Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________

FORM 10-Q
ý
Quarterly REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38506
GreenSky, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
82-2135346
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5565 Glenridge Connector, Suite 700,
Atlanta, Georgia
 
30342
(Address of principal executive offices)
 
(Zip Code)
 
(678) 264-6105
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Trading Symbol
Name of exchange on which registered
Class A common stock, $0.01 par value
GSKY
Nasdaq Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Smaller reporting company o
Emerging growth company ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class of Common Stock
 
Outstanding as of July 31, 2019
Class A, $0.01 par value(1)
 
61,827,192
Class B, $0.001 par value(2)
 
115,277,714
(1) Includes 2,128,970 shares of unvested Class A common stock awards.
(2) Includes 1,581,595 shares of Class B common stock associated with unvested GreenSky Holdings, LLC units.



GreenSky, Inc.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, the outcome of our exploration of strategic alternatives, including the terms, structure and timing of any resulting transactions; our operations; our financial performance; and Bank Partner commitments. You generally can identify these statements by the use of words such as “outlook,” “potential,” “continue,” “may,” “seek,” “approximately,” “predict,” “believe,” “expect,” “plan,” “intend,” “estimate” or “anticipate” and similar expressions or the negative versions of these words or comparable words, as well as future or conditional verbs such as “will,” “should,” “would,” “likely” and “could.” These statements may be found under Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks described under Part II, Item 1A “Risk Factors" of this Form 10-Q. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.



PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GreenSky, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(United States Dollars in thousands, except share data)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
209,176

 
$
303,390

Restricted cash
200,252

 
155,109

Loan receivables held for sale, net
2,798

 
2,876

Accounts receivable, net
22,622

 
15,400

Related party receivables
100

 
142

Property, equipment and software, net
14,194

 
10,232

Operating lease right-of-use assets
12,895

 

Deferred tax assets, net
359,969

 
306,979

Other assets
18,863

 
8,777

Total assets
$
840,869

 
$
802,905

 
 
 
 
Liabilities and Equity (Deficit)
 
 
 
Liabilities
 
 
 
Accounts payable
$
14,430

 
$
5,357

Accrued compensation and benefits
6,858

 
8,484

Other accrued expenses
1,308

 
1,015

Finance charge reversal liability
164,979

 
138,589

Term loan
385,662

 
386,822

Tax receivable agreement liability
303,233

 
260,901

Related party liabilities

 
825

Operating lease liabilities
15,761

 

Other liabilities
45,396

 
35,677

Total liabilities
937,627

 
837,670

 
 
 
 
       Commitments, Contingencies and Guarantees (Note 14)

 

 
 
 
 
Equity (Deficit)
 
 
 
Class A common stock, par value $0.01 and 75,356,311 shares issued and 61,772,014 shares outstanding at June 30, 2019 and 59,197,863 shares issued and 54,504,902 shares outstanding at December 31, 2018
753

 
591

Class B common stock, par value $0.001 and 115,309,728 and 128,549,555 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
116

 
129

Additional paid-in capital
118,382

 
44,524

Retained earnings
39,163

 
24,218

Treasury stock
(146,119
)
 
(43,878
)
Accumulated other comprehensive income (loss)
(558
)
 

Noncontrolling interest
(108,495
)
 
(60,349
)
Total equity (deficit)
(96,758
)
 
(34,765
)
Total liabilities and equity (deficit)
$
840,869

 
$
802,905




The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(United States Dollars in thousands, except per share data)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019

2018
 
2019
 
2018
Revenue
 

 
 
 
 
 
Transaction fees
$
108,365


$
90,197

 
$
192,413

 
$
161,137

Servicing and other
30,330


15,507

 
49,982

 
29,893

Total revenue
138,695


105,704

 
242,395

 
191,030

Costs and expenses
 

 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
56,228


33,765

 
114,265

 
69,895

Compensation and benefits
20,459


15,585

 
40,092

 
31,928

Sales and marketing
1,187


1,038

 
2,390

 
1,866

Property, office and technology
4,512


3,137

 
8,926

 
5,859

Depreciation and amortization
1,695


1,067

 
3,162

 
2,037

General and administrative
7,519


4,074

 
14,441

 
8,247

Related party expenses
589


230

 
1,125

 
813

Total costs and expenses
92,189


58,896

 
184,401

 
120,645

Operating profit
46,506

 
46,808

 
57,994

 
70,385

Other income (expense), net
 

 
 
 
 
 
Interest and dividend income
869


1,482

 
2,465

 
2,802

Interest expense
(6,323
)

(5,787
)
 
(12,566
)
 
(11,378
)
Other gains (losses)
(6,325
)

(93
)
 
(6,360
)
 
(795
)
Total other income (expense), net
(11,779
)

(4,398
)
 
(16,461
)
 
(9,371
)
Income before income tax expense (benefit)
34,727

 
42,410

 
41,533

 
61,014

Income tax expense (benefit)
(4,466
)

1,594

 
(5,061
)
 
1,594

Net income
$
39,193


$
40,816

 
$
46,594

 
$
59,420

Less: Net income attributable to noncontrolling interests
26,877


35,266

 
31,379

 
53,870

Net income attributable to GreenSky, Inc.
$
12,316

 
$
5,550

 
$
15,215

 
$
5,550

 
 
 
 
 
 
 
 
Earnings per share of Class A common stock(1):
 

 
 
 
 
 
Basic
$
0.20


0.10

 
$
0.26

 
$
0.10

Diluted
$
0.19

 
0.09

 
$
0.23

 
$
0.09



(1) 
For the three and six months ended June 30, 2018, basic and diluted earnings per share of Class A common stock is applicable only for the period from May 24, 2018 through June 30, 2018, which is the period following the initial public offering ("IPO") and related Reorganization Transactions (as defined in Note 1 to the Unaudited Condensed Consolidated Financial Statements). See Note 2 to the Unaudited Condensed Consolidated Financial Statements for the number of shares used in the computation of earnings per share of Class A common stock and the basis for the computation of earnings per share.







