U.S. markets closed

Edited Transcript of GSKY.OQ earnings conference call or presentation 3-Mar-20 1:00pm GMT

Q4 2019 GreenSky Inc Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of GreenSky Inc earnings conference call or presentation Tuesday, March 3, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Zalik

GreenSky, Inc. - CEO & Chairman

* Gerald R. Benjamin

GreenSky, Inc. - Vice Chairman & Chief Administrative Officer

* Rebecca Gardy; Senior Vice President of Investor Relations

* Robert G. Partlow

GreenSky, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Former Director

* Christopher Roy Donat

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* John Kimbrough Davis

Raymond James & Associates, Inc., Research Division - Research Analyst

* Robert Henry Wildhack

Autonomous Research LLP - Analyst of Payments and Financial Technology

* Steven Matthew Wald

Morgan Stanley, Research Division - Equity Analyst

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

* William Haraway Ryan

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you. And welcome to the GreenSky Fiscal 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, this event is streaming live on the GreenSky Investor Relations website, and a replay will be available on the same site approximately 2 hours after the completion of the call.

It is my pleasure to introduce your host, Ms. Rebecca Gardy, Senior Vice President of Investor Relations at GreenSky. Please go ahead.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [2]

--------------------------------------------------------------------------------

Thank you, Shannon. And thank you to all our listeners for joining us today. GreenSky issued a press release announcing results for its fourth quarter ended December 31, 2019, after the close of market trading hours yesterday, March 2, 2020. You can access this press release on the Investor Relations section of the GreenSky website. In addition, we've also posted our fourth quarter fiscal '19 investor presentation, which we will refer to during today's call.

On today's call, we have David Zalik, Chairman and Chief Executive Officer; Gerry Benjamin, Vice Chairman and Chief Administrative Officer; and Robert Partlow, Chief Financial Officer.

Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These are statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We disclaim any obligation to update any forward-looking statements except as required by law. Information about these risks and uncertainties is included in our press release issued yesterday as well as in our filings with regulators.

We'll also be discussing certain non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to the GAAP results, and we encourage you to consider all measures when analyzing GreenSky's performance. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated March 2, 2020, and on the Investor Relations page of our website.

And with that, I would now like to turn it over to David. David?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [3]

--------------------------------------------------------------------------------

Thanks, Rebecca. Good morning, everyone, and thank you for joining us. It's good to be with you today to review our fourth quarter and fiscal 2019 results.

Our fiscal 2019 revenue grew 28% driven by transaction volume growth of 18% and increased servicing fee revenue. Through our expanding ecosystem of over 17,000 merchants and elective health care providers, we reported a record $1.5 billion of loans originated on our technology platform in the fourth quarter, bringing total fiscal 2000 (sic) [2019] transaction volume to nearly $6 billion. Over the last 5 years, transaction volume has grown at an average annual compound rate of nearly 33%, a testament to the power of our expanding base of quality merchants and the range of competitive financing products we enable on our platform.

As a leading point-of-sale technology platform enabling merchants and elective health care providers to offer instantaneous financing, GreenSky operates in 2 vast markets. Providing our merchants and providers with compelling, innovative products and solutions for their customers continues to be paramount for our sustained growth. To that end, our robust innovation pipeline, including enhanced feature functionality such as the GreenSky Universal Credit Application, is allowing us to become more deeply entrenched with our merchant network and widening the technology gap between GreenSky and our competitors. In combination with the rapid market share gains we've made in the elective health care space in only 4 years, GreenSky is well positioned to again achieve double-digit growth in volume in 2020.

This year, we place an increasing importance on the quality, productivity and profitability of the merchants and providers that comprise our network. Merchants with over $2 million in annual sales revenue represented 2/3 of the volume in our home improvement vertical. Our focus on merchant productivity is evidenced by the strong transaction volume originated by each cohort, as seen on Slide 13 of the presentation we posted on the Investor Relations section of our website last evening. We work side by side with many merchants to help them grow their business and have also parted ways with merchants that don't fit. We expect to see additional momentum in the current year from these efforts.

In a moment, Rob will walk you through the financial statements. But first, I want to touch on 2 key business initiatives: evolving and expanding our funding model and our Board's strategic alternative review process.

First, funding. As of the end of the fourth quarter, we had aggregate bank funding commitments of $9 billion, of which $2.2 billion was unused. As a reminder, Bank Partner commitments are revolving in nature in as much as they replenish as outstanding loans pay down. Given our expectations for originations and portfolio runoff, we anticipate having approximately $2.7 billion in additional capacity become available during 2020. Importantly, this is without any new Bank Partners joining the GreenSky consortium or expansion from existing partners. In addition, as we announced in December, we reached an agreement in principle for a $6 billion forward flow arrangement with a leading institutional asset manager to complement our Bank Partner funding group. The $6 billion commitment provides capacity of up to $2 billion per year over a 3-year term. We expect funding pursuant to this agreement to likely commence during the quarter -- second quarter of 2020.

The forward flow arrangement has 3 important characteristics: number one, no escrow, no FCR, no CECL; number two, no tail liability or volatility, no performance bonus; number three, approximately equivalent historic -- to our historic bank cost of funds, same profit, none of the volatility or complex accounting, all recognized at time of origination.

And secondly, as announced in our August 2019 -- in August 2019, the company's Board of Directors, working together with our senior management team and outside legal and financial advisers, has commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing stockholder value. The Board's review is ongoing, and the company does not intend to make further public comment regarding these matters unless and until the Board has approved a specific transaction or alternative or otherwise concludes its review. We expect to make an announcement in this regard no later than the second quarter of fiscal 2020.

I'll now turn it over to Gerry.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [4]

--------------------------------------------------------------------------------

Thank you, David, and good morning.

From the company's inception through the end of fiscal 2019, GreenSky has enabled over $22 billion of transactions with over 3 million consumers. As David referenced in his comments, the markets in which GreenSky competes are immense. As noted by the Harvard University Joint Center for Housing Studies, Americans spend more than $400 billion a year on residential renovations and repairs, while IBIS Worldwide and the applicable professional accreditation and societies and associations estimate that Americans spend more than $300 billion annually on those subsectors of elective health care that GreenSky actively pursues, namely dentistry, vision correction, veterinary medicine, dermatology and noninvasive cosmetics and reproductive medicine.

