GreenSky, Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Ladies and gentlemen, thank you, and welcome to the GreenSky Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the prepared remarks. As a reminder, this event is streaming live on the GreenSky Investor Relations website, and a replay will be available on the same site approximately two hours after the completion of the call. It is my pleasure to introduce your host, Amelia Freeman, Vice President of Tax and Equity at GreenSky. Please go ahead. Your line maybe on mute.

[Amelia Freeman:]

Thank you, Sydney, and thank you to all our listeners for joining us today. After the close of market trading hours yesterday, GreenSky issued a press release announcing results for its second quarter ended June 30, 2020. You can access this press release on the Investor Relations section of the GreenSky website. In addition, we've also posted our second quarter investor presentation, which we will refer to during today's call. On the call today, we have David Zalik, Chairman and Chief Executive Officer; Gerry Benjamin, Vice Chairman and Chief Administrative Officer; and Robert Partlow, Executive Vice President and Chief Financial Officer. We're also joined by Tim Kaliban, our President and Chief Risk Officer. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These are statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We disclaim any obligation to update any forward-looking statements except as required by law. Information about these risks and uncertainties is included in our press release issued yesterday, as well as in our filings with regulators. We will also be discussing a non-GAAP financial measure, adjusted EBITDA on today's call. This non-GAAP measure is 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 when analyzing GreenSky's performance. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated August 10, 2020, and on the Investor Relations page of our website. With that, I would now like to turn the call over to David.

[David Zalik:]

Thanks, Amelia. Good morning, everyone, and thank you for joining us. It's good to be with you today to review our second quarter 2020 results. As we continue to navigate COVID-19, we're committed to helping our consumers, merchants, bank partners, and our teammates navigate this challenging environment and continue to focus on the safety of all of our GreenSky associates and their family members. To that end, substantially all of our workforce continues to work remotely from home, while providing world-class servicing and customer service levels to our bank partners, merchants, and GreenSky program consumer borrowers. We continue to benefit from our investments in our GreenSky technology infrastructure, and I continue to be gratified by the innovation of our talented workforce. Now turning to our quarterly results. Our second quarter operating results and key business metrics depicts strong resiliency of demand in our core home improvement business, record levels of new merchant volumes, outstanding credit performance, and effective expense discipline across our business. Our transaction volume for the quarter was $1.4 billion compared to $1.6 billion in the second quarter of 2019. After hitting a low point in April 2020, our volumes rebounded throughout the second quarter, with April 2020 levels at 74% of April 2019 volume, May volumes were 84% of May 2019 volumes, and June volumes were 100% of 2019 levels. With the persistence of COVID-19, we expect to see the rate of rebound slow, thus it's difficult to reliably predict volumes for the remainder of 2020. Notwithstanding the impact of COVID-19 on this quarter's volumes, the company reported a very strong second quarter adjusted EBITDA of $40 million depicting an adjusted EBITDA margin of 30.3% compared to an adjusted EBITDA of $37 million with an adjusted EBITDA margin of 26.7% for the second quarter of 2019. In a few minutes, Gerry, will walk us through our key operating metrics and trends impacting our business, and then, Rob, will provide a detailed review of this quarter's operating results. However, I want to update you on four key business points

[Gerry Benjamin:]

