(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 2, 2020 ("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 Form 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 and wholly-owned subsidiary ofGS Holdings, LLC ("GS Holdings ").GS Holdings is a holding company with no operating assets or operations, was organized inAugust 2017 , and onAugust 24, 2017 acquired a 100% interest in GSLLC. The equity ofGS Holdings is owned partially byGreenSky, Inc. and partially by certain pre-IPO equity owners ofGS Holdings . 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 ofAugust 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. 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 and six months endedJune 30, 2021 , 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. 44 -------------------------------------------------------------------------------- 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 certain of our transaction volumes continue to be impacted. For the three months endedJune 30, 2021 , our transaction volume increased 14% compared to the second quarter of the prior year. 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 financially 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 ofJune 30, 2021 , less than$10 million , or 0.10% of our 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 and 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 •During the second quarter, GreenSky added or expanded several significant merchant and sponsor partnerships, which are expected to contribute up to$500 million in incremental 2022 annual transaction volumes, with the opportunity for additional significant growth. These partnerships include: •A five-year, exclusive, first-look contract with a longstanding sponsor, theElectric & Gas Industries Association (EGIA), which represents a market share win against HVAC competitors. The relationship is expected to generate an incremental$300 million in 2022 transaction volumes and to ultimately reach up to$1 billion in annual transaction volumes during the exclusivity period; •An innovative alliance with a leading digital marketplace for home services; and •New merchant agreements with two national manufacturers in the kitchens and bathrooms category. •During the second quarter, GreenSky completed approximately$1.1 billion in funding activities which included$547 million in whole loan and loan participation sales and an increase of$640 million to existing Bank Partner commitments. •In July, the Company entered into an agreement with theConsumer Financial Protection Bureau to resolve the inquiry related to consumer complaints about allegedly unauthorized loans initiated by certain merchants. As ofJune 30, 2021 the Company was fully reserved with respect to the agreement and the impact on the second quarter was$6.5 million of pre-tax income, which is reflected as a non-recurring item in the Company's adjusted EBITDA. For further information, see Note 14 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1. 45
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Second Quarter and Year-to-date 2021 Results The following are key business metrics and financial measures as of and for the three and six months endedJune 30, 2021 : Business Metrics •Transaction volume (as defined below) was$1.5 billion during the three months endedJune 30, 2021 compared to$1.4 billion during the three months endedJune 30, 2020 , an increase of 14%. Transaction volume was$2.8 billion during the six months endedJune 30, 2021 compared to$2.7 billion during the six months endedJune 30, 2020 , an increase of 4%; •Total revenue of$136.5 million during the three months endedJune 30, 2021 increased 3% from$133.0 million during the three months endedJune 30, 2020 . Total revenue of$261.7 million during the six months endedJune 30, 2021 increased 3% from$254.8 million during the six months endedJune 30, 2020 ; •The outstanding balance of loans serviced by our platform totaled$9.43 billion as ofJune 30, 2021 compared to$9.38 billion as ofJune 30, 2020 , an increase of 1%; •We maintained a strong consumer profile. GreenSky program borrowers with credit scores over 780 comprised 41% of the loan servicing portfolio as ofJune 30, 2021 , and over 90% of the loan servicing portfolio as ofJune 30, 2021 consisted of GreenSky program borrowers with credit scores over 700; and •The 30-day delinquencies as ofJune 30, 2021 were 0.70%, an improvement of 4 basis points overJune 30, 2020 . The delinquency rate includes accounts that received COVID-19 assistance that are no longer in payment deferral. Less than 0.1% of the total loans serviced by our platform as ofJune 30, 2021 were in deferral status, compared to approximately 0.8% as ofDecember 31, 2020 and 4% at the peak in the second quarter of 2020. Financial Measures We had net income of$46.7 million and$58.8 million , respectively, during the three and six months endedJune 30, 2021 compared to net income of$13.4 million and$2.4 million , respectively, during the six months endedJune 30, 2020 . The higher earnings in the 2021 periods was primarily due to: •A$5.9 million and$9.8 million , respectively, non-cash benefit to financial guarantee expense in the three and six months endedJune 30, 2021 , compared to a$10.2 million and$28.7 million , respectively, expense in the same periods in 2020. Refer to "Three and Six Months EndedJune 30, 2021 and 2020-Financial guarantee expense (benefit)" in this Part I, Item 2 as well as Note 1 and Note 14 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for additional discussion of our financial guarantee. •Our cost of revenue decreased$21.4 million and$29.8 million , respectively, during the three and six months endedJune 30, 2021 compared to the same periods in 2020, largely driven by a decrease in FCR liability, which 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. •These amounts were partially offset by sales, general and administrative costs that increased$2.4 million and$7.1 million , respectively, including$7.1 million and$13.5 million , respectively, of non-recurring costs during the three and six months endedJune 30, 2021 , primarily associated with legal and regulatory matters. For additional information, see Results of Operations within this Part I, Item 2. 