GREENSKY, INC. (United States dollars in thousands, except per share data and unless otherwise indicated) You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q, as well as the Audited Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in theGreenSky, Inc. 2020 Form 10-K filed with theSecurities and Exchange Commission onMarch 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 and Part II, Item 1A "Risk Factors" in this Form 10-Q. 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 Merger Agreement In September, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Goldman Sachs Group, Inc. ("Goldman Sachs"), andGoldman Sachs Bank USA ("Goldman Sachs Bank "), a wholly owned subsidiary of Goldman Sachs. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, (a)Goldman Sachs Bank will establish a new whollyowned subsidiary ("Merger Sub 1") into whichGreenSky, Inc. will be merged (the "Company Merger"), with Merger Sub 1 surviving the Company Merger as a whollyowned subsidiary ofGoldman Sachs Bank ; and (b)Goldman Sachs Bank will establish a new whollyowned subsidiary ("Merger Sub 2") that will be merged intoGS Holdings (the "Holdings Merger" and, together with the Company Merger, the "Mergers"). Consummation of the transaction is subject to the approval of the Company's stockholders, the receipt of required regulatory approvals, and satisfaction of other customary closing conditions. See Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 for additional information. Covid-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization designated the novel coronavirus disease (referred to as "COVID-19") as a global pandemic. The following are key impacts of COVID-19 on our business: 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 endedSeptember 30, 2021 , our transaction volume increased 4% compared to the third quarter of the prior year. Our transaction volume growth in the third quarter was impacted by escalating supply chain constraints in theU.S. that we expect to shift transactions to future periods. 46 -------------------------------------------------------------------------------- Table of
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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. 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." Third Quarter and Year-to-date 2021 Results The following are key business metrics and financial measures as of and for the three and nine months endedSeptember 30, 2021 : Business Metrics •Transaction volume (as defined below) was$1.54 billion during the three months endedSeptember 30, 2021 compared to$1.48 billion during the three months endedSeptember 30, 2020 , an increase of 4%. Transaction volume was$4.38 billion during the nine months endedSeptember 30, 2021 compared to$4.20 billion during the nine months endedSeptember 30, 2020 , an increase of 4%; •Total revenue of$128.1 million during the three months endedSeptember 30, 2021 decreased 10% from$142.0 million during the three months endedSeptember 30, 2020 . Total revenue of$389.8 million during the nine months endedSeptember 30, 2021 decreased 2% from$396.8 million during the nine months endedSeptember 30, 2020 ; •The outstanding balance of loans serviced by our platform totaled$9.56 billion as ofSeptember 30, 2021 compared to$9.55 billion as ofSeptember 30, 2020 ; •We maintained a strong consumer profile. GreenSky program borrowers with credit scores over 780 comprised 41% of the loan servicing portfolio as ofSeptember 30, 2021 , and over 91% of the loan servicing portfolio as ofSeptember 30, 2021 consisted of GreenSky program borrowers with credit scores over 700; and •The 30-day delinquencies as ofSeptember 30, 2021 were 0.73%, an improvement of 31 basis points overSeptember 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 ofSeptember 30, 2021 were in deferral status, compared to approximately 0.8% as ofDecember 31, 2020 and approximately 4% at the peak in the second quarter of 2020. Financial Measures We had net income of$39.8 million and$98.6 million , respectively, during the three and nine months endedSeptember 30, 2021 compared to net income of$2.8 million and$5.2 million , respectively, during the three and nine months endedSeptember 30, 2020 . The higher earnings in the 2021 periods was primarily due to: •Our cost of revenue decreased$58.9 million and$88.6 million , respectively, during the three and nine months endedSeptember 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. Refer to "Three and Nine Months EndedSeptember 30, 2021 and 2020 - Cost of Revenue" in this Part 1, Item 2 for additional discussion. 47 -------------------------------------------------------------------------------- Table of
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•A$2.0 million non-cash financial guarantee expense and$7.7 million benefit, respectively, during the three and nine months endedSeptember 30, 2021 , compared to a$0.3 million benefit and$28.4 million expense, respectively, during the same periods in 2020. Refer to "Three and Nine Months EndedSeptember 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. •Sales, general and administrative costs decreased$4.9 million during the three months endedSeptember 30, 2021 and increased$2.1 million during the nine months endedSeptember 30, 2021 compared to the same periods in 2020. Refer to "Three and Nine Months EndedSeptember 30, 2021 and 2020-Sales, general and administrative" in this Part I, Item 2 for additional discussion. For additional information, see Results of Operations within this Part I, Item 2. Adjusted EBITDA (as defined below) increased$19.6 million or 51% and$58.5 million or 61%, respectively, during the three and nine months endedSeptember 30, 2021 when compared to the same periods in 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 continued to observe supply chain impacts on materials costs and project completion times, which can impact the timing of transaction volumes and also 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 48 -------------------------------------------------------------------------------- Table of
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maintain and grow our business. We believe that this methodology for determining
Adjusted EBITDA can provide useful supplemental information to help investors
better understand the economics of our platform.
