What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-11 · 172 added, 119 removed, 250 unchanged (54% of the section changed)

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Financial Results and Trends

Our consolidated results of operations for the three months ended March 31, 2020 and 2019 were as follows:

Three Months Ended March 31,

2020 2019 Change %

Our consolidated results of operations for the three and six months ended June 30, 2020 and 2019 were as follows:

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 Change % 2020 2019 Change %

(In thousands, except percentages)

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Impact of COVID-19

The unprecedented and rapid spread of COVID-19 and the measures implemented to contain it have created a significant amount of economic volatility around the globe.

The unprecedented and rapid spread of the COVID-19 pandemic and the measures implemented to contain it have created a significant amount of economic volatility in our markets.

We have taken steps to ensure the health and safety of our employees and continued service to our customers and partners, while at the same time seeking to mitigate the impact of the pandemic on our financial condition and results of operations.

Additionally, the business and operations of our retail distributors and certain of our BaaS and other partners have been disrupted, with many experiencing reduced foot traffic or usage of their services.

While the duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time and the ultimate business and economic impact remains unknown, the conditions caused by this pandemic has and will continue to affect the rate of spending, gross dollar and purchase volume transacted through our network, and the amount of interchange we earn, and could otherwise adversely affect demand for our products and services, all of

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which could adversely affect our business, results of operations, and financial condition.

Moreover, as a result of these conditions during the quarter, we have experienced and may continue to experience increased costs, including higher call center costs.

While we have implemented cost-saving measures to offset increased costs and are otherwise working to mitigate the conditions driving our higher costs, the conditions caused by the pandemic could continue to adversely affect our business, results of operations, and financial condition in future periods.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time and the ultimate business and economic impact remains unknown.

Our employees and business continuity

Over the course of the first quarter of 2020, we enacted business continuity plans in Shanghai, China and across the U.S., mandated that our employees work from home, required contractors to work remotely and implemented strict travel restrictions.

While our employees have been successful in maintaining our operations, and our offices in China have since reopened consistent with local guidelines, we have experienced disruption in staffing levels at our third-party call centers across the globe and we continue to work with our partners to restore these staffing levels.

In response to the pandemic, we enacted business continuity plans in Shanghai, China and across the U.S., mandated that our employees work from home, required contractors to work remotely and implemented strict travel restrictions.

To date, our U.S.

employees have been successful in maintaining our operations in a remote work environment and our offices in China have since reopened consistent with local guidelines.

While we experienced disruption in staffing levels at our third-party call centers across the globe during March and the second quarter of 2020 staffing level have been restored to appropriate levels and we continue to monitor the situation, as we evaluate future operating plans.

Demand for our products and services

While sales through our online channel were strong during the quarter, the conditions caused by the COVID-19 pandemic have adversely affected our customers’ spending levels and ability or willingness to purchase our products and services through our retail distributors, lowered the volume of transactions through our BaaS platform, delayed the launching of new products and services, all of which will likely adversely affect our future sales, results of operations and financial condition.

In particular, the recent increases in filings for unemployment benefits in the U.S., while partially mitigated by the effects of governmental actions such as the CARES Act, have adversely affected our customers' spending levels and retention rates as well as account acquisition and transaction volume from our SimplyPaid programs.

Furthermore, the Federal Reserve recently announced reductions in short-term interest rates that have lowered the yields on our cash and investment balances and therefore, we expect a reduction in the amount of interest income we earn for the remainder of the year.

As noted above, the extent of the impacts from these conditions is currently uncertain and dependent on various factors, including the severity and transmission rate of the virus, the nature of and duration for which the preventative measures remain in place, the extent and effectiveness of containment and mitigation actions, the type of stimulus measures and other policy responses that the U.S.

government may adopt, and the impact of these and other factors on our employees, customers, retail distributors, partners and vendors.

Balance sheet and liquidity

We have taken steps to strengthen our liquidity position and to ensure we have ample flexibility to pursue strategic priorities, including drawing down the full $100 million available to us under our revolving credit facility, instituting an enterprise-wide headcount freeze and delaying or reducing non-critical projects.

Beginning in March 2020, the business and operations of our retail distributors, employers offering our PayCard programs and certain of our BaaS partners have been disrupted, with many experiencing reduced foot traffic or usage of their products and services.

The conditions caused by the COVID-19 pandemic adversely affected our customers’ spending levels and the ability or willingness to purchase our products and services through our retail distributors, lowered the volume of transactions through our BaaS and PayCard programs and delayed the launching of new products and services.

Governmental actions such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) helped mitigate the effects of COVID-19 on our business during the second quarter of 2020.

In particular, stimulus funds and incremental unemployment benefits provided under the CARES Act created a higher demand and usage of our products and services.

In the second quarter of 2020, our gross dollar volume, purchase volume and the number of active accounts grew year-over-year by 51%, 31% and 10%, respectively.

However, the incremental federal unemployment benefits from the CARES Act expired on July 31, 2020 and unless the government extends the duration of these additional unemployment benefits and does not significantly reduce these benefits, or offers comparable or better benefits, our customers' spending levels and usage of our products may be impacted, resulting in additional uncertainty on our revenue results for the remainder of the year.

Impact on interest income, cost structure and liquidity

Interest Income

The Federal Reserve recently announced reductions in short-term interest rates that have lowered the yields on our cash and investment balances and therefore, we expect a reduction in the amount of interest income we earn for the remainder of the year.

Cost Structure

We have experienced and may continue to experience increased costs, including higher call center costs and disputed transaction losses, which were exacerbated by the disruption in staffing levels at our third-party call centers in the first half of 2020.

