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GreenSky, Inc. (NASDAQ:GSKY)
Q1 2020 Earnings Call
May 12, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you, and welcome to the GreenSky first-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this event is streaming live on the GreenSky investor relations website, and a replay will be available on the same site approximately 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, ma'am.

Amelia Freeman -- Vice President of Tax and Equity

Thank you, Demetrius, 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 first quarter ended March 31st, 2020. You can access this press release on the investor relations section of the GreenSky website. In addition, we have also posted our first-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 Rob Partlow, executive vice president and chief financial officer. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These are statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We disclaim any obligation to update any forward-looking statements, except as required by law.

Information about these risks and uncertainties is included in our press release issued yesterday, as well as, in our filings with regulators. We also will be discussing certain non-GAAP financial measures. 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 11th, 2020, and on the investor relations page of our website.

And with that, I would now like to turn the call over to David.

David Zalik -- Chairman and Chief Executive Officer

Thank you, Amelia. Good morning, everyone, and thank you for joining us. It's good to be with you today to review our first-quarter 2020 results. These are unprecedented times.

Our thoughts go out to all those impacted directly or indirectly by the pandemic. We at GreenSky are committed to helping our consumers, merchants, bank partners, and teammates navigate this challenging environment. As previously announced, in mid-March, GreenSky implemented the remote working aspects of our business continuity plan, successfully migrating the company's entire workforce to work at home, while focusing on the safety of all of our GreenSky associates and their family members, continuing to provide world-class loan servicing and customer service levels to our bank partners, merchants, and GreenSky program consumer borrowers. Of note, our GreenSky technology infrastructure and the innovative capabilities of our talented workforce have enabled us to continue serving our constituents while working remote.

These accomplishments are a true testament to the leadership provided by the entire GreenSky senior management team and our chief technology officer and our executive vice president of operations, in particular. When the severity of the pandemic and the associated potential economic impacts became more clear in mid-March, 100% of the GreenSky bank funding partners came together to offer voluntary payment deferrals for any GreenSky program borrower voicing hardship. Approximately 2.5% of the customers reflected in the company's $9.3 billion servicing portfolio are GreenSky program borrowers that have received payment deferrals in response to hardship requests. The rate of such payment deferral requests received is low relative to many other consumer loan programs and is indicative of the exceptional credit quality of the GreenSky program borrowers.

Now turning to our quarterly results. Let me begin by saying that we entered 2020 firing on all cylinders. Our transaction volume for the quarter was $1.4 billion, a record for any first quarter in GreenSky's history, reflecting an increase of 10% over the first quarter of 2019. Before COVID-19 began disrupting business activity in mid-March, our transaction volumes for January and February together were up 16%, compared to the same two-month period in 2019.

Moreover, as indicated on Slide 32 of the investor presentation that GreenSky published last night, the company achieved first-quarter incentive payment receipts that exceeded comparable first-quarter 2019 amounts by 77%. Adjusted EBITDA, which we believe to be the most reliable operating performance indicator for the company, was $19.4 million for the first quarter, reflecting a 76% increase over the first quarter of 2019 after taking into account a 2019 charge-off recovery sale of $7.4 million last year, with no corresponding charge-off recovery sale this year. As you'd expect, the shutdown by the states of all elective healthcare procedures has driven the current run rate of the small component of our overall business to negligible origination volumes. However, I'm particularly pleased to share that notwithstanding the impact of the pandemic, our home improvement business continues to be quite durable.

For April, the monthly approved applications, a key leading indicator, were approximately 70% of April 2019 levels. Importantly, we have seen continued recovery for the last three consecutive weeks. In a moment, Gerry will walk you through our key operating metrics and the trends impacting the business, and then, Rob will provide a detailed review of the quarter's operating results. However, I want to update you on two key business initiatives, diversification of our funding model and our Board's strategic alternatives review process.

First, funding. As of the end of the first quarter of 2020, we had aggregate unused bank funding capacity of $1.6 billion. In addition, we anticipate approximately $3.4 billion of additional capacity over the next 21 months as existing loans pay down or pay off. We also have continued to actively diversify our funding to include alternative funding structures with one or more institutional investors, financial institutions, and other sources.

On that front, we are pleased to announce that GreenSky yesterday closed on an asset-backed revolving credit facility with J.P. Morgan Chase to finance purchase participations in loans by a GreenSky sponsored special purpose vehicle, SPV. This credit facility is $500 million, with $300 million committed, and an additional $200 million accordion, subject to lender consent. We expect that the SPV will then periodically conduct sales of loan participations or issuances of asset-backed securities to third-parties which would allow additional purchases to be financed to the revolving facility.

As those sales or issuances occur, the revolving facility could facilitate a substantial increase in the velocity of loan transaction volume through GreenSky's platform. In addition to the new revolving facility, we also continue to work with multiple institutional investors and a leading institutional asset manager to complement our bank partner funding via both whole loan sale programs and forward flow financing arrangements. We expect to close one or more of these financings in the second half of 2020. Lastly, as announced in August 2019, the company's board of directors, working together with our senior management team and outside legal and financial advisors, commenced a process to explore, review, and evaluate a range of potential strategic alternatives focused on maximizing stockholder value.