Adjusted EBITDA has limitations as an analytical tool and should not be
considered in isolation from, or as a substitute for, the analysis of other GAAP
financial measures, such as net income. Some of the limitations of Adjusted
EBITDA include:
•It does not reflect our current contractual commitments that will have an
impact on future cash flows;
•It does not reflect the impact of working capital requirements or capital
expenditures; and
•It is not a universally consistent calculation, which limits its usefulness as
a comparative measure.
Management compensates for the inherent limitations associated with using the
measure of Adjusted EBITDA through disclosure of such limitations, presentation
of our financial statements in accordance with GAAP and reconciliation of this
non-GAAP financial measure to the most directly comparable GAAP measure, net
income, as presented below.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 39,777 $ 2,811 $ 98,613 $ 5,247
Interest expense(1) 6,801 6,775 20,136 18,289
Income tax expense 4,368 197 10,822 799
Depreciation and amortization 3,548 2,973 10,343 8,180
Share-based compensation expense(2) 4,033 4,338 11,776 11,318
Financial guarantee liability - Escrow(3) - (2,382) - 26,274
Servicing asset and liability changes(4) 1,499 368 (9,995) (1,370)
Mark-to-market on sales facilitation
obligations(5) (6,955) 18,262 (6,174) 18,262
Merger-related costs(6) 5,036 - 5,036 -
Transaction and non-recurring expenses(7) 157 5,367 13,608 8,625
Adjusted EBITDA $ 58,264 $ 38,709 $ 154,165 $ 95,624
(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 ongoing Bank Partners , which are primarily a function of new loans
facilitated on our platform during the period increasing the contractual escrow
balance and the associated financial guarantee liability. In the fourth quarter
of 2020, due to expectations that some of these financial guarantees may require
cash settlement, the Company discontinued adjusting EBITDA for financial
guarantees.
(4)Includes the non-cash changes in the fair value of servicing assets and
liabilities related to our servicing 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)Includes professional services fees related to the pending merger with
Goldman Sachs.
(7)The three and nine months ended September 30, 2021 primarily include legal
fees associated with IPO litigation and regulatory matter. The three and nine
months ended September 30, 2020 include legal fees associated with IPO
litigation and regulatory matter and professional fees associated with our
strategic alternatives review process.
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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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Transaction Volume
Dollars (in millions) $ 1,541 $ 1,475 $ 4,382 $ 4,205
Percentage increase 4 % 4 %
Loan Servicing Portfolio
Dollars (in millions, at end of period) $ 9,560 $ 9,547 $ 9,560 $ 9,547
Percentage increase 0.1 % 0.1 %
Cumulative Consumer Accounts
Number (in millions, at end of period) 4.23 3.57 4.23 3.57
Percentage increase 18 % 18 %
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 ended September 30, 2021 and 2020 was
$9.5 billion . The average loan servicing portfolio for the nine months ended
September 30, 2021 and 2020 was $9.4 billion and $9.3 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 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.