Thank you, David, and good morning. Inclusive of the $1.4 billion of this quarter transaction volumes, GreenSky has enabled nearly 25 billion transactions for over 3.4 million consumers with the size of our loan servicing portfolio now approximating 9.4 million. With consumer spending considerably more time in their homes, our core home improvement vertical has continued to be strongly resilient with transaction volumes increasing considerably from April to May and then again from May to June. The COVID-19 impacts that are key to elective healthcare vertical was much more severe however, as virtually all states prohibited the performance of elective procedures, driving monthly transaction volumes to negligible levels. Fortunately, this represents only a very small piece of our overall company origination volumes. As we progress through 2020, we plan to intensify our focus on enhancing our home improvement product offerings, in particular, adding larger merchants that meet both our quality and productivity targets, while continuing to invest in advancing the effectiveness of our risk management processes and procedures. At our upcoming Investor Day later in the year, we will be highlighting the manner by which our ability to communicate digitally with the 85,000 merchants sales associates that have downloaded the GreenSky mobile app can be leveraged to enhance sales productivity. We continue to believe that the strong homeowner credit buyers present in our loan servicing portfolio represents an important differentiator when contrasting the GreenSky program with most other consumer loan portfolios. We're extremely pleased with GreenSky's Q2 credit performance continuing the consistently improving trends that we've witnessed now over the past four quarters. As depicted on Slide 20 of our second quarter 2020 investor presentation, the dollar credit weighted average FICO score of consumer originations was exceptionally strong at 783 for the second quarter compared to 769 in the same quarter last year. As highlighted in last night's earnings press release, the credit quality of the company's loan for servicing portfolio remains exceptional. As of the company's June loan servicing portfolio, 80% of the borrowers had an originated weighted average FICO in excess of 700 and 38% have scores in excess of 780. 30-day delinquency reserves at the end of the second quarter were 0.74% compared to 1.31% at the end of the second quarter of 2019, reflecting a 57 basis point improvement compared to a year-ago. As David noted, approximately 4% of our loan servicing portfolio was a payment deferral under hardship requests at the end of June. This being said, our small hardship deferral portfolio, and a very healthy dollar credit weighted average FICO score, and application of over 730. The ultimate performance of these hardship deferral accounts was currently difficult to predict will have some level of COVID-related unfavorable impact on future quarter's performance. In addition to the company's outstanding second quarter operating results, Q2 was extremely productive from a new merchant addition perspective. Of note, we added new merchants to the GreenSky network in the second quarter, producing more than $4.6 billion of annual sales revenues, a new company quarterly record. As of June 30, we had nearly 18,000 active merchants in the GreenSky Technology platform, more important than the 6% growth in the number of active merchants on our technology platform over the last year is the quality of these merchants. We focus not only on the substantial addition of high quality merchants, but also upon generating increased productivity for merchants that have been part of the GreenSky Merchant Network for many, many years. We partnered with infinite merchants to successfully grow their business, while continuing to take steps to call those merchants that don't meet our consumer satisfaction and publish quality standards. With COVID-19 persisting, the partnership we enjoy with our merchants has never been more important. In order for our merchants to better adapt to their customers financing needs in the current economic environment, we queried our merchants and developed a suite of new promotional loan products, primarily additional reduced rates and deferred interest loan products responsive to merchant inputs received. These product innovations have been very well received. As we hit here today, we believe GreenSky is extremely well-positioned to enjoy a significant increase in market share once economic conditions restore and normalize. We feel very good about the quality of our $9.4 million servicing portfolio and the quality of the loan freeze back facilitated per bank partners in the second quarter was exceptional. Before I turn it over to Rob to review the company's financial performance for the second quarter, I'm pleased to announce that Tom [indiscernible] will be joining GreenSky later this month as the company's new Vice President of Investor Relations. As a seasoned IR professional to formal sell-side equity analyst, we expect great thing from Tom and are pleased to welcome him to the GreenSky team. We look forward to having Tom join us at our Investor Day later in the year and on our earnings call next quarter, introduce him to many of you over the next few months. Rob?

[Robert Partlow:]

Thank you, Gerry.

[Operator:]

Pardon me, your line maybe on mute.

[Robert Partlow:]

