. For all loans originated on our
platform during 2019, the credit-line weighted average consumer credit score was
770. Furthermore, consumers with credit scores over 780 comprised 37% of the
loan servicing portfolio as of December 31, 2019, and over 85% of the loan
servicing portfolio as of December 31, 2019 consisted of consumers with credit
scores over 700; and
•Total revenue of $529.6 million during the year ended December 31, 2019
increased by 28% from $414.7 million during the year ended December 31, 2018,
which in turn increased by 27% from $325.9 million during the year ended
December 31, 2017. We recognized a fair value change in our servicing asset of
$30.5 million primarily associated with increases to the contractual fixed
servicing fees for certain Bank Partners, which positively impacted servicing
and other revenue.
Net income of $96.0 million during the year ended December 31, 2019 decreased
from $128.0 million during the year ended December 31, 2018, which in turn
decreased from $138.7 million during the year ended December 31, 2017. Adjusted
EBITDA (as defined below) of $164.1 million during the year ended December 31,
2019 decreased from $170.0 million during the year ended December 31, 2018,
which in turn increased from $157.1 million during the year ended December 31,
2017.
The decreases in net income and Adjusted EBITDA in 2019 were primarily due to:
•(i) the increase in the fair value change in finance charge reversal liability
resulting from
•(a) growth in our loan servicing portfolio, particularly deferred interest
loans in the promotional period,
•(b) an increase in credit losses, net of recoveries, and
•(c) an increase in contracted Bank Partner portfolio yields; and
•(ii) higher servicing, origination and operating expenses to support our growth
and increased requirements as a public company.
Net income for the year ended December 31, 2019 was also impacted by a non-cash
contingent expense associated with our financial guarantee arrangement with a
Bank Partner upon expiration of its loan origination agreement in the fourth
quarter of 2019. See Note 14 to the Notes to Consolidated Financial Statements
included in Item 8 for additional information regarding our financial guarantee.
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 Measures."
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with United 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 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 business.
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During the year ended December 31, 2019, management removed the EBITDA
adjustment for the non-cash impact of the initial recognition and subsequent
fair value changes in our servicing liabilities, as the fair value measurements
of our servicing rights are becoming a more significant component of our core
business model. The Adjusted EBITDA measures for the years ended December 31,
2018 and 2017 were adjusted accordingly, which resulted in decreases of those
measures by $945 and $2,071, respectively.
During the year ended December 31, 2019, management removed the EBITDA
adjustment for non-corporate tax expenses, which are recorded within general and
administrative expenses in our Consolidated Statements of Operations, to align
the adjustment with our corporate tax expense. The Adjusted EBITDA measures for
the years ended December 31, 2018 and 2017 were adjusted accordingly, which
resulted in decreases of those measures by $572 and $309, respectively.
During the year ended December 31, 2019, management added an EBITDA adjustment
for losses recorded in the fourth quarter of 2019 associated with the financial
guarantee arrangement for a Bank Partner that did not renew its loan origination
agreement when it expired in November 2019. The Adjusted EBITDA measures for the
years ended December 31, 2018 and 2017 were not impacted by this item.
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 and reconciliation of
Adjusted EBITDA to the most directly comparable GAAP measure, net income, as
presented below.
                                                       Year Ended December 31,
                                               2019            2018            2017
Net income                                   $  95,973       $ 127,980       $ 138,668
Interest expense                                23,860          23,584           7,536
Tax expense (benefit)                           (7,125)          5,534               -
Depreciation and amortization                    7,304           4,478           3,983
Equity-based compensation expense(1)            13,769           6,054

4,253


Change in financial guarantee liability(2)      16,215               -               -
Transaction expenses(3)                         11,345           2,393           2,612
Non-recurring expenses(4)                        2,804               -               -
Adjusted EBITDA                              $ 164,145       $ 170,023       $ 157,052


