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spk00: Good morning and welcome to GreenSky's first quarter 2021 financial results conference call. As a reminder, this event is being streamed live on GreenSky Investor Relations website. And the replay will be available on the same site approximately two hours after the completion of the call. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to Brinker Daly of Investor Relations. Mr. Daly, you may begin.
spk03: Thank you and good morning, everybody. Thank you all for joining us. Yesterday, GreenSky issued a press release announcing results of its first quarter 2021, ended March 31st, 2021. You can access this press release on the Investor Relations section of the GreenSky website. In addition, we have posted our first quarter 2021 earnings presentation which we will refer to during today's call. Today you will hear prepared remarks from David Zalek, our Chairman and Chief Executive Officer, and Andrew Kang, our Executive Vice President and Chief Financial Officer. We also are joined by Jeremy Benjamin, our Vice Chairman and Chief Administrative Officer. Before we begin, 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 statement, except that's 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 also will be discussing non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to 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 May 4th, 2021, and our investor relations page of our website. At this time, I will turn the call over to David.
spk06: Thank you, Brinker. Good morning everyone and thank you for joining us. It's good to be with you today to review our first quarter 2021 results. The first quarter was another solid quarter for GreenSky in a very strong start to the year. We have built on the momentum generated at the end of last year and are witnessing outstanding application volume growth across our markets that we believe will further propel our business in 2021. GreenSky posted a company record first quarter adjusted EBITDA of $35 million with a higher adjusted EBITDA margin of 28%. Our outstanding year-over-year profitability was in the face of still ongoing merchant supply chain difficulties related to the continued impacts of the pandemic. First quarter pro forma net income adjusting for non-recurring fees exceeded 2020 first quarter results by $24 million. A driver of the company's strong performance was the outstanding performance of our service portfolio. For the quarter, the 30-plus day delinquency rate, which is a leading indicator of credit performance, was 0.76%, marking a strong improvement compared to the previous quarter and to the first quarter of 2020. The strong credit performance has positive implications on our cost of revenue and other areas that impact our profitability, which Andrew will discuss in more detail shortly. Andrew will also go into more detail on our funding efforts in a moment, but I would highlight that during the first 120 days of the year, we completed over $2.3 billion in new funding initiatives across a diverse set of sources, which included a new forward flow agreement, additional loan sales, and the increased commitment of a longstanding bank partner. The rapid success of diversifying our funding model has been a strength for GreenSky, and I'm thrilled with the progress we've made since we announced the strategy last year. These efforts and successes have directly resulted in a lower cost of funds in Q1 and will allow us to continue optimizing our cost of revenue to further increase profitability going forward. Turning now to the results, transaction volume for the quarter was $1.3 billion, which puts us solidly on pace to meet our transaction volume guidance for the year, taking into account the typical seasonality of originations. From February to March, total company transaction volume increased 28% month over month, showing strong momentum as a result of the investments we've made in new and existing merchant relationships. This compares favorably to growth in the same period in 2020 of 5%, and in 2019 of 21%. Our servicing portfolio ended the quarter at $9.3 billion. Similar to what we and others are seeing in the broader consumer market, our servicing portfolio experienced higher prepayment rates compared to historical levels. While higher prepayment rates can result in slightly lower servicing fee revenue, we benefit from lower bank waterfall costs through saved bank margin and lower future credit losses. Simply put, earlier prepayments boost lifetime loan profitability for the majority of our portfolio. Despite these recent market trends, we expect our transaction volumes will outpace prepayments in future quarters, resulting in strong and sustainable servicing portfolio growth. Turning to credit quality, the performance and composition of our servicing portfolio remained exceptional during the first quarter. We believe that many consumers are choosing to use their