46 -------------------------------------------------------------------------------- Table of
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Adjusted EBITDA (as defined below) of$60.8 million during the three months endedJune 30, 2021 increased from$39.8 million during the three months endedJune 30, 2020 . Adjusted EBITDA of$95.9 million during the six months endedJune 30, 2021 increased from$56.9 million during the six months endedJune 30, 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 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, which results in lower charge-offs 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 share-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. 47 -------------------------------------------------------------------------------- Table of
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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 this non-GAAP financial measure to the most directly comparable GAAP measure, net income, as presented below. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net income$ 46,711 $ 13,355 $ 58,836 $ 2,436 Interest expense(1) 6,721 5,894 13,335 11,514 Income tax expense 4,582 1,497 6,454 602 Depreciation and amortization 3,479 2,762 6,795 5,207 Share-based compensation expense(2) 4,031 3,481 7,743 6,980 Financial guarantee liability - Escrow(3) - 10,248 - 28,656 Servicing asset and liability changes(4) (3,989) 568 (11,494) (1,738) Mark-to-market on sales facilitation obligations(5) (7,827) - 781 - Transaction and non-recurring expenses(6) 7,111 2,025 13,451 3,258 Adjusted EBITDA$ 60,819 $ 39,830 $ 95,901 $ 56,915 (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 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 ongoingBank 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 servicing liabilities related to our servicing obligations associated with Bank Partner agreements 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 Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional discussion. (6)The three and six months endedJune 30, 2021 primarily include legal fees associated with IPO litigation and regulatory matter. The three and six months endedJune 30, 2020 include legal fees associated with IPO litigation and regulatory matter and professional fees associated with our strategic alternatives review process. 48 -------------------------------------------------------------------------------- Table of
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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. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Transaction Volume Dollars (in millions)$ 1,546 $ 1,358 $ 2,841 $ 2,729 Percentage decrease 14 % 4 % Loan Servicing Portfolio Dollars (in millions, at end of period)$ 9,431 $ 9,384 $ 9,431 $ 9,384 Percentage increase 1 % 1 % Cumulative Consumer Accounts Number (in millions, at end of period) 4.06 3.39 4.06 3.39 Percentage increase 20 % 20 % 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. 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 endedJune 30, 2021 and 2020 was$9.4 billion and$9.3 billion , respectively. The average loan servicing portfolio for the six months endedJune 30, 2021 and 2020 was$9.4 billion and$9.2 billion , 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 ofJune 30, 2021 , we had aggregate funding commitments from ourBank Partners of approximately$10.3 billion , a substantial majority of which are "revolving" commitments that replenish as outstanding loans are paid down. Of the funding commitments available atJune 30, 2021 for use in the next 12 months, approximately$2.6 billion was unused, and we anticipate approximately$2.3 billion of additional funding capacity will become available as loans pay-down under revolving commitments during this period. During the second quarter of 2021, an existing Bank Partner increased its revolving commitment by$500 million to$2.0 billion and extended the terms of its commitment for an additional two years into the fourth quarter of 2023. 49 -------------------------------------------------------------------------------- Table of