(1)Includes equity-based compensation to employees and directors, as well as
equity-based payments to non-employees.
(2)Includes losses recorded in the fourth quarter of 2019 associated with the
financial guarantee arrangement for a Bank Partner that did not renew its loan
origination agreement when it expired in November 2019. See Note 14 to the Notes
to Consolidated Financial Statements included in Item 8 for additional
discussion of our financial guarantee arrangements.
(3)For the year ended December 31, 2019, includes loss on remeasurement of our
tax receivable agreement liability of $9.8 million and professional fees
associated with our strategic alternatives review process of $1.5 million. For
the year ended December 31, 2018, includes certain costs associated with our
IPO, which were not deferrable against the proceeds of the IPO. Further,
includes certain costs, such as legal and debt arrangement costs, related to our
March 2018 term loan upsizing. For the year ended December 31, 2017, includes
one-time fees paid to an affiliate of one of the members of the board of
managers in conjunction with the August 2017 term loan transaction.
(4)For the year ended December 31, 2019, includes (i) legal fees associated with
IPO related litigation of $2.0 million, (ii) one-time tax compliance fees
related to filing the final tax return for the Former Corporate Investors
associated with the Reorganization Transactions of $0.2 million, and (iii) lien
filing expenses related to certain Bank Partner solar loans of $0.6 million.
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In light of the anticipated material non-cash charges to be recorded in
connection with our financial guarantee arrangements as required subsequent to
the adoption and implementation of ASU 2016-13 (as discussed in Note 1 to the
Notes to Consolidated Financial Statements in Item 8 within "Accounting
Standards Issued, But Not Yet Adopted - Measurement of credit losses on
financial instruments"), management is evaluating both the disclosure of
additional non-GAAP financial measures and the modification of its historical
computation of adjusted EBITDA commencing in 2020 to enhance the disclosure of
indicators of our business performance over the long term and to provide
additional useful information to users of our financial statements.
Further, we utilize Adjusted Pro Forma Net Income, which we define as
consolidated net income, adjusted for (i) transaction and non-recurring
expenses; (ii) for 2019, losses associated with the financial guarantee
arrangement for a Bank Partner that did not renew its loan origination
agreement; and (iii) incremental pro forma tax expense assuming all of our
noncontrolling interests were subject to income taxation. Adjusted Pro Forma Net
Income is a useful measure because it makes our results more directly comparable
to public companies that have the vast majority of their earnings subject to
corporate income taxation. Adjusted Pro Forma Net Income 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 Pro Forma Net Income include:
•It makes assumptions about tax expense, which may differ from actual results;
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 Pro Forma Net Income through disclosure of such limitations,
presentation of our financial statements in accordance with GAAP and
reconciliation of Adjusted Pro Forma Net Income to the most directly comparable
GAAP measure, net income, as presented below.
                                                       Year Ended December 31,
                                               2019            2018            2017
Net income                                   $  95,973       $ 127,980       $ 138,668
Change in financial guarantee liability(1)      16,215               -               -
Transaction expenses(2)                         11,345           2,393           2,612
Non-recurring expenses(3)                        2,804               -               -
Incremental pro forma tax expense(4)           (24,768)        (21,248)

(54,266)


Adjusted Pro Forma Net Income                $ 101,569       $ 109,125

$ 87,014




(1)Includes losses recorded in the fourth quarter of 2019 associated with the
financial guarantee arrangement for a Bank Partner that did not renew its loan
origination agreement when it expired in November 2019. See Note 14 to the Notes
to Consolidated Financial Statements included in Item 8 for additional
discussion of our financial guarantee arrangements.
(2)For the year ended December 31, 2019, includes loss on remeasurement of our
tax receivable agreement liability of $9.8 million and professional fees
associated with our strategic alternatives review process of $1.5 million. For
the year ended December 31, 2018, includes certain costs associated with our
IPO, which were not deferrable against the proceeds of the IPO. Further,
includes certain costs, such as legal and debt arrangement costs, related to our
March 2018 term loan upsizing. For the year ended December 31, 2017, includes
one-time fees paid to an affiliate of one of the members of the board of
managers in conjunction with the August 2017 term loan transaction.
(3)For the year ended December 31, 2019, includes (i) legal fees associated with
IPO related litigation of $2.0 million, (ii) one-time tax compliance fees
related to filing the final tax return for the Former Corporate Investors
associated with the Reorganization Transactions of $0.2 million, and (iii) lien
filing expenses related to certain Bank Partner solar loans of $0.6 million.
(4)Represents the incremental tax effect on net income, adjusted for the items
noted above, assuming that all consolidated net income was subject to corporate
taxation for the periods presented. For the years ended December 31, 2019, 2018
and 2017, we assumed effective tax rates of 14.8%, 19.7% and 38.4%,
respectively.
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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.
                                                                          Year Ended December 31,
                                                                      2019                    2018                    2017
Transaction Volume
Dollars (in millions)                                  $    5,954              $    5,030              $    3,767
Percentage increase                                            18  %                   34  %
Loan Servicing Portfolio
Dollars (in millions, at end of period)                $    9,150              $    7,341              $    5,390
Percentage increase                                            25  %                   36  %
Active Merchants
Number (at end of period)                                  17,216                  14,907                  10,891
Percentage increase                                            15  %                   37  %
Cumulative Consumer Accounts
Number (in millions, at end of period)                       3.03                    2.24                    1.57
Percentage increase                                            35  %                   43  %