We have taken steps to strengthen our liquidity position and ensure we have ample flexibility to pursue strategic priorities, including utilizing our revolving credit facility, instituting an enterprise-wide headcount freeze and delaying or reducing non-critical projects.

In March 2020, we drew down the full $100 million available to us under our revolving credit facility as a precautionary measure due to the uncertainty associated with the COVID-19 pandemic.

We have since repaid the entire balance drawn as of June 30, 2020 and continue to have the full amount available to us should we need it to invest in strategic initiatives.

Additionally, the CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

This is expected to provide us with approximately $6 million of additional liquidity during the current year.

Currently, we do not anticipate any material impairments of our assets or material increases in allowances for loans losses.

The duration and magnitude of the effects of COVID-19 remains uncertain and dependent on various factors, including the continued severity and transmission rate of the virus, the nature of and duration for which the preventative measures remain in place, the extent and effectiveness of containment and mitigation actions, the type of stimulus measures and other policy responses that the U.S.

government may further adopt, and the impact of these and other factors on our employees, customers, retail distributors, partners and vendors.

See Part II, Item 1A, Risk Factors , for an additional discussion of risk related to the COVID-19 pandemic.

Total operating revenues

Our total operating revenues for the three months ended March 31, 2020 increased $21.7 million, or 6% over the prior year comparable period, generating revenue growth from both our Processing and Settlement Services and Account Services segments.

Within our Processing and Settlement Services segment, total operating revenues increased year-over-year by 14% as a result of year-over-year growth in the number of cash transfers and tax refunds processed, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services during the three months ended March 31, 2020 compared with the prior year period.

The deferral of the deadline to submit tax returns to July 2020 in response to the COVID-19 pandemic is not expected to materially impact the results of our Processing and Settlement Services segment since that deferral generally drives the behavior of taxpayers who are not expecting to receive refunds.

Within our Account Services segment, total operating revenues increased year-over-year by 2% primarily attributable to growth in the number of direct deposit active accounts from our BaaS and PayCard programs and an increase in BaaS program management service fee revenues earned from platform partners, partially offset by a

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decline in the number of active accounts in our Consumer programs.

Gross dollar volume grew 10% year-over-year primarily due to growth in our BaaS and PayCard programs.

Account holders enrolled in direct deposit also contributed to the increase as those accounts tend to generate higher levels of gross dollar volume and purchase volume than other active accounts, and consequently have a greater impact on the amount of interchange revenue we earn.

The decline in our active accounts in our Consumer business in recent periods is in part attributable to ongoing changes in our competitive environment, particularly as new entrants market largely free bank account offerings, and the impact of the COVID-19 pandemic in the last month of the first quarter of 2020, which affected new account acquisition through our retail channel.

We also experienced a year-over-year decline in net interest income due to lower yields on our cash and investment balances as a result of rate decreases by the Federal Reserve during the three months ended March 31, 2020.

Subsequent to March 31, 2020, we experienced a surge in our gross dollar volume from stimulus funds deposited onto our account programs by the Internal Revenue Service.

While we believe gross dollar volume is a strong indicator of our revenue for all our account programs and believe our long term strategy and unique collection of assets provide a competitive advantage to address the competitive pressures we face from new entrants, we have experienced mixed trends in March and April 2020 that make it difficult to forecast future results.

Further we are monitoring our direct deposit active base to better understand sources of our gross dollar volume.

With respect to the former, we have seen an increased proportion of ACH deposits coming from government benefits as account holders file for unemployment benefits.

The enhanced unemployment benefits afforded under the CARES Act has helped offset erosion in payroll deposits.

Our total operating revenues for the three and six months ended June 30, 2020 increased $37.9 million, or 14%, and $59.6 million, or 10%, respectively, over the prior year comparable periods, generating revenue growth from both our Account Services and Processing and Settlement Services segments.

Account Services

Within our Account Services segment, total operating revenues increased year-over-year for the three and six months ended June 30, 2020 by 18% and 10%, respectively, primarily attributable to growth in BaaS program management service fee revenues earned from platform partners and growth in the number of direct deposit active accounts as new and existing customers utilized our platform to receive stimulus funds and unemployment benefits and in turn, drove gross dollar volume and purchase volume growth of 51% and 31%, respectively.

Our account holders enrolled in direct deposit tend to generate higher levels of gross dollar volume and purchase volume than other active accounts, and consequently have a greater impact on the amount of interchange revenue we earn.

We also experienced a year-over-year decline in net interest income during the three and six months ended June 30, 2020 due to lower yields on our cash and investment balances as a result of rate decreases by the Federal Reserve.

While we believe gross dollar volume is a strong indicator of our revenue for all our account programs and believe our long term strategy and unique collection of assets provide a competitive advantage to address the competitive pressures we face from new entrants, current economic conditions caused by the COVID-19 pandemic have created mixed trends in our business that make it difficult to forecast future results.

We continue to monitor our direct deposit active base to better understand sources of our gross dollar volume.

We have seen an increased proportion of ACH deposits coming from government benefits as account holders file for unemployment benefits.

While state and federal unemployment benefits afforded under the CARES Act has helped offset erosion in payroll deposits, as we noted above, such benefits have since expired and it is unclear whether or how long such benefits will be extended or whether such benefits will be maintained, significantly reduced or replaced.