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As we add newBank Partners , their 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 the funding for loans originated by ourBank Partners to include alternative structures with institutional investors, financial institutions and other funding 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 six months endedJune 30, 2021 , GreenSky executed approximately$864 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. 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 (i) an agreed-upon portfolio yield, (ii) a fixed servicing fee and (iii) 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 they 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 2.2% of the total outstanding loan balance as ofJune 30, 2021 . Cash set aside to meet this requirement is classified as restricted cash in our Unaudited Condensed Consolidated Balance Sheets. As ofJune 30, 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 of the credit risk of loan receivables held for sale, however, our intent is that our holding period for such loan receivables is brief. 50 -------------------------------------------------------------------------------- Table of
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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. Results of Operations Summary Three Months Ended June 30, Six Months Ended June 30, 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenue Transaction fees$ 102,440 $ 101,777 $ 663 1 %$ 188,097 $ 191,661 $ (3,564) (2) % Servicing 31,375 28,481 2,894 10 % 66,042 59,764 6,278 11 % Interest and other 2,703 2,704 (1) - % 7,551 3,394 4,157 122 % Total revenue 136,518 132,962 3,556 3 % 261,690 254,819 6,871 3 % Costs and expenses Cost of revenue (exclusive of depreciation and amortization shown separately below) 43,935 65,377 (21,442) (33) % 107,932 137,682 (29,750) (22) % Compensation and benefits 21,918 21,724 194 1 % 44,391 43,888 503 1 % Property, office and technology 4,529 4,178 351 8 % 8,988 8,099 889 11 % Depreciation and amortization 3,479 2,762 717 26 % 6,795 5,207 1,588 30 % Sales, general and administrative 10,881 8,526 2,355 28 % 25,523 18,455 7,068 38 % Financial guarantee expense (benefit) (5,880) 10,248 (16,128) N/M (9,763) 28,656 (38,419) N/M Related party 452 477 (25) (5) % 904 954 (50) (5) % Total costs and expenses 79,314 113,292 (33,978) (30) % 184,770 242,941 (58,171) (24) % Operating profit 57,204 19,670 37,534 191 % 76,920 11,878 65,042 548 % Other income (expense), net (5,911) (4,818) (1,093) 23 % (11,630) (8,840) (2,790) 32 % Income before income tax expense 51,293 14,852 36,441 245 % 65,290 3,038 62,252 2,049 % Income tax expense 4,582 1,497 3,085 206 % 6,454 602 5,852 972 % Net income$ 46,711 $ 13,355 $ 33,356 250 %$ 58,836 $ 2,436 $ 56,400 2,315 % Less: Net income attributable to noncontrolling interests 30,381 9,222 21,159 229 % 38,708 1,637 37,071 2,265 % Net income attributable to GreenSky, Inc.$ 16,330 $ 4,133 $ 12,197 295 %$ 20,128 $ 799 $ 19,329 2,419 % Earnings per share of Class A common stock Basic$ 0.23 $ 0.06 $ 0.28 $ 0.01 Diluted$ 0.22 $ 0.06 $ 0.27 $ 0.01 51
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Three and Six Months EndedJune 30, 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 endedJune 30, 2021 , transaction fees revenue increased 1% compared to the same period in 2020 due to a 14% increase in transaction volume, partially offset by a decrease in transaction fee rate. During the six months endedJune 30, 2021 , transactions fees revenue decreased 2% compared to the same period in 2020, primarily attributable to a decrease in transaction fee rate resulting from a change in the mix of promotional terms of loans originated on our platform and an increase in price concessions, which reduced transaction fees by$3.7 million during the six months endedJune 30, 2021 compared to$2.4 million offered to the same merchant group during the same period in 2020. These decreases were partially offset by a 4% increase in transaction volume. Transaction fees earned per dollar originated ("transaction fee rate") were 6.63% during the three months endedJune 30, 2021 compared to 7.50% during the same period in 2020, and 6.62% during the six months endedJune 30, 2021 compared to 7.02% during the same period in 2020. The year over year transaction fee rate decreases are primarily 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 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 of 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 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Servicing fee$ 27,734 $ 29,529 $ 55,261 $ 59,023 Fair value change in servicing asset 3,641 (1,048) 10,781 741 Total servicing revenue$ 31,375 $
28,481
During the three months endedJune 30, 2021 , servicing revenue increased$2.9 million , or 10%, compared to the same period in 2020, which was primarily attributable to the$3.6 million increase in the fair value of our servicing asset in 2021, as compared to the$1.0 million decrease in the fair value of our servicing asset during the same period in 2020. The increase in the servicing asset in 2021 reflects the further improvement in credit forecasts in the second quarter of 2021. The servicing fee decrease reflects a 2021 average servicing fee rate of 1.19%, compared to 1.27% during the same period of 2020 primarily attributable to the diversification of our funding strategy. During the six months endedJune 30, 2021 , servicing revenue increased$6.3 million , or 11%, compared to the same period in 2020, which was primarily attributable to the$10.8 million increase in the fair value change in our servicing asset in 2021, as compared to the$0.7 million increase in the fair value change in our servicing asset 52 -------------------------------------------------------------------------------- Table of