The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(United States Dollars in thousands)

 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
39,193

 
$
40,816

 
$
46,594

 
$
59,420

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net unrealized gains (losses) on interest rate swap arising during the period
(1,949
)
 

 
(1,949
)
 

Other comprehensive income (loss), net of tax
(1,949
)
 

 
(1,949
)
 

Comprehensive income
37,244

 
40,816

 
44,645

 
59,420

Less: Comprehensive income attributable to noncontrolling interests
25,486

 
35,266

 
29,988

 
53,870

Comprehensive income attributable to GreenSky, Inc.
$
11,758

 
$
5,550

 
$
14,657

 
$
5,550





































The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.



6



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) (Unaudited)
(United States Dollars in thousands, except share data)

 
GreenSky, Inc. Stockholders Equity
 
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Total
Balance at March 31, 2019
62,151,547

119,187,862

$
711

$
119

$
80,543

$
27,030

$
(94,828
)
$

$
(86,835
)
$
(73,260
)
Net income





12,316



26,877

39,193

Cumulative effect of accounting change(1)





(59
)


(137
)
(196
)
Issuance of unvested Class A common stock awards
480,032


5


(5
)





Class A common stock option exercises
153,865


2


(860
)




(858
)
Class B common stock exchanges
3,552,029

(3,625,399
)
35

(3
)
(1,095
)




(1,063
)
Forfeited share-based compensation awards
(102,426
)
(252,735
)








Class A common stock repurchases
(4,463,033
)





(51,291
)


(51,291
)
Distributions





(124
)


(13,096
)
(13,220
)
Share-based compensation




3,271





3,271

Equity-based payments to non-employees




4





4

Tax adjustments




2,611





2,611

Impact of noncontrolling interest on change in ownership during period




33,913




(33,913
)

Other comprehensive income (loss), net of tax







(558
)
(1,391
)
(1,949
)
Balance at June 30, 2019
61,772,014

115,309,728

$
753

$
116

$
118,382

$
39,163

$
(146,119
)
$
(558
)
$
(108,495
)
$
(96,758
)


(1) 
Represents an adjustment to the cumulative effect resulting from our adoption of the Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases. See Note 1 to the Unaudited Condensed Consolidated Financial Statements for additional information on our lease guidance implementation.

























The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


7



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) (Continued) (Unaudited)
(United States Dollars in thousands, except share data)

 
GreenSky, Inc. Stockholders Equity
 
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Total
Balance at January 1, 2019
54,504,902

128,549,555

$
591

$
129

$
44,524

$
24,218

$
(43,878
)
$

$
(60,349
)
$
(34,765
)
Net income





15,215



31,379

46,594

Cumulative effect of accounting change(1)





(87
)


(203
)
(290
)
Issuance of unvested Class A common stock awards
1,873,512


19


(19
)





Class A common stock option exercises
281,292


3


(1,263
)




(1,260
)
Class B common stock exchanges
14,003,645

(14,146,255
)
140

(14
)
(1,931
)




(1,805
)
Class B warrant exercises

1,180,163


1

(1
)





Forfeited share-based compensation awards
(146,860
)
(273,735
)








Class A common stock repurchases
(8,744,477
)





(102,241
)


(102,241
)
Distributions





(183
)


(13,941
)
(14,124
)
Share-based compensation




5,936





5,936

Equity-based payments to non-employees




7





7

Tax adjustments




7,139





7,139

Impact of noncontrolling interest on change in ownership during period




63,990




(63,990
)

Other comprehensive income (loss), net of tax







(558
)
(1,391
)
(1,949
)
Balance at June 30, 2019
61,772,014

115,309,728

$
753

$
116

$
118,382

$
39,163

$
(146,119
)
$
(558
)
$
(108,495
)
$
(96,758
)


(1) 
Represents the cumulative effect resulting from our adoption of the Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases. See Note 1 to the Unaudited Condensed Consolidated Financial Statements for additional information on our lease guidance implementation.
























The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

8




GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) (Continued) (Unaudited)
(United States Dollars in thousands, except share data)

 
GreenSky Holdings, LLC (Prior to Reorganization Transactions)
GreenSky, Inc. Stockholders Equity
 
Additional Paid-in Capital
Retained Earnings
Total Permanent Equity (Deficit)
Temporary
Equity
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Noncontrolling Interest
Total
Balance at March 31, 2018
$
(553,901
)
$
99,029

$
(454,872
)
$
430,348



$

$

$

$

$

$
(24,524
)
Activity prior to and including Reorganization Transactions
 
 
 
 
 
 
 
 
 
 
 
 
Net income

19,609

19,609









19,609

Issuances
339


339









339

Redemptions
(496
)

(496
)








(496
)
Distributions
(37,980
)
(38,909
)
(76,889
)
(16,358
)







(93,247
)
Share-based compensation
1,131


1,131









1,131

Equity-based payments to non-employees
2


2









2

Effect of Reorganization Transactions
590,905

(79,729
)
511,176

(413,990
)
15,816,268


158


(97,344
)



Activity in connection with IPO
 
 
 
 
 
 
 
 
 
 
 
 
Issuances of Class A common stock, net of costs




43,700,000


437


950,553



950,990

Issuances of Class A common stock effective on date of IPO




434,783


4


(4
)



Issuances of Class B common stock





128,983,353


129




129

Purchases of GreenSky Holding, LLC units








(901,833
)


(901,833
)
Purchases of Class A common stock




(2,426,198
)

(24
)

(52,988
)


(53,012
)
Class A common stock option exercises




125,398


1


(1
)



Initial effect of the Reorganization Transactions and IPO on noncontrolling interest








69,299


(69,299
)

Deferred tax adjustments








47,129



47,129

Activity subsequent to Reorganization Transactions and IPO
 
 
 
 
 
 
 
 
 
 
 
 
Net income









5,550

15,657

21,207

Distributions









(68
)
(14,537
)
(14,605
)
Share-based compensation








719



719

Equity-based payments to non-employees








2



2

Impact on noncontrolling interest of change in ownership during period








(159
)

159


Balance at June 30, 2018
$

$

$

$

57,650,251

128,983,353

$
576

$
129

$
15,373

$
5,482

$
(68,020
)
$
(46,460
)














The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.