increased disposable income and stimulus checks to pay off their debt, which benefits the credit performance of our servicing portfolio. Our 30-plus-day delinquency rate equaled just 0.76% of our overall servicing portfolio at the end of March, an improvement of 47 basis points from a year ago, an improvement of 23 basis points from the end of 2020. Delinquency rates continue to outperform due to the high credit quality of our program borrowers who have demonstrated resiliency despite last year's unprecedented challenges. Importantly, while some consumers are repaying their loans more rapidly, transaction volume is originating at a faster pace as we continue to see strong demand in home improvement. In fact, March approvals represented the single largest month of approved credit lines in company history. Next, as we've done in the past, I'd like to provide an update on the status of our COVID-19 disaster assistance program. Green Sky program borrowers are continuing to exit payment deferral at a faster rate than those requesting new enrollments. And at the end of March, approximately 0.2% of loans, or $20 million, of our servicing portfolio were in deferral status. Of the loans that had previously received a deferral, approximately 0.4% were greater than 30 days delinquent at the end of the quarter. While we are cautiously optimistic that we will continue to see improving trends, our total exposure to borrowers that were impacted by the pandemic has declined substantially since the end of 2020. Turning to slide six of the presentation, After our strong first quarter results, we are seeing real tailwinds for the remainder of the year in our home improvement and elective healthcare businesses as broader macroeconomic trends continue to improve. We believe that improved consumer balance sheets and more time at home translates into continued and accelerating demand for home improvement projects. In elective healthcare, as states begin reopening in the final months of 2020, we've seen an upward trend in our patient solution volume. And as we sit here today, the majority of states are once again fully open for business, and we see medical providers expanding both their office staff and hours to work through patient backlogs. We anticipate increasing transaction volume within our elective healthcare business as the year progresses. Our merchants are the key to our transaction volume, so let's turn to some updates on that front. As previously mentioned, we recently renewed our partnership with the Home Depot and have further built on that success, solidifying our market-leading position in the home improvement space. During the quarter, we also expanded the strategic relationship with one of our largest sponsors and enhanced our agreement with one of our top three windows and doors merchants, whereby we expect to see a material increase in their annual transaction volume in the coming year. Other key wins in the windows and doors space include a $20 million annual transaction volume merchant and two regional $15 million annual transaction volume merchant wins from our competitors. In addition to the great progress in windows and doors, we also won a $30 million a year transaction volume HVAC merchant from a competitor, increasing GreenSky's market share in the HVAC category, our second largest segment. Coming off of the turbulent 2020, these wins strengthen our position as the leader and the largest consumer finance platform in home improvement as we optimize our relationships with existing merchants and win share with new partners. In our elective healthcare business, our transaction volume is a percentage of our total company volume, increased in the first quarter as we continue to build momentum. We shared previously that we completed a strategic alliance with Clear Blue Smiles, a cutting-edge orthodontic provider, and also significantly expanded our relationship with the nation's largest provider of dental implants. Furthermore, we successfully completed integration work and launched our universal credit application within our elective healthcare business. As a reminder, the universal credit application, which was rolled out within our home improvement business in 2019, is a tool that increases merchants' approval rates without a degradation of Green Sky's credit quality through our partnership with Second Look Lenders and fosters a better consumer experience through a streamlined application process. Based on these key wins and those in the pipeline, I'm excited that we are not only taking market share, we are also growing volumes with our existing merchant relationships. As illustrated on slide seven, we have a demonstrated track record helping our merchants grow transaction volumes on our platform for multiple years and believe that the recent wins with existing and new merchants will further build on that success. I will now turn it over to Andrew to discuss our quarter's financial highlights.