Thank you, Gerry. As I'll review the results for the second quarter and fiscal 2020 during my remarks, I will refer to the corresponding page numbers of the presentation. Please also note that all comparisons will be relative to the second quarter of 2019 unless otherwise stated. Over the last several quarters, we have highlighted the improving year-over-year trend in performance fees that served to reduce the fair value change in FCR component of our cost of revenue. In fact, last quarter, we highlighted the material increase in bank incentive fees received when compared to Q1 2019, representing a 76% increase in dollar terms and 56 basis point increase as a percentage of service loans. And we reiterated our confidence that the GreenSky was poised to continue delivering these positive trends over the coming quarters. As increasing incentive fees are a byproduct of improving credit performance and a moderating cost of funds as outlined on Slide 31 of the second quarter investor presentation released last night, it is noteworthy that second quarter 2020 incentive fees grew 83% from $30.5 million in 2019 to $55.8 million, representing an 85 basis point improvement as a percentage of serviced assets, laying the foundation for the second quarter strong operating results despite the COVID-19 headwinds. We also talked with you the last couple of quarters about how the new current expected credit loss or CECL accounting standards change the accounting requirements for estimating credit losses. I'll briefly remind you that our CECL impact is different than per bank that has credit risk on the loan. Instead, our primary financial instruments in scope are the financial guarantee arrangements with our bank partners, which are secured by our bank credit escrow, which is a significant component of our restricted cash on our balance sheet. Under the new accounting for guarantees under CECL, future loan originations by our bank partners are not factored into the forecast of bank partner portfolio performance for the purposes of the new guaranty reserve calculation. The key feature of GreenSky's innovative waterfall structures that creates very durable portfolios over our bank partners is the programmatic nature of bank partners continual loan originations to both replace run-off as well as to grow their portfolios. Under the guidance of the CECL standard, we must now assume a model of loan losses whereby any consumer loan portfolio goes into run-off with no new origination in the portfolio. For the second quarter, we recognized a non-cash charge of $10.2 million associated with our financial guarantees. However, it is important to note that during this quarter, and so far in 2020, none of our bank partners have actually had to use any of the escrow under their arrangements with us. As such, we continue to adjust our EBITDA for the non-cash expense and will reduce our EBITDA when a bank partner uses cash under the financial guarantees program. Turning to our financial results, which correspond to Page 28 of presentation, transaction volume in the second quarter of fiscal 2020 was approximately $1.4 billion, 14% decrease from $1.6 billion originating in our platform in the second quarter of 2019, as COVID-19 depressed transaction activity across our platform. The company's transaction fee rate in the second quarter was 7.49%, an increase of 62 basis points over 2019 6.87%. As COVID-19 depressed economic activity during the second quarter, our merchants pivoted their product offerings to more promotional products, lower rates, lower interest rates, and longer promotional periods that translated into higher transaction fee rate. You can see the trend in transaction fee rate on Slide 21 of the presentation and the trend of the interest rates of our bank partner transaction activity on Slide 22. Total revenue in the second quarter decreased by 4% to $133 million from $139 million in the same period last year. The transaction fees totaling $102 million, down 6% from last year. Servicing revenue declined modestly to $28.5 million in the second quarter of 2020, $1.8 million lower than the $30.3 million realized in the second quarter of 2019. The decline was entirely attributable to the second quarter of 2019 $9 million mark-to-market gain on the servicing assets, whereas this quarter's $1 million mark-to-market loss was realized, as the overall level of the bank partner portfolio balances declined due to the low COVID impacted originations as well as the aggregation of loans held-for-sale. Absent the non-cash mark-to-market on loans held-for-sale, servicing fees which are senior cash flows and the bank partner waterfalls increased to $29.5 million from $21.3 million driven by the year-over-year growth in the bank partner portfolios and an increase in the servicing fee rate from 1.08% to 1.27% this quarter. As you may recall, starting with the second quarter of last year, several of our bank partners service arrangements were amended to among other things increase their fixed servicing fees. When servicing fees are higher than their market rate for servicing, the excess servicing fees create a servicing asset. Interest income is a new revenue stream in Q2 and has increased to $2.7 million in the second quarter. This is attributable to the loans held-for-sale on our balance sheet of $411 million arising from our new funding model special purpose vehicle. Turning to Slide 29, cost of revenue totaled $64.9 million or 2.8% of the servicing portfolio in the second quarter compared to Q2 2019's cost of revenue of $56.2 million with the rate of 2.85%. Cost of revenue has historically been divided into three distinct components

[Amelia Freeman:]

Thank you, Rob. That concludes our prepared remarks. And with that operator, let's please have our first question.

[Operator:]

Certainly. [Operator Instructions]. Our first question comes from John Davis of Raymond James. Your line is open.

