What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-06 · 131 added, 131 removed, 291 unchanged (47% of the section changed)

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In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.

Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including the impact of the coronavirus (COVID-19) pandemic on our business, results of operations and financial condition, results of operations and financial condition, and our response to it, and those identified below, under “Part II, Item 1A.

Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including the impact of the coronavirus (COVID-19) pandemic on our business, results of operations and financial condition and our response to it, and those identified below, under “Part II, Item 1A.

Risk Factors,” and elsewhere herein.

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Financial Results and Trends

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change % 2020 2019 Change %

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Total operating expenses 293,720 242,635 51,085 21.1 % 907,890 736,127 171,763 23.3 %

Net income 3,294 34,692 (31,398) (90.5) % 50,139 98,735 (48,596) (49.2) %

Net (loss) income (2,992) (531) (2,461) * 47,147 98,204 (51,057) (52.0) %

* Not meaningful.

Impact of COVID-19

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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.

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

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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.

While we experienced disruption in staffing levels at our third-party call centers across the globe in the first half of 2020, staffing levels 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

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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.

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

In particular, stimulus funds and incremental unemployment benefits provided under the CARES Act and a fundamental shift in consumer behavior towards electronic payments has created a higher demand and usage of our products and services.

In the third quarter of 2020, our gross dollar volume, purchase volume and the number of active accounts grew year-over-year by 47%, 26% and 10%, respectively.

While we believe we will continue to benefit from the accelerated adoption of digital payments, we expect our key performance indicators to normalize throughout the fourth quarter of 2020 as the effect of past governmental actions lessen.

Impact on interest income, cost structure and liquidity

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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.

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.

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.

We have experienced increased costs, including higher 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 implemented cost-saving measures to offset increased costs and are otherwise working to mitigate the conditions driving our higher costs.

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, strictly managing our enterprise-wide employee headcount and delaying or reducing non-critical projects.

We currently have the full $100 million available to us under our revolving credit facility 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.

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Total operating revenues

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.

Our total operating revenues for the three and nine months ended September 30, 2020 increased $50.6 million, or 21%, and $110.2 million, or 13%, 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.

Within our Account Services segment, total operating revenues increased year-over-year for the three and nine months ended September 30, 2020 by 25% and 14%, respectively, primarily attributable to growth in our key metrics, such as gross dollar volume and purchase volume.

The growth in gross dollar volume was driven, in part, by the extension of federal unemployment benefits and higher levels of tax refund payments due to the extension of the tax filing deadlines to July 2020.

The growth in our key metrics resulted in year-over-year increases in BaaS program management service fee revenues earned from platform partners, monthly maintenance fees and interchange revenues, partially offset by an increase in estimated cash back rewards that we record as a reduction to card revenues and other fees.

We also experienced a year-over-year decline in net interest income during the three and nine months ended September 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.

We continue to monitor gross dollar volume to better understand its sources.

We saw an increased proportion of ACH deposits coming from government benefits when account holders filed for unemployment benefits.

While state and federal unemployment benefits afforded under the CARES Act 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.

Within our Processing and Settlement Services segment, total operating revenues increased year-over-year by 6% and 7% for the three and nine months ended September 30, 2020, respectively, primarily due to growth in the number of cash transfers and tax refund payments processed, as well as the introduction of new tax processing services compared with the prior year periods, partially offset by a year-over-year decline in Simply Paid disbursement transactions due to the effects of the COVID-19 pandemic.

During the fourth quarter of 2020, we anticipate a modest decline in the number of cash transfers and the related revenue, as compared to the same period in 2019, as a result of the non-renewal of a reload partner arrangement.

We do not expect a corresponding impact to net income due to the lower profitability of this arrangement.

Total operating expenses

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.

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.

Our total operating expenses for the three and nine months ended September 30, 2020 increased $51.1 million, or 21%, and $171.8 million, or 23%, 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 certain BaaS account programs and 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.

We also experienced higher compensation and benefits expenses, principally due to accrued bonus compensation for non-executive employees and stock-based compensation expenses associated with performance-based equity awards as a result of our improving performance.

During the three months ended September 30, 2020, sales and marketing expenses declined year-over-year, principally from lower marketing expenses.

In 2019, the majority of our marketing expenses were concentrated in the second half of the year to support the launch of our Green Dot Unlimited product.