spk05: Thank you, David, and good morning. Turning to slide eight of the presentation, so far 2021 has continued to demonstrate our consistent progress and executing against our diversified funding strategy, which is today benefiting from both more efficient loan sales and also from enhanced relationships with our existing bank funding partners. We believe this quarter has demonstrated disciplined execution on both fronts. In March, we announced the completion of a $1 billion forward flow sale agreement with a leading life insurance company who is new to GreenSky's ecosystems. In April, we further expanded that agreement by increasing its commitment by an additional $500 million for a total of $1.5 billion. Subsequent to quarter end, a bank partner that has been part of GreenSky's platform for multiple years increased its commitment by an additional $500 million, increasing their total revolving bank waterfall commitment to $2 billion. That bank partner also extended its agreement for an additional two years into the fourth quarter of 2023. Also in the first quarter, we completed approximately $315 million in planned loan sales at improved pricing compared to the fourth quarter. Excluding a small number of 0% loans, the loans sold in the first quarter were at or above par. And since our inaugural loan sale in the third quarter of 2020, we have completed over $1.5 billion in sales. At this point, GreenSky has a wide variety of funding options in place with a combination of strong bank waterfall commitments, a forward flow agreement, and strong institutional investor demand for incremental loan purchases. With these options, we now have the tools to further optimize our profitability across our loan products, which you'll see directly reflected in our updated 2021 guidance that I will provide additional details around shortly. Let me give you some additional details around our funding commitments. Our bank waterfall commitments were approximately $9.7 billion in total at the end of March, prior to the $500 million bank partner increase. Approximately $1.9 billion of commitments were unused at quarter end, and we expect an additional $2.4 billion in revolving capacity to become available in the next 12 months as consumers pay down their loans, providing ample funding for our planned future transaction volumes. With a combination of our expected waterfall capacity and the $1.5 billion forward flow agreement in place, as well as institutional demand for our loans, we have the opportunity to be highly selective around future incremental funding with a focus on further optimizing our overall costs. As David noted earlier, GreenSky's funding is the most diverse and robust it has ever been in the history of the company, and the strong demand for assets from both banks and institutional investors is now reflected in our improved sales costs. Turning to details around the first quarter financials on slide nine. As David mentioned earlier, the first quarter produced net income of $12.1 million compared to a net loss of $10.9 million in the first quarter of 2020. Let me walk you through the key drivers of these results. Starting with revenues, Total revenue for the quarter was $125 million, up 3% year over year. Transaction fee revenue for the quarter was approximately $86 million, driven by a transaction fee rate of 6.61%, a six basis point improvement from the same quarter in 2020. It is important to note that when excluding certain sponsor rebates that regularly occur in the first quarter of each year, our normalized transaction fee rate for the quarter was 6.89%. During the quarter, we also observed a product mix of originations more in line with pre-pandemic levels, reflecting higher APRs and lower transaction fee rates. In the guidance provided last quarter, we had anticipated this return to pre-2020 transaction fee rates over the course of this year, but instead experienced a faster normalization within the first quarter. As a result, we have updated our expectation to reflect that transaction fee rates for the remainder of the year will be more in line with pre-pandemic levels of approximately 6.8%. It is important to note, again, as we have highlighted in the past, a lower transaction fee rate is correlated to a higher loan portfolio APR, which benefits incentive payment performance. Said another way, we continue to maximize our lifetime profitability of our transaction volume across all of our products, taking into account both take rate as well as the collateral yield of the loans originated on our platform. For the quarter, total servicing revenue was $34.7 million compared to $31.3 million, an 11% increase year-over-year. Servicing fee revenue of $27.5 million was $2 million lower due to a lower servicing fee rate in the quarter of 1.18% compared to 1.27% in the same quarter last year. This change is attributable to a shift in volume among funding sources and from holding loan participations in our warehouse facility in 2021. Our servicing asset fair value impact on revenue increased by $5.4 million to $7.1 million in Q1. This increase was primarily driven by the 23 basis points decrease in delinquency rate that we mentioned earlier and the improved performance forecast of our servicing portfolio. Effectively, our servicing spread has widened as the cost of service-performing loans is far less than for non-performing loans. Operating expenses, exclusive of non-recurring professional fees, was flat for the quarter when compared to last year, and our sales and marketing costs, expressed as a percentage of revenue, continued to decline to an industry-leading 4%. Turning to the cost of revenue on slide 11 in our investor presentations. Overall, cost of revenue improved 11% compared to a year ago, from $72 million to $64 million. I want to remind everyone that GreenSky's cost of revenue can be simplified into two key parts. First, our costs related to originating and servicing, or what I call operational cost of revenue. And second, our cost of funding, which includes our bank waterfall costs and our loan sale costs. Beginning with the operational cost of revenue as a percentage of transaction volume, origination-related expenses decreased seven basis points year over year, continuing to benefit from our investment in GreenSky's technology platform. Our servicing-related expense as a percentage of the average servicing portfolio was flat year over year as we've successfully overcome the higher level of costs associated with supporting our consumers during the COVID-19 pandemic. Second, our funding costs, which are made up of are made up of two distinct components. First, our