[John Davis:]

Hey, good morning guys. David I’m wondering if you could just provide a little bit more color on the strategic review and specifically kind of the focus on home improvement, does that mean you're going to kind of exit elective medical or not expanding the future vertical or other verticals in the future, just so maybe a little bit more color on how you arrived at remaining public company, but also your comments are really focusing on home improvement?

[David Zalik:]

Thanks for the question and good morning. Yes, so I think it's pretty straightforward. our home improvement business even in this environment has proved unbelievably resilient in terms of demand. And so that's where we're focusing certainly for this year. Other business lines which are much smaller for GreenSky have been much more impacted. But we're already at 100% plus of prior-year in home improvement. So that's where the bulk of our businesses, the vast, vast majority, 90%, that's where all of our consumers and merchants are in terms of majority. And so it's sort of obvious for us, that's where the focus is. Certainly as the environment returns to normal, there'll continue to be opportunities. And we'll continue to grow that. But we're focusing where the revenue is right now. And then in terms of the strategic review, I think the board and management and advisors did a really thoughtful job. And for us, understanding the opportunities in front of us, the opportunities on related to funding, and the current environment took longer than we wanted to, but I think we made some good decisions and have some good opportunities in front of us.

[John Davis:]

Okay. And then obviously that was pretty impressive you get back to required volumes in June, safe to assume that those have increased on a year-over-year basis in July and maybe early August, any commentary there? And then also along those lines, credit remains very solid, how much did you and/or the banks tightened credit and if you did, who started loosening those credit standards at all?

[David Zalik:]

Yes. So we -- we've been very cautious about volume, we certainly feel good about it. But we're not going to -- we're not going to predict, what this Fall will bring. We're cautiously optimistic. But we certainly feel good about and it's certainly better than we expected relative to volume especially considering our healthcare business was much more impacted than our home improvement business. And the performance of credit is a function of the industries that were in the positive selection that we get primarily doing business with Homeowners and the credit performance is a function of years of work from our risk organization preparing for an eventual recession. So we feel really good about that. Thank you.

[John Davis:]

All right. And then last one for me, just high-level, how should we think about the margin profile of this business going forward? Right, even though public, this was a mid-40s EBITDA margin business. Obviously, there's a little bit different business model today with a different funding mix. So as we think about the go-forward, I think you did 30% margins in the quarter. So how should we think about what you guys think the right level of EBITDA margin is, as we kind of think about the back half of this year and into 2021?

[David Zalik:]

Right. So can't speak to the back half of this year specifically. But I think we have been consistent in suggesting that over time in long-term, this is a 30% plus margin business. Gerry, do you want to add some commentary to that?

[Gerry Benjamin:]

Yes, you nailed it, David. Absent any one-time COVID-related impact, we have CECL distortion which is non-cash, and perhaps periodic mark-to-market adjustments, that will go both ways over time. I think this is a solid 30% plus EBITDA margin business and in scale, we could move, we're on the midway point there mid-30s and moving on. So I think David nailed it.

[Operator:]

Thank you. And our next question comes from Steven Wald with Morgan Stanley. Your line is open.

[Steven Wald:]

Great, good morning and thanks for taking my questions. Just kind of want to follow-up on some of those points maybe just to start off on the margin since we ended there. Just going through the reconciliation how you guys have reshaped that relative to some of the things that have happened over the last year. I think second quarter is typically marked the highpoint of the year for you guys seasonally on the margin, and so I'm just trying to make sure I understand the puts and takes of what gets you to the 30% margin as you shift the funding model and are we going to see the revenue -- should revenue yield move higher? Or should we just see less pressure on the cost of revenue side from the FCR. And just trying to understand what drives the expectation for a 30% plus margin in what looks like it's been revised lower in terms of the margins from the prior-year?

[David Zalik:]

Gerry, you want to speak to that?