For the nine months ended September 30, 2020, we experienced 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.

While we continue to build operational efficiencies 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 incoming customer disputes and operational disruptions caused by the COVID-19 pandemic.

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 nine months ended September 30, 2020 and we expect will normalize beginning in 2021 as our improvement measures begin to take effect.

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 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.

Consequently, our sales and marketing expenses throughout 2020 has been negatively impacted by the increased commission rate.

We recorded an income tax benefit of $1.3 million for the three months ended September 30, 2020, a decrease $0.5 million, or 27%, from the prior year comparable period.

The decrease was primarily due to the effect of certain limitations on our income tax deductions on compensation.

Income tax expense for the nine months ended September 30, 2020 decreased $8.8 million, or 38%, from the prior year comparable period 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change % 2020 2019 Change %

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Tax Refunds Processed 0.75 0.11 0.64 ** 12.35 12.02 0.33 2.7 %

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

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

** Not meaningful.

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 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.

The increases in total dollar volume of 47% and 34% during the three and nine months ended September 30, 2020, respectively, and the increases in gross dollar volume from direct deposit sources of 39% and 27% during the three and nine months ended September 30, 2020, respectively, from the comparable prior year periods were principally driven by an increase in the number of direct deposit active accounts and federal benefits received under the CARES Act, as well as uncharacteristically higher levels of tax refund payments in the third quarter of 2020 due to the extension of the tax filing deadlines to July 2020.

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.

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.

We experienced an increase in the number of active accounts and direct deposit active accounts of 10% and 11%, respectively, as of September 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 and the extension of tax filing deadlines to July 2020.

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 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.

Purchase volume increased approximately 26% and 18% during the three and nine months ended September 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 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.

Our cash transfers increased 9% and 10% during the three and nine months ended September 30, 2020, respectively, over the prior year comparable periods primarily due to an increase in transactions driven by the number of third-party account programs that utilize the Green Dot Network to accept funds through our cash processing network.

As discussed above, during the fourth quarter of 2020, we anticipate a modest decline in the number of cash transfers and the related revenue, as compared to the same period in 2019, as a result of the non-renewal of a reload partner arrangement.

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

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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 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.

The overall increase in the number of tax refunds processed of 3% during the nine months ended September 30, 2020 was primarily due to an increase in refunds processed through online consumer tax filing software platforms, compared to the prior year period.

Key components of our results of operations

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Our aggregate other fees vary primarily based upon account sales of all types, gift card sales, purchase transactions and the number of active accounts in our portfolio.

Processing and Settlement Service Revenues — Processing and settlement service revenues consist of cash transfer revenues, tax refund processing service revenues and Simply Paid disbursement revenues.

Processing and Settlement Service Revenues — Processing and settlement service revenues consist of cash transfer revenues, tax refund processing service revenues, Simply Paid disbursement revenues and other tax

processing service revenues.

We earn cash transfer revenues when consumers fund their cards through a reload transaction at a Green Dot Network retail location.

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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.

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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These costs vary with the total number of active accounts in our portfolio, as do losses from customer disputed transactions, unrecovered customer purchase transaction overdrafts and fraud.

Costs associated with professional services, depreciation and amortization of our property and equipment, amortization of our acquired intangible assets, rent and utilities vary based upon our investment in infrastructure, business development, risk management and internal controls and are generally not correlated with our operating revenues or other transaction metrics.

associated with professional services, depreciation and amortization of our property and equipment, amortization of our acquired intangible assets, rent and utilities vary based upon our investment in infrastructure, business development, risk management and internal controls and are generally not correlated with our operating revenues or other transaction metrics.

Income Tax Expense

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 CARES Act was signed into law, which 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 six months ended June 30, 2020.

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 June 30, 2020 and 2019

Comparison of Three-Month Periods Ended September 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 June 30,

Three Months Ended September 30,

Amount % of Total

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Total operating revenues $ 291,070 100.0 % $ 240,448 100.0 %

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

Card Revenues and Other Fees — Card revenues and other fees totaled $146.6 million for the three months ended September 30, 2020, an increase of $44.4 million, or 43.4%, 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 and to a lesser extent, an increase in monthly maintenance fee assessments as a result of higher account balances.

The deposit liability on our balance sheet has increased substantially year-over-year as a result of the increase in gross dollar volume.