As of September 30, 2021 , we had aggregate funding commitments from our Bank
Partners of approximately $7.9 billion , a substantial majority of which are
"revolving" commitments that replenish as outstanding loans are paid down. Of
the funding commitments available at September 30, 2021 for use in the next 12
months, approximately $2.6 billion was unused, and we anticipate approximately
$1.6 billion of additional funding capacity will become available as loans
pay-down under revolving commitments during this period, assuming renewal of all
current revolving commitments. During the third quarter of 2021, an existing
Bank Partner increased its revolving commitment by $100 million to $1.0 billion .
Also during the third quarter of 2021, as previously disclosed, a Bank Partner
provided termination notice that its loan origination agreement with us will end
in November 2021 and that
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Bank Partner's funding commitment is excluded from our aggregate Bank Partner commitments atSeptember 30, 2021 , referenced above. 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 nine months endedSeptember 30, 2021 , GreenSky executed approximately$1.3 billion 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. OnSeptember 14, 2021 , concurrently with the execution of the Merger Agreement and as a condition to the Company's entry into the Merger Agreement, certain of the Company's subsidiaries entered into a commitment letter for a backstop participation purchase facility (the "Commitment Letter") withGoldman Sachs Bank . Pursuant to the Commitment Letter,Goldman Sachs Bank committed to provide such subsidiaries with (a) a commitment of up to$0.8 billion to purchase economic participations in loans originated by the Company'sBank Partners under the GreenSky program during the period from the execution of definitive agreements for such purchase facility through the earlier of (i) the consummation of the Mergers pursuant to the Merger Agreement and (ii) the termination of the Merger Agreement in accordance with its terms, and (b) in the event that the Merger Agreement is terminated in accordance with its terms prior to the consummation of the Mergers, a commitment of up to$1.0 billion to purchase economic participations in loans originated by the Company'sBank Partners under the GreenSky program during the period from the Merger Agreement termination date through the last day of the ninth full calendar month following such termination date. The Company is in the process of finalizing the definitive agreements for such purchase facility. We anticipate whole loan or 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 51 -------------------------------------------------------------------------------- Table of
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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 ofSeptember 30, 2021 . Cash set aside to meet this requirement is classified as restricted cash in our Unaudited Condensed Consolidated Balance Sheets. As ofSeptember 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. 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 recent impact on our business from the COVID-19 pandemic. Results of Operations Summary Three and Nine Months EndedSeptember 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 endedSeptember 30, 2021 , transaction fees revenue decreased 8% compared to the same period in 2020 due to a decrease in transaction fee rate, partially offset by 4% increase in transaction volume. During the nine months endedSeptember 30, 2021 , transactions fees revenue decreased 4% compared to the same period in 2020, primarily attributable to a decrease in transaction fee rate. In addition, interchange fees decreased during the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 due to an increase in direct processing of payments to merchants. These decreases were partially offset by a 4% increase in transaction volume. Transaction fees earned per dollar originated ("transaction fee rate") were 6.40% and 6.54%, respectively, during the three and nine months endedSeptember 30, 2021 compared to 7.29% and 7.12%, respectively, during the same periods 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 52 -------------------------------------------------------------------------------- Table of
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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. With the onset of the COVID-19 pandemic in 2020, our merchants shifted originations to more promotional loans, which resulted in the upward shift in the transaction fee rate. In 2021, we've seen a reversion to pre-pandemic levels as it relates to the mix of loans. In addition, the mix of loans offered by merchants generally varies by merchant category, and is dependent on merchant and consumer preference. 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 and liabilities 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 and liabilities. The following table presents servicing revenue earned from servicing fees and the fair value changes in servicing assets and liabilities related to our Bank Partner agreements included in our servicing revenue. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Servicing fee$ 27,911 $ 28,238 $ 83,172 $ 87,261 Fair value changes in servicing assets and liabilities (1,795) (792) 8,986 (51) Total servicing revenue$ 26,116 $ 27,446 $ 92,158 $ 87,210 During the three months endedSeptember 30, 2021 , servicing revenue decreased$1.3 million , or 5%, compared to the same period in 2020, which was primarily attributable to the$1.8 million net decrease in the fair value of servicing assets and liabilities related to our Bank Partner servicing arrangements in 2021, as compared to the$0.8 million decrease during the same period in 2020. The fair value changes in servicing assets and liabilities for the three months ended three months endedSeptember 30, 2021 reflects changes in balances of Bank partner portfolios and the respective applicable fees during the quarter. The servicing fee decrease reflects a 2021 average servicing fee rate of 1.17%, compared to 1.19% during the same period of 2020 primarily attributable to the diversification of our funding strategy. During the nine months endedSeptember 30, 2021 , servicing revenue increased$4.9 million , or 6%, compared to the same period in 2020, which was primarily attributable to the$9.0 million net increase in the fair value change in servicing assets and liabilities related to our Bank Partner servicing arrangements in 2021, as compared to the$(0.1) million decrease during the same period in 2020. In addition to the same factors that impacted the third quarter, described above, the net increase during the nine months endedSeptember 30, 2021 reflects the significant improvements in credit forecasts since December. The servicing fee decrease reflects a 2021 average servicing fee rate of 1.18%, compared to 1.25% 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 three months endedSeptember 30, 2021 , interest income decreased$3.6 million compared to the same period in 2020 due to the lower balance of loan receivables held for sale during the quarter. During the nine months endedSeptember 30, 2021 , interest income increased$0.6 million compared to the same period in 2020. 53 -------------------------------------------------------------------------------- Table of
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Cost of Revenue (exclusive of depreciation and amortization expense)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Origination related $ 5,816 $ 7,396 $ 16,338 $ 20,153
Servicing related 12,190 13,415 38,328 38,937
Fair value change in FCR liability 11,805 21,832 57,483 110,386
Loan and loan participation sales costs 11,011 31,823 35,824 42,672
Mark-to-market on sales facilitation obligations (6,955) 18,262
(6,174) $ 18,262
Total cost of revenue (exclusive of depreciation
and amortization expense) $ 33,867 $ 92,728 $ 141,799 $ 230,410
Origination related
During the three and nine months ended September 30, 2021 , loan origination
related expenses decreased 21% and 19%, 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 0.38% and 0.37% during the three and nine months ended September 30, 2021 ,
respectively, from 0.48% and 0.47% for the same periods in 2020. Additionally,
there were lower customer protection expenses of $2.0 million and $2.8 million
during the three and nine months ended September 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
Loan servicing related expenses were relatively flat year-over-year. Servicing
related expenses as a percent of our average loan servicing portfolio were 0.51%
and 0.51% during the three and nine months ended September 30, 2021 ,
respectively, compared to 0.54% and 0.51% for the same periods in 2020.
Fair value change in FCR liability
Under our contracts with Bank Partners , we receive incentive payments from Bank
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 to Bank 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 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."
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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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Beginning balance $ 141,605 $ 198,755 $ 185,134 $ 206,035
Receipts(1) 65,604 62,631 170,038 166,939
Settlements(2) (79,707) (95,706) (273,348) (295,848)
Fair value changes recognized in cost of
revenue(3) 11,805 21,832 57,483 110,386
Ending balance $ 139,307 $ 187,512 $ 139,307 $ 187,512
(1)Includes: (i) incentive payments from Bank 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 from Bank 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 $7.4 million and $4.3 million ,
respectively, during the three months ended September 30, 2021 and 2020, and
$20.1 million and $24.3 million , respectively, during the nine months ended
September 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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Incentive payments $ 57,020 $ 57,525 $ 146,522 $ 155,737
Recoveries on unsold charged-off receivables(1) 8,584 5,106 23,516 11,202
Total receipts $ 65,604 $ 62,631 $ 170,038 $ 166,939
(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 $4.8 million and
$6.2 million during the three months ended September 30, 2021 and 2020,
respectively, and $15.6 million and $17.4 million during the nine months ended
September 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 nine months ended September 30, 2021 of $10.0
million , or 46%, and $52.9 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.