9



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) (Continued) (Unaudited)
(United States Dollars in thousands, except share data)

 
GreenSky Holdings, LLC (Prior to Reorganization Transactions)
GreenSky, Inc. Stockholders Equity
 
Additional Paid-in Capital
Retained Earnings
Total Permanent Equity (Deficit)
Temporary
Equity
Class A Shares
Class B Shares
Class A Amount
Class B Amount
Additional Paid-in Capital
Retained Earnings
Noncontrolling Interest
Total
Balance at January 1, 2018
$
(554,906
)
$
98,519

$
(456,387
)
$
430,348



$

$

$

$

$

$
(26,039
)
Activity prior to and including Reorganization Transactions
 
 
 
 
 
 
 
 
 
 
 
 
Net income

38,213

38,213









38,213

Issuances
339


339









339

Redemptions
(496
)

(496
)








(496
)
Distributions
(37,980
)
(57,003
)
(94,983
)
(16,358
)







(111,341
)
Share-based compensation
2,132


2,132









2,132

Equity-based payments to non-employees
6


6









6

Effect of Reorganization Transactions
590,905

(79,729
)
511,176

(413,990
)
15,816,268


158


(97,344
)



Activity in connection with IPO
 
 
 
 
 
 
 
 
 
 
 
 
Issuances of Class A common stock, net of costs




43,700,000


437


950,553



950,990

Issuances of Class A common stock effective on date of IPO




434,783


4


(4
)



Issuances of Class B common stock





128,983,353


129




129

Purchases of GreenSky Holding, LLC units








(901,833
)


(901,833
)
Purchases of Class A common stock




(2,426,198
)

(24
)

(52,988
)


(53,012
)
Class A common stock option exercises




125,398


1


(1
)



Initial effect of the Reorganization Transactions and IPO on noncontrolling interest








69,299


(69,299
)

Deferred tax adjustments








47,129



47,129

Activity subsequent to Reorganization Transactions and IPO
 
 

 
 
 
 
 
 
 
 
 
Net income









5,550

15,657

21,207

Distributions









(68
)
(14,537
)
(14,605
)
Share-based compensation








719



719

Equity-based payments to non-employees








2



2

Impact on noncontrolling interest of change in ownership during period








(159
)

159


Balance at June 30, 2018
$

$

$

$

57,650,251

128,983,353

$
576

$
129

$
15,373

$
5,482

$
(68,020
)
$
(46,460
)















The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

10



GreenSky, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(United States Dollars in thousands)
 
Six Months Ended June 30,
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
46,594

 
$
59,420

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,162

 
2,037

Share-based compensation expense
5,936


2,851

Equity-based payments to non-employees
7


8

Operating lease liability payments
(143
)

(193
)
Amortization of debt related costs
840


840

Fair value change in servicing assets and liabilities
(8,635
)

201

Original issuance discount on term loan payment
(21
)

(10
)
Deferred tax expense (benefit)
(5,061
)
 
1,594

Loss on remeasurement of tax receivable agreement liability
6,383

 

Changes in assets and liabilities:
 
 
 
(Increase) decrease in loan receivables held for sale
78

 
30,116

(Increase) decrease in accounts receivable
(7,375
)
 
(2,065
)
(Increase) decrease in related party receivables
42

 
182

(Increase) decrease in other assets
(870
)
 
3,619

Increase (decrease) in accounts payable
9,378

 
(1,217
)
Increase (decrease) in finance charge reversal liability
26,390

 
12,899

Increase (decrease) in related party liabilities

 
(1,044
)
Increase (decrease) in other liabilities
13,084

 
366

Net cash provided by operating activities
89,789

 
109,604

Cash flows from investing activities
 
 
 
Purchases of property, equipment and software
(7,123
)

(2,707
)
Net cash used in investing activities
(7,123
)
 
(2,707
)
Cash flows from financing activities
 
 
 
Proceeds from IPO, net of underwriters discount and commissions

 
954,845

Purchases of GreenSky Holdings, LLC units

 
(901,833
)
Purchases of Class A common stock

 
(53,012
)
Issuances of Class B common stock

 
129

Redemptions of GreenSky Holdings, LLC units prior to Reorganization Transactions

 
(496
)
Proceeds from term loan

 
399,000

Repayments of term loan
(1,979
)
 
(350,115
)
Member distributions
(17,757
)
 
(127,640
)
Payments under tax receivable agreement
(4,664
)
 

Class A common stock repurchases
(104,272
)
 

Equity option exercises prior to Reorganization Transactions

 
339

Payment of IPO related expenses

 
(2,749
)
Payment of equity transaction expenses, prior to Reorganization Transactions

 
(32
)
Payment of taxes on Class B common stock exchanges
(1,805
)
 

Proceeds from option exercises
290

 

Payment of option exercise taxes
(1,550
)
 

Net cash used in financing activities
(131,737
)
 
(81,564
)
Net increase (decrease) in cash and cash equivalents and restricted cash
(49,071
)
 
25,333

Cash and cash equivalents and restricted cash at beginning of period
458,499

 
353,838

Cash and cash equivalents and restricted cash at end of period
$
409,428

 
$
379,171

 
 
 
 
Supplemental non-cash financing activities
 
 
 
Equity transaction costs accrued but not paid
$

 
$
1,106

Distributions accrued but not paid
7,105

 
11,493


The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

11

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars in thousands, except per share data, unless otherwise stated)