[Gerry Benjamin:]

Perhaps Rob and Dave can join me. We've got three things going on; that I think you'll see. First of all, we're starting to see some nice scale in the business, the expenses look good, you see our customer acquisition cost in the investor deck is down to 3% this quarter from historically would have been running 5%, we're seeing some nice scale there. We don't know 3% is sustainable forever. But we are seeing the benefits of our scale. Our transaction fee mix appears to stabilize that could change, if we got back in the solar business in a meaningful way for instance, or new software buys there. As I mentioned earlier, while we have these mark-to-market adjustments periodically to your point, let's just say that 50% of our origination were financed in core workflow and investor-related arrangements, that would take all the data out of our business model, there would be no FCR. So it becomes a much simpler equation for that piece of the business. Just finance either a forward-flow or sale arrangements you have a realized transaction at closing. That provides a meaningful drag on our cost of sales that FCR would be realized that the point in time those investments held-for-sale are divestments. So combination of scale, shutting the FCR, and obviously maintaining or perhaps improving the transaction volume.

[Steven Wald:]

Okay, that's helpful. If we can switch back to the credit in the delinquencies, 74 basis points, I know the asterisks there around just it's executing the deferrals and looks great on its own, just kind of wanted to get a sense of what you're seeing in terms of customer behavior there. And what's your sense of, if you were to normalize that within the deferrals of who you think would probably normally be on a delinquent basis, kind of where you'd be -- you'd be more within the range you've been historically or sort of just get a sense of where that might be, once you normalize for that?

[Gerry Benjamin:]

It was only 4% of the servicing portfolio that we've been pursued of these hardships deferrals. And the average FICO of that universe, consumers that are in that rural population is really shockingly strong. We can't say with tremendous confidence, how the world will perform, we're cautiously optimistic that we'll come out of this with deductible level of charge-offs that go loss, but at this point in time, it's difficult to say. To your point even if we normalize those hardship deferrals, we come up with a very, very satisfactory 30-day delinquency rate maybe in the near 100 plus basis point range, but something in that zip code.

[Steven Wald:]

Okay, that's super helpful. And then if I could just squeeze, one last one following-up on the strategic review, maybe if we just step back towards, I reviewed your comments last night from when you -- when you guys started and the sense was that the market was sort of missing something in the intrinsic value of the business. And I guess, I'm kind of wondering as you move a year ahead, the kind of stocks where it is and obviously a lot happened COVID has happened and whatnot. I guess I'm curious in terms of pushing ahead in the areas that have been core to you, the entire time, with the major change being the move to add non-bank funding in the coming year, sort of what -- what it is that drove you towards deciding that the current course would push -- would really enhance the market value. I guess I'm curious like as to how your thoughts have evolved on that?

[David Zalik:]

We like to be continued owners of the business. We think it'll be good for shareholders. We think that in the long-term, the opportunities are good for being a shareholder.

[Gerry Benjamin:]

Let me supplement David's comment just a bit. The one thing that this COVID period of time has reinforce to us is we're just terribly fond of the credit bias that we're enjoying vis-à-vis the vast majority of our power of being homeowners. When we look at our credit performance, when we look at our hardship deferral rate compared to virtually any other consumer program, we're aware of what we're looking at the core performance we're seeing in the strength of these borrowers. And when we look at our adjacent online and e-commerce offerings that are touching homeowners, we want to stay very, very close and retain that homeowner bias. I don't think there's another program out there of our mass, of our depth, of our breadth that anybody can touch and that reflects itself and the demand we're seeing for our loan to the marketplace, the pricing we're seeing for our loans in the marketplace. And the liquidity of the three type program loans that we're facilitating for our bank partners. I think they're very, very pleased with the quality, the diversity, the lack of concentration, the quick turnover, just that tremendous attributes that we find ourselves, I think uniquely advantaged in the ward [ph] as well. So continue to invest and leverage that bias, I think gives us a unique asset by which to derive value over time.

[Operator:]

And our next question comes from Andrew Jeffrey with Truist Securities. Your line is open.