Processing and Settlement Services

Within our Processing and Settlement Services segment, total operating revenues decreased slightly year-over-year by 3% for the three months ended June 30, 2020 due to a shift in the number of tax refunds processed from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of tax filing deadlines and a year-over-year decline in Simply Paid disbursement transactions, partially offset by growth in the number of cash transfers.

The deferral of the deadline to submit tax returns to July 2020 in response to the COVID-19 pandemic has shifted volumes from the first half to the second half of the year, but we do not expect it to have a material impact on the number of tax refunds processed for the full year 2020.

Total operating revenues increased 7% for the six months ended June 30, 2020, as a result of year-over-year growth in the number of cash transfers, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services compared with the prior year periods.

Total operating expenses

Our total operating expenses for the three months ended March 31, 2020 increased $44.2 million, or 17% over the prior year comparable period.

This increase was primarily the result of several factors, including higher processing expenses associated with the growth of BaaS account programs and lower accrued payment network incentives due to the anticipated impact of COVID-19 and higher sales and marketing expenses attributable to the year-over-year increases in operating revenues generated from products and services that are subject to revenue-sharing arrangements with our distributors and partners and our continued marketing investment in our Green Dot Unlimited Cash Back Bank Account ("Green Dot Unlimited").

Our total operating expenses for the three and six months ended June 30, 2020 increased $76.5 million, or 33%, and $120.7 million, or 24%, respectively, over the prior year comparable periods.

This increase was primarily the result of several factors, including higher processing expenses associated with the growth of BaaS account programs, higher sales and marketing expenses attributable to the year-over-year increases in operating revenues generated from products and services that are subject to revenue-sharing arrangements with our distributors and partners, our continued marketing investment in our Green Dot Unlimited Cash Back Bank Account ("Green Dot Unlimited") and higher compensation and benefits expenses, principally due to accrued bonus compensation for non-executive employees and employee stock-based compensation expenses associated with performance-based equity awards.

We also experienced an increase in other general and administrative expenses, primarily due to a year-over-year growth in dispute transaction losses and higher depreciation and amortization of property, plant and equipment as a result of growth in capital expenditures in recent years.

These increases were offset by a decrease in compensation and benefits expenses primarily due to lower accrued bonuses and employee stock-based compensation expenses associated with performance based equity awards.

As previously announced, we renewed our Walmart MoneyCard agreement in October 2019.

The term of the agreement began on January 1, 2020 and expires on January 31, 2027, with an automatic renewal clause for an additional period of one year, subject to certain terms as discussed in the agreement.

Revenues generated under the MoneyCard program have represented a substantial, but declining portion of our total operating revenues.

Under this new agreement, the sales commission rate we pay to Walmart for the MoneyCard program increased from the prior agreement.

While we continue to build operational efficiencies and implement best practices within our customer service operations, in the short-term, we continue to incur significantly higher dispute transaction losses year-over-year, primarily due to higher volumes of customer complaints and reserves for credits to be issued for previously denied disputes.

While we do not anticipate these conditions to persist over a long duration, dispute transaction losses have negatively impacted other general and administrative expenses for the three and six months ended June 30, 2020 and are expected to impact the same during the three months ending September 30, 2020.

Additionally, under our new Walmart MoneyCard agreement, beginning January 1, 2020, the sales commission rate we pay to Walmart for the MoneyCard program increased from the prior agreement.

Consequently, we expect our sales and marketing expenses throughout 2020 to be negatively impacted by the increased commission rate.

Our income tax expense decreased $3.9 million, or 25% below the prior year comparable period primarily due to a decline in operating income generated.

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Our income tax expense for the three and six months ended June 30, 2020 decreased $5.3 million and $9.2 million, respectively, or 58% and 37%, respectively, from the prior year comparable periods.

The decrease was primarily due to a decline in operating income generated, offset by a higher effective tax rate year-over-year.

We review a number of metrics to help us monitor the performance of, and identify trends affecting, our business.

We believe the following measures are the primary indicators of our quarterly and annual revenues:

Three Months Ended March 31,

2020 2019 Change %

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 Change % 2020 2019 Change %

(In millions, except percentages)

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GDV from Direct Deposit Sources $ 10,568 $ 7,208 $ 3,360 46.6 % $ 21,222 $ 17,425 $ 3,797 21.8 %

Number of Active Accounts* 5.74 6.05 (0.31) (5.1) %

Direct Deposit Active Accounts* 2.99 2.87 0.12 4.2 %

Number of Active Accounts* 6.25 5.66 0.59 10.4 % n/a n/a n/a n/a

Direct Deposit Active Accounts* 3.12 2.31 0.81 35.1 % n/a n/a n/a n/a

Purchase Volume $ 8,477 $ 6,470 $ 2,007 31.0 % $ 16,759 $ 14,670 $ 2,089 14.2 %

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Tax Refunds Processed 1.90 2.52 (0.62) (24.6) % 11.6 11.91 (0.31) (2.6) %

* Represents number of active and direct deposit active accounts as of March 31, 2020 and 2019, respectively.

* Represents number of active and direct deposit active accounts as of June 30, 2020 and 2019, respectively.

Gross Dollar Volume — represents the total dollar volume of funds loaded to our account products from direct deposit and non-direct deposit sources.

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This metric also serves as a leading indicator of revenue generated through our Account Services segment products, inclusive of interest income generated on deposits held at Green Dot Bank, fees charged to account holders and interchange revenues generated through the spending of account balances.

The increase in total dollar volume of 10.1% during the three months ended March 31, 2020 and the increase in gross dollar volume from direct deposit sources of 4.3% during the three months ended March 31, 2020, from the comparable prior year period were principally driven by an increase in the number of direct deposit active accounts.