traditional bank waterfall costs accounted for approximately 85% of our servicing portfolio in Q1 of this year, compared to 100% of our funding costs in the first quarter of 2020. The second component of our loan sale costs is made up of mark-to-market on loan participations we hold on our balance sheet and mark-to-market obligations of loans held for sale with one of our bank partners. Based on loans already sold or currently in our warehouse, these represented about 15% of our servicing portfolio in Q1 2021. As we move through 2021, we plan to provide additional granularity on the details behind the breakdown of both of these funding sources. Overall, our cost of funds this past quarter was $7 million, or 14% lower compared to the same quarter last year. You will note that a year ago, we did not have any loan sale costs in the first quarter, having established our warehouse facility in Q2 of 2020 and completing our first loan sale in Q3 of that same year. Our lower overall funding costs this quarter reflect both the strong performance from our bank waterfalls and the improved pricing of our loan sales, in which we recognize approximately $8.6 million in mark-to-market on future sales facilitation obligations. Combined, our overall cost of funding improved significantly compared to a year ago. When we launched our diversified funding platform, we believed loan sale costs would improve over time, and this past quarter's results clearly demonstrate successful outcome in not only maintaining but improving unit economics under our new funding model. Bank waterfall costs as a percentage of the average bank portfolio improved approximately 100 basis points when compared to the first quarter of 2020. finance charge reversal expense was approximately $26 million lower, and our incentive payments benefited from those higher prepayments and lower charge-offs. On slide 11, the financial guarantee expense for the first quarter represented a $3.9 million benefit, which is attributable to the decrease in the delinquency rate and improved credit forecasts. Through the remainder of the year, we anticipate that higher transaction volumes offset by stronger credit performance will keep the financial guarantee expense relatively flat quarter over quarter. As a reminder, the manner by which we are specifically impacted by the adoption of CECL, whereby the escrow that we put aside on behalf of our bank partners makes up nearly all of the financial guarantee expense. While our ongoing bank partners have historically used little to no escrow, the CECL methodology requires us to estimate an expense for each discrete loan facilitated as if it is in runoff. rather than reflecting the actual growing loan portfolios of our originating bank partners. It is important to note that no originating bank partner used escrow this quarter and we expect that to continue to be the case. Moving to our revised full year guidance on slide 13. As David mentioned in his opening remarks, we are on pace to achieve our full year transaction volume guidance of $6.2 billion to $6.5 billion and we believe that quarterly seasonal volume trends will be similar to pre-2020 periods. We are revising our full-year revenue guidance to be between $560 million and $570 million as we observe transaction fee rates move to pre-pandemic levels by the end of Q1. We are now estimating 2021 transaction fee rates to be closer to historical levels prior to 2020. Additionally, given recent prepayment rate trends, we expect our servicing fees on the portfolio and interest income on loan receivables held for sale to be slightly lower for the year. It is important to reiterate that a lower transaction fee rate typically corresponds to a higher origination APR, which benefits incentive payments. Also, higher prepayment rates contribute to lower associated bank margins as well as lower FCR expense, which both act as a benefit toward bank waterfall costs. Together, overall profitability as evidenced by both net income and adjusted EBITDA is expected to be meaningfully stronger for the full year 2021, which is reflected in our upward revision of guidance. We are increasing full-year net income guidance to be between $35 million and $45 million and increasing adjusted EBITDA to be between $95 million and $105 million, reflecting a 17% to 19% adjusted EBITDA margins. Our current full-year guidance includes the potential impact from loans that are currently in or have previously been in deferral related to the pandemic that could reduce incentive payments in the second half of the year. Although our most recent delinquency trends remain near record lows, which we expect to continue into the second quarter, some uncertainty still remains as how these loans may perform in the second half of the year, with continuing elevated unemployment rates and as federal stimulus possibly tapers. Our revised full-year forecast reflects our current expectation of portfolio performance, but as we progress through the year, we will have greater visibility on how credit may ultimately perform. To the extent our servicing portfolio continues to reflect the current positive macroeconomic environment, there could be additional upsides or estimated profitability in the second half of the year. Before moving to Q&A, beginning on slide 14, I want to remind everyone that we have provided some additional assumptions on how to model key inputs underlying our 2021 guidance on transaction volume, revenue, and cost of revenue. As mentioned, we expect transaction volume seasonality for the year to closely resemble the average quarterly transaction volume percentage in years prior to 2020, reflecting a more normal seasonality pattern. Also, we estimate that transaction fee rates for the remainder of the year will be more closely aligned to trends prior to 2020 as both of these metrics are expected to normalize to pre-pandemic levels. In addition to updated transaction fee trends, we expect interest and other income to be between $10 million and $15 million for the year. This is a result of lower expected interest income from loan participation held in our warehouse as we see the velocity of our loan sales accelerate in 2021 compared to the second half of last year. Regarding the cost of revenue, we estimate our cost of funds to be 50 basis points lower than our previous estimate, reflecting the improved costs reported this past quarter. Thank you for the opportunity to discuss our first quarter 2021 financial results and for your ongoing interest and support of Green Center. Operator, this completes our prepared remarks, and we are now ready to take questions.