[Andrew Jeffrey:]

Hope everybody is doing well. I'm looking at the transaction fee rates and I think my understanding is that the take rate improved this quarter due to more promotional offers, I wonder if you could just elaborate a little bit, is that merchants saying, hey look, this is a particularly great time to put a new windows or remodel your kitchen. And they're selling products that are more -- that have more promotions in them. And sort of I guess, I wonder how sustainable that is? And what sort of sync the longer-term impact is at your businesses, this is obviously a very strong transaction fee quarter just trying to think about how we model that going forward?

[David Zalik:]

Yes, let me provide some context. You'll remember, when transaction fee rate went down, we reminded everybody that our economics are a combination of a) transaction fee plus b) servicing revenue plus c) the performance bonus of the cash flow of the portfolio that we generate. And when transaction fee rate goes down, the performance fee tends to go up as indicated by higher average build yield on the portfolio. So shifts in transaction fee rate do not impact the long-term cash flow of the business. It's easy to focus on it for the short-term. But it doesn't actually change the present value of the cash flows based on the origination. So the answer to your question is we're not from a long-term perspective terribly focused on it, what we're focused on is quality, demand, quality origination, and quality performance.

[Andrew Jeffrey:]

Rob, how would you -- how would you try to give guidance to terms of forecasting or building a model on transactions?

[Robert Partlow:]

Yes, I would say, maybe we certainly have seen during the peak of the COVID times, the transaction fee rate come up, it's actually down slightly. But I think it's still remaining at elevated level with the transaction activity we see today. So I'd expect it to be higher than it was for the remainder of this year than last year. We’re seeing I think merchants do through this process. I think they kind of realized that promotional financing is a great way to drive sales. I do think there's a little bit of stickiness in terms of the promotional products, once you start using them. It's a little bit of a realized, that's a really effective sales tool. So I think it'll be, end-up being a little bit higher than it was historically, that’s the best way to think about it.

[Andrew Jeffrey:]

Okay. But I guess the key message for us is it doesn't change your cash flows. It's really the focus on the quality of the credit.

[Robert Partlow:]

That's correct.

[David Zalik:]

That's correct. And again, that's what we said when take rate was down a few dozen basis points. It's exactly the same accurate message when it goes up.

[Andrew Jeffrey:]

Yes, it was consistent in the past too. Appreciate the high-level of conclusion, this is a business that you want to own and that you think you can optimize for shareholders given the opportunity and the big TAM, are you spending enough to drive growth?

[David Zalik:]

We think there is opportunities to accelerate growth. We're just obviously being very cautious in this environment. We're certainly delighted with the resiliency of quality demand and a little bit surprised by it. We're quite encouraged by it. So we think that as there's more visibility into the economic and political environment, we would expect to see an acceleration of investment in growth.

[Operator:]

Thank you. And our next question comes from Chris Donat with Piper Sandler. Your line is open.

[Chris Donat:]

Good morning, gentlemen. Thanks for taking my questions. I wanted to ask one about the patent approval. Congratulations on getting through that that long and torturous process. I'm just wondering if you have anything for what it means for the business model, is there -- are there opportunities to license the patent? Would there be potential litigation? I imagine that just going to put it as a trophy over the mantle right now, the approved application there.

[David Zalik:]

Good morning, Chris. Nice to hear your voice. It's been a long time since any of us were in person. Yes, it's pretty remarkable after nearly six years. We appreciate the service of the United States Patent Office. We do think it -- it presents opportunities and we're still evaluating that. And so we expect it will be more than a mantel on the fireplace.

[Chris Donat:]

Okay and I guess we’ll whatever we'll be aware of it when it happens. Then shifting gears wanted to ask, it's impressive to see your, the FIFO scores that you've put up this quarter and delinquency rates being low, any insight into how homeowners have behaved or perhaps benefited with the CARES Act and federal stimulus and unemployment insurance? Are you seeing any impact on -- of those activities on homeowners or is it hard to tell with your borrowers, if they're benefiting from anything going on?

[David Zalik:]

So I think that it's fair to say that disproportionately low percentage of our consumers and program borrowers either historically or prospective or new originations, a disproportionately low percentage are positively impacted by extended benefits. These tend to be higher average income homeowners. So I think that -- it's the fair, reliable answer is disproportionately low positive impact, which also means disproportionately low impact of volatility of future benefits. I would point out that delinquency pre-March 15 was at record lows. So we feel like we were going into that environment in a great position.