The increases in total dollar volume of 51% and 28% during the three and six months ended June 30, 2020, respectively, and the increases in gross dollar volume from direct deposit sources of 47% and 22% during the three and six months ended June 30, 2020, respectively, from the comparable prior year periods were principally driven by an increase in the number of direct deposit active accounts and stimulus funds and unemployment benefits received under the CARES Act.

Number of Active Accounts — represents any bank account within our Account Services segment that is subject to United States Patriot Act compliance and, therefore, requires customer identity verification prior to use and is intended to accept ongoing customer cash or ACH deposits.

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Our direct deposit active accounts, on average, have the longest tenure and generate the majority of our gross dollar volume in any period and thus, generate more revenue over their lifetime than other active accounts.

Despite a year-over-year decrease in the number of active accounts, resulting principally from lower unit sales of accounts within our retail and digital consumer programs, we had an increase in direct deposit active accounts of 4% as of March 31, 2020 on a year-over-year basis, primarily driven by growth in our Platform Service offerings from our BaaS and PayCard and Wage Disbursement programs, which are comprised principally of account holders enrolled in direct deposit.

We experienced an increase in direct deposit active accounts of 35% as of June 30, 2020 on a year-over-year basis, primarily driven by new and existing customers utilizing our platform to receive stimulus funds and unemployment benefits provided for under the CARES Act.

Purchase Volume — represents the total dollar volume of purchase transactions made by our account holders.

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We use this metric to analyze interchange revenue, which is a key component of our financial performance.

Purchase volume increased approximately 1% during the three months ended March 31, 2020 from the comparable prior year period.

Purchase volume increased approximately 31% and 14% during the three and six months ended June 30, 2020, respectively, from the comparable prior year periods, in line with the increase in Gross Dollar Volume as described above.

Number of Cash Transfers — represents the total number of cash transfer transactions conducted by consumers, such as a point-of-sale swipe reload transaction, the purchase of a MoneyPak or an e-cash mobile remittance transaction marketed under various brand names, that we conducted through our retail distributors in a specified period.

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We review this metric as a measure of the size and scale of our retail cash processing network, as an indicator of customer engagement and usage of our products and services, and to analyze cash transfer revenue, which is a key component of our financial performance.

Our cash transfers increased 10.5% during the three months ended March 31, 2020 over the prior year comparable period primarily due to an increase in transactions and the number of third-party account programs that utilize the Green Dot Network to accept funds through our cash processing network.

Our cash transfers increased 11% during the three and six months ended June 30, 2020, respectively, over the prior year comparable periods primarily due to an increase in transactions and the number of third-party account programs that utilize the Green Dot Network to accept funds through our cash processing network.

Number of Tax Refunds Processed — represents the total number of tax refunds processed in a specified period.

Due to seasonality, the number of tax refunds processed is most concentrated during the first half of each

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year and is minimal during the second half of each year.

Due to seasonality, the number of tax refunds processed is most concentrated during the first half of each year and is minimal during the second half of each year.

We review this metric as a measure of the size and scale of our tax refund processing platform and as an indicator of customer engagement and usage of its products and services.

The overall increase in the number of tax refunds processed of 3.3% during the three months ended March 31, 2020, was primarily driven by an increase in refunds processed through online consumer tax filing software platforms, compared to the prior year period.

The overall decrease in the number of tax refunds processed of 3% during the six months ended June 30, 2020 compared to the prior year period is primarily attributable to a shift in volume from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of the tax filing deadline to July 2020.

Key components of our results of operations

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We earn Simply Paid disbursement fees from our business partners at the point in time payment disbursements are made.

Interchange Revenues — We earn interchange revenues from fees remitted by the merchant’s bank, which are based on rates established by the payment networks, at the point in time when customers make purchase transactions using our products.

transactions using our products.

Our aggregate interchange revenues vary based primarily on the number of active accounts in our portfolio, the average transactional volume of the active accounts in our portfolio and on the mix of cardholder purchases between those using signature identification technologies and those using personal identification numbers and the corresponding rates.

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Our net interest income and our net interest margin fluctuate based on changes in the federal funds interest rates and changes in the amount and composition of our interest-bearing assets and liabilities.

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Operating Expenses

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Our income tax expense consists of the federal and state corporate income taxes accrued on income resulting from the sale of our products and services.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.

The CARES Act, among other things, includes certain income tax provisions for individuals and corporations;

On March 27, 2020, the CARES Act was signed into law, which among

other things, includes certain income tax provisions for individuals and corporations;

however, these benefits do not impact our current tax provision.

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Reference is made to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Except as disclosed in Note 2 — Summary of Significant Accounting Policies under Recently Adopted Accounting Pronouncements to the Consolidated Financial Statements included herein, there have been no changes to our critical accounting policies and estimates during the three months ended March 31, 2020.

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Recent Accounting Pronouncements

Reference is made to the recent accounting pronouncements disclosed in Note 2 — Summary of Significant Accounting Policies to the Consolidated Financial Statements included herein.

Comparison of Three-Month Periods Ended March 31, 2020 and 2019

Comparison of Three-Month Periods Ended June 30, 2020 and 2019

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, processing and settlement service revenues, interchange revenues and net interest income:

Three Months Ended March 31,

Three Months Ended June 30,

Amount % of Total

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Total operating revenues $ 316,240 100.0 % $ 278,326 100.0 %

Card Revenues and Other Fees — Card revenues and other fees totaled $141.4 million for the three months ended March 31, 2020, an increase of $11.8 million, or 9.1%, from the comparable prior year period.