Note 1. Organization, Summary of Significant Accounting Policies and New Accounting Standards
Organization
Unless the context requires otherwise, "we," "us," "our," "GreenSky" and "the Company" refer to the business of GreenSky, Inc. and its subsidiaries. "Bank Partners" are defined as federally insured banks that originate loans under the GreenSky program and any other lenders with respect to those loans.
We are a leading technology company Powering Commerce at the Point of Sale®. Our platform is powered by a proprietary technology infrastructure that facilitates merchant sales, while reducing the friction and improving the economics associated with a consumer making a purchase and a bank extending financing for that purchase. It supports the full transaction lifecycle, including credit application, underwriting, real-time allocation to our Bank Partners, document distribution, funding, settlement and servicing. Merchants using our platform, which presently range from small, owner-operated home improvement contractors and healthcare providers to large national home improvement brands and retailers and healthcare service organizations, rely on us to facilitate low or deferred interest promotional point-of-sale financing and payments solutions that enable higher sales volume. Consumers on our platform, who to date primarily have super-prime or prime credit scores, find financing with promotional terms to be an attractive alternative to other forms of payment. Our Bank Partners' access to our proprietary technology solution and merchant network enables them to build a diversified portfolio of high quality consumer loans with attractive risk-adjusted yields with minimal upfront investment.
GreenSky, Inc. was formed as a Delaware corporation on July 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 below, in order to carry on the business of GreenSky Holdings, LLC (“GS Holdings”) and its consolidated subsidiaries. GS Holdings, a holding company with no operating assets or operations, was organized in August 2017. On August 24, 2017, GS Holdings acquired a 100% interest in GreenSky, LLC ("GSLLC"), a Georgia limited liability company, which is an operating entity. Common membership interests of GS Holdings are referred to as "Holdco Units."
Immediately prior to our IPO, (i) the operating agreement of GS Holdings (the "GS Holdings Agreement") was amended and restated to, among other things, modify its capital structure by replacing the different classes of membership interests and profits interests with Holdco Units; (ii) we issued to each of the Continuing LLC Members (as defined below) a number of shares of GreenSky, Inc. Class B common stock equal to the number of Holdco Units held by it (other than the Holdco Units that were exchanged in connection with the IPO), for consideration in the amount of $0.001 per share of Class B common stock; (iii) certain Holdco Units were contributed to GreenSky, Inc. in exchange for shares of our Class A common stock; (iv) equity holders of the Former Corporate Investors (as defined below) contributed their equity in the Former Corporate Investors to GreenSky, Inc. in exchange for shares of our Class A common stock and the right to certain payments under the Tax Receivable Agreement (“TRA”), and Former Corporate Investors merged with and into subsidiaries of GreenSky, Inc.; (v) outstanding options to acquire Class A units of GS Holdings were equitably adjusted so that they are exercisable for shares of Class A common stock; and (vi) outstanding warrants to acquire Class A units of GS Holdings were equitably adjusted pursuant to their terms so that they are exercisable for Holdco Units (and an equal number of shares of Class B common stock). We refer to these transactions collectively as the “Reorganization Transactions.”
Following the Reorganization Transactions, the "Original GS Equity Owners" (other than the Former Corporate Investors) and certain "Original Profits Interests Holders," which we collectively refer to as the "Continuing LLC Members," continue to own Holdco Units. "Original GS Equity Owners" refers to the owners of units of GS Holdings prior to the Reorganization Transactions. "Former Corporate Investors" refers to certain of the Original GS Equity Owners that merged with and into one or more subsidiaries of GreenSky, Inc. in connection with the Reorganization Transactions, which was accounted for as a common control transaction and had no material impact on the net assets of the Company. "Original Profits Interests Holders" refers to the owners of profits interests in GS Holdings prior to the Reorganization Transactions.

12

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


On May 24, 2018, the Company's Class A common stock commenced trading on the Nasdaq Global Select Market in connection with its IPO of 43,700,000 shares of its Class A common stock at a public offering price of $23.00 per share, receiving approximately $954.8 million in net proceeds, after deducting underwriting discounts and commissions (but not including other offering costs), which were used to purchase 2,426,198 shares of Class A common stock and 41,273,802 newly-issued Holdco Units at a price per unit equal to the price per share of Class A common stock sold in the IPO, less underwriting discounts and commissions. The newly-issued Holdco Units were sold by Continuing LLC Members, which we also refer to as "Exchanging Members." Pursuant to an "Exchange Agreement," the Exchanging Members can exchange their Holdco Units (with automatic cancellation of an equal number of shares of Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments, or for cash (based on the market price of the shares of Class A common stock), at our option (such determination to be made by the disinterested members of our board of directors).
The IPO and Reorganization Transactions resulted in the Company becoming the sole managing member of GS Holdings. As the sole managing member of GS Holdings, we operate and control all of GS Holdings’ operations and, through GS Holdings and its subsidiaries, conduct GS Holdings’ business.
The Company consolidates the financial results of GS Holdings and reports a noncontrolling interest in its Unaudited Condensed Consolidated Financial Statements representing the GS Holdings interests held by Continuing LLC Members. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income (loss) to the Company and the noncontrolling interest. During the three and six months ended June 30, 2019, the Company had a weighted average ownership interest in GS Holdings of 34.7% and 33.4%, respectively.
Summary of Significant Accounting Policies
Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements were prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial statements. We condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these interim statements should be read in conjunction with the GreenSky, Inc. 2018 Form 10-K filed with the SEC on March 15, 2019. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of our financial condition and results of operations for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2018, was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements required by United States generally accepted accounting principles ("GAAP"). All intercompany balances and transactions are eliminated upon consolidation. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, share-based compensation and income taxes. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.

13

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Unaudited Condensed Consolidated Balance Sheets to the total included within the Unaudited Condensed Consolidated Statements of Cash Flows as of the dates indicated.
 