While we believe that GreenSky holds the #1 market position in the home improvement vertical and the #3 market position in elective health care after just 4 years from launch, our share of both of these markets remains modest, allowing lots of room for continued material growth for years to come.

While other market participants are attempting to emulate us, we continue to successfully launch new products, services and capabilities that further separate us from the competition. In addition to our existing technology, service and support, we are extremely excited to see the response from home improvement merchants to our newly released product like the Universal Credit Application and our pre-approval marketing capabilities that continue to make us unique in the market.

In elective health care, we're continuing to innovate to expand the range of promotional payment options that have traditionally been made available by providers. The health care team is continuing to iterate on these products and services that are needed by providers while, at the same time, ensuring that the credit profile of approved program borrowers continues to meet our funding partners' underwriting standards. The feedback has been overwhelmingly positive, and the pace at which elective health care providers are joining the GreenSky ecosystem shows we're making exciting progress.

Accordingly, we enter fiscal 2020 with an intense focus on enhancing our home improvement and elective health care product offerings, adding larger merchants and elective health care providers that meet both our quality and productivity targets while continuing to invest in advancing the effectiveness of our risk management processes and procedures.

As depicted on Slide 19 of the fiscal '19 investor presentation posted, we have never relaxed the GreenSky program underwriting standards to stimulate transaction volume growth. In fact, the dollar credit-weighted average FICO score of consumers at origination was exceptionally strong at 771 for the fourth quarter and 770 for the full year. As highlighted in yesterday's earnings press release, the credit quality of the company's loan servicing portfolio remains truly exceptional with 85% and 37% of the company's December 31 loan servicing portfolio composed of borrowers with weighted average FICO scores at origination in excess of 700 and 780, respectively.

30-day delinquencies reached a 3-year fourth quarter-end low point of 1.38%, which is impressive given the continued growth of health care originations, which depicts slightly lower average FICO scores and predictably display higher delinquency rates relative to home improvement. Both our home improvement and health care originations each had better FICO distributions over the prior year and better performance within FICO ranges.

We continue to make investments to enhance our proprietary credit and merchant management tools and systems, which we believe will deliver additional improvements throughout 2020. Early indicators show that 2019 home improvement vintage of originations has the highest weighted average FICO distribution and lowest early delinquencies of any loan vintage we've facilitated. And the same is true for the '19 vintage elective health care originations.

As of December 31, we had over 17,000 active merchants and providers on our platform. Our 15% growth rate in total active merchants over December 31, 2018, reflects the substantial addition of high-quality merchants, net of our intentional and ongoing roll-off of prior merchants and providers that did not meet our performance or productivity targets.

The fourth quarter Origination Productivity Index, or OPI, was 20.8%, down modestly from 21.1% in the third quarter and 22.2% in the fourth quarter of 2018, mostly due to the lagging nature of the 11th district monthly weighted average Cost of Fund Index or COFI. Given that effective January 1, 2020, the Federal Home Loan Bank has discontinued publishing the COFI index, management is reviewing alternative representative indices to benchmark the directional movement of bank cost of funds for purposes of computing OPI on a go-forward basis.

And with that, I'll turn it over to Rob to review the company's financial performance for both the fourth quarter and the fiscal year. Rob?

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Thank you, Gerry. As I review the results for the fourth quarter and fiscal 2019 during my remarks, note that all comparisons will be relative to the fourth quarter of 2018 and the fiscal year 2018, respectively, unless otherwise stated.

Transaction volume in the fourth quarter of fiscal 2019 was approximately $1.5 billion compared to $1.3 billion last year or a year-over-year increase of 16%. The transaction volume for the fiscal year grew by nearly $1 billion or 18% to a record $5.95 billion.

The company's transaction fee rate in the fourth quarter was 6.76%, down 10 basis points sequentially from the third quarter. For the fiscal year, the average transaction fee was relatively stable at 6.82%, down 12 basis points compared to 2018. The predominant driver of the year-over-year decline was product mix shifts as we had lower solar originations, coupled with a marginal shift of originations from 0 interest rate promotional loans to deferred rate loans. As discussed on prior calls, the variability of the promotional products, which our merchants and providers offer to their consumer, causes our transaction fee as a percentage of transaction volume to fluctuate throughout the year based on the promotional products our merchants choose to use to drive sales activity.

Total revenue in the fourth quarter grew 22% to $133.8 million, with transaction fees up 11%. Servicing and other revenues increased 77% compared to last year driven by continued portfolio growth and the recognition of $5.1 million servicing asset associated with the increase of the contractual fixed servicing fee for certain Bank Partner agreements.

For fiscal year 2019, total revenue grew 28% to $529.6 million, with transaction fees up 16% to $405.9 million, in line with our transaction volume growth. Servicing and other fees increased 88% driven by the 30% growth in our average loan servicing portfolio as well as the recognition of a $30.5 million servicing asset in connection with the modification of certain agreements -- servicing agreements with certain Bank Partners, whereby the servicing fees, which are senior cash flows in the waterfall, were increased above the market servicing rate.

Cost of revenue totaled $69.4 million or 3.1% of assets under management in the fourth quarter and $248.6 million or 3% of assets under management for fiscal 2019. We break out in -- on Slide 29 the components of cost of revenue into 3 distinct components: servicing costs, origination costs and the fair value change in the FCR liability.

For the fourth quarter, origination-related expenses totaled $8.3 million or 0.55% of originations, down from 0.59% in the third quarter and 0.66% in the fourth quarter of 2018. For the fiscal year, origination-related expenses totaled $33.6 million or 0.56% of originations, consistent with 2018's 0.56% of originations.

Servicing-related expenses were $11.9 million or 0.53% of the average loan servicing portfolio for the fourth quarter, consistent with the fourth quarter of 2018's 0.53%. For the full year, servicing-related expenses totaled $44.6 million or 0.54% and represents a marginal improvement over 2018's expense rate of 0.56%.