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during the same period in 2020. The increase in the servicing asset in 2021 reflects the improvements in credit forecasts since December. The servicing fee decrease reflects a 2021 average servicing fee of 1.18%, compared to 1.28% during the same period in 2020 primarily attributable to the diversification of our funding strategy. Interest and other We earn interest income from loan receivables held for sale, including loan participations purchased by the Warehouse SPV. The amount of interest for each period depends on the average level of loan participations and the mix of loans owned for each period. During the six months endedJune 30, 2021 , interest income increased$4.2 million compared to the same period in 2020, primarily due to the use of the Warehouse SPV, formed in the second quarter of 2020, which resulted in an increase in loan receivables held for sale. Cost of Revenue (exclusive of depreciation and amortization expense) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Origination related$ 5,218 $ 6,115 $ 10,522 $ 12,757 Servicing related 12,596 12,363 26,138 25,522 Fair value change in FCR liability 19,261 36,050 45,678 88,554 Loan and loan participation sales costs 14,687 10,849 24,813 10,849 Mark-to-market on sales facilitation obligations (7,827) - 781 $ - Total cost of revenue (exclusive of depreciation and amortization expense)$ 43,935 $ 65,377 $ 107,932 $ 137,682 Origination related During the three and six months endedJune 30, 2021 , loan origination related expenses decreased 15% and 18%, respectively, compared to the same periods in 2020, largely driven by operational efficiencies in loan processing, with origination related expenses as a percent of transaction volume decreasing to 0.34% and 0.37% during the three and six months endedJune 30, 2021 , from 0.45% and 0.47% for the same periods in 2020. Additionally, there were lower customer protection expenses of$263 thousand and$850 thousand during the three and six months endedJune 30, 2021 , respectively, compared to the same periods in 2020, which are incurred when the Company determines that a merchant did not fulfill its obligation to a borrower and compensates a Bank Partner for the applicable portion of the loan principal balance. Servicing related During the three and six months endedJune 30, 2021 , loan servicing related expenses increased 2% and 2%, respectively, compared to the same periods in 2020, which resulted from our 1% and 2% period-over- period, respectively, average loan servicing portfolio growth. The increases in servicing related expenses associated with the increases in loans serviced were primarily for personnel costs within our collections and operations functions as well as printing and posting costs. Servicing related expenses as a percent of our average loan servicing portfolio were 0.54% and 0.56% during the three and six months endedJune 30, 2021 , respectively, compared to 0.53% and 0.55% for the same periods in 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 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 53 -------------------------------------------------------------------------------- Table of
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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, we experienced 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. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Beginning balance$ 167,436 $ 213,158 $ 185,134 $ 206,035 Receipts(1) 53,168 59,600 104,434 104,308 Settlements(2) (98,260) (110,053) (193,641) (200,142) Fair value changes recognized in cost of revenue(3) 19,261 36,050 45,678 88,554 Ending balance$ 141,605 $ 198,755 $ 141,605 $ 198,755 (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 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 and includes billed finance charges not yet collected on loan participations purchased by the Warehouse SPV of$10.1 million and$20.0 million , respectively, during the three months endedJune 30, 2021 and 2020, and$12.7 million and$20.0 million , respectively, during the six months endedJune 30, 2021 and 2020, which were not yet collected and subject to potential future finance charge reversal at the time of purchase. These amounts were paid to the Bank Partner in full as of the participation purchase dates. (3)A fair value adjustment is made based on the expected reversal percentage of billed finance charges (expected settlements), which is estimated at each reporting date. The fair value adjustment is recognized in cost of revenue in the Unaudited Condensed Consolidated Statements of Operations. Further detail regarding our receipts is provided below for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Incentive payments$ 45,424 $ 55,759 $ 89,502 $ 98,212 Recoveries on unsold charged-off receivables(1) 7,744 3,841 14,932 6,096 Total receipts$ 53,168 $ 59,600 $ 104,434 $ 104,308 (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$5.6 million and$5.3 million during the three months endedJune 30, 2021 and 2020, respectively, and$10.8 million and$11.1 million during the six months endedJune 30, 2021 and 2020, respectively. These collected recoveries are excluded from receipts, as they do not impact our fair value change in FCR liability. The decreases in the fair value change in FCR liability recognized in cost of revenue during the three and six months endedJune 30, 2021 of$16.8 million , or 47%, and$42.9 million , or 48%, respectively, compared to the same periods in 2020, were primarily a function of a lower balance of deferred interest loans subject to FCR as a result of loan prepayments and our funding diversification that began in mid-2020. 54 -------------------------------------------------------------------------------- Table of
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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") and fair value changes in contingent consideration receivables, certain fees and the amortization of deferred debt issuance costs incurred in connection with obtaining the Warehouse Facility. During the three and six months endedJune 30, 2021 , the loan and loan participations sales costs were$14.7 million and$24.8 million , respectively, inclusive of realized losses of$11.4 million and$14.7 million , respectively, on Warehouse Loan Participations sold. Mark-to-market on sales facilitation obligations The mark-to-market on sales facilitation obligations reflects the changes in the fair value in the embedded derivative for loan participation commitments and is recognized as a mark-to-market in cost of revenue for the period. While our Bank Partner funding costs are recognized over the life of the loan, the fair value adjustments on Warehouse Loan Participations and sales facilitation obligations are recognized in the period of the purchase of the loan participations by the Warehouse SPV or entering into of the loan participation commitment. Thus, the fair value adjustments will create a benefit in the form of reducing Bank Partner funding costs over the life of the loan. During the three and six months endedJune 30, 2021 , the mark-to-market on sales facilitation obligations were$(7.8) and$0.8 million , respectively. As the first sales facilitation obligations were entered into in the third quarter of 2020, there were no such amounts during the three and six months endedJune 30, 2020 . See Note 3 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further information. Compensation and benefits Compensation and benefits expense primarily consists 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 endedJune 30, 2021 , compensation and benefits expense increased$194 thousand , or 1%, compared to the same period in 2020 as a result of a$542 thousand increase in stock-based compensation expense and a$200 thousand decrease in capitalized information technology costs, partially offset by lower salary expense of$634 thousand . During the six months endedJune 30, 2021 , compensation and benefits expense increased$503 thousand , or 1%, compared to the same period in 2020 as a result of a$637 thousand increase in stock-based compensation expense and a$543 thousand decrease in capitalized IT costs, partially offset by a decrease in salary expense of$763 thousand . Property, office and technology During the three months endedJune 30, 2021 , property, office, and technology expense increased$351 thousand , or 8%, compared to the same period in 2020. The increase is primarily due to a$483 thousand increase in software, hardware and hosting costs, partially offset by a$154 thousand decrease in consulting expenses associated with additional technology process innovation costs in the 2020 period. During the six months endedJune 30, 2021 , property, office, and technology expense increased$889 thousand , or 11%, compared to the same period in 2020. The increase is primarily due to an increases in software, hardware and hosting costs of$1.2 million , partially offset by a$333 thousand decrease in consulting expenses. Depreciation and amortization During the three and six months endedJune 30, 2021 , depreciation and amortization expense increased$0.7 million , or 26%, and$1.6 million , or 30%, respectively, compared to the same periods in 2020, primarily driven by increases over time in capitalized internally-developed software from our growing infrastructure, resulting in increased amortization expense. 55 -------------------------------------------------------------------------------- Table of
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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 and six months endedJune 30, 2021 , sales, general and administrative expense increased$2.4 million , or 28%, and$7.1 million , or 38%, respectively, compared to the same periods in 2020, respectively, primarily related to increases in legal and regulatory costs of$4.1 million and$11.2 million , respectively, partially offset by a decrease in provision for losses for loan receivables held for sale of$1.2 million and$2.8 million , respectively. See Note 14 to the 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 and six months endedJune 30, 2021 , the Company recognized a financial guarantee benefit of$5.9 million and$9.8 million , respectively, compared to financial guarantee expense of$10.2 million and$28.7 million , respectively, during the same periods in 2020. The financial guarantee benefit recognized in 2021 is primarily due to an improved credit forecast and lower delinquency rates while the same periods last year were 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 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 Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information regarding the measurement of our financial guarantees under the new standard. 