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 and has grown
substantially in the past several years.
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. Our loan servicing
portfolio is an indicator of our servicing activities. The average loan
servicing portfolio for the years ended December 31, 2019, 2018 and 2017 was
$8,213 million, $6,303 million and $4,501 million, respectively.
Active Merchants. We define active merchants as home improvement merchants and
healthcare providers that have submitted at least one consumer application
during the twelve months ended at the date of measurement. Because our
transaction volume is a function of the size, engagement and growth of our
merchant network, active merchants, in aggregate, are an indicator of future
revenue and profitability, although they are not directly correlated. The
comparative measures can also be impacted by disciplined corrective action taken
by the Company to remove merchants from our program who do not meet our customer
satisfaction standards.
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. Although
not directly correlated to revenue, cumulative consumer accounts is a measure of
our brand awareness among consumers, as well as the value of the data we have
been collecting from such consumers since our inception. We may use this data to
support future growth by cross-marketing products and delivering potential
additional customers to merchants that may not have been able to source those
customers themselves.
Factors Affecting our Performance
Network of Active Merchants and Transaction Volume. We have a robust network of
active merchants, upon which our transaction volumes rely. Our revenues and
financial results are heavily dependent on our transaction volume, which
represents the dollar amount of loans funded on our platform and, therefore,
influences the fees that we earn and the per-unit cost of the services that we
provide. Our transaction volume depends on our ability to retain our existing
platform participants, add new participants and expand to new industry
verticals. We engage new merchants through both direct sales channels, as well
as affiliate channel partners, such as manufacturers, software companies and
other entities that have a network of merchants that would benefit from consumer
financing. Once onboarded, merchant relationships are maintained and grown by
direct account management, as well as regular product enhancements that
facilitate merchant growth.
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Bank Partner Relationships; Other Funding. "Bank Partners" are defined as
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 and payments
technology and related marketing, servicing, collection and other services (the
"GreenSky program" or "program"). Our ability to generate and increase
transaction volume and expand our loan servicing portfolio is, in part,
dependent on (a) retaining our existing Bank Partners and having them renew and
expand their commitments, (b) adding new Bank 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. No assurance is given that any of the current funding
commitments of our Bank Partners will be renewed.
In that regard, Regions Bank, one of our Bank Partners, made a strategic
decision to reduce its use of indirect lending programs and elected not to renew
its origination commitment when it expired on November 25, 2019. This prompted
management to conclude at the end of 2019 that the likelihood of making escrow
payments in future periods with respect to the Regions escrow account was
probable of occurring, as a result of which we recorded a non-cash contingent
expense of $16.2 million and a corresponding liability as of December 31, 2019.
See Note 14 to the Notes to Consolidated Financial Statements included in Item 8
for further discussion of this item.
As of December 31, 2019, we had aggregate funding commitments from our ongoing
Bank Partners of approximately $9.0 billion, of which approximately $2.2 billion
was unused. These funding commitments are "revolving" and replenish as
outstanding loans are paid down. As a result of loan pay-downs, we anticipate
approximately $2.7 billion of additional funding capacity will become available
during 2020. As we add new Bank Partners, their full commitments are typically
subject to a mutually agreed upon onboarding schedule. Two of our ongoing Bank
Partners are in their initial three-year terms. The remaining six ongoing Bank
Partners extended their commitment terms in the normal course during 2019, one
of which adjusted its commitment from $4 billion to $3 billion in the fourth
quarter of 2019.
In addition to customary expansion of commitments from existing Bank Partners
and the periodic addition of new Bank Partners to our funding group, over time
we expect to diversify our funding to include a combination of commitments from
Bank Partners and alternative structures with one or more institutional
investors, financial institutions or other financing sources. As noted in Item 7
"Executive Summary-2019 Developments," in December 2019, we reached an agreement
in principle relating to a three-year, $6 billion forward flow arrangement with
a leading institutional asset manager, which would complement our current Bank
Partner commitments. Under this arrangement, the asset manager would have a
commitment of up to $2 billion per year for a three-year period. Unlike our Bank
Partner commitments, this forward flow arrangement would not be "revolving" and
would not replenish as outstanding loans are paid down. We expect funding
commitments to first be available under this arrangement during the second
quarter of 2020.
If we do not timely consummate the forward flow arrangement or alternative
structures, or if the funding commitments from our Bank Partners and the forward
flow arrangement or alternative structures (should they be consummated) are not
sufficient to support expected originations, it would limit our ability to
generate revenue at or above current levels.
Performance of the Loans our Bank Partners Originate. While our Bank Partners
bear substantially all of the credit risk on their wholly-owned loan portfolios,
Bank Partner credit losses and prepayments impact our profitability as follows:
•Our contracts with our Bank 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, we bill the consumer for interest
throughout the deferred interest promotional period, but the consumer is not
obligated to pay any interest if the loan is repaid in full before the end of
the promotional period. We are obligated to remit this accumulated billed
interest to our Bank Partners to the extent the loan principal balances are paid
off within the promotional period (each event, a
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finance charge reversal or "FCR") even though the interest billed to the
consumer is reversed. Our maximum FCR liability is limited to the gross amount
of finance charges billed during the promotional period, offset by the
collection of incentive payments from our Bank Partners during such period,
proceeds received from transfers of previously charged-off loan receivables
("Charged-Off Receivables") and 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.
•If credit losses exceed an agreed-upon threshold, we make limited payments to
our Bank Partners. Our maximum financial exposure is contractually limited to
the escrow that we establish with each Bank Partner, which represented a
weighted average target rate of 2.1% of the total outstanding loan balance as of
December 31, 2019. Cash set aside to meet this requirement is classified as
restricted cash in our Consolidated Balance Sheets.
For further discussion of our sensitivity to the credit risk exposure of our
Bank Partners, see Item 7A "Quantitative and Qualitative Disclosure About Market
Risk-Credit risk."
In January 2020, our Bank Partners became subject to a new reporting
requirement, Accounting Standards Update 2016-13, "Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,"
which may affect how they reserve for losses on loans. It is not clear at this
time what effect, if any, this new reporting requirement will have on Bank
Partner participation in our program.
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. As general economic conditions improve or deteriorate,
the amount of consumer disposable income tends to fluctuate, which, in turn,
impacts consumer spending levels and the willingness of consumers to take out
loans to finance purchases. Specific economic factors, such as interest rate
levels, changes in monetary and related policies, market volatility, consumer
confidence and, particularly, unemployment rates, also influence consumer
spending and borrowing patterns. 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.
Seasonality. See Part I, Item 1 "Business", for a seasonality discussion.
Components of Results of Operations
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.
Transaction fees. We earn a specified transaction fee in connection with each
purchase made by a consumer based on a loan's terms and promotional features.
Transaction fees are billed to, and collected directly from, the merchant and
are considered to be earned at the time of the merchant's transaction with the
consumer. We also may earn a specified interchange fee in connection with
purchases in which payments are processed through a credit card payment network.
Servicing and other. We earn a specified servicing fee from providing
professional services to manage loan portfolios on behalf of our Bank Partners.
We are entitled to collect servicing fees as part of the servicing agreements
with our Bank Partners, which are paid monthly based upon an annual fixed
percentage of the outstanding Bank Partner loan portfolio balance. Servicing and
other revenue is also impacted by the fair value change in our servicing assets
or liabilities associated with the servicing arrangements with our Bank
Partners. See
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