The board's review is ongoing and the company does not intend to make further public comment regarding these matters unless and until the Board has approved a specific transaction or alternative or otherwise concludes its review. We expect to make an announcement in this regard no later than when releasing our fiscal 2020 second-quarter operating results. I'll now turn it over to Gerry.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Thank you, David, and good morning. From the company's inception through the end of the first-quarter 2020, GreenSky has now enabled nearly $24 billion of transactions for over 3.2 million consumers. The markets in which GreenSky competes are immense. We firmly believe that GreenSky holds the No.

1 market position in the home improvement point-of-sale finance vertical. As David shared, our home improvement vertical has proven to be extremely resilient in the face of the COVID-19 pandemic. We believe that entering fiscal '20, we had achieved the No. 3 market position in elective healthcare point-of-sale finance after just four years from launch.

The COVID-19 impact on this vertical has been much more severe, however, due to the prohibition of elective medical and dental procedures enacted by virtually all of the states. Fortunately, this represents only a very small piece of our overall origination volume. Despite our leadership position in these two large industry verticals, both are highly fragmented. And accordingly, our share of these sizable market remains modest, allowing room for continued material growth for years to come once we get back to normal economic times.

As we have commented on prior calls, we've continued to adapt and innovate new products, services, and capabilities for our merchants and providers, distancing our technology moat in a manner that makes GreenSky truly distinctive in the marketplace. While premature to declare outright victory, we're seeing tangible evidence that suggest when we ultimately fully emerge from the economic impacts of the pandemic, GreenSky will enjoy meaningful home improvement market share gains. Of note, in the months of March and April alone, GreenSky enjoyed its greatest merchant enrollment growth, as measured by annual sales revenue, or ASR, of merchants enrolled in the company's history, surpassing $3 billion in ASR for these March and April recently added merchants. Representative new home improvement sponsors and merchants added in 2020 include a $150 million ASR national HVAC network, multiple large regional exterior remodelers aggregating more than $100 million in ASR, multiple large regional HVAC dealers aggregating more than $80 million in ASR, and a $20 million national outdoor hardscape network.

As we progress through 2020, we plan to retain our focus on enhancing our home improvement product offerings in particular, adding larger merchants and those that meet both our quality and productivity targets while continuing to invest in advancing the effectiveness of our risk management processes and procedures. Moreover, we continue to be extremely pleased with our 2020 credit performance to date. As depicted on Slide 21 of the first-quarter 2000 investor presentation, the dollar created weighted average FICO score of consumers at origination was exceptionally strong at 773 for the first quarter, compared to 769 in the same quarter last year. As highlighted in earnings -- yesterday's earnings press release, the credit quality of the company's loan servicing portfolio remains exceptional.

As of the company's March 31st loan servicing portfolio, 85% of borrowers had an originated weighted average credit FICO in excess of 700 and 37% had scores in excess of 780. Thirty-day delinquencies observed at the end of the first quarter was 1.23%, an 8-basis point improvement compared to a year ago. We continue to make material investments to enhance our proprietary credit and merchant management tools and systems, which we believe will deliver additional improvements throughout 2020. Importantly, early indicators show that the 2019 home improvement vintage of origination has the highest dollar credit weighted average FICO distribution and lowest early delinquencies of any loan vintage we facilitated from inception and the same is true for the 2019 vintage of elective healthcare originations.

As of March 31st, we had nearly 18,000 active merchants on the GreenSky technology platform. More important than the 13% growth in the total active merchants on our technology lab platform in the last 12 months is the quality of these merchants. We focus not only on the substantial addition of high-quality merchants but also upon generating increased productivity from several of the merchants who have been part of the GreenSky merchant network for many, many years. We partner with each of these merchants to successfully grow their businesses and we have actively taken steps to call those merchants that don't meet our rigid quality standards.

As we sit here today, we believe GreenSky is extremely well-positioned to enjoy a significant increase in market share once economic conditions restored to normal. We feel very good about the quality of our servicing portfolio. Moreover, the quality of the loans Greensky facilitated for our bank partners in the first quarter was exceptional. Of note, based upon April results, we are not yet seeing any increase in early stage delinquencies and charge-offs.

What we can't predict, however, is the rate by which states reopen their economies, whether the virus moderates in the comer summing months, or whether we witness another spike in the virus driving folks back to shelter at home or quarantine for safety. Therefore, while we plan for an extended period of softer origination volumes, we have both the technology and human resources available to support growth associated with a rapid economic recovery. On that note, I'll now turn it over to Rob to review the company's financial performance for the first quarter. Rob?

Rob Partlow -- Executive Vice President and Chief Financial Officer

Thank you, Gerry. As I review the results for the first quarter 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 first quarter of 2019, unless otherwise stated. As we discussed with you on our March 2nd year-end call, the company's adoption of the new current expected credit loss, or CECL accounting standard, changed the accounting requirements for estimating credit losses.

Our CECL impact is different than for a bank that has the 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 in the forecast of bank partner portfolio performance for the purposes of the new guarantee reserve calculation. A key future of GreenSky's waterfall structure that creates very durable portfolios for our bank partners is the programmatic nature of Bank Partners' continual loan originations to both replace runoff, as well as, grow their portfolios.

Under the guidance of the CECL standard, we must now assume a model loan losses, whereby any consumer loan portfolio goes into runoff with no new originations in the portfolio. As you will note, this results in a reserve level that is materially higher than our anticipated cash usage of escrow for our ongoing bank partners. The adoption impact on January 1st, 2020, was $118 million, a significant portion of our escrow balance on our $9.2 billion loan servicing portfolio as of December 31st, 2019. I would like to note that historically, our actual cash payments required under the financial guarantee arrangements have been immaterial for our ongoing bank partners and we anticipate this to continue to be the case.