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 and six months endedJune 30, 2021 , related party expenses decreased$25 thousand , or 5%, and$50 thousand , or 5%, compared to the same periods in 2020, due to decreased amortization of employee loans. Other income (expense), net During the three months endedJune 30, 2021 , other expense, net increased$1.1 million , or 23%, compared to the same period in 2020, primarily due to an increase in interest expense of$816 thousand from our incremental term loan entered intoJune 2020 (the "2020 Amended Credit Agreement"). During the six months endedJune 30, 2021 , other expense, net increased$2.8 million , or 32%, compared to the same period in 2020. The increase was primarily due to (i)$1.8 million increase in interest expense from the 2020 Amended Credit Agreement; (ii)$590 thousand decrease in interest income; and (iii) a net$285 thousand lower income from the change in the fair value of our servicing liabilities. Income tax expense Income tax expense recorded during the three and six months endedJune 30, 2021 of$4.6 million and$6.5 million reflected the expected income tax expense of$5.0 million and$6.3 million , respectively, on the net earnings for the periods related toGreenSky, Inc.'s economic interest inGS Holdings , which was combined with$438 thousand of tax benefit and$160 thousand of tax expense, respectively, arising from discrete items, primarily consisting of a 56 -------------------------------------------------------------------------------- Table of
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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. The increase in income tax expense during the three and six months endedJune 30, 2021 , as compared to the income tax expense in the same periods in 2020, was primarily related to an increase in overall net earnings attributable toGreenSky, Inc.'s economic interest inGS Holdings in 2021. Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests for the three and six months endedJune 30, 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 59.3% and 63.1% for the three months endedJune 30, 2021 and 2020, respectively, and 59.4% and 63.5% for the six months endedJune 30, 2021 and 2020, respectively. Financial Condition Summary Significant changes in the composition and balance of our assets and liabilities as ofJune 30, 2021 compared toDecember 31, 2020 were principally attributable to the following: •a$55.5 million increase in cash and cash equivalents and a$53.4 million decrease in restricted cash. See "Liquidity and Capital Resources" in this Part I, Item 2 for further discussion of our cash flow activity; •a$262.0 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 six months endedJune 30, 2021 as the company has implemented monthly and quarterly sales of whole loans and loan participations as an integral part of its funding diversification program; •a$43.5 million decrease in the FCR liability primarily due to 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$16.8 million decrease in our financial guarantee liability primarily driven by (i) the credit performance of the Bank Partner portfolios in the first six months of 2021 and (ii) the improvement in the forecasted credit performance of those portfolios relative toDecember 31, 2020 . The decrease in the liability also reflects approximately$4.2 million in escrow payments during the period related to a Bank Partner that is no longer originating loans under the GreenSky program. There was no utilization of escrow by any Bank Partner that was originating loans under the GreenSky program during the six months endedJune 30, 2021 ; •an increase in total equity of$57.0 million primarily due to: (i) net income of$58.8 million , (ii) share-based compensation of$7.7 million and (iii) other comprehensive income, net of tax of$3.1 million associated with our interest rate swap, partially offset by distributions of$10.8 million , which were primarily tax distributions; and •a$246.2 million decrease in notes payable resulting from repayments of the Warehouse Facility. 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 Form 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, 57 -------------------------------------------------------------------------------- Table of
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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 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$56.8 million is held for certainBank Partners in restricted cash as ofJune 30, 2021 , and for payments under our financial guarantees (see Note 14 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion), and (ii) sales facilitation obligations (see Note 3 to the 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, with the Company funding 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 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 ofJune 30, 2021 , the Warehouse SPV held$301.9 million of loan participations and the Warehouse Facility had an outstanding balance of$256.6 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 and six months endedJune 30, 2021 . Significant Changes in Capital Structure There were no significant changes in the Company's capital structure during the three and six months endedJune 30, 2021 . During the six months endedJune 30, 2020 , we established the SPV Facility and amended our 2018 Amended Credit Agreement. 58 -------------------------------------------------------------------------------- Table of
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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 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. Six Months EndedJune 30, 2021 2020
Net cash provided by (used in) operating activities