spk00: Absolutely. If you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question. Your first question comes from the line of John Davis of Raymond James.
spk04: Hey, good morning, guys.
spk06: David, I just want to start out with you. With transaction volume, obviously, you know, talk about some key wins and a lot of momentum, especially, I guess, sequentially February to March. Any thoughts on April and what gives you confidence? that you can hit that midpoint or higher of your guide that was on change on transaction volume despite at least a 1Q that was a little bit weaker than we had expected. Just curious also where that shook out. Maybe we just had the seasonality wrong. But we're just curious kind of what gives you confidence given, I think, slightly weaker trends in 1Q. Yeah, so thank you, John. Transaction volume in April, as we indicated, had accelerating growth. all of the leading indicators for us are through the roof. And so the first thing we look at are the number of applications that we received daily, weekly, for example, in April, already in May. And then it's which of those customers were approved. And then that translates into transaction volume typically over the next 60 to 90 days. So when we look at this February over last February, this March over last March isn't as relevant. So we look at this March over March of 2019. And then we look at growth from February to March and growth from March to April. And we see what the leading indicators are. And we see how that tracks very nicely to our full year forecast, which is broken up by month, which does take into account seasonality. Keep in mind, I think historically Q1 is about 20% of a year. And I think some people just took our annual transaction volume and divided by four or something closer to dividing by four. And obviously that's pretty way off. So all the leading indicators show that we are at or better than where we expected for Q1 and certainly for Q2. Look, I said to be clear, you kind of,
spk05: ended up where you expected for 1Q overall.
spk04: Technically, we beat budget.
spk06: Okay. That's helpful. And then Andrew, maybe just talk and help us a little bit. I know there's a lot of moving pieces in the EBITDA margin that obviously came in much better. It looks like it was all FCR-related, but maybe just try and keep it high level. The puts and takes of why, you know, 28 in the first quarter, I think the midpoint of guys is about 1,000 basis points below at 18. Like, what are the big call-outs of why it will decline, again, obviously above your prior guidance? and then maybe help us a little bit with the sequential or kind of quarterly cadence of the expected margin, because I know that can bounce around a lot.
spk05: Sure. So I think one of the largest drivers of the change in the revenue, I'm sorry, in the revised guidance is around the cost of revenue. So trying to break that down, I think simply put, we've seen as we have transitioned into a diversified funding model, and this is something that we actually, I believe, tried to highlight when we first announced the strategy. We expected there to be some lower volatility around FCR expense. We're seeing that come through. If you look quarter over quarter, I'm sorry, year over year, in the first quarter, you'll see that there was a significant increase decrease in the FDR expense. That, coupled with more improving loan sale costs, is really helping to support a more efficient cost of funds, which is contributing to the profitability. That's probably the largest component. To some extent, we're obviously benefiting, as you would expect, from improved credit performance as it relates to our incentive payments. You know, the delinquency trends, they continue to be near record lows, and as a result, you know, we continue to see some of the similar trends we saw in 2020 related to higher expected incentive payments, although I would attribute more of the cost of revenue improvement related to FCR expense. And then probably the last piece is just, as I mentioned earlier, the loan sale costs continue to improve. We've now put a lot of components of that model in place. And I'd say that when we discussed this in Q3, we talked about our ability to improve upon that execution. I think with the stability of the markets and strong institutional investor demand, we've been able to accelerate that probably even faster than I would have expected. Pound for pound, I think the efficiency of our overall funding costs have been significantly improved. That coupled with operating expenses, both in servicing collections as well as in SG&A, all being flat to better, are also contributing to a solid beat versus our initial expectation.