For the first quarter, we recognized a non-cash charge of $18.4 million associated with our financial guarantees. The additional reserve relates primarily to the growth of our escrow balance during the first quarter and included approximately $3.4 million related to the additional modeled escrow usage due to the impact of forecasted elevated levels of unemployment on this spigot off portfolio forecast. Turning to our financial results, with our -- which correspond to Page 29 of our presentation, transaction volume in the first quarter of 2020 was approximately $1.4 billion, a 10% increase over the $1.2 billion originated on our platform in the first quarter of 2019. The company's transaction fee rate in the first quarter was 6.55%, down marginally from 6.77% in the same period in 2019, reflecting normal variation of promotional products offered by our merchants.

As we have discussed on prior calls, the variability in the promotional products, which our merchants and providers offer to their consumer, causes our transaction fee as a percentage of transaction volume to fluctuate throughout the year, based on the promotional products our merchants choose to use to drive sales activity. Total revenue in the first quarter grew 17% to $121 million, with transaction fees totaling $89.9 million, up 7% over last year. Servicing and other revenue increased 59% to $31.3 million and included a $1.8 million increase in our servicing asset, driven by the growth of bank partner servicing portfolios with higher-than-market servicing fees. As you may recall, starting with the second quarter of last year, several of our bank partners servicing arrangements were amended to, among other things, increased their fixed servicing fees when service and fees are higher than the market rate for servicing the excess servicing fees create a servicing asset.

The servicing fees, which are senior cash flows in the bank partner waterfalls, increased to 1.29% of the bank partner portfolio in Q1 2020 from 1.05% in 2019, reflecting the increase in our fixed servicing fees that occurred throughout 2019. Turning to Slide 30. Cost of revenue totaled $71.8 million or 3.1% of assets under management in the first quarter, consistent with Q1 2019's rate of 3.1%. Cost of revenue is divided into three distinct components: servicing costs, origination costs, and a fair value change in the FCR liability.

Service and related expenses for the first quarter were $12.8 million or 0.56% of the average loan servicing portfolio and down from Q1 2019's 0.57%. For the first quarter, origination-related expenses totaled $6.5 million or 0.47% of originations, down from 0.69% in the first quarter of 2019. The year-over-year improvements in our efficiency measures reflect our operations technology teams working together to find new and innovative ways to help our customers. On Slide 31, we have provided the detail of components of the fair value change in the FCR liability.

The fair value change in the FCR liability for the first quarter was $52.5 million or 2.28% of the average loan servicing portfolio, up from Q1 2019's $38.8 million for rate of 2.07%. The year-over-year increase of $13.7 million largely reflects the growth of the balance of deferred interest loans within our portfolio. Please note, we did not pursue a charge-off recovery sale during the first quarter, whereas in 2019, we realized $7.4 million from the quarter's sale. As we will make more over time by retaining the receivables versus selling the receivables to our investors, we do not plan to continue these sales going forward.

In addition, when comparing to Q1 2019, note the impact of the aforementioned 24-basis point increase in the servicing fee paid to GreenSky by bank partners which has the effect of reducing receipts paid to GreenSky by approximately 24 basis points or $5.5 million during the past quarter, and thereby, results in a corresponding increase in the fair value change in the FCR liability expense line item. Adjusting the fair value change in the FCR liability expense for the shift of the servicing fees from receipts to servicing revenue and for the cessation of our recovery sale program, the FCR rate would improved by 42 basis points year over year. This year-over-year improvement reflects the strong performance of our bank partner portfolios. On Slide 21 or 32, we also break out the fair value change in the FCR liability by the drivers of this expense line item.

I'll begin with the expense for the future finance charge reversals, which is the expense related to the building up of the liability on our balance sheet for future finance charge reversals. This expense in the first quarter was $97.2 million and 4.2% of the loan servicing portfolio, up from 2019's $70.8 million for an FCR rate of 3.79%. The increase in this expense is indicative of a larger balance of deferred interest loans in our portfolio. As previously noted, the FCR rate has increased during the year due to the impact of higher APRs on transactions and the higher mix of deferred interest loans in our elective healthcare vertical.

The impact of the higher billed interest rates on deferred interest loans has largely played itself out, as you can see from the modest 1-basis point sequential change in the rate. Receipts from our servicing portfolio reduced the expense for future finance charge reversals. Even though we did not offer the charge-off receivables for sale this past quarter, as we have in prior quarters, receipts, nonetheless, increased materially this quarter to $44.7 million or 1.94% of the average loan servicing portfolio from Q1 2019 to $32.1 million or 1.72% of the average loan servicing portfolio. The driver of the strong year-over-year improvement was within the incentive payments line.

First-quarter incentive payments totaled $42.4 million or 1.84% of average loan servicing portfolio, compared to Q1 2019's rate of 1.28%. The 56-basis point improvement in the rate despite the aforementioned 24-basis point impact of the higher servicing fees was driven by a combination of the higher finance charges and fees for both deferred interest and reduced rate loans. The agreed-upon bank partner yields for the portfolio benefited from decline in interest rates and lower net charge-off rate on our portfolio has benefited from the improvements we have made in risk and operations. Turning back to Slide 29.