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.
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During the three and nine months endedSeptember 30, 2021 , the loan and loan participations sales costs were$11.0 million and$35.8 million , respectively, inclusive of realized losses of$10.4 million and$25.2 million , respectively, on Warehouse Loan Participations sold. During the three and nine months endedSeptember 30, 2020 , the loan and loan participations sales costs were$31.8 million and$42.7 million , respectively, inclusive of$19.7 million realized discount on Warehouse Loan Participations sold. The lower cost in 2021 reflects an increase in the price for loan products, the mix of loans, and the level of Warehouse Loan Participations held. 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 nine months endedSeptember 30, 2021 , the mark-to-market benefits recognized on sales facilitation obligations were$7.0 million and$6.2 million , respectively. As the first sales facilitation obligations were entered into in the third quarter of 2020, the mark-to-market expense during both the three and nine months endedSeptember 30, 2020 was$18.3 million . 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 endedSeptember 30, 2021 , compensation and benefits expense increased$1.6 million , or 7%, compared to the same period in 2020 as a result of a$1.9 million increase in salary expense, partially offset by a$0.3 million decrease in stock-based compensation expense. During the nine months endedSeptember 30, 2021 , compensation and benefits expense increased$2.1 million , or 3%, compared to the same period in 2020 as a result of a$1.2 million increase in salary expense, a$0.3 million increase in stock-based compensation expense, and a$0.6 million decrease in capitalized IT costs. Property, office and technology During the three months endedSeptember 30, 2021 , property, office, and technology expense increased$146 thousand , or 4%, compared to the same period in 2020. During the nine months endedSeptember 30, 2021 , property, office, and technology expense increased$1.0 million , or 8%, compared to the same period in 2020, primarily due to an increase in software, hardware and hosting costs. Depreciation and amortization During the three and nine months endedSeptember 30, 2021 , depreciation and amortization expense increased$0.6 million , or 19%, and$2.2 million , or 26%, 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. 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. 56 -------------------------------------------------------------------------------- Table of
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During the three months endedSeptember 30, 2021 , sales, general and administrative expense decreased$4.9 million , or 42%, compared to the same period in 2020. The decrease is primarily related to non-recurring legal and regulatory costs incurred during the three months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , sales, general and administrative expense increased$2.1 million , or 7%, compared to the same period in 2020, primarily related to an increase in legal and regulatory costs of$7.0 million . The increase was partially offset by a decrease in provision for losses for loan receivables held for sale of$4.7 million and a decrease in provision for losses on accounts receivable of$0.4 million . 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 months endedSeptember 30, 2021 , the Company recognized financial guarantee expense of$2.0 million compared to a financial guarantee benefit of$0.3 million during the same period in 2020. During the nine months endedSeptember 30, 2021 , the Company recognized a financial guarantee benefit of$7.7 million , compared to financial guarantee expense of$28.4 million during the same period 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. Merger-related costs Merger-related costs include legal and other professional services expenses related to the pending merger with Goldman Sachs, and totaled$5.0 million during the three and nine months endedSeptember 30, 2021 . For more information on the pending merger, see Note 1 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1. 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 nine months endedSeptember 30, 2021 , related party expenses increased$85 thousand , or 24%, and$35 thousand , or 3%, compared to the same periods in 2020, due to decreased amortization of employee loans. Other income (expense), net During the three months endedSeptember 30, 2021 , other expense, net increased$1.0 million , or 15%, compared to the same period in 2020, primarily due to the fair value change in our interest rate swap for which we discontinued hedge accounting during the third quarter of 2021. For further information on our interest rate swap accounting, see Note 8 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1. 57 -------------------------------------------------------------------------------- Table of