Card Revenues and Other Fees — Card revenues and other fees totaled $152.7 million for the three months ended June 30, 2020, an increase of $31.1 million, or 25.6%, from the comparable prior year period.

Our card revenues and other fees increased principally as a result of BaaS program management service fee revenues earned from platform partners.

This increase was offset partially by a decline in monthly maintenance fees and an increase in estimated cash back rewards that we record as a reduction to card revenues and other fees.

The decline in monthly maintenance fees is associated with the decline in the number of active accounts in our Consumer business, as discussed above.

This increase was offset partially by an increase in estimated cash back rewards that we record as a reduction to card revenues and other fees.

Our estimate of cash rewards varies based on multiple factors including the terms and conditions of the cash back program, customer activity and customer redemption rates.

Cash rewards have increased steadily year-over-year as our cash-back programs have grown, principally from those launched in 2016 and to a lesser extent, new cash-back programs launched in 2019.

Processing and Settlement Service Revenues — Processing and settlement service revenues totaled $123.1 million for the three months ended March 31, 2020, an increase of $15.5 million, or 14%, from the comparable prior year period.

The increase was driven primarily by year-over-year growth in transaction volume associated with cash transfers and tax refunds processed, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services.

Interchange Revenues — Interchange revenues totaled $90.9 million for the three months ended March 31, 2020, a decrease of $1.6 million, or 2%, from the comparable prior year period.

The decrease was primarily due to a decline in interchange rates earned on purchase volume during the three months ended March 31, 2020.

Interest Income, net — Net interest income totaled $6.8 million for the three months ended March 31, 2020, a decrease of $4.0 million, or 37%, from the comparable prior year period.

The decrease was principally the result of lower yields on our investment securities portfolio and customer funds on deposit as a result of rate decreases by the Federal Reserve during the three months ended March 31, 2020.

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Processing and Settlement Service Revenues — Processing and settlement service revenues totaled $65.5 million for the three months ended June 30, 2020, a decrease of $1.6 million, or 2%, from the comparable prior year period.

The decrease is attributable in part to a shift in the timing of tax refunds processed from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of the tax filing deadline to July 2020, partially offset by growth in the number of cash transfers.

Interchange Revenues — Interchange revenues totaled $96.0 million for the three months ended June 30, 2020, an increase of $14.7 million, or 18%, from the comparable prior year period.

The increase was primarily due to an increase in the amount of purchase volume during the three months ended June 30, 2020 compared to the prior year period, which we attribute primarily to stimulus funds and unemployment benefits made available under the CARES Act, partially offset by a decline in the interchange rate earned as a result of an increase in the average dollar amount purchased per transaction.

Interest Income, net — Net interest income totaled $2.1 million for the three months ended June 30, 2020, a decrease of $6.2 million, or 75%, from the comparable prior year period.

Operating Expenses

The following table presents a breakdown of our operating expenses among sales and marketing, compensation and benefits, processing, and other general and administrative expenses:

Three Months Ended March 31,

Three Months Ended June 30,

Amount % of Total

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Total operating expenses $ 310,850 98.3 % $ 234,363 84.2 %

Sales and Marketing Expenses — Sales and marketing expenses totaled $116.7 million for the three months ended March 31, 2020, an increase of $18.0 million, or 18% from the comparable prior year period.

Sales and Marketing Expenses — Sales and marketing expenses totaled $106.8 million for the three months ended June 30, 2020, an increase of $19.4 million, or 22% from the comparable prior year period.

This increase was primarily driven by an increase in sales commissions associated with higher revenues generated from products that are subject to revenue-sharing agreements and an increase in advertising expenses in continued support of our Green Dot Unlimited product launched in the second half of 2019.

Under our new agreement with Walmart, the sales commission rate we pay for the MoneyCard program increased from the prior agreement.

We expect our sales and marketing expenses in 2020 to be negatively impacted by the increased commission rate.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $53.1 million for the three months ended March 31, 2020, a decrease of $8.4 million or 14% from the comparable prior year period.

The decrease was due to lower salaries and wages of $4.8 million, principally due to lower accrued bonus compensation, and a decline in stock-based compensation of approximately $3.4 million, in both cases due to lower performance expectations in light of the COVID-19 pandemic.

Processing Expenses — Processing expenses totaled $71.1 million for the three months ended March 31, 2020, an increase of $19.5 million or 38% from the comparable prior year period.

This increase was principally due to growth in BaaS account programs within our Account Services segment and lower accrued payment network incentives due to the anticipated impact of the COVID-19 pandemic.

Other General and Administrative Expenses — Other general and administrative expenses totaled $62.4 million for the three months ended March 31, 2020, an increase of $15.1 million or 32%, from the comparable prior year period.

This increase was primarily due a year-over-year growth in dispute transaction losses and higher depreciation and amortization of property, plant and equipment as a result of growth in capital expenditures in recent years.

Under our new agreement with Walmart, beginning on January 1, 2020, the sales commission rate we pay for the MoneyCard program increased from the prior agreement.

As such, we expect our sales and marketing expenses in 2020 to be negatively impacted by the increased commission rate.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $58.9 million for the three months ended June 30, 2020, an increase of $10.6 million or 22% from the comparable prior year period.

The increase was due to higher salaries and wages of $8.6 million, a portion of which was attributable to accrued bonus compensation for non-executive employees and an increase in stock-based compensation expense of approximately $5.2 million due to certain performance-based awards.