Operating expenses, which exclude cost of revenue and the non-cash charge -- noncash CECL charge of $18.4 million, totaled $37 million, up 12% from $33 million. As we continue to build and invest in our team, as well as, incurring certain legal and other expenses, we do not expect it to be recurring over the long term. GAAP net income for the first quarter was a loss of $10.9 million, compared to $7.4 million net income in Q1 2019. The decrease was primarily due to a combination of both the recognition of the CECL financial guarantee expense, a non-cash charge of $18.4 million, coupled with the absence of the charge-off recovery sale during the quarter versus the $7.4 million proceeds during the Q1 2019.

As we have indicated on our prior earnings calls, we believe the adjusted EBITDA is one of the key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business. We reflect the noncash CECL charge as an adjustment given its noncash accounting construct. Adjusted EBITDA for the first quarter was $19.4 million, compared to the $18.4 million in the first quarter of 2019. 2019's $18.4 million include the previously discussed $7.4 million in charge-off receivable sales.

Absent the charge-off receivable sale in 2019, the year-over-year growth in EBITDA was 76% year over year, reflecting the strong improvement in year-over-year results. And with that, I'll turn it back over to Amelia to set up the Q&A.

Amelia Freeman -- Vice President of Tax and Equity

Thank you. Rob. That concludes our prepared remarks. Please remember we are happy to take detailed modeling questions offline.

And with that, operator, let's please have our first question.

Questions & Answers:


Operator

And our first question comes from John Davis with Raymond James. You may proceed.

John Davis -- Raymond James -- Analyst

Just [Inaudible] exited March, call it, down 15% to 20% on a volume perspective --

David Zalik -- Chairman and Chief Executive Officer

I'm sorry, I missed the -- hey, good morning. I missed the first part. I think there was a connection. Could you start over?

John Davis -- Raymond James -- Analyst

OK. Yeah, sorry. Can you hear me now?

David Zalik -- Chairman and Chief Executive Officer

Can hear you great. Good morning.

John Davis -- Raymond James -- Analyst

OK. Good morning. Just first on April trends. The math suggests you exited March, call it, down 15% to 20% from a volume perspective and I appreciate the down 30% funded -- or sorry, improved home improvement loans.

But just trying to foot that with what you're seeing in total volume trends, obviously, elective medical is down? And then, what's the difference between approved and funded? Just trying to figure out what April's like?

David Zalik -- Chairman and Chief Executive Officer

So the leading indicator for April, as we indicated in our home improvement business, was down 30% from prior year. We also indicated that the last three weeks, we've seen a resurgence. I don't think we're providing any more detail at this time. Gerry, do you want to provide some more color?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

No. Good morning, John. As we said in our comments, the elective business was really driven to not -- virtually all the states prohibited anything other than emergency procedures. They're coming back online slowly.

As David commented, we're seeing a tapering in the distance, if you will, between '20 and '19 same-day a year ago in terms of new applications. So we feel that that 30% is sort of the bottom and it will improve from there. The rate by which it improves, it's probably too early to say, though. And if you recall, the healthcare business is less than 10% of our monthly origination.

John Davis -- Raymond James -- Analyst

OK. Thanks. Then, I just want to get on the SPV for a minute. First, just thoughts on why creating it and the benefits? And then second, just to make sure I understand it, these loans will sit on the balance sheet? And then finally, how should we think about the economics relative to the waterfall model?

David Zalik -- Chairman and Chief Executive Officer

So for us, it's opportunistic. We see that there are opportunities to expand and diversify to non-bank facilities and we see this as a good way to facilitate that. Whether it's whole loan or forward flow, securitization, it's a relatively small amount of balance sheet leverage for these assets and we see potentially high velocity. So for us, it's opportunistic.

Gerry, do you want to add some comments?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Yeah. The other thing it does, it really creates a lot of flexibility for us, John. If we were to put on all the afterburners to close that forward flow arrangement right now, just given where credit markets are, we're not inclined to lock in long-term rates until markets settle just a bit. So this serves as a bit of a holding tank, if you would, that allows us to time more permanent arrangements.

It's good for us and it's good for counterparties. The quality of the super prime book of assets, we've proven the demand is superb. No lack of people that want to buy these assets. What we don't have any interest in doing is entering into a mispriced arrangement.

So, this provides a lot of flexibility, and to David's point, think of this as a holding tank that we can turn over with a lot of velocity. So it's only $500 million in terms of sticker, but you turn that over four, six times a year, you're talking about real money. So it really was a vehicle or structural flexibility that we put in place.

John Davis -- Raymond James -- Analyst

OK. And then, just how should we think about the economics relative the waterfall mark?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

As we said earlier, we've been really pleased with the multiple marks that we've gotten at bids and they vary by product type. We basically think of our loans in three different buckets: reduce late loans, deferred loans, and all we refer to as ZILs, almost like a zero coupon and each of these investors have different views regarding pricing. So we maintain the ability to optimize and we want the flexibility to sort of pick and choose where we swap these. So as we said, the overall economics, notwithstanding the fact that we remove a lot of beta from our business model is not terribly different than what we're seeing in our bank partner environment.

John Davis -- Raymond James -- Analyst

OK. And then last one for me. I think you kind of already alluded to this, but we had a $6 million forward loan agreement on the table last time we talked last quarter. It seems like that's come down to $2 billion, and then, pushed out to the back half of the year.

So I'm assuming that's just what you said that you don't want to lock in rates given where credit markets are today. But in your commentary on that, is it the same leading asset manager that you were going to do the $6 billion deal with still looking for $2 billion? Just any commentary there would be helpful.

David Zalik -- Chairman and Chief Executive Officer

Yes, I can provide --

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

It's a multi-year deal.