[Chris Donat:]

Okay. And then just want to ask one more on the mix of home improvement loans on Slide 11, look like relative to prior-quarters you saw a bit of a downtick in windows and doors, but improvements in things like awnings and sunrooms and remodeling. Is it fair to say this is like you’re seeing people on a work-from-home environment, doing home offices or any general trends that you want to comment on? I know you made some in the prepared remarks but just curious what's going on?

[David Zalik:]

Yes. What we're seeing is a healthy and broad rebound. I think that windows and doors was temporarily more impacted as it has a more complex supply chain. We saw manufacturing capacity limited. But we're seeing demand by category begin to return to normal levels.

[Operator:]

Thank you. Our next question comes from Reggie Smith with JPMorgan. Your line is open.

[Reggie Smith:]

Hey guys. Good morning. Thanks for taking my question. I had a quick question on I guess on the receipts rate. Nice uptick this quarter, I was curious about the sustainability of that and whether it is in any way impacted by anything that's kind of a shorter term and duration. Could you speak about maybe payment, the payment rate and whether that slowed and impacted, any color you could provide their sustainability of that and the underlying trend? And I got a follow-up as well. Thank you.

[David Zalik:]

Gerry?

[Gerry Benjamin:]

Reggie, good to chat with you. Thanks for being here. As you know, the receipts are a byproduct of a couple of factors. First is our underlying cost of funds. I think we all believe we're in an interest rate environment that's temperance, and likely to remain there for the foreseeable future. So we feel pretty good about the rate outlook and the forward curve which suggests we should feel good about it. And then the other significant part is credit performance. As David indicated, pre-COVID we felt like we were really in great shape and again tightening the underwriting standards and watching credit carefully and enhanced our risk policy, and started seeing pronounced improvements from Q2 last year. And it's continued, notwithstanding the COVID impact. So those two rates, those two factors, are the key drivers of receivables. We continue to believe interest rates will be temporary to moderate, and we've got every reason to believe ex any COVID-related impacts that credit performance will continue to be outstanding. So as Rob indicated in his opening comments, the outlook for CECL is really quite solid.

[Reggie Smith:]

Got it. And I guess just to drill down a little bit obviously delinquencies are down which is great. Have you seen, I guess a slowing in the payment rate that may benefit you guys like this is helpful, any tailwind there or things just kind of businesses as usual. Any granular detail you can provide there would be helpful?

[Gerry Benjamin:]

When you say slowing in the payment rate, obviously the 30-day delinquency is sort of the leading indicator that we look at carefully as sort of a future indicator of what could be coming in the way of charge-offs little lower the better. We saw that 30-day delinquency rates start popping up. That would not be shocking relative to universal hardship deferrals, but we're not seeing any [indiscernible] there.

[David Zalik:]

And in terms of dollar payment velocity of customers, it remains strong. So we feel good about that.

[Reggie Smith:]

Got it. And I think someone asked about July and I don't know if your response get lost in the other questions, but did you guys provide or could you provide any look into what you're seeing transaction wise in July? Is it better than June? Is it kind of stable to June like any insight there would obviously be helpful.

[David Zalik:]

We feel good about the continued resilience of the business. I don't think we're publishing July numbers but certainly relative to prior-year, July, we feel good about it.

[Reggie Smith:]

Okay, that's helpful. Last question for me, I guess the forbearance or the hardships, when did those roll-off or when will that mature and those come back to life?

[David Zalik:]

Those hardship deferrals were generally 90 days. So we would expect generally over the next 90 days.

[Operator:]

Thank you. And the next question comes from the line of Bill Ryan from Compass Point. Your line is open.