These increases were partially offset by lower third-party contractor and employee benefit expenses.

Processing Expenses — Processing expenses totaled $71.4 million for the three months ended June 30, 2020, an increase of $22.2 million or 45% from the comparable prior year period.

This increase was principally due to growth in BaaS account programs within our Account Services segment and overall volume of transactions processed through our platform.

Other General and Administrative Expenses — Other general and administrative expenses totaled $73.8 million for the three months ended June 30, 2020, an increase of $24.4 million or 49%, from the comparable prior year period.

This increase was primarily due to a year-over-year growth in dispute transaction losses, as discussed above, and higher depreciation and amortization of property, plant and equipment as a result of growth in capital expenditures in recent years.

Income Tax Expense

The following table presents a breakdown of our effective tax rate among federal, state and other:

Three Months Ended March 31,

Three Months Ended June 30,

federal statutory tax rate 21.0 % 21.0 %

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Nondeductible expenses 1.1 0.2

Capital loss valuation allowance release (4.4) —

Other (0.2) 0.2

Effective tax rate 53.6 % 20.8 %

Our income tax expense totaled $12.0 million, a decrease of $3.9 million or 25% from the comparable prior year period primarily due to a decline in our operating income.

The increase in the effective tax rate is primarily due to the impact of general business credits, partially offset by year-over-year decline of $4.4 million in excess tax benefits from stock-based compensation.

Our income tax expense decreased by $5.3 million to $3.8 million for the three months ended June 30, 2020 from the comparable prior year period primarily due to a decline in our operating income.

The increase in the effective tax rate for the three months ended June 30, 2020, as compared to the same period in 2019, was primarily due to a decline in excess tax benefits from stock-based compensation and an increase in the IRC 162(m) limitation on the deductibility of certain executive compensation.

The IRC 162(m) limitation increased principally due to performance-based stock awards granted in connection with the recent hiring of certain executive officers.

These increases were partially offset by the impact of general business credits and the release of the valuation allowance reserve on capital losses.

The "Other" category in our effective tax rate consists of a variety of permanent differences, none of which were individually significant.

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Comparison of Six-Month Periods Ended June 30, 2020 and 2019

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, processing and settlement service revenues, interchange revenues and net interest income:

Six Months Ended June 30,

Amount % of Total

Operating Revenues Amount % of Total

Operating Revenues

(In thousands, except percentages)

Operating revenues:

Card revenues and other fees $ 294,075 43.3 % $ 251,190 40.6 %

Processing and settlement service revenues 188,516 27.8 174,652 28.2

Interchange revenues 186,836 27.6 173,875 28.1

Interest income, net 8,982 1.3 19,123 3.1

Total operating revenues $ 678,409 100.0 % $ 618,840 100.0 %

Card Revenues and Other Fees — Card revenues and other fees totaled $294.1 million for the six months ended June 30, 2020, an increase of $42.9 million, or 17%, from the comparable prior year period.

This increase was driven by the same factors discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Revenues—Card Revenues and Other Fees."

Processing and Settlement Service Revenues — Processing and settlement service revenues totaled $188.5 million for the six months ended June 30, 2020, an increase of $13.8 million, or 8%, from the comparable prior year period.

This increase was driven primarily by year-over-year growth in transaction volume associated with cash transfers, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services for the six months ended June 30, 2020 compared to the prior year period.

Interchange Revenues — Interchange revenues totaled $186.8 million for the six months ended June 30, 2020, an increase of $12.9 million, or 7%, from the comparable prior year period.

This increase was driven by the same factors discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Revenues—Interchange Revenues."

Interest Income, net — Net interest income totaled $9.0 million for the six months ended June 30, 2020, a decrease of $10.1 million, or 53%, from the comparable prior year period.

This decrease was driven by the same factors discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Revenues—Interest Income, net."

Operating Expenses

The following table presents a breakdown of our operating expenses among sales and marketing, compensation and benefits, processing, and other general and administrative expenses:

Six Months Ended June 30,

Amount % of Total

Operating Revenues Amount % of Total

Operating Revenues

(In thousands, except percentages)

Operating expenses:

Sales and marketing expenses $ 223,549 33.0 % $ 186,133 30.1 %

Compensation and benefits expenses 111,932 16.5 109,773 17.7

Processing expenses 142,466 21.0 100,854 16.3

Other general and administrative expenses 136,223 20.0 96,732 15.6

Total operating expenses $ 614,170 90.5 % $ 493,492 79.7 %

Sales and Marketing Expenses — Sales and marketing expenses totaled $223.5 million for the six months ended June 30, 2020, an increase of $37.4 million, or 20% from the comparable prior year period.

This increase was driven by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Expenses—Sales and Marketing Expenses."

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $111.9 million for the six months ended June 30, 2020, an increase of $2.1 million or 2% from the comparable prior year period.

This increase was driven by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Expenses—Compensation and Benefits Expenses."

Processing Expenses — Processing expenses totaled $142.5 million for the six months ended June 30, 2020, an increase of $41.6 million or 41% from the comparable prior year period.

This increase was driven by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Expenses—Processing Expenses."

Other General and Administrative Expenses — Other general and administrative expenses totaled $136.2 million for the six months ended June 30, 2020, an increase of $39.5 million or 41%, from the comparable prior year period.

This increase was driven by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2020 and 2019—Operating Expenses—Other General and Administrative Expenses."