David Zalik -- Chairman and Chief Executive Officer

Go ahead, Gerry.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

All I said is, remember that $6 billion was a three-year multi-year deal. So the arithmetic pretty much holds true. Jump in there, David.

David Zalik -- Chairman and Chief Executive Officer

Yeah. So still engaged with that particular asset manager, other asset managers have emerged as well for pool loans. But the answer to your question is it hasn't structurally changed in terms of $6 billion going to $2 billion, it was always $2 billion a year.

John Davis -- Raymond James -- Analyst

OK. All right. Thanks, guys.

David Zalik -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question comes from Steven Wald with Morgan Stanley. You may proceed.

Steven Wald -- Morgan Stanley -- Analyst

Yeah. Can you guys hear me?

David Zalik -- Chairman and Chief Executive Officer

Hear you great.

Steven Wald -- Morgan Stanley -- Analyst

Great. Hope you guys are well. Maybe, if we could touch on another piece of the funding side here. And I know you guys just touched on the bank -- the non-bank partner piece.

Wondering what your conversations are like with your bank partners so far as we track through the year? I know those tend to be done months in advance of any renewals or adjustments. But just if you could provide us any color on at least the top 5 or 4 partners? I think BMO is the only one that's extended beyond this year by term. How have those been trending with the virus impacts? I think one of your bank partners is saying one year reduced exposure over time.

David Zalik -- Chairman and Chief Executive Officer

So I think the conversations have been constructive. I thinkn actually most of our relationships have already been extended. This is not new news. Well into next year and beyond, I think, we have one that we're expecting a material extension later this year.

That would be the only one that remains to be extended. Everything else has already been extended. So the conversations have been constructive. I think the financial institutions have done their own stress tests on the portfolio and the feedback has been, I think, confident and encouraging.

So, we feel that we're in really good shape with our legacy bank partners.

Steven Wald -- Morgan Stanley -- Analyst

OK. Great. And maybe just shifting toward the expense base to backing out items like CECL reserving adjustments and all that, as we deal with tougher top-line environment and as you're looking through it, what are the sort of areas you feel like you can take out? I didn't really see a ton of granularity on what you guys are doing on the expense side, but just wondering how you guys are thinking about that as we go through the next few months?

David Zalik -- Chairman and Chief Executive Officer

Yeah. So to the extent we see prolonged reduction, although, we're not expecting a reduction in revenue as much as we are less growth this year. A lot of expenses are variable, origination-related expenses. And as we have growing business, we hire more, as we have a business that grows less quickly, we'll hire less quickly.

So, there certainly is a great deal of variable cost that we can scale up and scale down as appropriate. But we don't see the need for that at this time.

Steven Wald -- Morgan Stanley -- Analyst

OK. Great. And if I could just squeeze in one last one. On your merchant side, what's the general health of your merchant partners right now? In terms of -- I mean, a lot of these tend to be small businesses aside from things like partners like Home Depot.

What's going on in terms of the health there? Are businesses shutting down, furloughing, temporarily halting? What's -- what are you seeing?

David Zalik -- Chairman and Chief Executive Officer

So the bulk of our business are these amazing, small and medium-sized companies. They typically are doing, call it, $5 million to $25 million in revenue. So they're small, but they're mighty and they're not tiny businesses. Generally, what we're seeing is they continue to operate.

Some of them have seen 20%, 30%, 40% reductions, but they're seeing their business rebound depending on the market that they're in. Some of them, but very few from what we can tell, have ceased operations or furloughed their teams. It seems that the vast majority slowed down dramatically their ability either to finish the job or to make a sale. But we are seeing evidence that that's restarted in earnest.

And I would say that many of our merchants have reported recently record sales as markets become available to them again. And to the extent that there was a slowdown really much to our surprise, it was much less of a slowdown that I think we all expected in home improvement. Did I answer your question?

Steven Wald -- Morgan Stanley -- Analyst

OK. Yeah, that's very helpful. Thank you.

Operator

And our next question comes from Reggie Smith with J.P. Morgan. You may proceed.

Reggie Smith -- J.P. Morgan -- Analyst

Hey, good morning, gentlemen. Can you hear me? Hello?

David Zalik -- Chairman and Chief Executive Officer

Yes, can hear you great. Good morning.

Reggie Smith -- J.P. Morgan -- Analyst

Yeah. Right. A few questions. One of them you've kind of been touched on.

I wanted to kind of go back to your commentary on, I guess, April trends. I think, Dave called it a resurgence and Gerry say tapering. Just trying to understand, I guess, the magnitude of the discussion there. The second part of the question, kind of help us or remind us how the business works when volume or originations are declining? I think the question before asked about operating expenses, but what are some of the natural offsets that should kick in if transaction revenues are down, year over year in the second quarter? And could you see a situation where EBITDA is negative next quarter?

David Zalik -- Chairman and Chief Executive Officer

Can you repeat the last question, the very beginning cut out?

Reggie Smith -- J.P. Morgan -- Analyst

Yeah. So if -- presuming originations are down 20%, right? I would imagine transaction revenues have a similar kind of flow. What are the natural offsets in the business expense wise? And could you see a scenario in the second quarter where EBITDA is negative?

David Zalik -- Chairman and Chief Executive Officer

We don't see a second -- a scenario where second-quarter EBITDA is negative. And going back to the -- and the offsets are the originally -- the vast majority of origination costs are variable. And so, those are the natural offsets. As it relates to April for the month, we reported that the leading indicator was down about 30% and we have seen in the last three weeks that the consecutive growth from what we think was a trough three weeks ago.