June 30,
 
2019
 
2018
Cash and cash equivalents
$
209,176

 
$
236,629

Restricted cash
200,252

 
142,542

Cash and cash equivalents and restricted cash in Unaudited Condensed Consolidated Statements of Cash Flows
$
409,428

 
$
379,171

Fair Value of Assets and Liabilities
We have financial assets and liabilities subject to fair value measurement or disclosure on either a recurring or nonrecurring basis. Such measurements or disclosures relate to our cash and cash equivalents, loan receivables held for sale, derivative instruments, servicing assets and liabilities, and term loan.
ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In valuing this asset or liability, we utilize market data or reasonable assumptions that market participants would use, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The guidance provides a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or a liability as of the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Unobservable inputs for the asset or liability.
An asset’s or a liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
We apply the market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities, to value our cash and cash equivalents and loan receivables held for sale. We apply the income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount, to value our finance charge reversal liability and servicing assets and liabilities. We determine the fair values of our interest rate swap and term loan by applying a discounted cash flow model based on observable market factors and credit factors specific to us.
Refer to Note 3 for additional fair value disclosures.
Derivative Instruments
We are exposed to interest rate risk on our variable-rate term loan, which we manage by entering into an interest rate swap that is determined to be a derivative in accordance with ASC 815, Derivatives and Hedging. Derivatives are recorded on the balance sheet at fair value and are marked-to-market on a quarterly basis. The accounting for the change in fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate the derivative as a hedge and apply hedge accounting, and whether the hedging relationship continues to satisfy the criteria required to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to variability in cash flows of a recognized asset or liability that is attributable to a particular risk are considered cash flow hedges. The primary purpose of cash

14

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


flow hedge accounting is to link the income statement recognition of a hedging instrument and a hedged item whose changes in cash flows are expected to offset each other. The change in the fair value of the derivative instrument designated as a cash flow hedge is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings in the same period when the hedged item affects earnings. The reclassification into earnings is reported in the same income statement line item in which the hedged item is reported. To the extent that the hedge is ineffective, the amount deferred in other comprehensive income (loss) may not exactly offset the earnings impact of the hedged item.
Refer to Note 3 and Note 8 for additional derivative disclosures.
Revenue Recognition
Disaggregated revenue
Revenue disaggregated by type of service was as follows for the periods presented:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Merchant fees
$
96,127

 
$
75,576

 
$
170,221

 
$
134,941

Interchange fees
12,238

 
14,621

 
22,192

 
26,196

Transaction fees
108,365

 
90,197

 
192,413

 
161,137

Servicing fees(1)
30,318

 
15,458

 
49,951

 
29,789

Other(2)
12

 
49

 
31

 
104

Servicing and other
30,330

 
15,507

 
49,982

 
29,893

Total revenue
$
138,695

 
$
105,704

 
$
242,395

 
$
191,030

(1) 
For the three and six months ended June 30, 2019, includes a $8,966 change in fair value of our servicing assets primarily associated with an increase to the contractually specified fixed servicing fee for one of our Bank Partners. Refer to Note 3 for additional information.
(2) 
Other revenue includes miscellaneous revenue items that are individually immaterial. Other revenue is presented separately herein in order to clearly present merchant, interchange and servicing fees, which are more integral to our primary operations and better enable financial statement users to calculate metrics such as servicing and merchant fee yields.
We have no remaining performance obligations as of June 30, 2019. No assets were recognized from the costs to obtain or fulfill a contract with a customer as of June 30, 2019 or December 31, 2018. Volume-based price concessions to merchants and other channel partners that were netted against the gross transaction price were $3,198 and $1,100 during the three months ended June 30, 2019 and 2018, respectively, and $9,106 and $5,693 during the six months ended June 30, 2019 and 2018, respectively. We recognized bad debt expense arising from our contracts with customers of $387 and $227 during the three months ended June 30, 2019 and 2018, respectively, and $596 and $1,225 during the six months ended June 30, 2019 and 2018, respectively, which is recorded within general and administrative expense in our Unaudited Condensed Consolidated Statements of Operations.
Recently Adopted Accounting Standards
Leases    
In February 2016, the FASB issued ASU 2016-02, which required the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases with terms greater than 12 months on our Unaudited Condensed Consolidated Balance Sheets. Presentation of leases within our Unaudited Condensed Consolidated Statements of Operations and Unaudited Condensed Consolidated Statements of Cash Flows was generally consistent with the prior lease accounting guidance codified in ASC 840, Leases. In July 2018, the FASB issued ASU 2018-11, which provided an additional (and optional) transition method to adopt ASU 2016-02 by applying its provisions at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the

15

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


period of adoption, rather than applying the provisions at the beginning of the earliest period presented in the financial statements.
We adopted the standard as of January 1, 2019 with the transition method outlined in ASU 2018-11, recognizing a cumulative-effect adjustment to retained earnings as of that date. Comparative periods continue to be presented and disclosed in accordance with legacy guidance in ASC 840. We applied the practical expedients permitted under the transition guidance outlined in ASU 2018-11, which permitted us to not reassess the following: (i) whether any expired or existing contracts are or contain a lease, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases.
As a result of adopting this standard, we recorded a ROU asset of $11.3 million, a lease liability of $14.1 million and an immaterial cumulative-effect adjustment to equity as of January 1, 2019. Our adoption of this standard did not have any impact on our Unaudited Condensed Consolidated Statements of Operations.
See Note 14 for additional lease disclosures.
Improvements to non-employee share-based payment accounting
In June 2018, the FASB issued ASU 2018-07 to simplify certain aspects of the accounting for non-employee share-based payment transactions. Under the new standard, all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards are within the scope of ASC 718. Consistent with the accounting requirement for employee share-based payment awards, non-employee share-based payment awards within the scope of ASC 718 are measured at grant date fair value of the equity instruments, and the requirement to reassess classification of non-employee share-based payment awards upon vesting is eliminated. Our adoption of this standard on January 1, 2019 did not have any impact on our Unaudited Condensed Consolidated Financial Statements.    
Accounting Standards Issued, But Not Yet Adopted
Measurement of credit losses on financial instruments
In June 2016, the FASB issued ASU 2016-13, which is intended to better align the timing of recognition of credit losses on financial instruments with management’s expectations. The standard requires a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. Management must determine expected credit losses for all financial instruments held at the reporting date based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts, the latter of which broadens current guidance. The standard requires enhanced disclosures to help investors and other financial statement users to better understand the significant estimates and judgments used in estimating credit losses. The standard is effective for us on January 1, 2020, with early adoption permitted. The majority of this standard's provisions must be applied using a modified retrospective approach. We are currently evaluating the potential impact of adopting this standard.
Customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract
In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. This standard also requires entities to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and to apply the existing impairment guidance in ASC 350-40 to the capitalized implementation costs as if the costs were long-lived assets. The standard clarifies that such capitalized implementation costs are also subject to the guidance on abandonment in ASC 360, Property, Plant, and Equipment.