Income Tax Expense

The following table presents a breakdown of our effective tax rate among federal, state and other:

Six Months Ended June 30,

federal statutory tax rate 21.0 % 21.0 %

State income taxes, net of federal tax benefit (0.6) 1.7

General business credits (6.6) (1.5)

Employee stock-based compensation 1.8 (3.7)

IRC 162(m) limitation 8.1 2.4

Nondeductible expenses 0.7 0.1

Other (0.5) 0.2

Effective tax rate 23.9 % 20.2 %

Our income tax expense decreased by $9.2 million to $15.8 million for the six months ended June 30, 2020 from the comparable prior year period primarily due to a decline in our operating income.

The increase in the effective tax rate was primarily due to a year-over-year increase of $2.4 million as a result of the IRC 162(m) limitations on the deductibility of certain executive compensation and a year-over-year decline of $5.8 million in excess tax benefits from stock-based compensation, partially offset by the impact of general business credits.

The "Other" category in our effective tax rate consists of a variety of permanent differences, none of which were individually significant.

Liquidity and Capital Resources

The following table summarizes our major sources and uses of cash for the periods presented:

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

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Increase in unrestricted cash, cash equivalents and restricted cash $ 871,257 $ 5,397

For the three months ended March 31, 2020 and 2019, we financed our operations primarily through our cash flows generated from operations and customer funds held on deposit.

As of March 31, 2020, our primary source of liquidity was unrestricted cash and cash equivalents totaling $1.6 billion.

For the six months ended June 30, 2020 and 2019, we financed our operations primarily through our cash flows generated from operations and customer funds held on deposit.

As of June 30, 2020, our primary source of liquidity was unrestricted cash and cash equivalents totaling $1.9 billion.

We also consider our $241.5 million of available-for-sale investment securities to be highly-liquid instruments.

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We believe our current unrestricted cash and cash equivalents, cash flows from operations and financing from our revolving credit facility will be sufficient to meet our working capital, capital expenditure and other commitments for at least the next 12 months, as discussed below.

We will continue to monitor the impact of COVID-19 on our business to ensure our liquidity and capital resources remain appropriate throughout this period of uncertainty.

We continue to monitor the impact of COVID-19 on our business to ensure our liquidity and capital resources remain appropriate throughout this period of uncertainty.

Cash Flows from Operating Activities

Our $104.1 million of net cash provided by operating activities during the three months ended March 31, 2020 was the result of $46.8 million of net income, adjusted for certain non-cash operating items of $33.9 million and increases in net changes in our working capital assets and liabilities of $23.4 million.

Our $115.4 million of net cash provided by operating activities during the three months ended March 31, 2019 was the result of $64.0 million of net income, adjusted for certain non-cash operating items of $37.3 million and increases in net changes in our working capital assets and liabilities of $14.0 million.

Our $161.5 million of net cash provided by operating activities during the six months ended June 30, 2020 was the result of $50.1 million of net income, adjusted for certain non-cash operating items of $71.0 million and increases in net changes in our working capital assets and liabilities of $40.3 million.

Our $167.1 million of net cash provided by operating activities during the six months ended June 30, 2019 was primarily the result of $98.7 million of net income, adjusted for certain non-cash operating items of $67.6 million and increases in net changes in our working capital assets and liabilities of $0.7 million.

Cash Flows from Investing Activities

Our $73.9 million of net cash used in investing activities during the three months ended March 31, 2020 was primarily due to the purchase of available-for-sale investment securities, net of proceeds from sales and maturities, of $24.7 million, the acquisition of property and equipment of $15.7 million, and capital contributions related to our investment in TailFin Labs, LLC of $35.0 million.

Our $40.3 million of net cash used in investing activities during the three months ended March 31, 2019 was due to the purchase of available-for-sale investment securities, net of proceeds from sales and maturities, of $22.7 million and the acquisition of property and equipment of $19.3 million.

Our $24.7 million of net cash used in investing activities during the six months ended June 30, 2020 was primarily due to the acquisition of property and equipment of $31.4 million, and capital contributions related to our investment in TailFin Labs, LLC of $35.0 million, partially offset by proceeds from the sale and maturities of available-for-sale investment securities, net of purchases, of $40.9 million.

Our $78.8 million of net cash used in investing activities during the six months ended June 30, 2019 was due to the purchase of available-for-sale investment securities, net of proceeds from sales and maturities, of $39.8 million and the acquisition of property and equipment of $37.7 million.

Cash Flows from Financing Activities

Our $469.9 million of net cash provided from financing activities during the three months ended March 31, 2020 was principally the result of a net increase in customer deposits of $442.0 million and net borrowings on our revolving credit facility of $65.0 million, offset by a net decrease of $34.7 million in obligations to customers.

Our $510.5 million of net cash provided from financing activities during the three months ended March 31, 2019 was primarily the result of a net increase in customer deposits of $621.0 million, offset by the $60.0 million voluntary prepayment of our note payable, a net decrease of $39.4 million in obligations to customers and $11.8 million in tax payments made to net settle equity awards.

While the effect of COVID-19 has created economic uncertainty and impacted how we manage our liquidity and capital resources, and we have instituted an enterprise-wide headcount freeze and delayed or reduced non-critical projects, we anticipate that we will continue to purchase property and equipment we consider necessary to support our business.

Our $734.5 million of net cash provided from financing activities during the six months ended June 30, 2020 was principally the result of a net increase in customer deposits of $826.2 million, offset by a net decrease of $56.6 million in obligations to customers and net repayments on our revolving credit facility of $35.0 million.