These increases were 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 $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.

Cash rewards have increased steadily year-over-year as our cash-back programs have grown, principally from those programs launched in the second half of 2019.

Processing and Settlement Service Revenues — Processing and settlement service revenues totaled $57.5 million for the three months ended September 30, 2020, an increase of $2.9 million, or 5%, from the comparable prior year period.

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

These increases were offset by a decline in the number of Simply Paid disbursement transactions due to the effects of the COVID-19 pandemic.

Interchange Revenues — Interchange revenues totaled $84.9 million for the three months ended September 30, 2020, an increase of $7.8 million, or 10%, 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 September 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 $2.0 million for the three months ended September 30, 2020, a decrease of $4.5 million, or 69%, 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 first quarter of 2020.

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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 June 30,

Three Months Ended September 30,

Amount % of Total

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Total operating expenses $ 293,720 100.9 % $ 242,635 100.9 %

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, 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.

Sales and Marketing Expenses — Sales and marketing expenses totaled $96.2 million for the three months ended September 30, 2020, a decrease of $2.2 million, or 2% from the comparable prior year period.

This decrease was primarily driven by lower marketing expenses.

In 2019, the majority of our marketing expenses were concentrated in the second half of the year to support the launch of our Green Dot Unlimited product.

This decrease was partially offset by an increase in sales commissions associated with higher revenues generated from products that are subject to revenue-sharing agreements.

Under our current 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, our sales and marketing expenses in 2020 continue to be negatively impacted by the increased commission rate.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $61.1 million for the three months ended September 30, 2020, an increase of $14.4 million or 31% from the comparable prior year period.

The increase was primarily due to higher salaries and wages of $11.5 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 $4.9 million associated with certain performance-based awards.

These increases were partially offset by lower third-party contractor and employee travel expenses due to COVID-19 related travel restrictions.

Processing Expenses — Processing expenses totaled $74.2 million for the three months ended September 30, 2020, an increase of $25.2 million or 51% 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.

Other General and Administrative Expenses — Other general and administrative expenses totaled $62.3 million for the three months ended September 30, 2020, an increase of $13.7 million or 28%, 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 June 30,

federal statutory tax rate 21.0 % 21.0 %

State income taxes, net of federal tax benefit 3.0 1.8

General business credits (6.6) (1.6)

Employee stock-based compensation (0.5) (3.3)

IRC 162(m) limitation 40.2 2.5

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 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.

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

Our income tax benefit totaled $1.3 million for the three months ended September 30, 2020 compared to a $1.8 million income tax benefit for the prior year comparable period, resulting in an effective tax rate of 31.1% and 76.9%, respectively.

We have not included an effective tax rate reconciliation for the three months ended September 30, 2020 and 2019, because the effective tax rate calculation for each period is not meaningful to our consolidated financial statements on a year-over-year basis.

Our income tax benefit decreased by $0.5 million for the three months ended

September 30, 2020 from the prior year comparable period primarily due to the IRC 162(m) limitation on the deduction of certain executive compensation and a decrease in the excess tax benefits deduction for stock-based compensation.

Comparison of Nine-Month Periods Ended September 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,

Nine Months Ended September 30,

Amount % of Total

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Total operating revenues $ 969,479 100.0 % $ 859,288 100.0 %

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."

Card Revenues and Other Fees — Card revenues and other fees totaled $440.7 million for the nine months ended September 30, 2020, an increase of $87.3 million, or 25%, from the comparable prior year period.

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

Processing and Settlement Service Revenues — Processing and settlement service revenues totaled $246.0 million for the nine months ended September 30, 2020, an increase of $16.7 million, or 7%, 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 nine months ended September 30, 2020 compared to the prior year period, partially offset by lower Simply Paid disbursement transactions due to the effects of the COVID-19 pandemic.

Interchange Revenues — Interchange revenues totaled $271.7 million for the nine months ended September 30, 2020, an increase of $20.7 million, or 8%, from the comparable prior year period.

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

Interest Income, net — Net interest income totaled $11.0 million for the nine months ended September 30, 2020, a decrease of $14.6 million, or 57%, from the comparable prior year period.

