GreenSky, Inc.

GreenSky, Inc.
NasdaqGS:GSKY
Analyst/Investor Day
Tuesday, January 12, 2021 6:00 PM GMT
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Contents
Table of Contents
Call Participants .................................................................................. 3
Presentation .................................................................................. 4
Question and Answer .................................................................................. 17
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GREENSKY, INC. ANALYST/INVESTOR DAY | JAN 12, 2021
Call Participants
EXECUTIVES
Andrew Kang
Executive VP & CFO
David Zalik
Chairman & CEO
Dennis I. Kelly
President of GreenSky Patient
Solutions
Gerald R. Benjamin
Vice Chairman & Chief
Administrative Officer
John Kimbrough Davis
Raymond James & Associates, Inc.,
Jesse Davis Research Division
Minaz K. Vastani Michael Masters Young

Chief Technology Officer Truist Securities, Inc., Research
Division
Thomas C. Morabito
Vice President of Investor Steven Wald
Relations
William Haraway Ryan
Timothy Daniel Scott Kaliban Compass Point Research & Trading,
President & Chief Risk Officer LLC, Research Division
Unknown Executive
ANALYSTS
Arren Saul Cyganovich

Citigroup Inc., Research Division
Christopher Roy Donat

Piper Sandler & Co., Research
Division
Jeffrey Brian Cantwell

Guggenheim Securities, LLC,
Research Division
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Presentation
Thomas C. Morabito
Vice President of Investor Relations
Hello, everyone, and welcome to GreenSky's Virtual Investor Day. I'm Tom Morabito, Vice President of
Investor Relations. As a reminder, this event is streaming on the GreenSky Investor Relations website, and
a replay will be available on the same site approximately 2 hours after the completion of the meeting. We
have also posted our Investor Day presentation, which we will refer to during today's event.
Turning to the agenda. Today, you will hear prepared remarks from the following GreenSky executives;
David Zalik, our Chairman and Chief Executive Officer; Gerry Benjamin, our Vice Chairman and Chief
Administrative Officer; Tim Kaliban, our President and Chief Risk Officer; Minaz Vastani, our Chief
Technology Officer; Dennis Kelly, our President of Patient Solutions; Jesse Davis, our President of
Home Improvement; and finally, Andrew Kang, our Executive Vice President and Chief Financial Officer.
Afterwards, we will conduct a Q&A session.
Before I turn it over to David, 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 presentation as well as in our filings with regulators.
We will also be discussing non-GAAP financial measures during today's event. These non-GAAP measures
are not intended to be considered in isolation from, a substitute for or superior to our GAAP results, and
we encourage you to consider all measures on analyzing GreenSky's performance. These non-GAAP
measures are described and reconciled to their GAAP counterparts in the presentation materials and on
the Investor Relations page of our website.
At this time, I'd like to turn the presentation over to David.