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During the nine months endedSeptember 30, 2021 , other expense, net increased$1.8 million , or 12%, 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)$0.8 million gain from the change in fair value of our interest rate swap; (iii)$0.6 million decrease in interest income; (iv) net$0.4 million lower income from the change in the fair value of our servicing liabilities; and (v)$0.3 million decrease in other losses. Income tax expense Income tax expense recorded during the three and nine months endedSeptember 30, 2021 of$4.4 million and$10.8 million , respectively, reflected the expected income tax expense on the net earnings for the periods related toGreenSky, Inc.'s economic interest inGS Holdings , as well as$20 thousand of tax benefit and$200 thousand of tax expense, respectively, arising from discrete items, primarily consisting of a 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 nine months endedSeptember 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 nine months endedSeptember 30, 2021 and 2020 reflects income attributable to the Continuing LLC Members for the entire periods based on their weighted average ownership interest inGS Holdings , which was 57.6% and 60.4% for the three months endedSeptember 30, 2021 and 2020, respectively, and 58.8% and 62.4% for the nine months endedSeptember 30, 2021 and 2020, respectively. Financial Condition Summary Significant changes in the composition and balance of our assets and liabilities as ofSeptember 30, 2021 compared toDecember 31, 2020 were principally attributable to the following: •a$94.2 million increase in cash and cash equivalents and a$55.5 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$244.4 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 nine months endedSeptember 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$45.8 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 sales of loan participations. This activity is analyzed in further detail throughout this Part I, Item 2; •a$17.4 million decrease in our financial guarantee liability primarily driven by (i) the credit performance of the Bank Partner portfolios in the first nine 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$5.3 million in escrow payments funded 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 nine months endedSeptember 30, 2021 ; •an increase in total equity of$101.0 million primarily due to: (i) net income of$98.6 million , (ii) share-based compensation of$11.8 million and (iii) other comprehensive income, net of tax of$3.6 million associated with our interest rate swap, partially offset by distributions of$15.6 million , which were primarily tax distributions; and •a$224.6 million decrease in notes payable resulting from repayments of the Warehouse Facility. 58 -------------------------------------------------------------------------------- Table of
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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, 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$51.1 million is held for certainBank Partners in restricted cash as ofSeptember 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. 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 ofSeptember 30, 2021 , the Warehouse SPV held$324.9 million of loan participations and the Warehouse Facility had an outstanding balance of$278.3 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 nine months endedSeptember 30, 2021 . 59 -------------------------------------------------------------------------------- Table of
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Significant Changes in Capital Structure There were no significant changes in the Company's capital structure during the three and nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2020 , we established the Warehouse Facility and amended our 2018 Amended Credit Agreement. 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. Nine Months EndedSeptember 30, 2021 2020
Net cash provided by (used in) operating activities
$ (11,311) $
(12,120)
Net cash provided by (used in) financing activities
Cash and cash equivalents and restricted cash totaled$506.4 million as ofSeptember 30, 2021 , an increase of$38.7 million fromDecember 31, 2020 . Restricted cash, which had a balance of$264.4 million as ofSeptember 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 ofSeptember 30, 2021 andDecember 31, 2020 were comprised primarily of four components: (i)$162.9 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)$51.1 million and$84.6 million , respectively, which represented an additional restricted cash balance that we maintained for certainBank Partners related to our FCR liability; (iii)$32.2 million and$27.7 million , respectively, which represented certain custodial in-transit loan funding and consumer borrower payments that we were restricted from using for our operations; and (iv)$18.2 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 Nine Months EndedSeptember 30, 2021 . Cash flows provided by operating activities were$300.9 million during the nine months endedSeptember 30, 2021 . The largest source of operating cash flow for the nine months