This decrease was driven by the same factors discussed above under “Comparison of Three-Month Periods Ended September 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,

Nine Months Ended September 30,

Amount % of Total

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Total operating expenses $ 907,890 93.6 % $ 736,127 85.7 %

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

Sales and Marketing Expenses — Sales and marketing expenses totaled $319.7 million for the nine months ended September 30, 2020, an increase of $35.2 million, or 12% from the comparable prior year period.

increase was driven by an increase in sales commissions associated with higher revenues generated from products that are subject to revenue-sharing agreements.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $173.0 million for the nine months ended September 30, 2020, an increase of $16.5 million or 11% from the comparable prior year period.

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

Processing Expenses — Processing expenses totaled $216.6 million for the nine months ended September 30, 2020, an increase of $66.7 million or 44% from the comparable prior year period.

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

Other General and Administrative Expenses — Other general and administrative expenses totaled $198.5 million for the nine months ended September 30, 2020, an increase of $53.2 million or 37%, from the comparable prior year period.

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

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

Six Months Ended June 30,

Nine Months Ended September 30,

federal statutory tax rate 21.0 % 21.0 %

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Effective tax rate 23.4 % 19.1 %

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.

Our income tax expense totaled $14.4 million for the nine months ended September 30, 2020, representing a decrease of $8.8 million from the prior year comparable period, and primarily driven by the decline in our operating income.

The increase in the effective tax rate for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 is primarily due to an increase of $0.5 million in taxable income resulting from the IRC 162(m) limitation on the deductibility of certain executive compensation and a $3.9 million decline in excess tax benefits from stock-based compensation.

We recognized an excess tax benefit on stock compensation of $0.5 million for the nine months ended September 30, 2020, compared to a $4.4 million excess tax benefit for the prior year comparable period.

These increases were 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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Financing activities 983,001 (335,374)

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

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.

Increase (decrease) in unrestricted cash, cash equivalents and restricted cash $ 1,075,914 $ (230,840)

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

As of September 30, 2020, our primary source of liquidity was unrestricted cash and cash equivalents totaling $2.1 billion.

We also consider our $309.4 million of available-for-sale investment securities to be highly-liquid instruments.

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Cash Flows from Operating Activities

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.

Our $198.9 million of net cash provided by operating activities during the nine months ended September 30, 2020 was the result of $47.1 million of net income, adjusted for certain non-cash operating items of $108.8 million and increases in net changes in our working capital assets and liabilities of $42.9 million.

Our $204.7 million of net cash provided by operating activities during the nine months ended September 30, 2019 was primarily the result of $98.2 million of net income, adjusted for certain non-cash operating items of $95.2 million and increases in net changes in our working capital assets and liabilities of $11.3 million.

Cash Flows from Investing Activities

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.

Our $105.9 million of net cash used in investing activities during the nine months ended September 30, 2020 was primarily due to the acquisition of property and equipment of $43.9 million, capital contributions related to our investment in TailFin Labs, LLC of $35.0 million, and purchases of available-for-sale investment securities, net of proceeds from sales and maturities, of $26.6 million.

Our $100.1 million of net cash used in investing activities during the nine months ended September 30, 2019 was primarily due to the purchase of available-for-sale investment securities, net of proceeds from sales and maturities, of $40.5 million and the acquisition of property and equipment of $58.2 million.

Cash Flows from Financing Activities

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.

Our $983.0 million of net cash provided from financing activities during the nine months ended September 30, 2020 was principally the result of a net increase in customer deposits of $1.1 billion, offset by a net decrease of $84.3 million in obligations to customers and net repayments on our revolving credit facility of $35.0 million.

Total customer deposit balances have increased substantially as compared to December 31, 2019, principally as a result of stimulus funds and other government benefits received by our cardholders under the CARES Act.

Our $335.4 million of net cash used in financing activities during the nine months ended September 30, 2019 was principally the result of $100 million used for stock repurchases under our stock repurchase program, our $60.0 million repayment of our note payable, and net decreases in customer deposits and obligations to customers of $133.1 million and $25.3 million, respectively.

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

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 the extent and timing of 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.

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

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

At September 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 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.

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

As of and for the nine months ended September 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.

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The rules also include a new capital conservation buffer, which imposes a common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-weighted assets.

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

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 September 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 June 30, 2020 which management believes would have changed our category as "well capitalized."

There are no conditions or events since September 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

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

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

September 30, 2020

Amount Ratio Regulatory Minimum "Well-capitalized" Minimum

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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