16

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


In addition, this standard requires alignment in presentation between: (1) the expense related to the capitalized implementation costs and the fees associated with the hosting element (service) of the arrangement on the statement of operations; (2) the capitalized implementation costs and any prepayment for the fees of the associated hosting arrangement on the balance sheet; and (3) the payments for capitalized implementation costs and the payments made for fees associated with the hosting element in the statement of cash flows. The standard is effective for us on January 1, 2020, with early adoption permitted, and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are refining our inventory of existing cloud computing arrangements to identify hosting arrangements that are service contracts and will evaluate how to account for the implementation costs of such arrangements.
Note 2. Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GreenSky, Inc., adjusted for the assumed exchange of all potentially dilutive Holdco Units for Class A common stock, by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive elements.
Prior to the IPO, the GS Holdings membership structure included Class A, B and C Units and profits interests. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these Unaudited Condensed Consolidated Financial Statements. Therefore, the basic and diluted earnings per share for the three and six months ended June 30, 2018 represent only the period from May 24, 2018 to June 30, 2018, the period wherein we had outstanding Class A common stock.


17

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the periods indicated.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Income before income tax expense
$
34,727

 
$
42,410

 
$
41,533

 
$
61,014

Less: Net income attributable to GS Holdings prior to Reorganization Transactions

 
19,609

 

 
38,213

Less: Net income attributable to noncontrolling interests after Reorganization Transactions
26,877

 
15,657

 
31,379

 
15,657

Less: Income tax expense (benefit)
(4,466
)
 
1,594

 
(5,061
)
 
1,594

Net income attributable to GreenSky, Inc. – basic
$
12,316

 
$
5,550

 
$
15,215

 
$
5,550

Add: Reallocation of net income attributable to noncontrolling interests from the assumed exchange of common units of GS Holdings for Class A common stock
26,877

 
15,657

 
31,379

 
15,657

Less: Income tax expense (benefit) on reallocation of net income attributable to noncontrolling interests(1)
5,928

 
3,493

 
4,561

 
3,493

Net income attributable to GreenSky, Inc. – diluted
$
33,265

 
$
17,714

 
$
42,033

 
$
17,714

Denominator:
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding – basic
61,081,834

 
57,399,632

 
59,523,049

 
57,399,632

Add: Dilutive effects, as shown separately below
 
 
 
 
 
 
 
Holdco Units exchangeable for Class A common stock
115,939,261

 
128,257,580

 
119,405,831

 
128,257,580

Class A common stock options
2,435,080

 
2,479,889

 
2,677,026

 
2,479,889

Holdco warrants exchangeable for Class A common stock

 
563,458

 
164,016

 
563,458

Unvested Class A common stock(2)
243,746

 
189,363

 
185,371

 
189,363

Weighted average shares of Class A common stock outstanding – diluted
179,699,921

 
188,889,922

 
181,955,293

 
188,889,922

 
 
 
 
 
 
 
 
Earnings per share of Class A common stock outstanding – basic
$
0.20

 
$
0.10

 
$
0.26

 
$
0.10

Earnings per share of Class A common stock outstanding – diluted
$
0.19

 
$
0.09

 
$
0.23

 
$
0.09

 
 
 
 
 
 
 
 
Excluded from diluted earnings per share, as their inclusion would have been anti-dilutive(3)
 
 
 
 
 
 
 
Class A common stock options
2,806,641

 
472,500

 
2,806,641

 
472,500

Unvested Class A common stock
360,847

 

 
360,847

 

(1)
We assumed effective tax rates of 4.2% and 22.3% for the three months ended June 30, 2019 and 2018, respectively, and (1.2)% and 22.3% for the six months ended June 30, 2019 and 2018, respectively, which represent the effective tax rates on the consolidated GreenSky, Inc. entity inclusive of the income taxes on the portion of GS Holdings' earnings that are attributable to noncontrolling interests. The rates for the three and six months ended June 30, 2019 are reflective of the tax benefits from remeasurement of net deferred tax assets, warrant exercises and stock-based compensation deductions.
(2)
Includes both unvested Class A common stock issued as part of the Reorganization Transactions and unvested Class A common stock awards issued subsequent to the Reorganization Transactions.
(3) 
These amounts represent the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce these amounts if they had a dilutive effect and were included in the computation of diluted earnings per share.
Shares of the Company’s Class B common stock do not participate in the earnings or losses of the Company and, therefore, are not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.


18

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


Note 3. Fair Value of Assets and Liabilities
The following table summarizes, by level within the fair value hierarchy, the carrying amounts and estimated fair values of our assets and liabilities measured at fair value on a recurring or nonrecurring basis or disclosed, but not carried, at fair value in the Unaudited Condensed Consolidated Balance Sheets as of the dates presented. There were no transfers into, out of, or between levels within the fair value hierarchy during any of the periods presented. Refer to Note 4, Note 7, Note 8 and Note 9 for additional information on these assets and liabilities.
 