On Slide 30, we have provided the detailed components of the fair value change in the FCR liability. I will focus on the Q4-over-Q4 comparison as this will help isolate the noise created by the seasonal nature of consumer credit behavior.

The fair value change in the FCR liability for the fourth quarter was $49.2 million or 2.19% of the average loan servicing portfolio, up from Q4 2018's $37.3 million or 2.09% of the average loan servicing portfolio. The increase of $11.9 million largely reflects the growth of the balance of deferred interest loans within our portfolio; in addition, the impact of the 20 basis point increase in the servicing fee paid to GreenSky by our Bank Partners, which reduces incentive payments paid to GreenSky and thereby increases this fair value change in FCR liability expense line item. This higher servicing fee paid results in a higher net servicing revenue to GreenSky. Absent the shift of servicing fees from receipts to servicing revenue, the fair value change in the FCR liability rate would have decreased from Q4 2018 to Q4 2019, reflecting the improving metrics in our portfolio, a stable to improving credit along with declining bank margins.

On Slide 31, we also break out the fair value change in the FCR liability by the drivers of this expense line. I'll begin with the expense for future finance charge reversals, which is the expense related to building up the liability on our balance sheet for future finance charge reversals. This expense in the fourth quarter was $94.4 million and 4.21% of the loan servicing portfolio, up from 2018's $66.1 million or 3.71%. The increase in this expense is indicative of a larger balance of deferred interest loans in our portfolio. As previously noted, the FCR rate has increased due to the impact of higher APRs on newer transaction volume and the higher mix of deferred interest loans in our elective health care vertical.

Receipts from our servicing portfolio reduced the expense for future finance charge reversals and totaled $45.2 million or 2.01% of the average loan servicing portfolio in the fourth quarter and were up materially from Q4 2018's $28.8 million or 1.62% of the average loan servicing portfolio.

Incentive payments are the principal components of receipts. Fourth quarter receipts totaled $37.2 million or 1.66% of the average loan servicing portfolio compared to Q4 2018's $20.6 million or 1.16% of the average loan servicing portfolio. This 50 basis point improvement in the rate, despite the aforementioned 20 basis point impact of the higher servicing fees, was driven primarily by the 73 basis point increase in finance charges and fees from both deferred interest loans as well as reduced interest loans, coupled with a lower mix of 0 interest loans being originated.

The other components of incentive payments from Bank Partners were relatively unchanged. Agreed-upon Bank Partner yields increased 2 basis points as the impact of last year's higher rate environment has been offset by the lower cost of this year's originations. The net charge-off rate was effectively flat in Q4 2019 versus Q4 2018 as the benefit from the improvements we have made in risk and operations have offset the impact of higher proportion of elective health care loans in the portfolio.

Proceeds from the recoveries of previously charged-off loans and proceeds from charged-off receivable transfers totaled 36 basis points during Q4 2019, down from Q4 2018's 46 basis points as we reduced the transfer of charged-off receivables during the quarter.

Operating expenses increased year-over-year as we continued to build and invest in our team as well as in current certain expenses we do not expect to be recurring over the long term.

Compensation expenses increased $21.7 million or 35% for the year to $84 million, reflecting a $7.8 million increase in share-based compensation and continued investment in our IT, credit and sales infrastructure.

Property, office and technology expenditures increased $3.9 million or 30% for the fiscal year to $17.1 million due to higher technology contractor and consulting expense as well as higher software and operating lease costs.

General and administrative expenses increased $10.7 million or 77% for the year largely driven by legal, advisory and professional fees. As we have previously discussed, one of our Bank Partners did not renew their origination agreement at the end of November. As a result, we realized approximately $60 million financial guarantee expense related to our expected usage of large proportion of the existing $90 million escrow. Note that historically, we've had a small financial guarantee expense related to smaller legacy portfolios, and the expense is previously included in G&A expenses but are now broken out separately on the face of our income statement.

Other expense net of other income increased $12.8 million to $32.1 million for the year due primarily to the $9.8 million expense related to the remeasuring of our Tax Receivable Agreement liability. During 2019, we remeasured our deferred tax assets, resulting in an $11.6 million tax benefit due to state tax law changes and the obligation to file in certain states for the first time. Since most of our deferred tax assets are attributable to amortizable tax goodwill and subject to the Tax Receivable Agreement, a corresponding increase in the TRA liability was recorded with an increase in other expense.

Income tax benefit reported during 2019 reflected the expected income tax expense of $8.2 million on the net earnings for the entire year related to GreenSky, Inc.'s economic interest in GreenSky Holdings. The expected income tax expense for 2019 was offset by $15.3 million of tax benefits, which primarily include the remeasurement of our deferred tax assets of $11.6 million and warrant and stock-based compensation deductions of $3.3 million.

GAAP net income for the fourth quarter and full year was $5.3 million and $96 million, respectively. Because of our Up-C corporate structure, GAAP income reflects only the tax expense or tax benefit on a portion of GreenSky owned by the C corporation. We believe adjusted pro forma net income is a more useful measure of our entire enterprise's operating results as this measure reflects C corp income tax on all GreenSky earnings, inclusive of the amount owned by the noncontrolling interest as well as adjustments for certain other items, as noted in our press release.

Adjusted pro forma net income was $20.5 million in the fourth quarter, down 5% from the fourth quarter of 2018, and $101.6 million for the full year, down from $109.1 million in 2018.

The effective tax rate was 14.8% and 19.7% for 2019 and 2018, respectively.

As we had indicated on prior earnings calls, we believe that adjusted EBITDA is one of our 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.

Adjusted EBITDA for the fourth quarter was $35.3 million compared to $32.6 million in the fourth quarter of 2018. For the full year, adjusted EBITDA decreased 3% to $164.1 million from $170 million in 2018.

In our 10-K, we will also report comprehensive income, which accounts for the fair value change in the $350 million interest rate swap that is designated as a hedge of our interest rate risk on our term loan debt. The fluctuations in the market expectations about the path of future Federal Reserve rate cuts resulted in a mark-to-market gain in the swap of $1.9 million during the fourth quarter and a loss of $2.5 million for 2019. Actual cash settlements are reclassified into interest expense as they occur during the hedge's 4-year term.