David Zalik
Chairman & CEO
Thanks, Tom. Hello, everyone, and thank you for joining us. It's great to be with you today, and I believe
we have an outstanding lineup of presenters, as we describe where GreenSky has been the current status
of our business, and most important for many of you, where we see the business heading. Before we get
started, let me just say that I hope everyone had a great holiday season, likely very different than in prior
years and that your families are safe as we continue to deal with COVID.
For those of you that are new to the GreenSky story, we're a mobile-first technology company, providing
point-of-sale financing and payment solutions to a growing ecosystem of merchants, consumers, bank
partners and investors. We're currently focused on 2 very large industry verticals, home improvement and
elective healthcare. We were founded in 2006 and went public in 2018. We have developed deep domain
expertise and achieved significant scale, having now facilitated in excess of $26 billion of point-of-sale
commerce since inception.
In short, our mission is simple, to help businesses grow and delight their customers. The manner by which
we accomplish our mission is, however, rather complex. While many of you have only known us since
we've been public, we have been growing and innovating for nearly 15 years. We continue to expand our
product offerings to meet the needs of our funding partners, merchants and consumer customers, and I
firmly believe that the best is yet to come for GreenSky.
On Slide 6, we highlight how our B2B2C technology platform helps businesses increase their revenue and
accelerate their cash flow by eliminating much of the friction historically associated with point-of-sale
financing. Here, GreenSky sits at the center of our merchant, consumer and financing partner ecosystem
with our proprietary technology, enabling the objectives of each constituent party.
First, merchants are able to close more sales, enjoy higher invoice values and get paid quicker, all while
incurring no upfront CapEx or systems integration costs. Any merchants that can accept a credit card by
a simple point-of-sale terminal can accept GreenSky. Second, consumers are able to apply and buy at the
point of sale, which takes less than a minute, start to finish. In addition, available promotional terms are
more attractive relative to other payment options, for example, using available credit capacity on a high
interest credit card.
Importantly, the GreenSky user interface is very intuitive, as Minaz will be discussing in a few minutes.
Third, for our financing partners, we offer access to prime and super-prime consumers at the point-of-
sale. This allows for attractive risk-adjusted yields from loan portfolio with no concentration in national
geographic diversification, all with no customer acquisition or marketing costs. Of course, paramount
is protecting and advocating for consumers and delivering a robust compliance framework. GreenSky
continues to enhance its comprehensive customer protection and compliance system in fashion that our
funding partners both require and value greatly.
Next, on Slide 7, let's discuss GreenSky's key differentiators and our competitive position in the
marketplace. First is our mobile-first technology. Our proprietary platform creates a huge competitive
advantage throughout the entire life cycle of the loan from origination to funding to servicing. Importantly,
our technology is scalable, enabling us to manage the business as our merchants expand and as we grow
as a company. Second, we are attacking huge addressable markets. As Gerry will touch on, the market is
estimated to be approximately $600 billion per year of spend by consumers in our targeted verticals. And
as we know, there is substantial demand for point-of-sale financing.
Third, we're the leader in this space. GreenSky's business model and vast merchant network would be
difficult to replicate as is our unrivaled, paperless consumer and merchant experience. We're growing,
we've long been profitable. And again, we believe we have and continue to evolve superior technology.
Fourth, we have a variety of growth drivers, including opportunities to add new merchants in existing and
adjacent verticals and distribution channels, further expand within our existing merchants and pursue
attractive cross-sell opportunities, which we will talk about further today.
Finally, our financial model highly recurring revenue stream and industry-leading low customer acquisition
cost, a committed network of bank partners, providing over $8 billion in funding commitment, along
with the proven ability to supplement our committed bank funding with institutional investor and capital
markets financing activities, which Andrew will speak to shortly.
On Slide 8, we dig a little deeper into the growth strategy that I just mentioned. On the left-hand side,
you can see that it all starts with the strong relationships we enjoy with merchants, including sponsors,
independent high-volume merchants and elective health care providers. Importantly, while GreenSky is
the leading player in home improvement vertical, and we believe the #3 player in elective healthcare, we
still have a negligible market share in our existing verticals. The market opportunity is enormous.
In terms of our existing verticals, home improvement remains highly fragmented with great opportunities
for additional penetration. Pre-COVID, you will see that we have historically added $600 million to $9
million in incremental origination volume each year. Jesse Davis, our Home Improvement President, will be
sharing an exciting update with you shortly.
We're also looking forward to a solid recovery in our Patient Solutions vertical following a difficult 2020,
when states effectively legislated elective procedure volumes away in order to maintain capacity for COVID
patients. To give you a feel for the size of our elective healthcare opportunity, our leading competitor
originates in excess of $10 billion a year in elective healthcare loan volume. Our Patient Solutions
President, Dennis Kelly, will be sharing why we're so excited about our elective healthcare opportunity in a
few minutes.
Next, given our highly sought after prime and super-prime customer base, we believe there are significant
opportunities to leverage our affinity relationships to offer existing and new customers a host of products,
including mortgage refinance as one example. We can also drive new product offerings, such as credit
cards and secured financing products to this captive consumer customer base.
Moving further to the right on this slide, in terms of adjacent industry verticals, we continue to expand our
product offerings purposefully into other home centric categories as well as continuing to web develop our
e-commerce and omnichannel solutions. Importantly, we continue to focus our efforts on the large ticket
item demands of prime and super-prime borrowers, leveraging our strong homeowner credit bias.
Lastly, we continue to develop technology that allows our merchants to capture a widening spectrum of
constituents by developing offerings for customers throughout the entire credit spectrum. And as Andrew
will discuss, we continue to expand our bank partner relationship and other complementary funding
sources.
So where does all this lead to? On Slide 9, we highlight the plan for the next 5 years, and these are:
calendar year 2025 transaction volumes approaching $10 billion, reflecting a 5-year compound transaction
volume annual growth rate approximately over 13%; calendar year 2025 revenues of approximately $900
million, with longer-term sustainable adjusted EBITDA margins targeting in excess of 30%. We referred
to this as our 10 x 9 x 30 plan. We believe that these financial goals are highly achievable, and we look to
executing on our plan and to keep everyone updated on our progress each quarter along the way.
Thanks, everyone. And now let me turn it over to Gerry, who will speak more about our markets, our
merchants and our opportunities for growth.
Gerald R. Benjamin
Vice Chairman & Chief Administrative Officer
Thanks, David. As David shared, GreenSky has achieved significant scale since its entry into the point-
of-sale space back in 2012, having now facilitated in excess of $26 billion of commerce for more than 3.6
million consumers with a vast roster of merchants and elective healthcare providers currently leveraging
GreenSky's proprietary technology platform. For calendar year 2020, GreenSky facilitated in excess of
$5.5 billion of transaction volume and an estimated transaction fee rate of 7.1%, while servicing a $9.5
billion loan servicing portfolio at December 31, 2020.
Notwithstanding the impact of COVID-19 upon the business, calendar year '20 adjusted EBITDA margins
are estimated to approximate 20%. As Slide 12 highlights, largely as a byproduct to the vast addressable
markets that GreenSky serves, the strong value that our merchants derive from utilizing our proprietary
technology and GreenSky's superior user experience, GreenSky is and very much remains a growth
company.
As illustrated on Slide 13, you will see that the addressable market for our core domestic home
improvement, elective healthcare verticals exceed $600 billion per annum in consumer spend. As our
business unit leaders will be sharing with you, we strategically attack both of these large markets by
focusing on select discrete subsectors therein.
By way of example, while windows and doors represent a large part of our business that we believe will
continue to grow dynamically, we look to further expand our HVAC penetration over the coming quarters.
One of the unique attractive features of GreenSky business model is our strong recurring revenue
function. On Slide 14, you will see, by way of example, for the cohort of merchants added to the GreenSky
network in calendar year 2013, which is the bar colored in dark blue, 7 years later, in 2020, this group of
merchants continued to deliver annual growing transaction volumes. Illustrated on Slide 15, because of
the strong lifetime value of each merchant added to the GreenSky ecosystem, you will see that GreenSky
boasts the lowest account acquisition cost among leading tech players reporting. GreenSky enjoys a
lifetime account value to customer acquisition cost exceeding 35x. One of the reasons that Greensky is
able to generate such outstanding lifetime value to customer acquisition cost metrics is its intense focus
on larger merchants.
As Slide 16 depicts, GreenSky continues to strategically focus marketing efforts on larger merchants.
Notably, as outlined on Slide 17, GreenSky enjoys among the highest adjusted EBITDA margins of leading
fintech companies reporting. And as Andrew will highlight for you shortly, we anticipate GreenSky's
sustainable adjusted EBITDA margins to exceed 30%. There are many ways to stimulate growth. While
driving exceptional growth in annual transaction volumes, we are proud that we have maintained credit
discipline from inception.
As Slide 18 depicts, you can vividly see that the FICO score of approved GreenSky program borrowers
at application continue to escalate. With more than 75% of GreenSky approved program borrowers
reporting application FICO scores in excess of 720 as of September 30. As our GreenSky merchants
seek to augment their business models to embrace both e-commerce and omnichannel offerings, we will
continue to evolve our GreenSky technology user experience to enable program borrowers to transact in
any mode they choose. Continuing to focus on large ticket prime and super prime borrowers, GreenSky
is pursuing adjacent verticals right for its e commerce offering, allowing us and our financing partners to
continue to enjoy our strong homeowner credit bias.
Slide 19 illustrates select product categories, where we believe that the GreenSky e-commerce suite
can add tremendous value. Note that each of these products include large ticket items, often physically
large and bulky, typically purchased by homeowners rather than renters. With an excess of 3.6 million
satisfied GreenSky program borrowers and adding some 50,000 new Greensky home improvement loans
each month, we sense that the installed and growing base of prime and super-prime GreenSky program
borrowers was ripe for the cross-sale of additional credit products.
As illustrated on Slide 20, our recent GreenSky program borrower survey indicated that 47% were either
interested or extremely interested in one or more additional credit products, and 74% of the respondents
indicated that they were at least somewhat interested in one or more additional credit products. We
anticipate launching a first mortgage cross-sale test campaign in the coming quarters as we believe that
GreenSky program borrowers represent a fertile ground for a new source of potentially lucrative fee
income.
As our GreenSky leadership team share their planned presentations this afternoon, we hope you are
appreciate why we believe that GreenSky is so well positioned to achieve significant growth over the
coming years. As highlighted on Slide 21, the company is attacking very large addressable markets with
the combined domestic home improvement and elected health care verticals, aggregating more than $600
billion in consumer spend per annum. The company enjoys a highly attractive recurring revenue business
model. The company's lifetime customer value to customer acquisition cost is exceptional exceed 35x. The
company has achieved significant scale and is poised for continued growth.
Calendar year '21 transaction value is anticipated to grow by more than 15% to approximately $6.4
billion, with an anticipated revenue compound annual growth rate of approximately 13% over the next
5 years. The company produces highly attractive operating margins anticipated to exceed 30% at scale.
The company's unique ecosystem with its large captive merchant base, committed funding and millions of
satisfied program borrowers would be extremely difficult to replicate, creating a meaningful competitive
moat for GreenSky. And the company continues to innovate and is led by a deep and highly experienced
management team.
With that, I'm pleased to introduce our President and Chief Risk Officer, Tim Kaliban. He's going to walk
you through the GreenSky value proposition, along with sharing select risk management and credit
initiatives and metrics. Tim?
Timothy Daniel Scott Kaliban
President & Chief Risk Officer
Thanks, Gerry. Good afternoon, and welcome to you all. As David alluded to, GreenSky has developed
a unique ecosystem with 3 constituents in our revenue stream derived from each merchants, banks
and consumers. And GreenSky uniquely has developed a value-added turnkey full life cycle solution for
each constituent. We'll spend some time looking at those solutions and the characteristics and credit
performance of the loans created in this ecosystem. Starting at the beginning of our ecosystem is our
application and origination process. GreenSky is the leader in our space in developing and innovating
in mobile and web technologies to present a best-in-class origination experience for consumers and
merchants alike. Merchants can enroll in the GreenSky program and begin providing payment and finance
products seamlessly and without any integration, and they can then provide promotional finance and
payment plan applications to the consumer customers, creating the most convenient apply and buy
experience in the industry. In turn, the GreenSky program provides access for our lending and finance
partners to a super prime and prime consumer origination channel, they would otherwise not have access
to.
In 2020, GreenSky pioneered our universal credit application, or UCA, which further enhances our value
proposition to our merchants by automating the process for applications that need to be routed to second
or third look financing platforms. This helps ensure a preference for our merchants to use GreenSky is
their first look because they then never need to reenter applications for turndown applicants. It provides
a better origination experience for consumers to quickly find a suitable finance program for their credit
needs and it ensures that GreenSky lenders continue to get the best first look origination volume, while
the program provides credit options to a spectrum of credit applicants.
Now let's turn to the turnkey end-to-end solution and value proposition. GreenSky provides the technology
platform and servicing for application and origination, funding and payment, loan servicing and back-office
functions. GreenSky's solution is not only unique, but it's also proprietary custom developed and patented.
Minaz Vastani will be discussing our technology solution in greater detail in the next [indiscernible]. We
offer the complete solution for each of our constituents. Merchants grow their business and delight their
customers with the most convenient platform for them and their customers. Consumers get apply and buy
promotional credit and payment options, and banks get an attractive and highly compliant consumer non-
real estate loan origination channel.
Starting with the application. GreenSky develops, hosts and provides the mobile web and API applications
used by our consumers and lenders. Merchants prefer offering the GreenSky program application
and consumers prefer using our application because the application experiences digital, short, simple
and intuitive. And we provide lender credit decisions Our patented Round Robin process adjudicates
applications and allocates loans to lending partners in real-time and enables instantaneous supply
and commerce between consumers and merchants backed by our lenders. The GreenSky's technology
platform delivers a paperless loan documentation and signature process, followed by industry best in rapid
exchange amongst consumers, merchants and banks with both information and funds.
Another component of our solution is our lending and financing partner integration. We have close
relationships with our lenders and work closely with them to partner in their origination and servicing.
This includes business intelligence and data integration customized for each partner. Our program is a
mature SoC 1, SoC 2 and PCI compliance solution for our partners. We operate under tight financial,
operational, fraud and data security controls. And importantly, we try to control our merchants' activity