Level
 
June 30, 2019
 
December 31, 2018
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
1
 
$
209,176

 
$
209,176

 
$
303,390

 
$
303,390

Loan receivables held for sale, net(2)
2
 
2,798

 
3,299

 
2,876

 
3,552

Servicing assets(3)
3
 
8,966

 
8,966

 

 

Liabilities:
 
 
 
 
 
 
 
 
 
Finance charge reversal liability(3)
3
 
$
164,979

 
$
164,979

 
$
138,589

 
$
138,589

Term loan(1)
2
 
385,662

 
394,134

 
386,822

 
386,234

Interest rate swap(3)
2
 
2,125

 
2,125

 

 

Servicing liabilities(3)
3
 
3,347

 
3,347

 
3,016

 
3,016

(1) 
Disclosed, but not carried, at fair value.
(2) 
Measured at fair value on a nonrecurring basis.
(3) 
Measured and carried at fair value on a recurring basis.
Cash and cash equivalents
Cash and cash equivalents are classified within Level 1 of the fair value hierarchy, as the primary component of the price is obtained from quoted market prices in an active market. The carrying amounts of our cash and cash equivalents approximate their fair values due to the short maturities and highly liquid nature of these accounts.
Loan receivables held for sale, net
Loan receivables held for sale are recorded in the Unaudited Condensed Consolidated Balance Sheets at the lower of cost or fair value and, therefore, are measured at fair value on a nonrecurring basis. For our loan receivables held for sale, fair value approximates par value, as we have consistently sold loans for the full current balance in historical and current period transactions with our Bank Partners.
Loan receivables held for sale are classified within Level 2 of the fair value hierarchy, as the primary component of the price is obtained from observable values of loan receivables with similar terms and characteristics as the loan receivables sold to our Bank Partners. We have the ability to access this market, and it is the market into which these loan receivables are typically sold.
Interest rate swap
In June 2019, we entered into a $350.0 million notional, four-year interest rate swap agreement to hedge changes in our cash flows attributable to interest rate risk on $350.0 million of our variable-rate term loan to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. This swap involves the receipt of variable-rate amounts in exchange for fixed interest rate payments over the life of the agreement without an exchange of the underlying notional amount and was designated for accounting purposes as a cash flow hedge. The interest rate swap is carried at fair value on a recurring basis in the Unaudited Condensed Consolidated Balance Sheets and is classified within Level 2 of the fair value hierarchy, as the inputs to the derivative pricing model are generally observable and do not contain a high level of subjectivity. The fair value was determined based on the

19

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.
Finance charge reversal liability
Our Bank Partners offer certain loan products that have a feature whereby the account holder is provided a promotional period to repay the loan principal balance in full without incurring a finance charge. For these loan products, we bill interest each month throughout the promotional period and, under the terms of the contracts with our Bank Partners, we are obligated to pay this billed interest to the Bank Partners if an account holder repays the loan balance in full within the promotional period. Therefore, the monthly process of billing interest on deferred loan products triggers a potential future finance charge reversal ("FCR") liability for the Company. The FCR component of our Bank Partner contracts qualifies as an embedded derivative. The FCR liability is not designated as a hedge for accounting purposes and, as such, changes in its fair value are recorded within cost of revenue in the Unaudited Condensed Consolidated Statements of Operations.
The FCR liability is carried at fair value on a recurring basis in the Unaudited Condensed Consolidated Balance Sheets and is estimated based on historical experience and management’s expectation of future FCR. The FCR liability is classified within Level 3 of the fair value hierarchy, as the primary component of the fair value is obtained from unobservable inputs based on the Company’s data, reasonably adjusted for assumptions that would be used by market participants. The following table reconciles the beginning and ending fair value measurements of our FCR liability during the periods indicated.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Beginning balance
$
149,598

 
$
100,913

 
$
138,589

 
$
94,148

Receipts(1)
38,931

 
33,742

 
71,054

 
61,835

Settlements(2)
(62,332
)
 
(46,834
)
 
(122,211
)
 
(89,672
)
Fair value changes recognized in cost of revenue(3)
38,782

 
19,226

 
77,547

 
40,736

Ending balance
$
164,979

 
$
107,047

 
$
164,979

 
$
107,047

(1) 
Represents cash received from deferred payment loans during the promotional period (referred to as incentive payments), cash received from recoveries on previously charged-off Bank Partner loans, and the proceeds received from transferring our rights to Charged-Off Receivables (as defined below) attributable to 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 any of the periods presented.  
(2) 
Represents the reversal of previously billed finance charges associated with deferred payment loan principal balances that were repaid within the promotional period.  
(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.  

20

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


Our estimated reversal rate for billed interest on deferred loan products is the significant unobservable input used to value the Level 3 FCR liability. As we have expanded our deferred loan products and as our historical experience with these products has progressed, management has developed more specific reversal rates for categories of deferred loan products based on the length of the interest-free promotional period (ranging from 6 to 24 months), whether or not loan principal payments were required to be paid during the interest-free promotional period, and the industry vertical (home improvement or elective healthcare). This has resulted in incremental increases in the number of reversal rate assumptions used to value the FCR liability. The overall decrease in reversal rates is primarily attributable to lower reversal rate experience on loans within the elective healthcare industry vertical. The following table presents the ranges and weighted averages of our estimated reversal rates as of the dates indicated.
Reversal rate
 
June 30, 2019
 
December 31, 2018
Range
 
60.0% - 96.8%

 
70.0% - 97.3%

Weighted average
 
87.7
%
 
88.2
%
The weighted averages in the above table were calculated by first determining the percentage of the reporting date FCR liability attributable to each category of deferred loan products for which a reversal rate assumption was determined. We then multiplied these weights by the unique reversal rate for each category and summed the resulting products.
A significant increase or decrease in the estimated reversal rates could result in a significantly higher or lower, respectively, calculation of our expected future payments to our Bank Partners, resulting in a higher or lower, respectively, fair value measurement of our FCR liability.
Periodically, we transfer our rights to previously charged-off loan receivables ("Charged-Off Receivables") in exchange for a cash payment based on the expected recovery rate of such loan receivables, which consist primarily of previously charged-off Bank Partner loans. We have no continuing involvement with these Charged-Off Receivables other than performing reasonable servicing and collection efforts on behalf of the third parties and Bank Partners that purchased the Charged-Off Receivables. The proceeds from transfers of Charged-Off Receivables attributable to Bank Partner loans are recognized on a collected basis as reductions to cost of revenue, which reduces the fair value adjustment to the FCR liability in the period of transfer. The following table presents details of Charged-Off Receivables transfers during the periods indicated.
 