Turning to our balance sheet. We finished the year with $195.8 million of unrestricted cash. Free cash flow for 2019 was $43 million, as detailed on Slide 36 of our fiscal 2019 investor presentation.

We ended 2019 with approximately $51.9 million of loan receivables held for sale as we continued to periodically acquire and sell Bank Partner originations. Subsequent to December 31, 2019, the company executed a par sale of $24.1 million of loan receivables held for sale within the company's Bank Partner network.

Looking ahead to our first quarter, the company's adoption of the new current expected credit loss, or CECL, accounting standard will change the requirements for estimating credit loss to our Bank Partners' escrow accounts, which are a component of restricted cash. We account for the risk of loss to the escrow funds as an off-balance sheet credit exposure under a financial guarantee arrangement. And as we noted in our prior 10-Q, this type of guarantee is within the scope of CECL. Importantly, CECL does not allow the inclusion of future loan originations by our Bank Partners. Thus, the modeling of loan losses for any consumer loan portfolio is assumed to go into runoff with no new originations in the portfolio. The adoption impact is expected to represent a significant portion of our $150.4 million escrow on our $9.2 billion loan servicing portfolio as of December 31, 2019.

Historically, our actual cash payments required under the financial guarantee arrangements have been immaterial for our ongoing Bank Partners, and we anticipate this continue to be the case. As for many companies, the adoption of CECL will meaningfully impact noncash -- have a meaningful impact on our noncash earnings for GAAP and balance sheet, and we are working through the refinements of the appropriate non-GAAP measure to be better aligned with our financial measures -- better align our financial measures with our actual economic performance.

Finally, before I end the call, I want to let you know Rebecca Gardy will be leaving GreenSky next week as she has accepted a new role, relocating to the northeast. We want to thank Rebecca for her many contributions since joining GreenSky before our IPO, and we also want to wish her well on her exciting new opportunity. Thank you, Rebecca.

And with that, I'd like to turn the call over to Rebecca to set up Q&A.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [6]

--------------------------------------------------------------------------------

Thanks, Rob. Operator, we'll take our first question.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from John Davis with Raymond James.

--------------------------------------------------------------------------------

John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Maybe I just wanted to touch on, first of all, why the decision not to guide for 2020. And I think in the release, you talked to double-digit origination growth. But maybe also, just help us with directionally the pieces, take rate margin and how we should think about the outlook for the full year.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [3]

--------------------------------------------------------------------------------

John, just -- it's David. Can you hear me okay?

--------------------------------------------------------------------------------

John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

I can.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [5]

--------------------------------------------------------------------------------

Okay. Terrific. So I'll take it in reverse order. From our perspective, take rate was very stable, and that's always been a function of mix. So we think that's a good thing.

I think your other question was around the -- I think was around guidance. And as I mentioned, we are completing the strategic alternative review. And when that's completed, then we'll be ready.

--------------------------------------------------------------------------------

John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. But just directionally, should -- how should we think about take rate this year or margins? I think double-digit origination growth, but just trying to think about what the profitability of this business model looks like going forward. So just any sort of directional color would be super helpful.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [7]

--------------------------------------------------------------------------------

Yes. Let me...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [8]

--------------------------------------------------------------------------------

Gerry, do you want to add some color to that?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [9]

--------------------------------------------------------------------------------

Yes, let me jump in here. I think you'll note that our EBITDA margin for the full year, if we take away the impact of our FCR growth, you would have about a flat EBITDA margin. I think the EBITDA margin -- adjusted EBITDA margin for the full year declined from roughly 41% to 31%. If we would have normalized the FCR, it would have been within 120 basis points of last year, I believe the math is. Instructionally, because of our moderating cost of bank funds and improved credit quality, you'll see in Q4, in the slides, the EBITDA margin converges very, very closely this year Q4 versus last year Q4. We think that's telling and a pretty good precursor of what we expect in 2020. Some people say, do you have wind in your sail. You never want to speak too soon. But clearly, from the interest rate environment, things are looking pretty benign. I think we'd all agree. And from a credit point of view, we've been very, very clear to indicate we're seeing improvements that are carrying over into 2020. So those 2 factors have a very, very material impact on our FCR, which, as you know, is a by-product of our growing service portfolio. So as David said, stable take rate, improving EBITDA margin, which only [degradated] for the prior year for 2019 based on the growth of the FCR.

--------------------------------------------------------------------------------

John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe we can run through just high-level economics of the new forward flow agreement. David, I think you made some comments on the call that you're not going to get -- you're going to get a similar cost of funds with this agreement, but you're taking a lot less risk. So just trying to understand and put the economics don't appear to be changing, but you're obviously taking on less risk and volatility. So maybe just kind of walk through how that works. It'd be helpful.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [11]

--------------------------------------------------------------------------------

Sure. I think we...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [12]

--------------------------------------------------------------------------------

Yes. I'll think of it as...

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [13]

--------------------------------------------------------------------------------

Go ahead, David.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [14]

--------------------------------------------------------------------------------

No. Please, Gerry.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [15]

--------------------------------------------------------------------------------

We touched on this briefly on our last call. As you would expect, as we're selling basically loans that our banks originate into a forward flow arrangement, there's a true-up at the point of time of that movement. So you'll either have a gain or a loss recognized on the movement because those loans will be sold either at par, at premium or a discount. To David's point, there is no CECL implication because there's none -- no ongoing economic in that loan. It's held by the counterparty. There is no escrow for the same reason. And accordingly, you have what I call a closed transaction. So your point is well taken. There is less risk. It comes with a cost. Some of those loans will sell at a discount. But as David pointed out, over the life of the loan arrangement, we would expect the economics to be approximately equivalent to what we've historically experienced.