spk06: Okay. Any comments? Sorry.
spk05: No, go ahead. I think you were going to.
spk06: Yeah, just sequentially, like how should we think about the margin, all else equal, kind of from one Q into the, obviously you're implying it's going to be down, but is it down a lot in two Q and it gets better in three Q, four Q? Just help us a little bit with how you guys are thinking about this from a quarterly cadence perspective.
spk05: So I think Q2 will continue to see a lot of what I just described happening. And we'd expect there to be some strong performance. I think, as David alluded to, we expect volumes to pick up as well, seeing some of the leading indicators of the first quarter. I think where I tried to be a little bit more transparent was in the second half of the year when I provided my walkthrough on guidance. We do, I think the biggest kind of toggle there is the fact that we do have and believe that there's still some uncertainty on how our consumers perform that have been impacted by COVID. Overall, what I call the depth of that impact is definitely much smaller today. If you recall, at the peak in 2020, our deferred portfolio was about 4%. It's now basis points, so the impact, the sheer impact of that is much, much smaller. However, we still have about $20 million of loans that are in deferral, and we have about $40 million of loans that have had some level of deferral in the past. So I think what we're trying to model is that there still remains some uncertainty in the second half of the year related to how those loans could perform. You know, we are cautiously optimistic because sitting here today, we're not seeing those trends yet. But I would say, you know, our sentiment is not that different from many others. We hear that, you know, we're still cautiously optimistic, but modeling for a little bit more uncertainty.
spk04: Okay. I appreciate that. Thanks.
spk00: Your next question comes from Juliano Milagno with Compass Point.
spk01: Good morning, and thanks for taking my questions. I guess from a starting point, it would be interesting to get a little bit of a sense of what the different moving parts are within the FCR change and kind of the guidance on a go-forward basis and what kind of the primary drivers are. And what I mean by that is what portion of that is more credit or the portion of that portfolio size because you may have more loan sales. So the portfolio subject to the FCR might be contracting And there's a portion of that, you know, even just beyond that, just loan performance, just from a better delinquency performance.
spk05: Sure. So in our prepared remarks, I think what we tried to make transparent was that in Q1, about 85% of our loans, you know, from a cost of funds perspective is allocated to bank waterfall costs, and 15% of our service portfolio is based on loan sales. If you compare that to 2020 Q1 of 2020, 100% of that would have been on bank waterfalls. So, effectively, 15% of the servicing portfolio is now funded through loan sales. As we talked about, when you sell a loan, we don't incur any of the FCR expense. So, if you look on page 11, you can see that the FCR expense on the right side in Q1 was about $77.6 million. And in Q1 of 2020, it was about $97 million. So you can see the dramatic decrease. And that would be attributed to us primarily being able to diversify our funding model and the benefit that we had expected to achieve on our bank waterfall cost. Right below that, you can see that incentive payments to a lesser degree improved. So, if you look at Q1 of 2020, incentive payments were $44 million, and in Q1 2020, incentive payments were $42 million. So, there's still a benefit there, and that's primarily where you would see the better credit performance of the portfolio come through. So pound for pound, we're getting more from an FCR expense benefit, but we are also seeing the benefit from credit as well.
spk01: That sounds very good. Then kind of on a go-forward basis, it looks like the fiscal 21 is a bit front-end loaded. from an EBITDA perspective, and what you seem to be assuming is a similar trend, some of the similar impacts that you were assuming before, but just a little bit less on the front end of the year and more in the back half of the year. What I'm kind of curious about is how that cadence might run, because at least from most consumer finance companies out there, credit seems to be extremely strong going into the second quarter. So I'm kind of curious, how that setup flows through for the second quarter if credit remains in a similar ballpark to the first quarter during the second quarter, and then how we should think about that cadence for the year.