Aggregate Unpaid Balance
 
Proceeds
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total(1)
 
Bank Partner
loans
 
Loan
receivables
held for sale
 
Total
Three Months Ended June 30, 2019
$
53,585

 
$
360

 
$
53,945

 
$
7,427

 
$
50

 
$
7,477

Three Months Ended June 30, 2018
37,469

 
124

 
37,593

 
5,021

 
17

 
5,038

Six Months Ended June 30, 2019
107,237

 
1,027

 
108,264

 
14,782

 
141

 
14,923

Six Months Ended June 30, 2018
74,895

 
1,283

 
76,178

 
10,000

 
171

 
10,171

(1) 
During the three months ended June 30, 2019 and 2018, $5,495 and $3,461, respectively, of the aggregate unpaid balance on cumulative transferred Charged-Off Receivables were recovered through our servicing efforts on behalf of our Charged-Off Receivables investors. During the six months ended June 30, 2019 and 2018, such recoveries on behalf of our Charged-Off Receivables investors were $10,655 and $6,680, respectively.
Term loan
The carrying value of our term loan is net of unamortized debt discount and debt issuance costs. The fair value of our term loan was determined using a discounted cash flow model based on observable market factors (such as changes in credit spreads for comparable benchmark companies) and credit factors specific to us. The fair value of our term loan is classified within Level 2 of the fair value hierarchy, as the inputs to the discounted cash flow model are generally observable and do not contain a high level of subjectivity.

21

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


Servicing assets and liabilities
We elected the fair value method to account for our servicing assets and liabilities to more appropriately reflect the value of the servicing rights in our Unaudited Condensed Consolidated Financial Statements. As a result of this election, our servicing assets and liabilities are carried at fair value on a recurring basis within other assets and other liabilities, respectively, in the Unaudited Condensed Consolidated Balance Sheets and are estimated using a discounted cash flow model. Servicing assets and liabilities are classified within Level 3 of the fair value hierarchy, as the primary components of the fair values are obtained from unobservable inputs based on peer market data, reasonably adjusted for assumptions that would be used by market participants to service our Bank Partner loans and transferred Charged-Off Receivables portfolios, for which market data is not available. Changes in the fair value of our servicing assets are recorded within servicing and other revenue and changes in the fair value of our servicing liabilities are recorded within other gains (losses) in the Unaudited Condensed Consolidated Statements of Operations. Contractually specified servicing fees recorded within servicing and other revenue in the Unaudited Condensed Consolidated Statements of Operations totaled $21,352 and $15,458 for the three months ended June 30, 2019 and 2018, respectively, and $40,985 and $29,789 for the six months ended June 30, 2019 and 2018, respectively. The cash flow impacts of our assets and liabilities that are measured at fair value on a recurring basis are included within net cash provided by operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows.
The following table reconciles the beginning and ending fair value measurements of our servicing assets associated with Bank Partner loans during the periods presented. We did not have any servicing assets for the three and six months ended June 30, 2018.
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Beginning balance
$

 
$

Additions

 

Fair value changes recognized in servicing and other revenue
 
 
 
Change in inputs or assumptions used in the valuation model

 

Other changes in fair value(1)
8,966

 
8,966

Ending balance
$
8,966

 
$
8,966

(1) 
Primarily reflective of an increase to the contractually specified fixed servicing fee for one of our Bank Partners.
The following table reconciles the beginning and ending fair value measurements of our servicing liabilities associated with transferring our rights to Charged-Off Receivables during the periods presented.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
3,197

 
$
2,187

 
$
3,016

 
$
2,071

Initial obligation from transfer of Charged-Off Receivables(1)
647

 
450

 
1,298

 
911

Fair value changes recognized in other gains (losses)
 
 
 
 
 
 
 
Change in inputs or assumptions used in the valuation model

 

 

 

Other changes in fair value(2)
(497
)
 
(365
)
 
(967
)
 
(710
)
Ending balance
$
3,347

 
$
2,272

 
$
3,347

 
$
2,272

(1) 
Recognized in other gains (losses) in the Unaudited Condensed Consolidated Statements of Operations.
(2) 
Represents the reduction of our servicing liabilities due to the passage of time and collection of loan payments.
    

22

GreenSky, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(United States Dollars in thousands, except per share data, unless otherwise stated)


Significant assumptions used in valuing our servicing assets and liabilities were as follows:
Cost of servicing: The cost of servicing represents the servicing rate a willing market participant would require to service loans with similar characteristics as the Bank Partner loans or Charged-Off Receivables. The cost of servicing is weighted based on the outstanding balance of the loans.
Discount rate: The discount rate reflects the time value of money adjusted for a risk premium and is within an observable range based on peer market data.
Weighted average remaining life: For Bank Partner loans, the weighted average remaining life is determined using the aggregate curves for each loan product type based on expected cumulative annualized rates of prepayments and defaults.
Recovery period: For Charged-Off Receivables, our recovery period was determined based on a reasonable recovery period for loans of these sizes and characteristics based on historical experience. We assumed that collection efforts for these loans will cease after five years, and the run-off of the portfolio will follow a straight-line methodology, adjusted for actual cash recoveries over time.
The following table presents quantitative information about the significant unobservable inputs used to value the Level 3 servicing assets and liabilities as of the dates presented.
Input
 
June 30, 2019
 
December 31, 2018
 
Range
 
Weighted Average
 
Range