Reggie Smith -- J.P. Morgan -- Analyst

Got it. And then just thinking about interest rates come in, obviously, what impact does that have on the business? I know that as they went up, there was a little headwind. Are you expecting a relief from lower rates? Or how does that impact your profitability in the model?

David Zalik -- Chairman and Chief Executive Officer

So I think if you take in interest rates and this environment, we think it's neutral, would not suggest that it's a tailwind or a headwind at this time.

Reggie Smith -- J.P. Morgan -- Analyst

Got it. No, go ahead. Was Jerry about to jump in?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

I'm sorry, Reggie. Same question or follow-up.

Reggie Smith -- J.P. Morgan -- Analyst

No, no. I thought I heard someone asked about your comment. And then the last one, I didn't -- and maybe I overlooked it, I didn't see a non-GAAP EPS calculation or share count. Are you guys not providing non-GAAP EPS anymore?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Rob?

Rob Partlow -- Executive Vice President and Chief Financial Officer

Yeah. No, we are not, I think the -- with there's really limitations on what you can do with CECL and other things in terms of adjustments. So we focused on adjusted EBITDA as our core kind of non-GAAP measure.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

I'm hoping that an analyst will do a little work to derive it. The SEC is frowning upon it right now, but if it was our inclination, we'd think about pro forma adjusted giving effect to --

Rob Partlow -- Executive Vice President and Chief Financial Officer

The non-cash charge.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

The non-cash charge because the CECL charge just has got no relevance to our business model truly. But it would have turned that reported GAAP EPS to something akin to what we reported last year.

Reggie Smith -- J.P. Morgan -- Analyst

I understood. I think in the presentation, it showed a share count of something in the $60 million range, which is down considerably from the previous year. Is that a typo? Or --

David Zalik -- Chairman and Chief Executive Officer

It must be a typo. I'm not sure what you're referencing. That doesn't sound right.

Reggie Smith -- J.P. Morgan -- Analyst

Weighted average shares -- 

David Zalik -- Chairman and Chief Executive Officer

That's just the [Inaudible] shares. If you go on the 10-Q, we actually -- yeah, the 10-Q gives you a detail, Reggie.

Reggie Smith -- J.P. Morgan -- Analyst

OK. Thank you.

David Zalik -- Chairman and Chief Executive Officer

Thank you.

Rob Partlow -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question comes from Chris Donat with Piper Sandler. You may proceed. 

Chris Donat -- Piper Sandler -- Analyst

Hi, good morning, everyone. It's good to hear your voices. I wanted to ask one question on your first-quarter volume trends. I looked through the detail on Slide 11.

Solar right now 10%, that's a big jump, but looks like HVAC, roofing and construction lease, by my math, are down sort of 25% to 30% quarter-on-quarter. Just wondered if the trends are kind of persisting that way, like solar is strong, but HVAC roofing and construction are on the weaker side of your spectrum in April and May.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Are you making reference by chance to the pie chart that's on 11?

Chris Donat -- Piper Sandler -- Analyst

Yeah. I'm taking the pie chart and then we take that pie chart and use those percentages to slice up the transaction volume ex healthcare. So I'm doing a little math around it. But solar at 10%, that's a big jump.

Is that still strong is really the core of the question here?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Yeah. I think we may have a mislabeling on Slide 11, candidly. That doesn't chime.

David Zalik -- Chairman and Chief Executive Officer

Yeah. Chris, what we've seen is that HVAC has been affected less than windows, kitchens, bathrooms, and solar. And if we need to update Slide 11, we'll get that to you and circulate it broadly as well. So what we've seen is that it's more, number one, HVAC has been impacted less.

It's the bigger driver is what city and state you're in. Northeast, much more impacted than anywhere else. Southeast, least impacted. Amazing how much business is still in windows and in kitchen and bathroom remodeling was being gone in April and we're already seeing in May.

Even in state -- in the Midwest and the West Coast and the Southeast. So, no, solar is not growing faster than anything else. But we have seen HVAC be more durable even than windows and kitchen.

Rob Partlow -- Executive Vice President and Chief Financial Officer

If you actually turn to Slide 17, you can see our actual solar volume was 2%.

Chris Donat -- Piper Sandler -- Analyst

Yup. OK. Yeah, yeah, that makes more sense to me. All right.

And then anything on -- I guess, we're hearing out of some of the home improvement companies that -- or some of the data that we can also gather from them. But it looks like for consumers, they are engaging more in small projects rather than larger projects. I'm just wondering if you saw anything in the first quarter on like average ticket sizes or anything like that that suggested any change? Or is that not something you'd really see because of what you're financing?

David Zalik -- Chairman and Chief Executive Officer

Yeah. So what we're seeing is a durable demand from the consumer. We have not seen any change in -- material change in average purchase amount or financed amount or transaction amount. What we are seeing, interestingly enough, is more merchants are use -- from what we can tell, more merchants are using financing more often and are paying for more expensive promotions.

They value that sale even more. They're paying more for bigger promotions to drive traffic for their businesses, but we are not seeing average order value go down. Cost of windows isn't coming down. So, no, the short answer is consumers that are buying windows are not seemingly spending any less money.