--------------------------------------------------------------------------------

John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

Okay. And then last one for me. The OPI, I think it was down like 140 basis points. I apologize if I missed it, but maybe just what kind of drove that? And how do we think about -- or how do you guys think about the OPI kind of going into next year? I know we're going to have an index change. But just high-level commentary on the profitability of originations with all the new mix of the forward flow and just the different funding agreements.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [17]

--------------------------------------------------------------------------------

Sure, sure. I think the computation of the idea to measure the productivity of originations in a given quarter, taking into account something that approximates our bank cost of funds or our treasury cost of funds based on where our funding is coming from, still has merit. The COFI index is being discontinued by the Federal Home Loan, but it does have a lagging nature. So right now, as we report, COFI in Q4, it didn't show the benefit of the moderating interest rates on sort of a real time. It's a lagging indicator. If it would have, it would have been much closer or perhaps higher to Q4 a year ago. So I wouldn't make too much out of that. We're searching -- and my guess is, as opposed to the COFI, we'll be using something that may be swap based as a surrogate for cost of funds. It's probably a closer estimate of what our bank cost of funds or treasury cost of funds will be if there's a mixed funding model, if that makes sense.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Steven Wald with Morgan Stanley.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [19]

--------------------------------------------------------------------------------

Congratulations, Rebecca.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [20]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [21]

--------------------------------------------------------------------------------

Maybe if we could just start with the strategic alternative. I know you guys can't really comment too specifically, but if we kind of, one, take back almost a year or a little more than half a year, it seemed like it was sort of a sense that the market was missing something and you guys wanted to make sure you could maximize shareholder value. Could you just talk us through anything you've seen since then that might have changed or maybe conceptually since you've gone into the review process what you've sort of seen in terms of whether -- I think a lot of us have thought maybe you were talking about something like a deal. Or has anything changed there since you've announced that, that we should be thinking of in terms of how you're thinking about this?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [22]

--------------------------------------------------------------------------------

Well, I would tell you...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [23]

--------------------------------------------------------------------------------

No. I don't think anything has changed. What we've seen is that the enhancements from the incremental $6 billion of funding and the implication that, that has on our accounting, we think, is a real positive. You can imagine what our P&L and our balance sheet looks like if the vast majority of our funding has no escrow, no FCR, now no CECL, with similar lifetime economics to GreenSky. And no tail liability or volatility. And we've also seen that there are alternatives that is part of the evaluation. Gerry, I think you had something to add?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [24]

--------------------------------------------------------------------------------

No. To your point, I think the Board has been purposefully comprehensive in their review. These always take longer than you think they would. But to your point, the accounting implications of what may become a mixed model, where we're supported by our historic bank program that we like and value, complemented with a forward flow arrangement, there are implications to us if someone's looking at a transaction. There are also implications to a counterparty. And this accounting provision is somewhat new and it's been fluid, the interpretation as to how to apply it, because our bank model with our waterfall is not typical in the marketplace. So there's been learning by the outside audit firms, ourselves as well as, I sense, counterparties looking at the company. So it's taken some time. But I'm confident the Board's being comprehensive and thoughtful in their review.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [25]

--------------------------------------------------------------------------------

Got it. And maybe -- David, I think you sort of -- you alluded to this in the last point there. The shift with the new partner and the $6 billion forward flow, as you've kind of gone into the finalization of that and as you're looking at -- it's quite a sizable commitment, how does that change your view overall on where you guys should be pushing for the next leg of things? Should this be more -- should we expect this to be more of a non-bank-focused growth strategy in terms of new partners? Or will you continue to be pushing on the bank front as well?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [26]

--------------------------------------------------------------------------------

We love diversification. We love our Bank Partners. We love non-banks. I think what you should be looking for from us is a better accounting, a simpler accounting, a simpler way to understand the P&L of the business, and that's one of the advantages of the structure, not to mention at least $6 billion of incremental liquidity. And so our focus always has been diversification of funding. And certainly, as part of the strategic review is how do we provide better information that allows an investor to understand the actual performance of the business because the GAAP, the way we have to do it today, is not particularly helpful.

--------------------------------------------------------------------------------

Steven Matthew Wald, Morgan Stanley, Research Division - Equity Analyst [27]

--------------------------------------------------------------------------------

Got it. And if I could just maybe squeeze in a quick one at the end here. On the rate side of things, obviously rates have been moving around quite a bit. But I think we all recall how things kind of went moving sort of more of the economics out with some of the higher-interest products over time. As things maybe come down the other way, depending on where rates settle out, how are you guys thinking about that in terms of how that can impact take rate versus more sort of servicing or interest rate-driven revenues?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [28]

--------------------------------------------------------------------------------

Yes. So on the way down, what we have not seen is a material change in take rate. As you can see, 10 basis points or less. So we haven't seen a material change. And it's -- rates have been back down for a while now. So -- but take rate hasn't changed. The interest rates have not materially changed.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question comes from Andrew Jeffrey with SunTrust.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [30]

--------------------------------------------------------------------------------

Congratulations, Rebecca.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [31]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [32]

--------------------------------------------------------------------------------

I hope you're ready for colder winters. So it sounds like -- David and Gerry, it sounds like you've undertaken a fairly comprehensive review of risk, both -- I think mostly, I would think, sounds to me, on the contractor side, the merchant side. Can you talk about sort of how far through that process you are, whether there's been any trade-off between the contractor quality overall and growth? And if maybe, if we're nearing the end of that process, do you feel like we could see some acceleration just sort of maybe same-store sales, if I think about it that way?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [33]

--------------------------------------------------------------------------------

Yes. So I would expand what you've said. We've not -- we've taken a comprehensive review of risk, but it's not just on the merchant side. We've certainly worked very hard on expanding and diversifying the funding quite substantially. In addition, that funding structure dramatically changes the lack -- with lack of volatility on the tail. And yes, on the merchant side, we have focused heavily on profit and profitability and risk and customer satisfaction. And so we are now where we want to be. We're beginning to see the benefits of that. We do think that now that we have that behind us, that the back book is where we want it to be. And so we do think that there's those aspects of tailwind.

--------------------------------------------------------------------------------

Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [34]

--------------------------------------------------------------------------------

Okay. And just with regard -- Rob, it sounds like you alluded to in your comments perhaps an elevated level of investment and spend to support GreenSky's growth. Do you anticipate operating leverage -- and I'm thinking about the sort of mostly fixed-cost categories in OpEx, whether that be comp and benefits or G&A. Do we get leverage in '20?

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [35]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Chris Donat with Piper Sandler.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [37]

--------------------------------------------------------------------------------

Congratulations, Rebecca.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [38]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [39]

--------------------------------------------------------------------------------

Just one clarification on the timing of the strategic review. Do you mean that it will -- or you expect it to conclude by June 30 or March 31?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [40]

--------------------------------------------------------------------------------

June -- sorry, Q2. No later than the end of second -- our second fiscal quarter.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [41]

--------------------------------------------------------------------------------

Okay. Okay. And then looking at the -- I think I'll throw this one to Rob. Just on the financial guarantee liability and the CECL impact, as we think about it going forward, and I see the disclosure on Slide 18 and in the 10-K, can you give us, on a high level, sort of the puts and takes on what will cause that to move? What will -- will that be a function of the size of escrow? Is that what's going to be driving it? Or are there other factors that move it?

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Yes. Let me just kind of highlight. There was a -- CECL does kind of have this framework where it's, let's say, it's an unnatural presumption that all -- no new originations go into the Bank Partner portfolios. So escrow ends up being utilized as they wind down in a kind of draconian fashion. So first and foremost, all things being equal, if you had no growth in your servicing portfolio or growth in the Bank Partner portfolios and no growth in escrow, you would actually expect to see no real change in that CECL expense quarter-over-quarter because there'll be no real cash usage out of that.

So in larger terms, when you look forward, one of the things David highlighted with the new forward flow structure, there's no escrow associated with that. So with that, you'll see a portion of our originations and a portion of our growth in our servicing portfolio not go into Bank Partner structures with escrow but into these other structures. So while you would expect -- oh, as the escrow grows, you would expect there to be a CECL charge associated with that escrow growth. You should also expect a diminished growth in that escrow balances because we'll have more originations in these non-escrow Bank Partner structures. Does that make sense?

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [43]

--------------------------------------------------------------------------------

I think so. So -- but if you were to have, say, another situation where you have a Bank Partner and/or decrease, that causes the hit like you had in the fourth quarter, right? It was mostly the -- and the Regions? Or was it also the shrinkage of another relationship there?

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [44]

--------------------------------------------------------------------------------

That was driven by Regions and kind of -- if you will, the kind of -- I don't want to call it draconian, but the quick nature in which they kind of let their portfolio go into runoff versus kind of more of a typical orderly rundown of the portfolio, which is what we've seen in the past with Bank Partners.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [45]

--------------------------------------------------------------------------------

Okay. Got it on that one, at least I think. And then just thinking about the flow agreement and the gain on sale or potentially some discounts. Can you also talk about where -- like the different impacts from either loan types or other factors that will drive whether or not it's a gain or loss on sale just so we can start to get our heads around this one?

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [46]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [47]

--------------------------------------------------------------------------------

Yes. So when you say net, it's a net. It's a net. So for example, we originate $100. We might get a transaction fee of 7%. Depending on the investor's expected future cash flow, that $100 origination might be worth a 1% premium or 1% discount. And so we would net -- if we got 7% transaction fee and a par sale, we'd net 7%. The net equivalent of those 2 pieces are the same as the net equivalent of what our bank cost of funds is today, except there's no FCR, there's no escrow, there's no CECL, there's no tail liability or volatility.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [48]

--------------------------------------------------------------------------------

Right. And Dave, just to be clear, in terms of financial reporting, as long as you'll have the Bank Partner relationships, you will have some component of -- I mean, unless there's some change out there, but you'd still have the FCR liability and CECL impact for the Bank Partner side, right?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [49]

--------------------------------------------------------------------------------

No question. My comments on no escrow, no FCR are only in the context of this forward flow and would only apply to similar forward flow. Certainly, there are scenarios where GreenSky could provide non-GAAP reporting to translate it more simply for everybody. There's also the possibility of some of our banks moving to a different structure. But our objective, number one, is diversification of funding; and number two, providing a simpler P&L, which gets us on the path, too.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [50]

--------------------------------------------------------------------------------

Okay. Got it. And so then, the non-GAAP and the banks moving to a different structure are -- they're in the realm of the possible?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [51]

--------------------------------------------------------------------------------

True.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question comes from Ashwin Shirvaikar with Citi.

--------------------------------------------------------------------------------

Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Former Director [53]

--------------------------------------------------------------------------------

So I had a follow-up question on the forward flow piece of it. Does that have specific use cases, applications that are different than what you've been doing? I'd like to understand that piece a little bit better because as you might imagine, anytime someone says same returns, less risk or higher return, same risk, something like that, it does lead to a level of skepticism. So if you could delve into that a little bit more, I'd appreciate it.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [54]

--------------------------------------------------------------------------------

Gerry, why don't you speak to that?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [55]

--------------------------------------------------------------------------------

Sure, sure. So in these arrangements, we expect the counterparty to price the specific types of loans that would reflect the underlying cash flows. So if they're buying a reduced-rate loan, we expect that loan to be sold at a premium. If we're selling a deferred interest loan, where the cash flows from the ultimate consumer are perhaps abated or deferred, obviously the counterparty values those cash flows less. Those would sell at a discount. So when David says that the cost of funds will approximate our historic bank funding, we ran a pretty brief process, received multiple indications of interest and was pleasantly surprised by third-parties' view of the quality of these assets. And obviously, we will look to optimize our cost of funding based on what we sell into the forward flow arrangement, but I think, generally speaking, David's assertion that it will approximate bank cost over the life of the loan is an accurate statement.