spk05: Sure. I think we would echo that similar sentiment. We feel that into the second quarter, we feel credit will remain similar as Q1. What we are What we don't know and what we're being cautiously optimistic about is what happens in the second half of the year. If you recall previously, when we initially gave guidance for 2021, we had indicated that we had expected higher credit losses due to the pandemic kind of going through the course of 2021. We obviously haven't seen that in Q1. We're not seeing that in Q2. So, I think it's still, in our minds, a little yet to be determined on when we will still see it. Again, the magnitude of that overall impact is much, much lower, but I think we want to see Q2 performance before we're able to kind of continue that positive trend forward. So, to answer your question, Q2, very similar to Q1. to extend some uncertainty on how credit will perform in the second half of the year. That all being said, the total full-year guidance should give you an idea on how the impact will be in Q3 and Q4.
spk01: That's great. Thank you. I'll jump back into Q. Thank you.
spk00: Your next question comes from the line of Michael Young with Truist.
spk04: Hey, thanks for taking the question. Wanted to just kind of take the updated 21 guidance and put it, I guess, into the broader context of the 10 by 9 by 30 strategic plan. It seems like this is more, hey, we thought it was going to be more of a transition year with more pandemic impact. um in 2021 before kind of reverting to the norm um and maybe that's just going to be a lesser impact is that kind of a message or do you think this meaningfully impacts kind of that 10 by 9 by 30 plan over the next couple years
spk06: Well, we think it certainly demonstrates that it's highly achievable, and certainly sitting here in May, we're further along than we expected to be going down that path. I think it's important to point out this is – This is only in one part a credit story. And certainly going into Q1, we knew what delinquencies were. So credit was not the big surprise for Q1. There is upside around credit. But the thing that I think is that we haven't really talked about is we're getting more efficient funding more diverse funding, and certainly transaction volumes are trending exactly or better than we expected. So, Michael, I appreciate you asking because, you know, the way we think about it is we're just getting that much closer faster right now than we previously talked about to the 10 by 9 by 30. And I think that's a good step forward. And, of course, yes, there is upside for this year. Andrew, you had something to add?
spk05: I would just say – Short answer, yes. I think this puts us on track squarely on 10 by 9 by 30. We did talk about 2021 being a transitional year, and I think we pointed to higher loan sale costs. I think we demonstrated an improvement there in Q1, all things being equal. I think if that continues, I think we're clearly on path to meet our goals. And then in terms of credit, you know, we assumed that there was going to be a larger, you know, potential impact that's come down considerably since we announced that in investor day in January. But, you know, as I mentioned a moment ago, there's still a little uncertainty. So, you know, short answer is we think our results this quarter and thus far this year are squarely putting us to achieve that five-year plan.
spk04: Thanks. And one other question, just wanted to ask on the funding partners, you know, just kind of how those conversations are going. You know, on the one hand, I would think banks would be, you know, more desirous of, you know, funded assets at this point in the low-rate environment. You know, on the other hand, maybe some of the institutional side, we've seen a big jump up in the 10-year treasury rates, et cetera. So maybe, you know, has demand weakened there? You know, just any color you could add on just kind of how those conversations are going would be helpful.
spk06: We're feeling like we're living in the land of abundance. Our super regional and national banks certainly appreciate super prime short duration loans. So there's certainly more demand. However, as we've stated before, it's really important to us to have diversification. We've seen excellent execution, which also, by the way, conveniently is a much simpler accounting from bank buyers and non-bank buyers. And so for us, this is about, number one, optimizing diversification and long-term economics. We're taking a long-term view. That's certainly how we're treating our partners and vice versa. But We're seeing great demand, and we're driving this toward diversification for the long term.
spk04: Okay, perfect. Thanks. I'll step back.
spk06: Thank you.
spk00: Your next question comes from the line of Chris Denae with Piper Sandler.
spk04: Hi. Good morning, everyone. David, you mentioned You made a comment in your prepared remarks about, I think there were three merchant, you had a number of merchant wins, but I think three of them came from competitors. For the ones you won from competitors, can you give us any sense of why you won? What about GreenSky enabled you to take the business?