Chris Donat -- Piper Sandler -- Analyst

OK. And then, Gerry, you've made some comment on some of the additions on merchants like remodelers, HVAC dealers, and hardscape. Just wondering merchants, with those additions, are those things that had been in the works for months, I'm just trying to understand sort of the -- your merchant pipeline and what business you're able to do now? And if we might see a weaker merchant adds in a quarter or two because tougher to add them in a Zoom meeting rather than on a face-to-face sales call?

David Zalik -- Chairman and Chief Executive Officer

Let me speak to that, Gerry. So most of our merchant enrollment is not face-to-face. We support them face-to-face and we'll continue doing that. But these businesses and business owners, they're really busy, and so, they don't tend to like people interfering with their daily routine.

So you need to be invited. What we actually saw was not a pull forward, sort of, Chris, to reference, I think, what you were getting at. What we saw is that merchants that either were not using financing or using competitors suddenly started shifting to us as some competitors have had business interruptions, drastic changes in their operating procedures. And so, we've -- we think that it's a future Christmas present for us based on getting merchants that have long been either entrenched elsewhere, moving over, or merchants that has previously not used financing.

Chris Donat -- Piper Sandler -- Analyst

All right. Thanks very much.

David Zalik -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question comes from Rob Wildhack with Autonomous Research. You may proceed.

Rob Wildhack -- Autonomous Research -- Analyst

Good morning, guys. I know you've said in the past, payments on the financial guarantees have been immaterial. But can you share with us just how much losses would have to increase before the financial guarantees and the escrow are tapped into?

David Zalik -- Chairman and Chief Executive Officer

I'm going to defer that to Gerry and Rob?

Rob Partlow -- Executive Vice President and Chief Financial Officer

Yeah, that's -- I mean, I guess a couple of -- on the construct where you continue to originate loans, I think you'd have to see different levels of stresses under that environment. But it is typically in excess of a50% or more before you would start seeing potential escrow usage under kind of a steady state portfolio growth environment.

Rob Wildhack -- Autonomous Research -- Analyst

OK. And then just a follow-up on the SPV, a handful of questions. What interest rate that you're paying? How does the reserving work for that structure? And then, what does the SPV mean for your leverage ratio and existing debt covenants? Thanks, guys.

Rob Partlow -- Executive Vice President and Chief Financial Officer

Great questions. A couple of things. First, the -- from a financing cost, it is actually lower, if you will, from a spread perspective than our typical bank partners. So from an efficiency standpoint, it's actually very efficient for us.

From a funding cost, the -- see, the other part of your question was, how does it affect our leverage ratio? From a leverage ratio standpoint, this is securitization indebtedness is nonrecourse. So it's not part of that calculation.

Rob Wildhack -- Autonomous Research -- Analyst

OK. And then, do you have to do any reserving for the loans that will be funded through the SPV?

Rob Partlow -- Executive Vice President and Chief Financial Officer

Great question. These loans will be loans held for sale such as that. It is not a CECL charge, if you will. Related to that, it's a loans held for sales, you have to mark-to-market the loans and then book or your typical reserve for any impairments you see on bonds from a credit loss perspective.

But there's not a CECL charge directly related to that.

Rob Wildhack -- Autonomous Research -- Analyst

OK. Thank you.

Operator

And our next question comes from Ashwin Shirvaikar with Citi. You may proceed.

Ashwin Shirvaikar -- Citi -- Analyst

Thank you. Good morning, gentlemen. How are you?

David Zalik -- Chairman and Chief Executive Officer

Good. Great. Thank you.

Ashwin Shirvaikar -- Citi -- Analyst

Hey, so, one question I had was the $3.4 billion in additional capacity through 2021 that you referenced on one of your slides. Is that based on using sort of normal paydown patterns? Or have we used any sort of newer or modified assumptions given the current situation? And if so, could you talk through some of those assumptions?

David Zalik -- Chairman and Chief Executive Officer

Yeah. Very simply, it's based on what we expect to see in paydowns in the next 18 months.

Ashwin Shirvaikar -- Citi -- Analyst

Right. I understand that, but what are the underlying assumptions you're making about the economy, about the consumer, and so on and so forth?

David Zalik -- Chairman and Chief Executive Officer

We think it's going to be -- well, it's not connected to merchants. Consumer paydowns are -- yeah, are based on what we expect, which is our estimate based on what we know now. But we don't think that the volatility, the beta is terribly high, considering these are one-year weighted average life loans and 770 FICOs. And as indicated, what we've seen in -- Gerry indicated earlier today, early stage delinquencies have not deteriorated yet.

Ashwin Shirvaikar -- Citi -- Analyst

Got it.

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Ashwin, the one comment I would add is note that only 2.5% of the borrowers in our $9.3 billion loan servicing portfolio have requested any kind of hardship relief. It's pretty de minimis when you compare that with other consumer programs. We don't have enough definition to really provide what would be imprecise estimating. But we know what the weighted average life of the portfolio as we sensitized it for this small percentage that have been hardship relieved, but it's very, very small.

Ashwin Shirvaikar -- Citi -- Analyst

Got it. OK. And then the transaction fee rate, 6.55% in 1Q '20, should we expect to see that tick up through the year, maybe closer to the 6.7%, which was the rate excluding the promotional allowances?

David Zalik -- Chairman and Chief Executive Officer

Yes. We would expect it, do expect it to tick up a little bit. We've certainly seen that already here lately.

Ashwin Shirvaikar -- Citi -- Analyst

OK. The -- this is the first time in many quarters that you haven't had any proceeds from charged off receivables transfers. So is that more a reflection of the market? Or is that a change in approach by you?