$ (7,361) $
(8,524)
Net cash provided by (used in) financing activities
Cash and cash equivalents and restricted cash totaled$469.8 million as ofJune 30, 2021 , an increase of$2.2 million fromDecember 31, 2020 . Restricted cash, which had a balance of$266.5 million as ofJune 30, 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 ofJune 30, 2021 andDecember 31, 2020 were comprised primarily of four components: (i)$166.1 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)$56.8 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)$30.4 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)$13.2 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 Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information on our restricted cash held as escrow withBank Partners . Cash provided by (used in) operating activities Six Months EndedJune 30, 2021 . Cash flows provided by operating activities were$276.3 million during the six months endedJune 30, 2021 . The largest source of operating cash flow for the six months endedJune 30, 2021 was a$258.2 million decrease in loan receivables held for sale as a result of completed sales in the period. Net income of$58.8 million and other working capital benefits also contributed as sources of operating cash flows. These were partially offset by the use of$43.5 million of cash related to previously billed finance charges that reversed in the period. Six Months EndedJune 30, 2020 . Cash flows used in operating activities were$333.8 million during the six months endedJune 30, 2020 . Net income of$2.4 million was adjusted favorably for certain non-cash items of$50.6 million , which were predominantly related to financial guarantee losses, depreciation and amortization, share-based compensation expense, and mark to market adjustment on loan receivables held for sale, partially offset by the fair value changes in servicing assets and liabilities and deferred tax benefit. The primary uses of operating cash during the six months endedJune 30, 2020 were: (i) purchases of Warehouse Loan Participations by the Warehouse SPV and (ii) a decrease in billed finance charges on deferred interest loans that are expected to reverse in future periods driven by the settlements of billed finance charges on Warehouse Loan Participations at the time of purchase by the Warehouse SPV. 59 -------------------------------------------------------------------------------- Table of
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Cash used in investing activities Detail of the cash used in investing activities is included below for each period indicated. Six Months Ended June 30, 2021 2020 Software$ 6,973 $ 7,926 Computer hardware 257 372 Leasehold improvements 131 83 Furniture - 143
Purchases of property, equipment and software
Cash provided by (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$266.7 million during the six months endedJune 30, 2021 compared to net cash provided by financing activities of$333.9 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 proceeds of cash were primarily related to proceeds from the Warehouse Facility and proceeds from the term loan. The net cash provided by financing activities was offset by net cash used for tax and non-tax distributions to members and repayments of the principal balance of our term loan (net of original issuance discount). Borrowings See Note 7 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 for further information about our borrowings, including the use of proceeds, as well as our interest rate swap. 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 60 -------------------------------------------------------------------------------- Table of
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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 ofJune 30, 2021 , which is available to fund future needs ofGS Holdings' business. We had no amount drawn under available letter of credit as ofJune 30, 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$300.0 million , and an uncommitted$200.0 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 ofJune 30, 2021 , the outstanding balance on the Warehouse Facility was$256.6 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 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 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 61 -------------------------------------------------------------------------------- Table of
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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 and exchanges of Holdco Units or any future exchanges of Holdco Units for our Class A common stock pursuant to the Exchange Agreement, or 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$307.6 million as ofJune 30, 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 2020 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 Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 for discussion of certain legal proceedings and other contingent matters. Contractual Obligations We have future obligations under various contracts relating to debt and interest payments and operating leases. See Note 7 to the 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 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 and six months endedJune 30, 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. 62 -------------------------------------------------------------------------------- Table of
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