--------------------------------------------------------------------------------

Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Former Director [56]

--------------------------------------------------------------------------------

Got it. Okay. No, that's helpful. A broader sort of macro question. Obviously, as the world's sort of grappling with the potentially widening impact of the virus and so on and so forth, will the -- there is a direct impact to you guys. But how are you guys thinking of potentially an indirect impact because of macro weakness or because of sort of a coordinated response, part of which might involve lowering of interest rates, things like that? Any early thoughts and framework or how you guys are thinking about this or any past history with regards to macro downs?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [57]

--------------------------------------------------------------------------------

Yes. So we've been in touch with many of our key relationships, manufacturers, merchants. And our first question was around supply chain disruption. And generally, what's been reported to us is confidence that, particularly in windows, majority is manufactured here, be -- there are no critical supply chain requirements from Asia and there are alternatives or ample inventory. So from a supply standpoint, we haven't heard from any of our key relationships any particular concerns. Again, that speaks to the particular industries that we're in. And certainly, we have not seen anything from a demand standpoint thus far. We're certainly well positioned to adapt and adjust if anything changes, but we certainly haven't seen any lagging indicators in the last few days or few weeks.

--------------------------------------------------------------------------------

Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Former Director [58]

--------------------------------------------------------------------------------

Got it. And Rebecca, congratulations on the new opportunity.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [59]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Our next question comes from Tien-Tsin Huang with JPMorgan.

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [61]

--------------------------------------------------------------------------------

Wanted to ask on the forward flow first like everyone else. How does -- just trying to understand one last thing. Just how is it going to fit the round robin model, again trying to understand how you'll tap this funding source versus your legacy funding model.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [62]

--------------------------------------------------------------------------------

Great question. This is just another member of the round robin. So, well, our existing bank network continues to want loans, and this will be another series of pegs in the round robin.

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [63]

--------------------------------------------------------------------------------

Right. So I know that you'll obviously learn as you go with discovery. But with the accounting implications probably being a benefit, I mean, I -- just trying to think about the economics versus the optics and everything else and how that fits. But we should just think about it as one more piece of it?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [64]

--------------------------------------------------------------------------------

Our -- yes. So look, our first objective is always ample and diverse funding, and we're really excited about that. The second objective is lifetime profit and cash. And then third objective is optics. We think that we can use this. The -- clearly, it does a wonderful job of all 3. We think we can use this and emulate this approach with other funding partnerships or use the same data to present information that we think will be more helpful to the public audience.

--------------------------------------------------------------------------------

Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [65]

--------------------------------------------------------------------------------

Understood. Got it. So then my second question, final question, let's say, is just on the volume. I heard the double-digit outlook. But I'm just curious, if you were asked, how would -- how should we benchmark your potential for volume growth going forward? What level would be satisfactory in your mind? You talked about still relatively immature or low penetration. Secular growth is still there. I know the funnel is somewhat changing both at the top and the bottom. But can you -- any outlook on how to benchmark it, originations?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [66]

--------------------------------------------------------------------------------

Gerry, you want to provide some additional clarity at this time?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [67]

--------------------------------------------------------------------------------

Yes. Sure. To David's point, our market share in these very, very large markets continues to be pretty modest, notwithstanding we've been growing $800 million, $900 million a year of originations. I think if you look at the growth in Q4 over the prior year where it was -- well, it was around high teens...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [68]

--------------------------------------------------------------------------------

Mid-teens.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [69]

--------------------------------------------------------------------------------

Mid-teens to high teens...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [70]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [71]

--------------------------------------------------------------------------------

That feels like a reasonable place to start as we look into the coming year. We've sort of gotten a little bit back to basics, focusing on credit quality, merchant quality and, to David's point, put a lot of investment in processes, systems, talent that's really paying dividends and will for years to come over the life of the servicing portfolio. With that will come a little bit less volume, no doubt. And as we point out and have consistently, we purposely have never relaxed underwriting standards to stimulate growth. Correspondingly, when you employ discipline and focus on merchant quality, credit quality and get back to basics, you'll have a little bit muted top line, I would suspect. So I think Q4 kind of growth is probably a reasonable proxy for what to expect as we look forward. I hope that's helpful.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Bill Ryan with Compass Point.

--------------------------------------------------------------------------------

William Haraway Ryan, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [73]

--------------------------------------------------------------------------------

Just a couple of questions. First, on the Regions portfolio. Obviously, you've disclosed it for a couple of quarters, but it -- within the possible category, not probable. What moved it to probable in the fourth quarter? And I may have missed the explanation on the call, but you've normally run these adjustments through the P&L, not as an adjusting item. And this quarter, you obviously put it as an adjusting item. If you can give a little clarity on that.

And then just the second question on the funding side. You kind of add up the $2.2 billion bank funding liquidity, $2.7 billion runoff, $2 billion from the forward flow agreement, you get to about $6.9 billion in terms of funding capacity for growth in '20 -- or originations in 2020. Do you feel -- how that fits. It seems like, I guess, the consensus number is about $7.1 billion in volume. So do you have to kind of add some partners during the course of the year and, more importantly, for the benefit of 2021 in terms of funding capacity?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [74]

--------------------------------------------------------------------------------

I'll take the funding and then I'll turn the Region's question and accounting back to Gerry and Rob.

On the funding side, we feel very good about the bank funding network, the existing open to buy as well as the increase from the paydowns. And if we wanted that number to be bigger, we think that there's plenty of demand, and we -- that number is exactly where we want it to be.

As it relates to 2021, we're going into next year already with what, at that point, would be $4 billion remaining on the forward flow. Again, if -- based on the process we ran, there was plenty of demand. This was just one relationship that we're launching with on the forward flow side. So we feel that we're in really good shape.

--------------------------------------------------------------------------------

Robert G. Partlow, GreenSky, Inc. - Executive VP & CFO [75]

--------------------------------------------------------------------------------

And I guess I'll jump in, this is Rob. Related to the question on the Regions.

As we noted in the 10-Qs in prior quarters, we certainly -- we're -- we kind of disclose the risk. In the first -- in the fourth quarter, in November, is when they actually did not renew. And that's kind of where we flipped the -- from being possible to probable in terms of the risk.