David Zalik -- Chairman and Chief Executive Officer

Gerry, why don't you speak to that?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Yes. As part of the strategic review that the board has undertaken, it became clear that sort of the cost of capital that we enjoy is such that our economic benefit by continuing to use our collection procedures would suggest that the rate of return that we're paying investors exceeds by a good dimension our cost of capital and we're best served by retaining these accounts for our own and use our collection procedures and it will drive up our IRR on those assets. So as opposed to monetizing them programmatically like we have been, we've made meaningful improvement in collection and process, and we're on a mindset where we're better off keeping those economics for ourselves and not paying those out to investors. 

Ashwin Shirvaikar -- Citi -- Analyst

OK. That's good to know. Are there any other -- as a part of your review, I know you don't normally talk about it, are there any such other conclusions that the strategic review has given you that you're implementing, or that would be useful for investors to know?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

I mean, in all candor, it's probably not surprising just given the economic times we're in. We're generally internally focused right now by design and that would believe be the same for any prospective counterparty. Everybody's focused on their business, just given the dynamic nature of the market today.

Ashwin Shirvaikar -- Citi -- Analyst

That's great. Got it. Thank you, guys.

David Zalik -- Chairman and Chief Executive Officer

Thank you.

Operator

And our last question comes from Andrew Jeffrey with SunTrust. You may proceed.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning. Appreciate you taking the question, here. Gerry, I wonder if I could just dig in a little bit on the promotions. It sounds like to date, your merchants have borne the cost of those promotions rather than GreenSky subsidizing them.

Is that -- should we expect that to continue? Or will you support merchant sales by offering better terms, for example?

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

I'll let David expand on this, but we stay close to our merchants and we want to enable them any way we can to optimize their business. If that's getting creative with respect to new promotions, new financing tools, new programs, whether it be sort of 4th of July holiday specials or otherwise, we're going to be there for them. That being said, we have a cost of capital and we have a business to run and we do run our math and seek a targeted return, irrespective of the financial product we bring. But we're creative, we're accommodating, we're responsive.

I would note, if it wasn't clear in the last question, the Q1's transaction fee rate is impacted by seasonal rebates that only occur in the first quarter. So one of our prior questions came up, what you see -- would you expect to see a tick up in merchant rate throughout the year and David responded yes. If for no other reason than those rebates having been behind us, you can expect that to be the case. David, anything you'd add along that line?

David Zalik -- Chairman and Chief Executive Officer

Yeah, I would. I just want to remind you, our business model is to help businesses grow and delight their customers, but there's a cost to do that and we are for profit. So, we're not in a position to subsidize the merchants. The merchants pay a fee to use the platform, which increases their sales.

To Gerry's point, echoing my point earlier, they pay us a fee. We're actually seeing that fee go up. So I think the short answer to your question is, yes, we can -- we expect to continue to see merchants using our platform, paying for it to drive incremental growth, it's important to them, and perhaps more important today. And we're seeing an uptick in what they're paying based on one thing more promotions, more often.

Thank you.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

OK. I mean, I guess that all make sense. And it's consistent what you've said in the past about the 1Q seasonality of promotions. I just wonder to the extent we're in a more protracted downturn and it sounds like a sensible underwriting gets a little tighter, which makes sense.

Does there, at some point, become a tension at which there's a trade-off between volume and yield, right? I guess, I'm trying to parse out --

David Zalik -- Chairman and Chief Executive Officer

Yes. So I can tell you what we've seen is the more pressure the merchants are from a revenue standpoint, the more often they spend more money on promotional credit. That's something that we have seen very obviously in April, which I think, speaks directly to your question. When merchants are having a harder time getting the phone to ring or a harder time with consumers being comfortable moving forward with a project, what we've seen is that they are more likely to use our service more often with more expensive products.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

OK. That's helpful. Thanks, and then a quick one for Rob. On the servicing portfolio and that servicing asset, should we see runoff increase and barring any pricing changes, if the servicing portfolio at the bank declines, does that loan fall? So as the after they write the servicing asset down?

Rob Partlow -- Executive Vice President and Chief Financial Officer

Yes. Yes, it's a great question. So to the extent the servicing portfolios for the bank partner portfolios that have the higher yield, if they were to higher servicing asset or servicing fee. If that were to decrease, you would start seeing potentially more like net amortization from the servicing asset.

If it's steady, you would see kind of no net real activity, an increase in -- as you saw last quarter, you saw a slight increase or gain related to that. 

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Right.

Rob Partlow -- Executive Vice President and Chief Financial Officer

But it is somewhat correlated to the growth of the -- those particular servicing portfolios.

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

Got it. Thank you. Very helpful.

David Zalik -- Chairman and Chief Executive Officer

Thank you.

Amelia Freeman -- Vice President of Tax and Equity

Thank you, operator. And thank you, everyone, for joining us today. We hope everyone have a great day.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Amelia Freeman -- Vice President of Tax and Equity

David Zalik -- Chairman and Chief Executive Officer

Gerry Benjamin -- Vice Chairman and Chief Administrative Officer

Rob Partlow -- Executive Vice President and Chief Financial Officer

John Davis -- Raymond James -- Analyst

Steven Wald -- Morgan Stanley -- Analyst

Reggie Smith -- J.P. Morgan -- Analyst

Chris Donat -- Piper Sandler -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

Andrew Jeffrey -- SunTrust Robinson Humphrey -- Analyst

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