endedSeptember 30, 2021 was a$240.5 million decrease in loan receivables held for sale as a result of completed sales in the period. Net income of$98.6 million and other working capital benefits also contributed as sources of operating cash flows. These were partially offset by the use of$45.8 million of cash related to previously billed finance charges that reversed in the period. Nine Months EndedSeptember 30, 2020 . Cash flows used in operating activities were$430.5 million during the nine months endedSeptember 30, 2020 . Net income of$5.2 million was adjusted favorably for certain non-cash items of$64.1 million , which were predominantly related to financial guarantee losses, depreciation and amortization, equity-based expense, and mark to market adjustment on loan receivables held for sale, partially offset by the fair value changes in servicing assets and liabilities and deferred tax benefit. 60 -------------------------------------------------------------------------------- Table of
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The primary uses of operating cash during the nine months endedSeptember 30, 2020 were: (i) purchases of Warehouse Loan Participations by the Warehouse SPV and (ii) a decrease in billed finance charges on deferred interest loans that are expected to reverse in future periods driven by the settlements of billed finance charges on Warehouse Loan Participations at the time of purchase by the Warehouse SPV. Cash used in investing activities Detail of the cash used in investing activities is included below for each period indicated. Nine Months Ended September 30, 2021 2020 Software$ 10,668 $ 11,231 Computer hardware 348 658 Leasehold improvements 295 88 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$250.8 million during the nine months endedSeptember 30, 2021 compared to net cash provided by financing activities of$435.3 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 . 61 -------------------------------------------------------------------------------- Table of
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OnJune 10, 2020 , we entered into a Second Amendment to our Credit Agreement ("2020 Amended Credit Agreement"), which provided for an additional$75.0 million term loan ("incremental term loan"). The term loan and revolving loan facility under the 2018 Amended Credit Agreement and incremental term loan under the 2020 Amended Credit Agreement are collectively referred to as the "Credit Facility." The modified term loan and the incremental term loan are collectively referred to as the "term loan." The incremental term loan, incurs interest, due monthly in arrears, at an adjusted LIBOR, which represents the one-month LIBOR multiplied by the statutory reserve rate, as defined in the 2020 Amended Credit Agreement, with a 1% LIBOR floor, plus 450 basis points. The incremental term loan has the same security, maturity, principal amortization, prepayment, and covenant terms as the 2018 Amended Credit Agreement, maturing onMarch 29, 2025 . There was no amount outstanding under our revolving loan facility as ofSeptember 30, 2021 , which is available to fund future needs ofGS Holdings' business. We had no amount drawn under available letter of credit as ofSeptember 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 advance rate under the Warehouse Facility has generally been approximately 84% (on average) of the principal balance of the purchased participations. As ofSeptember 30, 2021 , the outstanding balance on the Warehouse Facility was$278.3 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 and in the 2020 Form 10-K) 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 62 -------------------------------------------------------------------------------- Table of
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in tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent tax basis is allocated to those assets.We and GS Holdings entered into a Tax Receivable Agreement ("TRA") with the "TRA Parties" (the equity holders of theFormer Corporate Investors , the Exchanging Members, the Continuing LLC Members and any other parties receiving benefits under the TRA, as those parties are defined in the 2020 Form 10-K), whereby we agreed to pay to those parties 85% of the amount of cash tax savings, if any, inUnited States federal, state and local taxes that we realize or are deemed to realize as a result of these increases in tax basis, increases in basis from such payments, and deemed interest deductions arising from such payments. As a condition to the Merger Agreement, the Company and certain beneficiaries party to the TRA were required to enter into an amendment to the TRA (the "TRA Amendment"), which TRA Amendment provided that no payments under the TRA will be made following or as a result of the consummation of the Mergers. For further information on the TRA, please refer to our 2020 Form 10-K. 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 nine months endedSeptember 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.
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