spk06: So in one case, it was better integration tools. In another case, it was a better user experience. And in a third case, it was a combination of frustration with the legacy partner on missing promises and just our reputation with their peers And so, you know, this isn't new for us. It's how we've grown the business for years. And we just wanted to kind of call it out. Obviously, we had hundreds of wins in the quarter, but these were large and directly coming from a verbose competitor.
spk04: Understood. And then just thinking about the – the transaction volume guidance for the full year. There's no change there, but it seems like the trends are working in your favor, not just some wins, but also healthcare. Is the lack of change reflect like the onboarding can take time or it takes time to ramp up a new merchant or conservatism in like how you do about the healthcare market? ramp over the year? I'm just trying to understand. It seems like the world looks a little better now than it did a couple months ago, and that might lead to better transaction volume. Or are you being more selective with your loans? We're noting that your FICO scores at origination are about 10 points higher than they were a year ago.
spk06: So, Chris, great question. It's everything you've just described. Certainly having lots of wins, taking market share, growing the market does take time to ramp. That's part of it. We're also sitting here in unchartered territory, and we're not going to pretend to know exactly what happens over the next eight months. So there is a conservative bias, and we have a lot of conviction that we can meet or beat, and we're in the meet and beat game, so that's what we're focused on.
spk05: I'd also highlight that David mentioned this a moment ago, but our Q1 results were ahead of what our internal budget was. on track with what we gave for the range of guidance. So I think for us, Q1 certainly was a good data point. We'd like to have Q2 in the back and then reassess. But I think all trends are showing as David described.
spk04: Okay. And then just the last one for me, on the FICO scores, because they are higher than they were before pandemic, Does that reflect something of your funding partners and what they're interested in in this environment? And is there an opportunity to widen your credit box going forward, or do you think with the uncharted waters that we're in that you're going to be cautious around that?
spk06: So I can say it's certainly not driven by us or our funding partners. It's driven by market demand. And I think you can imagine hard to – first of all, we're talking about five or six points, but over the last couple of years, hard to – To take exception to a 774 versus a 781, I don't think any funding source would see that as any kind of material degradation or improvement for that matter. It's purely demand. We think there is even more demand coming, and it's certainly a very exciting time, but it's not driven by us. You know, we think there's lots of good 680s and 700s out there. We just need them to have some stability in their lives and want to do more home improvement.
spk04: Got it. Thanks very much.
spk06: Thank you, Chris.
spk00: If you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question. Your next question comes from the line of Rob Talk. of Autonomous Research.
spk02: Good morning, guys.
spk05: Good morning. Good morning, Rob.
spk02: Just a quick one on the financial guarantee expense. Andrew, I think you said, you know, the expectation was flat sequentially. Does that mean that you're expecting it to be a negative expense for the rest of the year?
spk05: No, it means that it should just, you know, kind of not be an expense or a benefit. It should be pretty flat year for the rain, for maintenance.
spk02: And then, you know, David, you talked about comparing March 2021 volume to March 2019 volume. And I'm just wondering if you'd be willing to share how much volume is up in April 2021 versus April 2019.
spk06: I'm going to defer to Andrew on that, but what I can say is very healthy and gives us a lot of confidence that we'll meet or exceed our expectation for 21.
spk05: Yeah, I would say that, you know, March was the first month we saw, you know, real solid year-over-year growth, you know, coupled with the fact that we talked about credit line and application approval rates. recently kind of at all-time highs. I think that does have a leading indicator in April, as well as the remainder of the second quarter showing favorably. I think the best way to think about it is if you look at the seasonality, you'll see that the second quarter of the year is about 25-ish, I want to say 25%. of the 26% of total volume, so you should see an expected increase from Q1 to Q2 relative to that seasonality. Okay, thank you.
spk00: At this time, there are no further questions. I would like to turn the call back to management for any additional or closing remarks.
spk06: Thank you for your questions, and thank you again for joining us today. Please stay healthy and safe, and we look forward to speaking with you when we discuss our second quarter 2021 results.
spk00: Thank you for participating in today's conference call. You may now disconnect your lines at this time.
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