[Bill Ryan:]

Good morning and thanks for taking my questions. First question kind of a reiteration of a couple of past questions that incorporates incentive fees, forbearances and expected net charge-offs. Lot of the banks are kind of talking about the lifting of forbearances which are having a positive impact on charge-offs currently, that there's probably going to be some potential spike in charge-offs going into Q1 and Q2 of next year with lifting and forbearances and the unwinding of the temporary benefits and charge-offs and so any outlook for incentive income going specifically into the first couple of quarters next year? Are you anticipating kind of the same phenomenon before it normalizes maybe in the back half of 2021? And I'll just go on throughout the follow-up question, just in the sense of timing that you might be selling some of the loans out with your SPV, just some color on that. Thanks.

[David Zalik:]

Thank you. Great question, so the simple answer is yes to the first question. And the second answer is second half of this year. As we stated, I think in our prepared remarks, we expect one or more transactions out of the SPV.

[Operator:]

Thank you. And our last question comes from Rob Wildhack with Autonomous Research. Your line is open.

[Rob Wildhack:]

Good morning guys. Just a follow-up on that last one, can you give us any additional color on where losses have been historically and where you think they could get to? Or what kind of assumptions are informing that expectation for losses to increase later this year and into 2021?

[David Zalik:]

Yes. So as we noted, pre-COVID losses, as we look at delinquency and loss rate, more of a leading indicator delinquency in February, and early March were record low levels. So we do think that that over time, it has in COVID the potential to normalize to the historical losses. But we think that foundationally, we're in a much better place. And we will absorb that over the coming quarters. And that's based on an analysis of the fact that I think over 90% of the customers in payment deferrals were current or not materially delinquent going into the payment deferral, which is probably higher than we would have expected which is good. But certainly, as we indicated, we do think it's a short-term headwind. But it will be continued to be highly resilient.

[Rob Wildhack:]

Okay, thanks. And can you give us an update on where you are with the forward-flow agreement? It's taken some time for those discussions to get over the goal line. So just wondering, what those conversations are like and where you're getting the confidence that that'll still be a $2 billion to $3 billion commitment?

[David Zalik:]

Gerry, do you want to speak to that?

[Gerry Benjamin:]

Sure. Rob will join me here. We're in the market and discussions, advanced discussions with multiple investors. We clearly were not interested in pulling the trigger prematurely and just doing a deal to do a deal as interest rates and ABS structures have normalized post-COVID. That's been reflected in indicative pricing we’re seeing. So our patience has served us well. One of the reasons we put that SPV in place was to be a vehicle to warehouse these assets. And we periodically would sell those, part of that is not forcing the market but timing and letting market forces take place. As we mentioned earlier, we think we've got a unique competitive advantage given the homeowner bias, strong homeowner bias clones we facilitate, and it's being reflected in bids we receive and if you want to be long consumer credit homeowners in size, there's probably not a better place to go than talk to GreenSky. We're being patient in this process but we’ve got transparency, we're in discussions, advanced discussions with multiple parties. And as David and Rob commented, we're very confident and will calculate one or more transactions in the back half of the year but fundamentally the demand for these assets is really quite strategic. So we feel very, very good.

[Rob Wildhack:]

Okay, great. And I think you said in the past that maybe pricing wasn't as attractive in some of those discussions. So can we infer based on your comments there Gerry that the pricing conversations are a little bit better from your perspective today given the things are normalized in the ABS market -- rate market?

[Gerry Benjamin:]

Absolutely. The sort of onset of COVID, people didn't know what that ABS market would look like, it didn't lock up. But it certainly tightened up reasonably. So people were hitting the pause button, or they're wanting to sort of insert a risk premium that candidly we weren't interested in trading it. We have great confidence in all of these assets and it's proven to be more insightful in our part. So yes, as things have normalized in the ABS markets had become more liquid, credit available at better prices reflected this indicative pricing. And we stick by the commentary we gave previously over the life of the loans we facilitate, we believe, the prices we'll see in our forward-flow arrangements and spot buys will be closely correlated with what are for some of the funding of the GreenSky program. We feel very, very good about that.

[Operator:]

Thank you. And I'm not showing any further questions at this time. I'd now like to turn the conference back to speakers for any further remarks.

[David Zalik:]

Thank you, everybody.

[Amelia Freeman:]

Thank you everybody. This concludes today's call.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a good day.