with consumers' in the program. We'll discuss that more in a moment.
Finally, GreenSky operates call centers and service centers where we answer the calls and questions of
our merchants and consumer customers. GreenSky provides 100% of customer service with domestically
based GreenSky employees. We're very proud to reemphasize that we maintain that status throughout
2020, while transitioning our entire 1,200 associate team to a complete safe fully capable and efficient
work from home solution March of 2020. Special kudos to our operations and technology teams for
enabling that for all of us. And again, Minaz will shortly touch on our cloud architecture that allowed
GreenSky to move faster than most in light of the 2020 COVID developments.
Turning to merchant management. It's important to understand that GreenSky is constantly advocating for
our consumer customers and caring for their interactions with merchants in the program. That starts, but
doesn't end with merchant underwriting. GreenSky is very selective about the merchants and providers we
allow to use our platform.
After a merchant is onboarded, they must complete a training program that, in addition to the use of the
GreenSky platform, is focused on consumer protections, fair lending and overall compliance. Merchants
are also obligated to stay current in our training program with annual refresher training, and they receive
monthly notes from our compliance team. After merchants are onboarded and active in our program,
we watch and control them closely. The incidence of complaints from our consumer customers is low,
but we watch closely which merchants any complaints come from. And we provide customer advocates
to any consumer with a problem, so that we can facilitate and resolve any problems they might have.
Both GreenSky and our bank partners are focused on monitoring and ensuring customer satisfaction.
Something that GreenSky does that other platforms and payment systems do not do is to reach out the
customers who have not raised the complaint to make sure that they don't have a problem. And if it turns
out that they do, fix it. GreenSky places hundreds of thousands of outreached text messages, e-mails and
calls to consumers to assure we're providing the industry best customer advocacy.
Importantly, in the event of a dispute between a consumer and a merchant, we have charge-back rights
to protect consumers without cost to GreenSky. In the end, our goal is customer protection and advocacy,
and we work diligently customer-by-customer to make sure that happens. And we also look at consumers
through a merchant aggregated lens.
The result of the confluence of our point-of-sale solution to the best quality merchants and prime
consumers is a superior lender servicing portfolio. As you see here, our weighted average FICOs were
at an all-time high in 2020. Meanwhile, our weighted average household income was over $130,000,
and debt-to-income was in the low 20%. More importantly than average is the distribution. As Gerry
highlighted earlier, the FICO distribution of our service portfolio has continued to improve over time. That's
a result of our improved analytics and decisioning that have increased the proportion of loans, lines and
fundings in the highest FICO bands.
These optimizations have resulted in the trend of higher origination and servicing FICO scores that you see
on the left side of this page as well as the lower delinquency on the right side of the page. It's important
to note that although GreenSky has supported COVID payment deferral policies from our bank partners
in 2020, payment deferral accounts are not included in the analysis on the right, and it's mainly improved
risk management practices and credit performance that is reflected here. However, the expiration of
COVID payment deferrals is expected to cause a shift of some defaults from 2020 to 2021.
The GreenSky program offers a wide variety of plans, terms and tenors. When viewed in aggregate,
there has been remarkable stability in terms of the net default or loss profile of the loan originations on
a vintage basis. While historically stable, the Q1 2019 origination had the best loss performance of any
recent year. That's the purple line. Q2 2019 is the slightly shorter black line, and it was even better. If you
follow that along, every quarterly vintage since first quarter of 2019 has been better than the last and has
been the best vintage we've seen in the last 6 years.
So we and our lending partners are really pleased with credit performance -- the trending credit
performance and the servicing and origination platform that produce these high-quality assets. Thanks for
your time. At this time, I'd like to introduce our Chief Technology Officer, Minaz Vastani. Minaz?
Minaz K. Vastani
Chief Technology Officer
Thank you, Tim. Hi. My name is Minaz Vastani, and I am the Chief Technology Officer at GreenSky. In
my role, I'm responsible for product development and the technology organizations. The product and
technology organizations build, operate and secure the GreenSky platform and support systems comprised
of custom build as well as third-party solutions and providers. Big Money is Greensky's proprietary
platform for managing the loan lifecycle. GreenSky is a fintech company, where investments in a patented
technology platform has positioned us to build a competitive moat by providing frictionless customer
experiences for our customers, merchants and funding partners.
Big Money, our cloud-native platform, orchestrates these processes for loan origination facilitation,
account management for our customers and merchants, loan allocation and integration with our bank and
funding partners. Big Money gives us the ability to scale the business in a cost-effective manner, while
leveraging the best technical innovations developed by our teams and partners. Our mobile app delivers a
frictionless customer experience, enabling our merchants to offer GreenSky's financing options with ease
and simplicity. The GreenSky app is available in the Apple app store and Google Play stores for phones
and tablets. There are more than 130,000 apps active on merchant devices with a 72% penetration on
iOS and 28% on Android devices. The app features a simple interface designed for a frictionless customer
experience for merchants and their customers. Merchants originate loan applications via this app, and
the app integrates with the Big Money platform to complete originations, activate loans and initiate
transactions.
During the origination flow, if the customer does not meet our underwriting criteria, then the workflow
seamlessly routes credit applications to second look providers via deep integration for a seamless
customer experience. The mobile app is self-contained where sales associates of our merchants may
use the app for training on GreenSky products, learn with a demo application as well as access tools,
such as payment estimators, as they interactively work with their customers on finalizing their financing
application.
The user experience and capabilities of our mobile app helps deliver a differentiated and highly productive
experience for our merchants and customers. The Big Money ecosystem is a key technology differentiator.
The Big Money platform is an ecosystem of several integrated components that collectively serve the
GreenSky ecosystem. The platform serves as the system of record for our customers, our merchant and
bank partner data. The cloud-native platform is highly configurable and flexible, where business teams can
configure the platform to offer new plans, products, promotions, to respond to evolving market conditions
and customer preferences.
The platform features a rules engine that drives the complex decisioning of credit underwriting, merchant
underwriting, loan allocation as well as risk and fraud controls. The platform is fully API-enabled for some
of our larger merchants and providers to integrate directly from their systems into GreenSky's origination
flow.
The platform also powers the systems used by our customer service representatives and back office
personnel that service our customers through the lifecycle. The platform also features self-service
capabilities for our merchants and customers 24/7. The decisioning intelligence is powered by a modern
business intelligence and analytics platform built using technologies such as Talend and Snowflake. The Big
Money platform is built to scale in a cost-efficient manner. The platform is built, leveraging capabilities of
AWS' platform and Infrastructure as a Service component. The platform is geo redundant, operating out of
multiple data centers across 2 distinct regions in the country. Disaster recovery and fall tolerance are built
into the architecture of the platform, providing high-performance and resiliency of the platform.
The platform is secured, utilizing the defense in-depth model that adheres to all the necessary compliance
requirements as well as advanced AI and machine learning powered cloud security tools that constantly
monitor and reduce the attack surface of the platform. Securing our perimeter, data assets, applications
and our associates is a key focus of our information security program. We follow a defense and depth
model based on industry standard frameworks such as NIST and COBIT. Our security apparatus is built
using sophisticated products, services and partners that help monitor, detect and reduce our attack
surface in the ever-evolving cybersecurity landscape.
Our security ecosystem enables us to meet and exceed our compliance guidelines and standards of our
bank partners with annual attestations of our SOX, Sarbanes-Oxley, and PCI DSS compliance audits.
As a fintech company, our intelligence is driven by our data and analytics. We have built a sophisticated
business intelligence platform, leveraging some of the best cloud technology partners such as Snowflake,
Talend and Tableau. Our business intelligence platform provides real-time insights on the business as
well as analytics that empower our data scientists and machine learning modelers to build sophisticated
algorithms used across the enterprise. Our business intelligence platform is built using the same design
principles of scalability, resilience and fall tolerance inherent in our Big Money platform.
I hope the information I've shared in this session gave you an overview of our technology platform and
the talented team of technologists that continue to innovate and deliver new capabilities, providing the
best-in-class experiences for our merchants, customers and funding partners. It is now my pleasure to
introduce Dennis Kelly, President of our Patient Solutions division, to share his insights on our elective
healthcare business. Dennis?
Dennis I. Kelly
President of GreenSky Patient Solutions
Good afternoon, and thank you, Minaz. I'm Dennis Kelly, and I'm the President of GreenSky Patient
Solutions, our elective healthcare vertical. And it's my pleasure to share a brief overview of our business.
We initially piloted our elective healthcare business in 2016. And within 3 years, by the end of 2019, we're
generating approximately 10% of GreenSky's loan transaction volume, and we believe, had achieved the
#3 position for the key market segments we actively pursue.
As we entered 2020, we were extremely excited about the year ahead as we had refined our market
strategy and product development, and we're poised to have a great year. Unfortunately, the COVID
pandemic interrupted our plans along with everyone else's. The elective healthcare services market was
severely impacted by the government-mandated closures that were in place for approximately 60 days,
and even after being allowed to reopen, negatively impacted elective health care providers throughout the
balance of the year.
While navigating through the pandemic, we successfully signed a $1.8 billion long-term funding
partnership in the fourth quarter for elective healthcare loans generated within our provider network. As
we enter 2021, given the estimated $220 billion addressable market, we are well positioned to resume
the growth trajectory of our business and expect to return to contributing 10% of GreenSky's funded
transaction volume in '21 to '22.
On Slide 37, we've listed the 6 key market segments that we address with our program. Over the last
couple of years, we refined our program strategy to specifically address each of these segments, which
have unique requirements regarding the type of loan product, the consumer desires, along with different
promotions, loan terms and average transaction size. Additionally, we have leveraged GreenSky's API
capabilities to offer our target enterprise providers, the ability to easily interface their CRM system or to
integrate with the second look, subprime lender, utilizing our universal credit application, allowing more
customers to move forward with services and treatment plans.
Lastly, over the past year, we have implemented a dedicated provider, Concierge Service, that provides
one-call resolution for almost any issue of provider encounters with our program or one of their
customers. We believe GreenSky has the broadest and most sophisticated set of capabilities for both
elective healthcare providers and their customers. One of the key competitive advantages GreenSky has
in elective healthcare is the ability to offer multiple consumer plan options on both our installment and
revolving credit programs. For example, implant dentistry, LASIK and vision and fertility providers prefer
to have promotional installment loans with extended payment terms that allow for affordable monthly
payment options for large ticket transactions ranging from $5,000 to $50,000 plus.
Conversely, noninvasive cosmetic, general dentistry and the veterinary providers prefer to have a
revolving credit program to offer their patients, given the recurring visit aspect of their business strategy,
allowing the consumers to accept new promotions and authorize additional transactions on an existing
GreenSky program revolving credit line. Offering our market both of these programs and associated
consumer loan products allows us to support virtually all treatment sizes and types.
As a result of the COVID pandemic, the way elective healthcare services are provided has likely changed
for the foreseeable future. Given GreenSky's consumer direct application process and the robust industry-
leading consumer protection tools we've deployed over the last 2 years, we were able to seamlessly
transition to a contactless and paperless application and transaction authorization process for our
consumer applicants. These capabilities allow our providers to perform virtual consults and to interact with
their customers in a virtual waiting room or parking lot without requiring the staff to submit the consumer
application or run transactions without the consumer's preapproval.
Additionally, our universal credit application will give providers the ability to grow their revenues by
seamlessly offering their customers with subprime credit, another payment option. We leverage an
omnichannel sales strategy and have a very experienced field sales organization throughout the U.S. that
allows us to access large private equity-owned national enterprise provider networks. Our field sales team
has excellent network relationships with key opinion leaders and manufacturers across our industry. Our
provider Concierge's team and key account and enterprise account management teams deliver best-in-
class support for our provider network across the country.
Thank you for allowing me a few minutes to update you on our elective healthcare business. I now turn
the presentation over to Jesse Davis, the President of GreenSky's Home Improvement vertical.
Jesse Davis
Thank you, Dennis. I could not be more excited for the continued opportunity in Home Improvement. We
have only scratched the surface of the industry and are just getting started. The market is massive and
only continuing to expand as the housing market stock continues to age.
GreenSky is the market leader, and we have continued to innovate in order to be an integral part of the
increasing need for home improvements that will continue to be made. Historically, GreenSky has been
able to achieve market-leading growth. Our success year-over-year has enabled us to quickly become the
#1 provider in the country. Our robust network of merchants and experience in this industry has enabled
us to remain relatively flat in 2020 despite all the COVID conditions that have dramatically reshaped the
industry.
We're poised to return to our significant growth in 2021 because of how well we were able to manage
the industry changes from COVID. GreenSky is very entrenched and diversified across all the primary
home improvement verticals. Our top partnerships within our largest segment in windows and doors
are projecting substantial growth in 2021. One of our fastest-growing segments in HVAC will continue
to be fueled by the sponsor and manufacturer interest in our products. As legacy providers exclusivity
agreements expire. Merchants are rapidly adopting SaaS technology solutions to help run their businesses
with everything from pricing proposal softwares, marketing automation, presentation tools and lead
management and CRM systems. We are in the technology boom within the industry and have been the
leader in the API integrations into these solutions. These integrations are enhancing the adoption of
financing within home improvement businesses as the primary vehicle in converting leads to sales.
GreenSky has an extensive multichannel strategy and network to acquire and onboard more merchants to
the platform. Due to being the largest provider in the industry, we get considerable inbound traffic to our
inside sales team. We have an expansive referral program from our existing merchant base. We have the
largest outside sales footprint, working directly with new merchants to onboard and train their teams. And
we have a large network of sponsor relationships, inclusive of manufacturers, trade associations, franchise
systems, software companies and that all of them have vast networks of home improvement merchants
that promote us as their primary provider to their merchant bases.
GreenSky has a tremendous competitive advantage in the space, and we're able to provide our partners,
a full business solution tailored to their business needs. It's not just about financing. It's inclusive of
the highest credit lines in the industry, the strongest planned promotions, top of the funnel marketing
services, white label customization, down to the training and support needed to help our partners to grow
their businesses. Everything we do is designed with the intent and mission to help our merchant partners
succeed in their growth plans for their business.
Our strategy and plans are very exciting. We just expanded our outside sales team footprint. We have
new marketing promotions that will enhance our merchant's ability to drive promotional product offerings,
helping them achieve their incremental growth. We signed over 90 strategic exclusive partnerships
for 2021 in the fourth quarter of 2020, and they are set to launch now. We'll continue expanding our
integrated partnerships further, entrenching us in the fabric of the industry.
We just launched a new dedicated training team, enabling every merchant at GreenSky that does
$1 million or more in revenues, access to a 1:1 Relationship Manager. We have expanded and added
resources to our sponsor support team, and we are launching marketing support programs to help drive
consumer and merchant adoption of promotional payment options. We are very excited to execute our
plan and be an integral part of the home improvement industry growth and success in 2021.
And with that, I would like to pass this to Andrew Kang, our Executive Vice President and Chief Financial
Officer. Andrew?
Andrew Kang
Executive VP & CFO
Thank you, Jesse. It's great to be with you today, and I look forward to discussing several key themes that
I believe are important to help better understand and simplify GreenSky's financial results. First, I'd like to
start by walking through the key drivers of GreenSky's financial performance or simply put, how GreenSky
makes money. Second, I'll provide an update on our robust and increasing funding capacity and liquidity.
And finally, I'll discuss a preview of our 2020 results and high-level guidance for 2021 and 2022.
As David discussed earlier, we are excited and confident about our 10 x 9 x 30 strategic plan, which
highlights strong transaction volume growth across each of the next 5 years, achieve top line revenue in
calendar year 2025, reaching $900 million and demonstrates GreenSky's long-term sustainable adjusted
EBITDA margins in excess of 30%. Let's start with how GreenSky makes money.
Turning to Slide 50, this illustration shows GreenSky's economic model based on our highly successful
bank waterfall model of funding, which was innovated early on in GreenSky's history and has been
foundational in supporting the growth in our business for the last decade. Through the bank waterfall
model, we generate revenues in 2 ways. First, by far, our largest source of revenues are from transaction
fees that we receive from our merchants when consumer loans are originated at the point-of-sale on
our proprietary technology platform. As a result of our transaction volumes and our transaction fee rates
together, they drive GreenSky's robust transaction fee revenues.
We also received strong, stable and recurring servicing fees from our bank partners and investors as
we service their portfolios through our platform that both Tim and Minaz described earlier. The costs
associated with our bank partner funding are based on the waterfall structure that starts with the billed
yield on the underlying loans and takes into account finance charge reversals on deferred interest loans
that pay off during their promotional period. GreenSky receives an incentive payment at the bottom of the
waterfall when the aggregate billed finance charges are greater than the bank margin, the fixed servicing
fee and realized credit losses. As we have discussed before, in our results, incentive payments represent a
valuable component of GreenSky's profitability.
Lastly, for our bank waterfall commitments, we set aside agreed upon cash amount as escrow, which
can be used in the event of credit losses exceeding and agreed upon threshold. These escrow amounts
are held as restricted cash in our balance sheet and helped provide support and confidence to our bank
partners. That is how our historical bank waterfall continues to provide a cash efficient funding model,
which has demonstrated a long track record of success for both GreenSky and our bank partners. As you
know, we have diversified our funding through implementing a loan sales program, which I'll also walk
shortly.
Turning to Slide 51. The transaction fee revenue I described, accounts for approximately 75% of our
overall revenue. As you might expect, transaction fees can vary based on the type of loan product that the
consumer selects. For example, the transaction fee rate for a promotional loan that bills 0% interest or
where interest is deferred for an initial period is lower than that of a standard or reduced rate loan.
In 2020, we have seen an expansion of our transaction fee rate as a result of increased consumer demand
for promotional interest rate products. We estimate Q4 2020 transaction fee rate to be approximately
7.2%, slightly lower than that of Q2 and Q3 of 2020, which reflects the expected seasonality in our
business. It is important to note that transaction fees alone are not the single measure of GreenSky's
overall profitability. Transaction fees have and will continue to be highly correlated to the related APR of an
associated loan. And as you can see on the right chart, the related increase in APR is in concert with the
changes we see in transaction fees for the same quarter of originations. Given the trend in recent demand,
we do estimate that overall transaction fees will remain over 7% in the coming year.
Turning to Slide 52. Earlier, Gerry talked about the growth of our servicing portfolio over the last 5 years,
which we expect to be $11 billion by the end of this year. Servicing fee revenue provides a healthy
recurring profitability stream over the life of loans in our servicing portfolio. In 2020, servicing fees
averaged about 120 basis points annually, which reflects approximately a 10 basis point increase over
historical rates. And as we have seen, roughly 10 basis points on a $10 billion portfolio has a very
meaningful impact to our top line revenue. As we noted, we expect 15% growth in our service portfolio
by the end of next year, which will continue to meaningfully contribute to our top line growth in 2021 and
beyond.
Turning to the next slide. We have already talked about our bank waterfall funding. And as you know,
in the second half of 2020, we successfully launched our diversified funding model through which we
help support our targeted growth. Regardless of the source, we target loan-level lifetime profitability
or contribution margin based on revenues in excess of operating costs and funding costs, which are
collectively the cost of our revenue over the life of the loan. When we sell assets outside of our bank
waterfall structure, we recognize a mark-to-market expense in our cost of revenue based on an expected
market price, which varies based on discrete characteristics of each pool of loans, which also takes into
account the APR, the term and FICO of the underlying assets. The overall discount or premium upon sale
-- commitment to sell is recognized upfront, which is different from the bank waterfall where it is spread
over the life of the loan.
GreenSky's business model, since inception, has always been centered around the lifetime profitability
of each vintage of originations. That remains a consistent core focus to our diversified funding model
today as it has in the past. We previously announced the inaugural asset sale and related pricing with our
Q3 earnings. This was the first and arguably the hardest step in launching the platform. Since then, we
announced approximately $750 million in asset sales in Q3 and Q4, and we have recently executed an
additional sale of approximately $230 million loans to a bank at the end of Q4.
This sale serves to highlight 2 important items. First, it demonstrates the programmatic nature of our
strategy, and equally, if not more importantly, it reflects improved economics as, one, we expand our
depth to partners; and two, as we gain momentum with follow-on offerings. It also verifies that there
continues to be a tremendous amount of demand for our high-quality assets by both institutional buyers
as well as banks in today's current market environment. The lifetime contribution margin of the loan
originated on GreenSky's platform, whether sold to a third-party or funded through our bank waterfall
structure, are now equivalent, with the main difference between the 2 being the timing of recognition in
our financial statements. Let me explain more.
On the left of Slide 54, we illustrate the lifetime contribution margin of loans originated under our bank
waterfall. Top line revenue is contributed by the transaction fee, here showing a 7.2%, reflecting the
estimated Q4 2020 transaction fee. In addition, we captured the servicing fee margin, which is calculated
as the recurring servicing fee earned, less our servicing costs over the weighted average life of our total
portfolio. The cost of revenue shown here is simplified down to 2 main components: origination costs and
our cost to either funded our bank waterfall or our cost to sell loan participations, which is effectively our
diversified funding model. Bank waterfall cost share are defined as the billed yield of the customer loan,
less finance charge reversals, less credit losses and less bank margin again over the life of the loan. The
2.6% reflects the current cost of a typical bank waterfall arrangement, and in this example, our bank
waterfall structure provides a life of loan contribution margin of approximately 5.4% and or approximately
$300 million value creation this year based on a $5.5 billion transaction volume in 2020.
On the right, to illustrate loan sale lifetime economics, transaction fee revenue and servicing margin as
well as origination costs are unchanged. Here, we illustrate loan sale costs, which reflect our most recent
sale pricing from the $230 million sale in December. The price is applied to an estimated product mix
of loans in 2021, which results in a lifetime equivalent cost of approximately 2.7%. As you can see, the
improvement in loan sale pricing since we launched the execution of our diversified funding model in
September, brings the estimated lifetime contribution margin of loans sold to 5.3% with our historic bank
waterfall costs.
There are some very important points that I'd like to highlight regarding the attractiveness of these loan
sales. First, since the expense is recorded upfront, when you normalize these costs, being pulled ahead,
the lifetime contribution margin is equally attractive as the bank waterfall. And we believe that there
continues to be momentum to further improve upon sale pricing in '21. In addition to attractive pricing,
these loan sales also reduced future earnings volatility due to a number of important factors, including, of
course, by eliminating future finance charge reversals expense and by eliminating potential risk of future
credit losses as well as changes in the interest rate environment.
Lastly, these loan sales open up a vast market of liquidity from the capital markets, institutional investors
as well as from banks, which will provide more than ample liquidity to achieve our 10 x 9 x 30 growth
plan.
Turning to Slide 55. I feel it is helpful to show GreenSky's long history of bank partner relationships dating
back close to a decade. We celebrate that we have these strong and collaborative relationships over the
years, and we look to continue to expand upon the $8.1 billion of revolving commitments we have today.
Of note, we are excited to have entered into a new relationship with a bank partner to help us support
our Patient Solutions business, which represents a new bank partnership established in the fourth quarter
of 2020. We already discussed the significant benefits of our diversified loan sales strategy from a cost
and capacity standpoint, and we continue to focus on additional programmatic sales and forward flow
agreements in 2021. We feel there is positive momentum, and the market continues to demonstrate
strong demand for our high-quality assets.
Lastly, as we look to our growth plans in the next 5 years, we plan to establish an off-balance sheet
securitization platform to round out our expansion of funding sources and access to incremental liquidity in
the coming year.
On Slide 56, I would like to highlight a couple of additional important updates. First, in the fourth quarter,
we amended our credit facility that warehouses our loans sale program to increase the committed
amount from $300 million to $550 million. This was achieved by adding an additional new lender to the
facility and by establishing the Class B note. The B note also facilitates the increase in advance rate from
approximately 70% to 84% on average, establishing a more efficient funding structure.
As part of these changes, the facility term was also extended for an additional year, providing ongoing
capacity. GreenSky continues to maintain ample corporate liquidity through a fully unused revolver and
over $175 million in unrestricted cash.
We had a strong finish to the year with transaction volumes over $5.5 billion, approximately $100 million
more than what we anticipated when we spoke with you in early November. So despite the COVID-19
headwinds, our transaction volumes were about 93% of 2019 levels with a higher transaction fee rate.
Also, consistent with what we discussed with you in November, we expect the 2021 transaction volume to
reflect a growth in the mid-teens compared to 2020.
Our 2021 revenues are estimated to largely align with that transition volume growth and also will benefit
from servicing fees from a growing portfolio as it reaches $11 billion at the end of this year. We expect to
report approximately $105 million in adjusted EBITDA or EBITDA margin of 20% for the full-year 2020. It
is important to note that this past year reflects the impacts of establishing our diversified funding model,
which included upfront costs of approximately $65 million in 2020. Referring back to the comparison of
lifetime profitability that we discussed earlier on Slide 54, when loan sales costs are reflected over the life
of the portfolios sold, approximately 80% of these costs incurred in 2020 will benefit future periods where
bank margin costs will be saved. Despite the acceleration of costs for expanding our funding model in the
initial year of this transition, the results for the year were extremely resilient, having benefited from the
durability of our Home Improvement business despite the COVID-19 headwinds in elective healthcare.
Looking ahead, as I mentioned already, we expect to continue to benefit from solid and achievable
transaction volume growth, stable transaction fee rates and growth in our recurring service fee margins.
The largest impact to 2021 adjusted EBITDA, however, is expected to be higher than normal credit losses
due to the remaining uncertainty around the ultimate performance of the portfolio that was deferred
in 2020 as well as any ongoing impacts of COVID in 2021 and the overall macroeconomic environment
as a result. As we have detailed before, the loans originated and funded by our bank partners through
GreenSky's bank waterfall structure, credit losses have a 1:1 impact on the incentive payments we
receive. We are estimating that the potential impact from higher than normal credit losses in 2021 could
be $100 million between incentive payment impacts and loan sale costs.
The precision by which we can predict these credit losses remains uncertain. And although credit
performance up until now has not demonstrated any early signs of this worsening, at this time, we believe
that we have taken the most appropriate view in order to provide transparency for the next 4 quarters.
Comparability, if we normalize for these incremental losses and the translation of upfront loan sale costs,
we estimate that 2021 adjusted EBITDA margin would be approximately 30%. Once we have finished
recognizing these remaining impacts from COVID and once we have reached a steady state in expanding
our funding model, which, we believe will be by 2022, GAAP net income and adjusted EBITDA will reflect
GreenSky's true underlying profitability with sustainable adjusted EBITDA margins exceeding 30%.
Looking through to the next 5 years, we believe we will be able to successfully deliver on our 10 x 9 x
30 strategic plan through achievable transaction volume growth, stable transaction fee rates, growth in
servicing fee margin, simplified but transparent bank waterfall costs, the maturity of our loan sales costs
and stable and increasingly efficient operational and SG&A costs. These core components will demonstrate
a simplified way to understand and project a strong long-term profitability of GreenSky's business. And
we hope to provide additional details on these components with our fourth quarter results at the end of
February.
So before we move to Q&A, on Slide 58, once again, let's highlight some key investment considerations.
We are going after a very large addressable market, where the combined domestic home improvement
and elective healthcare verticals aggregate more than $600 billion in consumer spend per year. The
company enjoys a highly attractive recurring revenue business model. Our lifetime industry-leading
customer value-to-customer acquisition cost exceeds 35x, we have achieved significant scale and are
poised for continued growth with 2021 transaction volumes anticipated to grow by 15% to approximately
$6.4, billion with an anticipated real and sustained revenue CAGR of approximately 13% over the next
5 years. GreenSky produces highly attractive adjusted EBITDA margins anticipated to exceed 30%. Our
unique ecosystem, which is extremely difficult to replicate, establishes a tremendous competitive moat for
the company. And finally, a deep and highly experienced management team that has the capabilities to
lead GreenSky in innovating our technology and expanding ways that we can delight our customers.
With that, operator, we are now ready to take questions.
Question and Answer

Operator
[Operator Instructions]
Your first question comes from the line of Steven Wald of Morgan Stanley.
Steven Wald
Great. Thanks, guys, for doing the Investor Day. I really appreciate you running through all the pieces of
the business and your goals over the next 5 years.
Maybe the best place to start would be on your just general outlook for the sort of low to mid-teens on
transaction volume growth and revenue growth. If we just sort of dial it out to where we were before
COVID and the business was kind of growing quite a bit faster than that and sort of depending on what
base you're using it, it's clearly -- it looks like the expectations have been hampered a little bit.
I'm kind of curious whether it's -- as you look out to that, is it sort of your view of the specific verticals
you're in? Is it that the funding piece? Kind of what are the toggles getting you to that new run rate of
growth over the next 5 years? And I guess to tack on to that question, I'd be curious to know what's sort
of baked into that from contribution of each line and if there's any baked in new vertical to that growth
expectation?
David Zalik
Chairman & CEO
It's David. Thank you for the question. I'll take the first half of that and let Andrew speak to the second
half. I think it starts with first a conservative bias. We started this with, this is a 5-year forecast and we're
going to level-set and really establish a vision and credibility for the next 5 years. So I think it starts with
a very careful level setting and taking the position of as meet and beat as opposed to anything that's
highly aspirational. Andrew, if you have any comments, why don't you add to it?
Andrew Kang
Executive VP & CFO
Yes. No. Thank you, David. I was just going to add just on the component around on funding, we spoke
a little bit about in the presentation. We feel like we made a lot of progress in the past couple of quarters
around funding capacity. We have continued to demonstrate programmatic ongoing loan sale activity. I
think what's most promising is that, that dialogue continues to proliferate as we sit today. And we do hope
that we'll be able to continue showing additional capacity expand in 2021 through some of our discussions
that we're having today.
So in terms of growth, I believe that the funding, at least in the projected year, will be more than
adequate to capture the growth that we mentioned in our forecast. The other thing to highlight there,
too, obviously, we now have a strategic alliance with a funding partner that's specifically dedicated to our
Patient Solutions business. So we expect that there's more than adequate run room there to help us get
that back to where we saw levels closer to the end of 2019.
Steven Wald
I appreciate it. And if there is -- just on the last part of the question, I had was in terms of the
contribution from each segment and if there's any baked in additional verticals, as you talked about some
potential expansion areas into that, that run rate by the time you get out to 2025?
Andrew Kang
Executive VP & CFO
I think the forecast shows the fundamental focus and growth around Patient Solutions and Home
Improvement. We think there's upside as we develop into some of those additional capacities that we
discussed.
Steven Wald
Okay. Great. And then just...
David Zalik
Chairman & CEO
Which are not in the forecast, to your question. So the other products and verticals goes in the big
category of upside.
Steven Wald
Okay. Yes. Understood and very clear. Just if I could dial it back on a follow-up of just the evolving sort
of point-of-sale financing or buying out pay leader ecosystem that's out there. You guys have taken the
strategy of B2B2C. And it seems like the way you're kind of looking at it is you're establishing or looking
to establish more relationships with the consumers to see what else you can sell them, as to your point,
David, the potential areas of upside.
How should we think about the strategy going forward there? Is that an area you think you can
differentiate on or will you sort of lead with the strong funding base and then push into that with the sort
of capacity to lend or add products to partners in those other spaces, which is sort of driving you towards
the other products?
David Zalik
Chairman & CEO
So I may not be following all of your questions, but let me try to answer it. If you'd follow-up, we can keep
digging into more detail. First of all, there appears to be so much demand from a growing diverse set of
funders that we don't see any constraints on the funding side, and that's really exciting.
And I think as Andrew referenced in his presentation, we're actually seeing excellent economics from
alternative funding that is structured, we think, in a very attractive way. We are committed to diversified
funding and we're really happy with the progress we've made.
As it relates to the drivers, what we realize having now over 3.5 million consumer customers and having
a digital relationship with them, there's a tremendous amount of opportunity to have -- to extend that
digital relationship, we expect often in partnership with our banks, which will further enhance that
relationship, creating other products and services for our consumers, where, in essence, we have a
negative cost of acquisition. We've already acquired them. And that just creates more value for the entire
ecosystem of merchants -- I'm sorry, of banks and consumers.
So the driver there for us is we already have nexus. We already have a relationship. There's other
products and services that the consumers tell us they want, and we want it. But I just want to point out,
there's a really big difference between what we're doing in a buy now pay later, which tends to be small
ticket subprime, short duration. Our focus is on generally prime and super-prime larger ticket, where there
is a lot more volume. Did I answer your question?
Steven Wald
You did. We were looking to kind of get a better sense of what you're sort of getting into those other
products, and you pointed to the customer habituation and relationship there. So appreciate it.
Operator
[Operator Instructions] Your next question comes from the line of John Davis of Raymond James.
Raymond James & Associates, Inc., Research Division

I really appreciate the time here. Maybe, Gerry or David, just at a high level, I want to talk about the
embedded assumptions for home improvement versus the patient solutions, how should we think about
the profitability of each? And not looking for exact numbers here, but where does that mix end up as we
kind of model out to 2025.
David Zalik
Chairman & CEO
Yes. So I think if you go to Slide 54, you could actually see what the sort of aggregate contribution margin
is, I think it's Slide 54, Andrew, for the business at large. And that is, in essence, a present value of
the cash flows that GreenSky generates for every dollar originated. And I think the reason that slide is
so important is we create lots of complexity and noise in fusion when we talk about GAAP. But if you
just model the cash flow, you can see that whether you sell it in a bank waterfall or you sell it to an
asset buyer, the present value cash economics to GreenSky are almost identical. and it's similar for both
businesses.
Andrew Kang
Executive VP & CFO
And I would add that the illustration you're seeing takes in account kind of the blended mix of our
business. So even though we do not break out specifically the components at a line level of profitability
between home improvement and patient solutions. As David suggested, this slide does give you a good
aggregate view of the whole.
Okay. And then maybe I'll just stay on the topic of cash flow and free cash flow. How do you think about
free cash flow over this 5-year period, either a percentage of EBITDA or percentage of net income? And
obviously, with kind of the leverage on the balance sheet today, I think about $100 million, like how do
we think about the uses of that cash over time? If you do hit your numbers over the next several years,
you will generate a fair amount of cash, but just kind of looking for any type of guidance of how we should
think about cash flow over those probably in the next 5 years or so?
David Zalik
Chairman & CEO
Andrew, I'll let you speak to that.
Andrew Kang
Executive VP & CFO
Sure. So just to point out again, we have about $175 million of unrestricted cash on our balance sheet.
That reflects some of the transition that we went through earlier this year as we were kind of deploying
our diversified funding model. There was more cash consumption as we built up the capacity to sell loans
versus funding them through the bank waterfall. As you know, bank waterfall is kind of 100% loan-to-
value, whereas funding through our SPV, as I mentioned, with the update is now closer to kind of 15%
on average. But that is a timing component. So as you build out that capacity, we will see free cash
stabilize. We've estimated in the presentation that kind of our transition to a diversified funding model will
encompass about 2020 and 2021. So I do think that cash overall is stable today. We've built out most of
the kind of the utilization of our SPV capacity, but we still expect to mature that in '21. And then going
forward, I think it will just be more reflective of how the company has performed previous to kind of
switching over the funding model.
Unknown Executive
John, to Andrew's comment in this fashion, prior to 2020, the company produced free cash flow that
always exceeded reported adjusted EBITDA as a function of the cash sort of advance that comes out
of our waterfall. Andrew went on record previously saying he expects our '21 originations to take the
form of perhaps 20% non-waterfall. So as we get through the transition year, as Andrew appropriately
indicated, we would expect on a go-forward basis, the company will continue to generate cash at or above
its adjusted EBITDA reported level.
Okay. That's super helpful. And then I got 2 more, but just a quick one. What type of credit losses have
you guys kind of embedded in '22 and beyond in the EBITDA?
Andrew Kang
Executive VP & CFO
So we haven't given that specific number. What we want to do is really be transparent around the fact that
there is still a lot of uncertainty around how credit losses would ultimately play out in 2021. I believe that
what you're seeing in the forecast does translate to the impact that we would expect if losses were at the
levels we're forecasting today as an impact to our incentive payments. So that's kind of how you see that
flow through.
What we plan to do when we provide full year and fourth quarter results, we'll try and give you a little bit
more context as to how we think about 2021 and how you can input a credit view on how it impacts the
incentive payment for 2021. But that's kind of how I'm thinking about the model. I might turn it over to
Tim Kaliban, just to maybe speak more high-level on the credit perspective overall.
Timothy Daniel Scott Kaliban
President & Chief Risk Officer
Yes. So just keeping in line with some of the comments that we've had earlier around our thinking on
volume was earlier comments, trying to make sure that we meet or beat I think it's the same way you
ought to be thinking about our credit performance outlook for 2021. So we have not built in unrealistic
levels of optimism around economic recovery and the efficacy of and distribution of vaccines or any
immediate a complete recovery of the credit situation. So we expect that credit throughout 2021 will be
-- have some headwinds and then our model is projecting 2022 to be returning to a more standard and
normal situation, consistent with what we've seen in our historical performance.
Okay. That's helpful. And then last one for me, either David or Gerry or Andrew, this is more of a kind of
high level. Interest rates have obviously caused some in the business model in the past. And with rates
kind of gone down, but ticking up a little bit, like how should we think fundamentally about how rates will
impact your new funding model? And then how you kind of thought about interest rates impacting your
business over this kind of 5-year time period.
David Zalik
Chairman & CEO
Let me just kind of speak to that at a high level. And I think you've heard when rates went up, we talked
about how, except for a short lag, it's net neutral for GreenSky. And when rates went down, we also
caution people that it does not create incremental margin for us in the long term. So for us, what we've
seen when consumer interest rates go up, go down, merchants still want to spend about 7%. The size of
the promotion changes, the fundamental margin doesn't shift.
There could be some noise in a quarter just as things get reset and adjust. But we've proven when
rates go up and rates go down, it creates short-term noise, but it doesn't impact the long-term lifetime
profitability of originations.
John, are you still there?
Operator
Your next question comes from Michael Young of Truist Securities.
Michael Masters Young
Truist Securities, Inc., Research Division
Wanted to start just kind of with the decisioning around what's going to flow into the bank waterfall versus
what goes into the SPV and just how you're using a decision to determine that?
David Zalik
Chairman & CEO
So I think, first of all, it starts with full disclosure with our partners, but it really comes down to 3 really
important values. One, is transparency with our funding; two, optimizing diversification, not only among
our bank partners, but also non-bank funding; and three, optimization of economics. So I think your
question is how do we decide what to put in a bank waterfall and how do we decide what not to put in the
bank waterfall?
Yes. And in particular, around the optimization of those economics? Or if there's any cultural issues or
sensitivity that you have?
David Zalik
Chairman & CEO
No. I think what we generally expect over time is across products and strats, 20% of origination could go
into asset sales. It's not really so much any kind of cherry picking one way or the other, we really stay
away from that. And what we've seen, especially with recent transaction is that the net economics to
GreenSky in either structure or the equivalent, as we've demonstrated, I think it was on 54. So we feel
good about the demand, and we feel good about the diversification. And we certainly -- we feel good
about the economics. And our banks seem to feel good about the ROA and the ROE and the credit profile
for them.
Andrew Kang
Executive VP & CFO
I'd just add on to what David said. I think it's an important point, especially in the cost optimization. The
Slide 54 really gives you that translation of lifetime profitability relative to the timing and the recognition
of the loan sale costs. And what's important to recognize is that those costs have improved since we spoke
back when we are delivering the Q3 results.
And so we alluded to that as well. We wanted everyone to -- we wanted people know that we expected
those to improve. They have improved through the course of this year, most recently reflected by
an incremental loan sale that we completed right at the end of December. And so I think it's really
important to make sure that the point is not lost that we are allocating across our bank partners, as David
mentioned, with transparency and with a view on delivering the right type of credit quality collateral. But
now also from a cost perspective, we have the -- we really have the ability to optimize between sources
that are much more equivalent than they -- than we represented to you a quarter ago.
Okay. And maybe as a quick follow-up to that, just -- I think you guys have looked at a forward flow
agreement in the past. How does the economics compare to these 2 avenues? Maybe you could just kind
of spell that out a little more?
Andrew Kang
Executive VP & CFO
Sure. I think what we had said when we brought that forward flow concept to the table was pre COVID,
and we believe that the economics of a forward flow agreement, again, at the end of '19, at the beginning
of 2020 were at or potentially better than the bank waterfall economics. I think what we saw through the
course of 2020 was definitely a shift related to not only credit, but pricing due to the uncertainty.
And so we printed a transaction in Q3 that still had that heightened pricing. As I mentioned today, when
I think about programmatic loan sales and forward flow opportunities going forward, I feel like we've kind
of come back towards the same pricing in market that we did pre-COVID. And that's generally broadly
reflected in the capital markets executions we're seeing even away from GreenSky.
And one last one just for me. Just on -- if you kind of move into some of the mortgage origination or some
other kind of origination verticals, what would the structure of that be? Is that going to be a JV with the
bank partners, or can you just talk about how that would look if you have any early thoughts there?
David Zalik
Chairman & CEO
Yes. So our expectation is that it would be a JV with our bank partners. And those conversations are
moving forward.
And maybe, I guess, Andrew, how would that flow through the model? Would it just be a fee generation
for GreenSky that you guys would recognize on alone?
Andrew Kang
Executive VP & CFO
That's correct.
Operator
Your next question comes from Chris Donat of Piper Sandler.
Piper Sandler & Co., Research Division
I think I'll send this one to Andrew. Looking at Slide 57 with the commentary about the $65 million of sort
of transitional expenses in 2020, I thought you made some comments on it, but I wanted to just make
sure I got them right. In terms of thinking about how those transitional expenses will play out in 2021,
should we expect sort of a similar magnitude Or will it be much diminished given how the -- how much
time has passed and how the volumes have moved? Can you just help us understand, is it $65 million in
the ballpark for 2021 or probably less than that?
Andrew Kang
Executive VP & CFO
Again, we will plan to give you a little bit more components with our Q4 results, allowing some more
transparency on how to tie into a forward-looking modeling assumption. But to answer your question
directionally, I would say they would be pretty, I'd say, flat to maybe slightly improved because keep in
mind, 2020 was the first year that we're putting this in place, I think we're going to get some benefit of
having taken some of the activity in terms of loan sale costs in 2020. So I would expect 2021 to be at or
slightly better than what we saw in 2020.
David Zalik
Chairman & CEO
And what I would add to that, Chris, is on Page 54, Andrew has noted that 2021 loan sales are estimated
to be approximately 20% of annual originations. To Andrew's point, that will result in a mark-to-market
charge in 2021, as he said, approximating what we spent in 2020. And what that does in terms of just
looking at EBITDA -- adjusted EBITDA is it obviously creates noise. It's not comparable to 2019 where
there was no mark-to-market.
And the benefit of a $65 million mark-to-market charge we're expensing it all upfront, we get the benefit
of not having a bank waterfall cost in the subsequent 2 years. And so that's why when you look at the 5-
year forecast, it looks different in terms of margin for 2021, but it's -- that noise is happening because
we're taking a charge upfront, and it takes 3 years to sort of get to a steady state where you're at the
same equivalent from an EBITDA standpoint.
Okay. That's helpful. Actually, your comment there about the 3 years to steady state, I probably should
have asked the question now, I think so. And then just one more about the $230 million loan sale you did
in the fourth quarter and the improved economics there. Is that -- it seems to be in this environment that
we should have significantly greater demand from banks who -- it's very difficult for them to find yielding
assets here.
And I know the capital markets can be a little bit different. But were there different buyers for that $230
million loan sale or was it the similar sort of parties in the transactions you had with prior sales or is it just
a better environment right now? Just trying to figure out like all the things that might be changing out
there for you, especially as you build the platform.
Andrew Kang
Executive VP & CFO
Sure. So it was a new whole loan sale buyer. So I think to your point, it is kind of the count of folks looking
to partner with us on buying home loans is increasing. And also, I also would echo what you said in terms
of demand. I think the demand continues to also be pretty strong in the market with the dynamics that
you described in terms of regional and super regional banks continuing to have a need and desire for
assets, and in particular, high-quality, high credit quality assets that can provide the attractive ROAs and
ROEs that we can partner with.
Okay. And then just one last one from me on -- I don't think I'm able to calculate the numbers now. But
looking at transaction volumes over the last few quarters, it seemed like there is a shift in your volumes
toward windows and doors and away from HVAC.
I don't know if it's really that material to your business, but I'm just wondering if that's -- there's been a
change in merchant relationships, like more additions on the windows side and fewer additions on HVAC
or something by consumer demand or weather? Just trying to understand the dynamics of the transaction
volume.
David Zalik
Chairman & CEO
Yes. Great question. No changes in merchant relationships. It really is a function of consumer demand and
seasonality, and the fact that we're seeing more large ticket discretionary expenditure, whereas nobody
wakes up and says, my God, I really want a new HVAC system. It's going to be so exciting.
So HVAC is more of a need. And I think some tailwinds that we're seeing is because we are strong in
windows and doors and discretionary spending. We're actually seeing an acceleration. So it's more
acceleration of growth in discretionary than it is a reduction of HVAC.
Operator
Your next question comes from Bill Ryan of Compass Point.

William Haraway Ryan
Compass Point Research & Trading, LLC, Research Division
Just a couple of things. Following up on the 20% of volume going through the nonbank channel as far
as funding goes, is that something that's going to ramp up over time? Do you kind of expect it gear at a
higher level than the 20%?
And I'm just kind of asking this question is to think about, is that the right number for future years or
is it going to be a little bit higher than that? Second question, just from a modeling standpoint. I know
we -- Andrew, we talked about this in the past. How should we be thinking about the favorite topic
of conversation at the beginning of last year, CECL, in the sense of do we need to build growth in the
servicing the bank side related to CECL on that? And what -- how should we be thinking about in terms of
number?
David Zalik
Chairman & CEO
I'm going to turn this over to Andrew. But let me just say that the 20% is a placeholder, and that's what
we've put down for each year of these next 5 years. And I'll let Andrew speak to the importance for us,
not only to have diversification, but also optimization. So I'll turn it over to you, Andrew.
Andrew Kang
Executive VP & CFO
Yes. So thanks, David. So yes, the 20%, again, is a -- I'd call it a midpoint, it could be higher or lower,
and it's a stake that we put out there. I think the more important thing to take away is that because we
have normalized the cost of those loan sales, it really represents just an incremental funding source that is
effectively the equivalent of whether we put it into a bank waterfall or if we sell to a whole loan buyer.
So for me, whether it's 10% or whether it's 30%, I think the more important takeaway is that it's an
incremental funding source, and I alluded it too in the presentation, whole loan buyers as well as the
capital markets provide a significant amount of additional capacity on top of solid and stable and growing
bank waterfall commitments, I think, is probably the most important takeaway.
In terms of CECL, I'll remind everyone, I'm sure, we remember that CECL for us is different than CECL
for others. It is directly tied to the bank escrow that we hold as unrestricted cash for our bank waterfall
partners. We have seen that pick up in the past kind of 12-plus months. We do expect that to have more
or less normalized. And we also expect that some of the credit forecasting that we would see that could
underlie the assumptions behind the CECL are consistent with what we've described earlier in terms of
credit loss performance.
So overall, I would expect that for 2021, there may be additional amounts as we see the bank waterfall
contribute some more of the funding capacity, but overall should be pretty consistent with what we've
shown in the past. And this is another area where we'll try and give a little bit of transparency when we
provide some more assumptions with our Q4 results.
Operator
Your next question comes from Jeff Cantwell of Guggenheim Securities.
Guggenheim Securities, LLC, Research Division
I wanted to see if I could ask you a follow-up to an earlier question. And the focus is on Slide 57 of your
presentation. If we look at the outlook for transaction volume in '21 and '22, it shows it's about around
$300 million delta between the bottom of the range and the high end of the range. So can you just help us
out there and walk us through the top maybe 2 or 3 factors that could cause you to come in at the bottom
of the range and also the top 2 or 3 factors that [ we call you ] covered at the high end of the range? I
guess the point is, is there any color that you can give us on the transaction volume outlook for this year
and for next year, would be very helpful. I just want to make sure we understand all the key puts and
takes there as you're thinking about them right now.
David Zalik
Chairman & CEO
Yes. So I would say the first thing is, how does the economy recover? And how does the vaccine roll
out? And how does the consumer respond? And do we have other shutdowns? So we wanted to take a
conservative view, but I'd say that's the first thing is, how much more disruption are we going to see?
And I don't think anybody knows that. I think we're cautiously optimistic that we're at the beginning of
the end, but what does the next 5 months look like? What does the next 6 months -- not -- so I think that
would be the biggest driver in terms of '21. And then I think '22 is impacted just by momentum from '21.
Andrew, anything you want to add to that?
Andrew Kang
Executive VP & CFO
No, I think that's spot on. Obviously, predicting exactly where we think transaction volumes would play
out is something that has a lot of assumptions based. And I think really, the economy, COVID vaccine,
stimulus, supply chain, those all factor into it. But I'll go back to what you said before, David, our trend
with -- our current -- towards the end of Q4 with our merchant productivity has been extremely positive,
and we expect to provide that momentum into 2021. It's just some of the other factors that could provide
some uncertainty to the outcome.
Guggenheim Securities, LLC, Research Division
Okay. I appreciate it. And then another follow-up for me, if I may. What you've discussed today as your
outlook, which probably takes a 30% adjusted EBITDA margin, and clearly, what -- we can appreciate it,
there's many, many variables to get from here to there, right? So the one thing I wanted to ask you about
these expenses, how are you thinking about the push-pull between[ managing that ] 30% margin versus
investing in your sales team or investing in R&D, et cetera? I guess maybe putting that another way, what
are your key investments plans over the next few years? Can you help us out there? Any sort of color on
your key expense priorities? And what we should expect to see from GreenSky there, would be great.
David Zalik
Chairman & CEO
Yes. Let me start that and then Andrew can provide some more detail. So let me focus -- let me start with
-- the real driver of that margin is actually the gap getting caught up to the cash flow of the business.
So for example, if you were to normalize '20 or '21, you'd already be there. In terms of we're creating
these transactions that we take this big charge up front, it takes a couple of years to level set. But we've
always invested heavily in technology. That's why we have the advantages that we have. We continue to
develop and deploy. It's where we spend the most amount of money. And we're very appreciative of Minaz'
leadership, not only in terms of security and stability but also in terms of development and innovation
and our product organization. We're constantly iterating with our partners and our constituents about
additional product features, integrations, and that is really foundational to GreenSky and that is really
where our approach historically to budgeting is. If it's a product that we think has value add, it's how
much can we build this quarter or this year, and it's really always human capital constrained, not dollars
constrained.
And as Jesse alluded to, really driven by the size of the market and market demand, he's growing his sales
organization, his account management organization. We're also beginning to roll out other products and
services for our merchants, and that's falling under Jesse. Dennis has the same phenomenon. So just the
unit economics are such where investing in growth is not a challenge or a difficult decision for us. Andrew,
anything you want to add?
Andrew Kang
Executive VP & CFO

The only thing I'd add, David, is that outside of the sales, investment in technology and some of the
marketing spend that you just described, I'd say overall kind of operational costs remain flat to better. And
the better reflects some of the efficiencies that we continue to expect in terms of our operations around
servicing and collections, as we have a highly efficient and automated collections platform. We expect
that as a percentage of the service portfolio, those costs will become more efficient through the 5-year
forecast. So the areas where I think we are having discipline are continuing to show that result. Areas that
we will become more efficient, I think, are around servicing and operations, and the areas that we'll invest
in are the ones that you mentioned.
Operator
[Operator Instructions] Your next question comes from Arren Cyganovich of Citi.
I was wondering if you could talk a little bit about consumer demand. It looks like that your health care
services demand kind of popped back a bit in the fourth quarter. Do you expect that to still be more of a
positive trend or you have a little bit more benefit in the second half of next year? And how is the home
improvement demand been? It seems to be relatively steady, but just curious as what you're seeing for
now on a monthly basis.
David Zalik
Chairman & CEO
Got it. So let me say, we've actually seen an acceleration in home improvement more rapidly than what
we've seen in health care. We're basically growing and restarting the health care business starting this
quarter. We saw an acceleration of growth in home improvement actually late last year, which is certainly
very encouraging. And we do expect to get benefit from a reemergence of health care in 2021. And
actually, that was really where most of, I think, the volume disappointment was in terms of last year. So
we are seeing healthy demand from the consumer, especially in home improvement. And we're beginning
to see green shoots in terms of elective healthcare.
Okay. I appreciate that. And Andrew, on the -- I guess I'm still a little bit confused about the drop in
incentive. I think you'd commented it could be around $100 million, but you don't have a lot of precision
around that related to credit costs. Does that $100 million include the impact of the loan sale cost, too?
It looks like if you run the 8% versus 30% against your '21 revenue of $584 million, it looks like a total
amount of $128 million, but obviously, $100 million, it would be a much higher proportion than the $65
million you have for '20. Sorry if I'm confusing with you all those numbers, but it reflects my mind right
now.
Andrew Kang
Executive VP & CFO
No, no. I think I caught where you were going. So I think the $100 million is intended to reflect the
possible impact from an EBITDA perspective, which could be a combination of higher credit losses, which
would have an impact on incentive payments in 2021. But it also takes into account the concept that if
there are higher credit losses, there could be potential impacts to sales price and mark-to-markets as well.
So right, those things are kind of linked to some degree.
So I think the way you should think about it is we believe that up to $100 million is the potential exposure
related to COVID losses in 2021, and it could be a result of actual higher credit losses, which would fall
through incentive payment or it could be through potential higher pricing in mark-to-market. But I think if
you focus on the $100 million, that will get you the transparency on how we think it will impact adjusted
EBITDA in 2021.
Operator
There are no further questions at this time. I'll turn the call back over to Tom Morabito, Vice President of
Investor Relations.
Thomas C. Morabito
Vice President of Investor Relations
Thank you, operator, and thank you all for your questions. We look forward to speaking with you again late
next month on our fourth quarter earnings conference call. Thanks, again.
Operator
And this concludes today's conference call. Thank you for participating. You may now disconnect.
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Call Participants .................................................................................. 3

Question and Answer .................................................................................. 17

Minaz K. Vastani Michael Masters Young

Arren Saul Cyganovich

Christopher Roy Donat

Jeffrey Brian Cantwell

At this time, I'd like to turn the presentation over to David.

Question and Answer

Raymond James & Associates, Inc., Research Division

John, are you still there?

Your next question comes from Bill Ryan of Compass Point.

Executive VP & CFO

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