And from a location standpoint, as we've talked about in the past, most of our bank -- any of our smaller Bank Partners or Bank Partners who've ever left the program have always done it in kind of an orderly way in terms of allowing their portfolio to go into runoff or put solely -- do it in a mild manner, continue to originate and allow their portfolio to kind of decline over time or selling their portfolios or do another transactions which didn't result in any escrow usage. I mean when you look at this Regions kind of path, it was just kind of different and something we would expect kind of more unique in nature. And it certainly is a noncash item. So we look at that as kind of not representative of kind of our core business and how we're operating in 2019. It's kind of more of an anomaly. So when we think about kind of these measures, it's more about trying to represent kind of the earnings power of the company and what we're executing in 2019 versus kind of a one-off bank decision. And that was how we've made the decision on showing it as a -- as an adjustment to our pro forma net income.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

Our next question comes from Rob Wildhack with Autonomous Research.

--------------------------------------------------------------------------------

Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [77]

--------------------------------------------------------------------------------

Following up on the forward flow and round robin. Am I understanding it correctly that when the forward flow partner is out in the round robin, they get the loan, whether it's home improvement, elective health care, reduced rate, deferred interest? And what happens if you don't necessarily see eye to eye on the pricing? What if you think it's worth 101 and they priced it at 97? How does something like that resolve itself?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [78]

--------------------------------------------------------------------------------

So the first answer to your question is yes. And the second answer is we have agreed on price, and it is the equivalent of our bank cost of funding.

--------------------------------------------------------------------------------

Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [79]

--------------------------------------------------------------------------------

Got it. Okay. So it's (inaudible).

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [80]

--------------------------------------------------------------------------------

It's not an (inaudible). It's already been agreed to. It has an index no different than -- or similarly situated to our Bank Partners.

--------------------------------------------------------------------------------

Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [81]

--------------------------------------------------------------------------------

Is that something that can be amended annually? Or is that set for the entire 3-year agreement?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [82]

--------------------------------------------------------------------------------

Gerry, do you want to speak to that?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [83]

--------------------------------------------------------------------------------

Sure. Sure. We have reached pricing agreement, as David had indicated. This is the first of what we suspect will be multiple forward flow arrangements. The parties can always go back to the table and seek to renegotiate. It's not our intent. As we have gone in the marketplace, we saw and would suspect that there'll be opportunities where select counterparties may price a product differently than another counterparty. So we'll have the opportunity to optimize a bit. And I don't think that would jettison anyone. But generally speaking, we are looking to optimize our overall cost of funds, and we'll continue to, as would any counterparty.

--------------------------------------------------------------------------------

Operator [84]

--------------------------------------------------------------------------------

We will take our last question from Jason Kupferberg with Bank of America.

--------------------------------------------------------------------------------

Unidentified Analyst, [85]

--------------------------------------------------------------------------------

This is [David] on for Jason. Just real quick on the forward flow agreements. I just want to make sure. I think just similar to the last question about -- is there -- so all the different types of loans, there's not a specific type of loan or any kind of restriction on the types of loans you can put into that forward flow agreement?

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [86]

--------------------------------------------------------------------------------

No. The agreement...

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [87]

--------------------------------------------------------------------------------

The forward flow arrangement...

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [88]

--------------------------------------------------------------------------------

Sorry, David.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [89]

--------------------------------------------------------------------------------

Go ahead, Gerry.

--------------------------------------------------------------------------------

Gerald R. Benjamin, GreenSky, Inc. - Vice Chairman & Chief Administrative Officer [90]

--------------------------------------------------------------------------------

The agreement contemplates us selling our traditional reduced rate loans as well as our deferred interest loans and our 0 interest loans. There are partitions regarding amounts that reflect sort of our mix of origination, so nothing terribly unusual there. But in response to the prior question, just to be clear, swap rates and changes in swap rates are the underlying index that impact pricing. So we're playing in a level playing field or a market that people respect. And as we look from counterparty A to counterparty B, those underlying swap rates will impact our cost of funds, just like bank cost of funds impact us today and margin on swap rates. So nothing changes in that regard.

--------------------------------------------------------------------------------

Unidentified Analyst, [91]

--------------------------------------------------------------------------------

Got it. And then I wanted to go back to -- I think you mentioned a couple of times there's potential for some of your Bank Partners to do a similar type of arrangement where it's like actually a whole loan sale almost versus the current, which would obviously simplify your accounting and so on. But is this something that's in -- I guess, that you are in talks with and you're in discussions with your current partners in there? Or is this just a potential that you see? Does that make sense?

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [92]

--------------------------------------------------------------------------------

I would say it's a little bit of both. And I'll leave it at that.

--------------------------------------------------------------------------------

Unidentified Analyst, [93]

--------------------------------------------------------------------------------

Okay. And then just maybe just switching over just real quick. I was curious if you could just provide a little bit more color just in terms of what you're seeing in the market both from a merchant perspective. I appreciate that you guys have tightened underwriting maybe a little bit and, well, gone back to basics, as you said. But you still saw some -- a meaningful deceleration we've seen this year in the growth rates for this transaction volume. And I was just wondering if you could just talk a little bit more about that, what you're seeing and how we should think about that trending next year. That's all my questions.

--------------------------------------------------------------------------------

David Zalik, GreenSky, Inc. - CEO & Chairman [94]

--------------------------------------------------------------------------------

Yes. So I think Gerry provided some good direction. You saw growth rate in Q4. And from our perspective, as we keep getting bigger, the percentages get harder. But we've seen good consumer demand, good merchant demand. We're having excellent early vintages from a size standpoint just as our denominator keeps getting bigger. We -- it's harder to grow 50% when you're $6 billion, $7 billion. So we're seeing very good demand, and we feel good about the market in 2020 so far.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [95]

--------------------------------------------------------------------------------

Okay. I think that was our last question. Operator, is that correct?

--------------------------------------------------------------------------------

Operator [96]

--------------------------------------------------------------------------------

Yes, ma'am.

--------------------------------------------------------------------------------

Rebecca Gardy; Senior Vice President of Investor Relations, [97]

--------------------------------------------------------------------------------

Thank you. Thank you, everyone, for joining us. It's been a pleasure, and we hope everyone has a great day.

--------------------------------------------------------------------------------

Operator [98]

--------------------------------------------------------------------------------

With that, ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect. .