Our $82.9 million of net cash used in financing activities during the six months ended June 30, 2019 was primarily the result of $100 million used for stock repurchases under our stock repurchase program, a $60.0 million voluntary prepayment of our note payable, a net decrease of $48.3 million in obligations to customers and $16.9 million in tax payments made to net settle equity awards, offset by a net increase in customer deposits of $140.1 million.

While the effect of COVID-19 has created economic uncertainty and impacted how we manage our liquidity and capital resources, we anticipate we will continue to purchase property and equipment we consider necessary to support our business.

The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including when we begin hiring new employees, the rate of change of computer hardware and software used in our business and our business outlook as a result of the COVID-19 pandemic.

We intend to continue to invest in new products and programs we believe are critical, new features for our existing products and IT infrastructure to scale and operate effectively to meet our strategic objectives.

However, we do not expect these capital expenditures will exceed the amount of our capital expenditures in the previous year.

Table of Co n tents

We have used cash to acquire businesses and technologies and we anticipate that we may continue to do so in the future.

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We may also be required to raise additional financing to complete future acquisitions.

On February 28, 2017, we completed our acquisition of all the membership interests of UniRush LLC, which included a minimum $4 million annual earn-out payment for five years following the closing.

The earn-out payments will be made each year, with the minimum payment potentially becoming greater if certain revenue growth targets for the RushCard GPR card program are met in a given year.

Additionally, we may make periodic cash contributions to our subsidiary bank, Green Dot Bank, to maintain its capital, leverage and other financial commitments at levels we have agreed to with our regulators.

See Note 17—Commitments and Contingencies of the Notes to our Consolidated Financial Statements for additional financial commitments.

We may also make periodic cash contributions to our subsidiary bank, Green Dot Bank, to maintain its capital, leverage and other financial commitments at levels we have agreed to with our regulators.

2019 Revolving Facility

In October 2019, we entered into a new revolving credit agreement with Wells Fargo Bank, National Association, and other lenders party thereto.

The new credit agreement provides for a $100 million five-year revolving facility and matures in October 2024.

In October 2019, we entered into a revolving credit agreement with Wells Fargo Bank, National Association, and other lenders party thereto.

The credit agreement provides for a $100 million five-year revolving facility and matures in October 2024.

At our election, loans made under the credit agreement bear interest at 1) a LIBOR rate (the “LIBOR Rate") or 2) a base rate determined by reference to the highest of (a) the United States federal funds rate plus 0.50%, (b) the Wells Fargo prime rate, and (c) one-month LIBOR rate plus 1.0% (the “Base Rate"), plus in either case an applicable margin.

The applicable margin for borrowings depends on our total leverage ratio and varies from 1.25% to 2.00% for LIBOR Rate loans and 0.25% to 1.00% for Base Rate loans.

During the first quarter of 2020, we drew the maximum amount available to us on the 2019 Revolving Facility, resulting in a balance of $100.0 million outstanding as of March 31, 2020.

During the first quarter of 2020, we drew the maximum amount available of $100 million as a precautionary measure due to the uncertainty associated with the COVID-19 pandemic, but have since repaid the entire balance resulting in there being no borrowings outstanding as of June 30, 2020.

We are also subject to certain financial covenants, which include maintaining a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio at the end of each fiscal quarter, as defined in the agreement.

At March 31, 2020, we were in compliance with all such covenants.

At June 30, 2020, we were in compliance with all such covenants.

Stock Repurchase Program

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On January 2, 2020, we effectuated our agreement with Walmart to jointly establish a new fintech accelerator under the name TailFin Labs, LLC, with a mission to develop innovative products, services and technologies that sit at the intersection of retail shopping and consumer financial services.

See Note 16—Commitments and Contingencies of the Notes to our Consolidated Financial Statements for additional information.

As of and for the three months ended March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

See Note 7—Equity Method Investments of the Notes to our Consolidated Financial Statements for additional information.

As of and for the six months ended June 30, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Capital Requirements for Bank Holding Companies

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Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under

regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Table of Co n tents

The Basel III rules, which were promulgated by the Federal Reserve and other U.S.

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Under the Basel III rules, we must maintain a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, a ratio of Tier 1 capital to risk-weighted assets of at least 6%, a ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier 1 leverage ratio of 4.0%.

As of March 31, 2020 and December 31, 2019, we were categorized as "well capitalized" under the regulatory framework for prompt corrective action.

As of June 30, 2020 and December 31, 2019, we were categorized as "well capitalized" under the regulatory framework for prompt corrective action.

To be categorized as "well capitalized," we must maintain specific total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.

There are no conditions or events since March 31, 2020 which management believes would have changed our category as "well capitalized."

There are no conditions or events since June 30, 2020 which management believes would have changed our category as "well capitalized."

As a result of the economic disruption caused by the COVID-19 pandemic, in March 2020 the joint federal bank regulatory agencies issued an interim final rule (the "Interim Rule") that allows banking organizations that were required to implement the Current Expected Credit Loss ("CECL") accounting standard in 2020 optional relief that delays an estimate of the impact of CECL on its regulatory capital for two years.

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The standardized risk weights are prescribed in the bank capital rules and reflect regulatory judgment regarding the riskiness of a type of asset or exposure

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The actual amounts and ratios, and required "well capitalized" minimum capital amounts and ratios at March 31, 2020 and December 31, 2019 were as follows:

March 31, 2020

The actual amounts and ratios, and required "well capitalized" minimum capital amounts and ratios at June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020

Amount Ratio Regulatory Minimum "Well-capitalized" Minimum

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Total risk-based capital $ 205,548 83.4 % 8.0 % 10.0 %

Table of Co n tents

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis