What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-10 · 193 added, 128 removed, 282 unchanged (53% 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 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 continuing 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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Through our bank, we offer a suite of financial products to consumers and businesses including debit, prepaid, checking, credit and payroll cards, as well as robust money processing services, such as cash deposits and disbursements, and tax refund processing.

Effective beginning with the first quarter of 2021, we have realigned our segment financial reporting based on how our current Chief Operating Decision Maker (“CODM”) manages our businesses, including resource allocation and performance assessment.

Our CODM (who is our Chief Executive Officer) organizes and manages our businesses primarily on the basis of the channels in which our product and services are offered and uses net revenue and segment profit to assess profitability.

Segment profit reflects each segment's net revenue less direct costs, such as sales and marketing expenses, processing expenses, third-party call center support and transaction losses.

As a result of this realignment, our operations are now aggregated amongst three reportable segments:

Our operations are aggregated amongst three reportable segments:

1) Consumer Services, 2) Business to Business ("B2B") Services, and 3) Money Movement Services.

Net interest income earned by our bank, eliminations of intersegment revenues and expenses, unallocated corporate expenses, and other costs that are not considered when our CODM evaluates the performance of our three reportable segments are recorded in Corporate and Other expenses.

Prior periods presented have been recast to align with our revised segment presentation for the three months ended March 31, 2021.

Refer to our 2020 Annual Report on Form 10-K "Part 1, Item 1.

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Consolidated Financial Results and Trends

Our consolidated results of operations for the three months ended March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

2021 2020 Change %

Our consolidated results of operations for the three and six months ended June 30, 2021 and 2020 were as follows:

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

2021 2020 Change % 2021 2020 Change %

(In thousands, except percentages)

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Total operating revenues

Our total operating revenues for the three months ended March 31, 2021 increased $31.3 million, or 9% over the prior year comparable period, generating revenue growth across our Consumer Services and B2B Services segments, partially offset by lower revenues earned from our Money Movement Services.

Our deposit account programs within our Consumer Services and B2B Services segments continue to benefit from organic growth as the accelerated demand for digital payments continues.

Our total operating revenues for the three and six months ended June 30, 2021 increased $53.1 million, or 17%, and $84.5 million, or 12%, respectively, over the prior year comparable periods, generating revenue growth across our Consumer Services and B2B Services segments, partially offset by lower revenues earned from our Money Movement Services through the first half of the year.

Our deposit account programs within our Consumer Services and B2B Services segments continue to benefit from organic growth as the demand for digital payments continues.

We have seen a fundamental shift in consumer behavior towards electronic payments throughout the COVID-19 pandemic that has created a higher demand and usage of our products and services.

Additionally, these two segments also benefited from economic stimulus funds and incremental unemployment benefits enacted by the U.S.

Additionally, these two segments have benefited from economic stimulus funds and incremental unemployment benefits enacted by the U.S.

federal government.

In December 2020, an additional $900 billion economic stimulus package was signed into law, providing for additional direct payments and enhanced unemployment benefits, and in March 2021, another $1.9 trillion economic package was authorized under the American Rescue Plan Act of 2021.

On a year-over-year basis, our total gross dollar volume, purchase volume and number of active accounts grew year-over-year by 45%, 26% and 11%, respectively, compared to March 31, 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, ATM fees and interchange revenues across our deposit account programs.

These increases were partially offset by a year-over-year decline in Simply Paid disbursement transactions in our B2B segment due to the continued effects of the COVID-19 pandemic on the rideshare industry.

In January 2021, we announced the launch of GO2bank, a new mobile bank offered in our Consumer Services segment that is designed to help the majority of Americans living paycheck to paycheck build a stronger financial foundation.

GO2bank is designed to help our customers lower the cost of accessing and managing their money and offers features such as overdraft protection, high-value rewards, high-interest savings, and opportunities to establish, build, and track credit, regardless of credit history.

While still in its early stages, we remain encouraged by the growth opportunity GO2bank provides to our financial results in 2021 and beyond.

Our Money Movement Services have declined on a year-over-year basis in part due to a shift in the number of tax refunds processed from the first quarter of 2021 to the second quarter of 2021.

While the extension of the tax deadline to the latter half of the second quarter of the year has shifted volumes from the first quarter of 2021, we do not expect it to have a material impact on the total number of tax refunds processed for the full year 2021.

In addition, revenues from our tax processing services declined year-over-year as a result of securing a multi-year agreement with one of our largest customers in exchange for lower economics on tax refund transfers and we expect this to continue to impact revenue from refund transfers for the remainder of the year.

We also experienced a decline in cash transfers due in part to our decision not to renew a reload partner agreement in the fourth quarter of 2020.

The impact to segment profit is limited due to the lower profitability of this arrangement.

The non-renewal of this agreement will impact the number of cash transfers in 2021, but any year-over-year growth or decline in cash transfers in 2021 will be dependent on multiple factors, including the level of growth of deposit account programs in our Consumer Services and B2B Services segments.

In December 2020, an additional $900 billion economic stimulus package was signed into law, providing for additional direct payments and enhanced unemployment benefits.

In March 2021, another $1.9 trillion economic package was authorized under the American Rescue Plan Act of 2021, which provides for additional direct payments and enhanced unemployment benefits through September 2021.

As a result of organic growth and the benefit of U.S.

government actions, our total gross dollar volume and purchase volume grew by 15% and 5%, respectively, for the three months ended June 30, 2021, and 29% and 15%, respectively, for the six months ended June 30, 2021 over the prior year comparable periods.

The growth in these 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 across our deposit account programs.

Our Consumer Services segment has also benefited from fees associated with the introduction of our optional overdraft protection program services made available to cardholders across our portfolios, including our Go2bank product launched earlier this year, and favorable decreases in the amount of cash back rewards on our legacy card programs due to changes in consumer behavioral trends and the estimated redemption amounts.

Total Money Movement Services revenues for the three months ended June 30, 2021 remained consistent with the prior year comparable period.

Within our Money Movement Services, our tax processing revenues have increased on a year-over-year basis for the three months ended June 30, 2021 primarily due to timing shifts in the number of tax refunds processed for the comparable periods.

The revenue impact from the shift in refund transfer volumes to the second quarter of 2021 was partially offset by lower unit economics earned from refund transfers with one of our largest customers, which was agreed upon in exchange for securing a multi-year arrangement.

The net increase in our tax processing revenues during the second quarter of 2021 was offset by a decline in the number of cash transfers processed, in part due to our decision not to renew a reload partner agreement in the fourth quarter of 2020.

The non-renewal of this agreement will continue to impact the number of cash transfers and, to a lesser extent, profitability within the segment for the remainder of the year, but any year-over-year growth or decline in cash transfers in 2021 will be dependent on multiple factors, including the level of growth of deposit account programs in our Consumer Services and B2B Services segments.

Money Movement Services revenues decreased year-over-year for the six months ended June 30, 2021 as a result of the lower unit economics earned from refund transfers with one of our largest customers and a decline in the number of cash transfers processed, as discussed above.

Total operating expenses

Our total operating expenses for the three months ended March 31, 2021 increased $56.2 million, or 19% over the prior year comparable period.

This increase was the result of several factors, including higher processing expenses within our B2B Services segment associated with the growth of certain BaaS account programs and an increase in sales and marketing expenses in our Consumer Services segment to promote our newly launched GO2bank product during tax season.

As such, we expect to incur more marketing expenses in the first half of 2021 than the second half.

Each of these segments experienced an increase in third-party call center support, a component of compensation and benefits expenses, to meet the increased demand in our customer service center as a result of the federal relief programs described above, as well as year-over-year growth in dispute transaction losses, a component within other general and administrative expenses, in connection with the growth in purchase volume.

Our total operating expenses for the three and six months ended June 30, 2021 increased $26.7 million, or 9%, and $82.9 million, or 13%, respectively, over the prior year comparable periods.

As such, we have incurred more marketing expenses in the first half of 2021 than we expect to incur in the second half.

Both of these segments experienced an increase in third-party call center support, a component of compensation and benefits expenses, to meet the increased demand in our customer service center as a result of the federal relief programs described above.

In addition, both of these segments experienced year-over-year growth in transaction losses, a component within other general and administrative expenses, in connection with the growth in purchase volume and the introduction of our overdraft protection services.

Compensation and benefits expenses within Corporate and Other expenses also increased principally due to the timing of bonus compensation.

During 2021, we intend to continue to make growth-oriented investments that we believe will help to accelerate revenue growth and allow margins to expand in 2022 and beyond, including reinvesting any incremental revenue benefit in 2021, such as revenue associated with the March 2021 economic stimulus package, into marketing efforts for our newly launched GO2bank product.

In addition to marketing investments, our other growth oriented investments are focused in improving our customer's overall experience and building a modern and scalable core banking and card management platform that reduces our reliance on third-party processors and increases our ability to innovate and preserve margins.

As such, we expect to incur higher costs year-over-year associated with

third-party call centers, a component of compensation and benefits expenses, in our Consumer Services and B2B Services segments.

We also expect to increase salaries and wages expenses, which are also a component of compensation and benefits expenses, to support our customer experience efforts and our implementation of a modernized banking platform.

During 2021, we intend to continue to make investments that we believe will help to accelerate revenue growth and allow margins to expand in 2022 and beyond, including reinvesting any incremental revenue benefit in 2021,

such as revenue associated with the March 2021 economic stimulus package, into marketing efforts for our newly launched GO2bank product.

In addition to marketing investments, our other growth oriented investments are focused on improving our customer's overall experience and building a modern and scalable core banking and card management platform that reduces our reliance on third-party processors and increases our ability to innovate and preserve margins.

As such, we expect to continue incurring higher costs year-over-year associated with third-party call centers, a component of compensation and benefits expenses, in our Consumer Services and B2B Services segments.

We also expect our salaries and wages expenses to increase, which are also a component of compensation and benefits expenses, as we expect to expand our headcount in order to support our customer experience efforts and our implementation of a modernized banking platform.

Additionally, we expect our implementation to increase components of other general and administrative expenses, such as software license and hosting costs.

Our income tax expense for the three months ended March 31, 2021 decreased $4.9 million, or 41%, from the prior year comparable period.

The decrease in tax expense was driven primarily by the decline in our operating income, offset by a slightly higher effective tax rate year-over-year.

Our effective tax rate for the three months ended March 31, 2021 increased over the prior year comparable period primarily due to an increase in our expected pre-tax income and the corresponding rate impact on items such as general business credits and the IRC 162(m) limitation on the deductibility of executive compensation, partially offset by an increase in tax benefits associated with stock-based compensation.

Our income tax expense for the six months ended June 30, 2021 decreased $0.2 million, or 1%, on a year-over-year basis.

Our effective tax rate for the six months ended June 30, 2021 was 23.5%, compared to 23.9% for the prior year period.

The effective rates differ from our statutory rate due to the impact of items such as the IRC 162(m) limitation on the deductibility of executive compensation, state income taxes, general business credits, and the tax effects associated with stock-based compensation.

COVID-19 Update

Most of our U.S.

personnel continue to operate remotely and in response to our remote workforce strategy, we commenced closure of most our U.S.

leased office locations in 2021.

personnel continue to operate remotely and in response to our remote workforce strategy, we are in the process of closing most our U.S.

leased office locations.

However, we will be required to continue making our contractual payments until our operating leases are formally terminated or expire.

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

Three Months Ended March 31,

2021 2020 Change %

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

2021 2020 Change % 2021 2020 Change %

(In millions, except percentages)

Gross Dollar Volume $ 17,399 $ 15,107 $ 2,292 15.2 % $ 38,065 $ 29,401 $ 8,664 29.5 %

Number of Active Accounts* 6.35 5.74 0.61 10.6 %

Number of Active Accounts* 6.03 6.25 (0.22) (3.5) % n/a n/a n/a n/a

Purchase Volume $ 8,870 $ 8,477 $ 393 4.6 % $ 19,315 $ 16,759 $ 2,556 15.3 %

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Tax Refunds Processed 4.15 1.90 2.25 118.4 % 11.59 11.60 (0.01) (0.1) %

* Represents the number of active accounts as of March 31, 2021 and 2020, respectively.

* Represents the number of active accounts as of June 30, 2021 and 2020, respectively.

See “Segment Results” for additional information and discussion regarding key metrics performance by segment.

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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.

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.

Key components of our results of operations

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We charge new card fees, if applicable, when a consumer purchases a GPR card, gift card, or a checking account product.

Other revenues consist primarily of revenue associated with our gift card program, annual fees associated with our secured credit card portfolio, transaction-based fees, fees associated with optional products or services, and cash-back rewards we offer to cardholders.

Our cash-back rewards are recorded as a reduction to card revenues and other fees.

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Reference is made to the critical accounting 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, 2020.

Comparison of Three-Month Periods Ended March 31, 2021 and 2020

Comparison of Three-Month Periods Ended June 30, 2021 and 2020

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, cash processing 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 $ 369,373 100.0 % $ 316,240 100.0 %

Card Revenues and Other Fees — Card revenues and other fees totaled $186.0 million for the three months ended March 31, 2021, an increase of $44.6 million, or 31.5%, from the comparable prior year period.

Our card revenues and other fees increased principally as a result of an increase in gross dollar volume due to federal stimulus programs and growth in our active accounts.

The increase in gross dollar volume also resulted in an increase in BaaS program management service fee revenues earned from platform partners and to a lesser extent, an increase in monthly maintenance fee assessments and ATM fees.

Cash Processing Revenues — Cash processing revenues totaled $90.9 million for the three months ended March 31, 2021, a decrease of $32.2 million, or 26%, from the comparable prior year period.

The decrease is attributable in part to a shift in the timing of tax refunds processed from the first quarter to the second quarter of 2021, as a result of the extension of tax filing deadlines into the latter part of the second quarter of 2021 and lower economics on tax refund transfers in exchange for securing a multi-year agreement with one of our largest customers.

The number of cash transfers processed also decreased year-over-year, in part due to our decision not to renew a reload network agreement with a partner in the fourth quarter of 2020, as well as a decline in the number of Simply Paid disbursement transactions due to the effects of the COVID-19 pandemic on the rideshare industry.

Interchange Revenues — Interchange revenues totaled $111.2 million for the three months ended March 31, 2021, an increase of $20.3 million, or 22%, 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 March 31, 2021 compared to the prior year period, which is primarily attributed to the economic stimulus funds and unemployment benefits provided by the federal government, 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 $5.3 million for the three months ended March 31, 2021, a decrease of $1.5 million, or 22%, 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 in March 2020.

Card Revenues and Other Fees — Card revenues and other fees totaled $197.9 million for the three months ended June 30, 2021, an increase of $45.2 million, or 29.6%, from the comparable prior year period.

Our card revenues and other fees increased in part as a result of an increase in total gross dollar volume of 15%.

The increase in total gross dollar volume resulted in an increase in BaaS program management service fee revenues earned from platform partners and to a lesser extent, an increase in monthly maintenance fee assessments.

Card revenues and other fees also increased as a result of new optional features recently launched on our card programs, such as our overdraft protection program, as well as a favorable decrease in the estimated accrual of cash back rewards, which we record as a reduction to revenue.

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

Cash Processing Revenues — Cash processing revenues totaled $66.8 million for the three months ended June 30, 2021, an increase of $1.3 million, or 2%, from the comparable prior year period.

The increase is primarily due to timing shifts in the number of tax refunds processed for the comparable periods.

Tax refunds processed for the 2021 tax season shifted from the first quarter of 2021 to the second quarter of 2021 as a result of the extension of the tax filing deadlines to the latter half of the second quarter of the year, while a number of tax refunds processed during the prior year 2020 tax season shifted into the third quarter of 2020 also due to extended filing deadlines.The revenue impact from the shift in refund transfer volumes to the second quarter of 2021 was partially offset by lower unit economics earned on tax refund transfers from one of our largest customers as a result of our multi-year agreement.

The net increase from our tax processing revenues was offset by a decrease in the number of cash transfers processed year-over-year, in part due to our decision not to renew a reload network agreement with a partner in the fourth quarter of 2020.

Interchange Revenues — Interchange revenues totaled $101.1 million for the three months ended June 30, 2021, an increase of $5.1 million, or 5%, 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, 2021 compared to the prior year period, which is primarily attributed to the economic stimulus funds and unemployment benefits provided by the federal government.

Interest Income, net — Net interest income totaled $3.5 million for the three months ended June 30, 2021, an increase of $1.4 million, or 67%, from the comparable prior year period.

The increase in net interest income earned was the result of an increase in the size of our investment securities portfolio and customer funds on deposit, which is also primarily attributed to the economic stimulus funds and unemployment benefits provided by the federal government.

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 $ 337,570 91.3 % $ 310,850 98.3 %

Sales and Marketing Expenses — Sales and marketing expenses totaled $118.9 million for the three months ended March 31, 2021, an increase of $2.2 million, or 2% from the comparable prior year period.

This increase was primarily driven by higher marketing and supply chain expenses in connection with the launch of GO2bank in January 2021, partially offset by a decrease in sales commissions due to lower revenues generated from certain products that are subject to revenue-sharing agreements.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $75.0 million for the three months ended March 31, 2021, an increase of $21.9 million or 41% from the comparable prior year period.

The increase was primarily due to higher third-party call center support costs to meet increased demand in our customer service center as a result of the federal relief programs described above, higher salaries and wages, principally attributable to the timing of accrued bonus compensation, and an increase in stock-based compensation expense of approximately $5.0 million driven by fluctuations in the expected achievement of certain performance-based awards in the prior year period.

Processing Expenses — Processing expenses totaled $97.7 million for the three months ended March 31, 2021, an increase of $26.6 million or 37% from the comparable prior year period.

Sales and Marketing Expenses — Sales and marketing expenses totaled $96.5 million for the three months ended June 30, 2021, a decrease of $10.3 million, or 10% from the comparable prior year period.

This decrease was primarily driven by a decrease in sales commissions due to lower revenues generated from certain products that are subject to revenue-sharing agreements, partially offset by higher marketing and supply chain expenses in connection with the launch of GO2bank in January 2021.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $60.0 million for the three months ended June 30, 2021, an increase of $1.1 million or 2% from the comparable prior year period.

The increase was primarily driven by higher third-party call center support costs to meet increased demand in our customer service center as a result of the federal relief programs described above, partially offset by a decrease in stock-based compensation expense of approximately $5.2 million driven primarily by the timing of forfeited awards during the period and lower salaries and wages, principally attributable to reduced employee headcount for the comparable periods.

Processing Expenses — Processing expenses totaled $94.3 million for the three months ended June 30, 2021, an increase of $22.9 million or 32% from the comparable prior year period.

This increase was principally due to growth in BaaS account programs within our B2B Services segment and overall volume of transactions processed through our consolidated platform.

Other General and Administrative Expenses — Other general and administrative expenses totaled $68.0 million for the three months ended March 31, 2021, an increase of $5.6 million or 9%, from the comparable prior year period.

This increase was primarily due to a year-over-year growth in dispute transaction losses as a result of the increase in purchase volume, as discussed above, partially offset by lower professional fees and rent expenses as a result of our office closures in the U.S.

Other General and Administrative Expenses — Other general and administrative expenses totaled $86.8 million for the three months ended June 30, 2021, an increase of $13.0 million or 18%, from the comparable prior year period.

This increase was primarily due to a year-over-year growth in transaction losses as a result of the increase in purchase volume and the introduction of our overdraft protection services, as well as higher software license expenses for the reasons discussed above, partially offset by lower professional fees and rent expenses as a result of our office closures in the U.S.

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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Employee stock-based compensation 0.3 (0.5)

Nondeductible executive compensation 8.4 4.2

IRC 162(m) limitation 4.5 40.2

Nondeductible expenses (0.2) 1.1

Capital loss valuation allowance release — (4.4)

Other (0.1) (0.2)

Effective tax rate 25.3 % 53.6 %

Our income tax expense totaled $7.1 million, a decrease of $4.9 million or 41% from the prior year comparable period primarily due to a decline in operating income.

The increase in the effective tax rate is primarily due to the impact of general business credits and a year-over-year increase of $0.3 million in nondeductible compensation due to IRC 162(m) limitation, partially offset by a year-over-year increase of $3.3 million in excess tax benefits from stock-based compensation.

Our income tax expense totaled $8.5 million, an increase of $4.6 million or 122% from the prior year comparable period, primarily due to an increase in operating income.

The decrease in the effective tax rate for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 is primarily due to an

increase in our pre-tax income and the corresponding rate impact on items such as state income taxes, general business credits, employee stock-based compensation, and the IRC 162(m) limitation on the deductibility of executive compensation.

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, 2021 and 2020

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, cash processing 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 $ 383,949 50.3 % $ 294,075 43.3 %

Cash processing revenues 157,740 20.7 188,516 27.8

Interchange revenues 212,341 27.8 186,836 27.6

Interest income, net 8,829 1.2 8,982 1.3

Total operating revenues $ 762,859 100.0 % $ 678,409 100.0 %

Card Revenues and Other Fees — Card revenues and other fees totaled $383.9 million for the six months ended June 30, 2021, an increase of $89.8 million, or 31%, 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, 2021 and 2020—Operating Revenues—Card Revenues and Other Fees."

Cash Processing Revenues — Cash processing revenues totaled $157.7 million for the six months ended June 30, 2021, a decrease of $30.8 million, or 16%, 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, 2021 and 2020—Operating Revenues—Cash Processing Revenues," as well as a decline in the number of Simply Paid disbursement transactions due to the effects of the COVID-19 pandemic on the rideshare industry.

Interchange Revenues — Interchange revenues totaled $212.3 million for the six months ended June 30, 2021, an increase of $25.5 million, or 14%, from the comparable prior year period.

The increase was primarily due to an increase in the amount of purchase volume during the six months ended June 30, 2021 compared to the prior year period, which is primarily attributed to the economic stimulus funds and unemployment benefits provided by the federal government, 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 $8.8 million for the six months ended June 30, 2021, a decrease of $0.2 million, or 2%, 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 in March 2020, partially offset by an increase in the size of our investment securities portfolio and customer funds on deposit.

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 $ 215,410 28.2 % $ 223,549 33.0 %

Compensation and benefits expenses 134,951 17.7 111,932 16.5

Processing expenses 191,985 25.2 142,466 21.0

Other general and administrative expenses 154,725 20.3 136,223 20.1

Total operating expenses $ 697,071 91.4 % $ 614,170 90.6 %

Sales and Marketing Expenses — Sales and marketing expenses totaled $215.4 million for the six months ended June 30, 2021, a decrease of $8.1 million, or 4% from the comparable prior year period.

This decrease was driven by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2021 and 2020—Operating Expenses—Sales and Marketing Expenses."

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $135.0 million for the six months ended June 30, 2021, an increase of $23.1 million or 21% from the comparable prior year period.

Processing Expenses — Processing expenses totaled $192.0 million for the six months ended June 30, 2021, an increase of $49.5 million or 35% 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, 2021 and 2020-—Operating Expenses—Processing Expenses."

Other General and Administrative Expenses — Other general and administrative expenses totaled $154.7 million for the six months ended June 30, 2021, an increase of $18.5 million or 14%, from the comparable prior year period.

This increase was driven primarily by the same factors as discussed above under “Comparison of Three-Month Periods Ended June 30, 2021 and 2020—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,

federal statutory tax rate 21.0 % 21.0 %

State income taxes, net of federal tax benefit 1.1 (0.6)

General business credits (1.9) (6.6)

Employee stock-based compensation (2.9) 1.8

IRC 162(m) limitation 6.4 8.1

Nondeductible expenses 0.1 0.7

Other (0.3) (0.5)

Effective tax rate 23.5 % 23.9 %

Our income tax expense totaled $15.6 million, a decrease of $0.2 million or 1% from the prior year comparable period resulting primarily due to a decrease of $1.1 million on the IRC 162(m) limitation on the deductibility of executive compensation and an increase of $3.1 million in excess tax benefits from stock-based compensation.

We recognized an excess tax benefit on stock-based compensation of $1.9 million for the six months ended June 30, 2021, compared to a $1.2 million discrete tax expense on shortfalls from stock based compensation for the prior year comparable period.

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

Segment Results

Consumer Services

The results of operations and key metrics of our Consumer Services segment for the three months ended March 31, 2021 and 2020 were as follows:

Three Months Ended March 31,

2021 2020 Change %

The results of operations and key metrics of our Consumer Services segment for the three and six months ended June 30, 2021 and 2020 were as follows:

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

2021 2020 Change % 2021 2020 Change %

(In thousands, except percentages)

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Gross Dollar Volume $ 8,188 $ 8,683 $ (495) (5.7) % $ 18,344 $ 16,244 $ 2,100 12.9 %

Active Accounts* 4.07 3.70 0.37 10.0 %

Direct Deposit Active Accounts* 0.97 0.89 0.08 9.0 %

Active Accounts* 3.97 4.10 (0.13) (3.2) % n/a n/a n/a n/a

Direct Deposit Active Accounts* 0.92 0.90 0.02 2.2 % n/a n/a n/a n/a

Purchase Volume $ 6,455 $ 6,123 $ 332 5.4 % $ 13,593 $ 11,678 $ 1,915 16.4 %

* Represents number of active and direct deposit active accounts as of March 31, 2021 and 2020, respectively.

Segment revenues within Consumer Services increased $31.4 million, or 21%, compared to the prior year comparable period, while our segment expenses increased $28.3 million, or 28%.

Our revenue growth was the result of increases in our key metrics, including gross dollar volume, active accounts and purchase volume.

Total gross dollar volume on these deposit account programs increased 34% during the three months ended March 31, 2021, from the comparable prior year period, due to organic growth as the accelerated demand for digital payments continues and from customers that have utilized our platform to receive stimulus funds and unemployment benefits enacted by the federal government.

* Represents number of active and direct deposit active accounts as of June 30, 2021 and 2020, respectively.

Segment revenues within Consumer Services for the three and six months ended June 30, 2021 increased $19.5 million, or 12%, and $50.9 million, or 16%, respectively, compared to the prior year comparable periods, while our segment expenses for the three and six months ended June 30, 2021 increased $22.1 million, or 21%, and $50.4 million, or 24%, respectively.

Our gross dollar volume decreased 6% during the three months ended June 30, 2021, from the comparable prior year period and the total number of active accounts decreased by 3% as of June 30, 2021 year-over-year, largely due to the timing of stimulus funds.

In the second quarter of 2020, new and existing users utilized our platform to receive funds from the initial economic stimulus package.

Our cardholders benefited from the second and third economic stimulus packages primarily in the first quarter of 2021.

As a result of these timing differences, gross dollar volume and the number of active accounts declined year-over-year in the second quarter of 2021.

However, we generated revenue growth within this segment from interchange revenue earned on higher purchase volume of 5%, largely attributable to stimulus funds received in the first quarter of 2021 being spent in the second quarter of 2021, and the fees associated with the introduction of our new overdraft protection program, which is an optional service to our cardholders.

Consumer Services revenues also benefited from a favorable decrease in the estimated accrual of cash back rewards, which we recorded as a reduction to revenue, attributable to changes in consumer behavioral trends and estimated redemption amounts.

For the six months ended June 30, 2021, our revenue growth year-over-year was the result of increases in our gross dollar volume and purchase volume.

Total gross dollar volume on these deposit account programs increased 13% during the six months ended June 30, 2021, from the comparable prior year period due to organic growth as the demand for digital payments continues and from customers that have utilized our platform to receive stimulus funds and unemployment benefits enacted by the federal government this past year.

The increase in gross dollar volume has resulted in an increase in monthly maintenance fee assessments and ATM fees we earn on these portfolios.

Consequently, the number of active accounts also increased by 10% as of March 31, 2021 on a year-over-year basis.

Purchase volume increased 28% during the three months ended March 31, 2021, from the comparable prior year period, in line with the increase in gross dollar volume, resulting in an increase in the amount of interchange we earn.

Consumer Services expenses increased principally due to increased staffing of third-party call center support to meet the increased demand in our customer service center as a result of the federal relief programs, marketing expenses to promote our newly launched GO2bank product during tax season, and growth in disputed transaction losses as a result of the year-over-year increase in purchase volume.

We expect to incur more marketing expenses in the first half of 2021 than the second half to support GO2bank during the tax season.

Three Months Ended March 31,

2021 2020 Change %

Purchase volume increased by 16% during the six months ended June 30, 2021, from the comparable prior year period, resulting in an increase in the amount of interchange we earn.

Consumer Services expenses increased for the three and six months ended June 30, 2021, from the comparable prior year period principally due to increased staffing of third-party call center support to meet the increased demand in our customer service center as a result of the federal relief programs, marketing expenses to promote our recently launched GO2bank product, and growth in transaction losses as a result of the year-over-year increases in purchase volume and the introduction of our overdraft protection services.

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

2021 2020 Change % 2021 2020 Change %

(In thousands, except percentages)

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Gross Dollar Volume $ 9,211 $ 6,424 $ 2,787 43.4 % $ 19,721 $ 13,157 $ 6,564 49.9 %

Active Accounts* 2.28 2.04 0.24 11.8 %

Active Accounts* 2.06 2.15 (0.09) (4.2) % n/a n/a n/a n/a

Purchase Volume $ 2,415 $ 2,354 $ 61 2.6 % $ 5,722 $ 5,081 $ 641 12.6 %

* Represents number of active accounts as of March 31, 2021 and 2020, respectively.

Segment revenues within our B2B Services increased $32.1 million, or 43.5%, compared to the prior year comparable period, while our operating expenses increased $34.4 million, or 63.7%.

For similar reasons as our Consumer Services, total gross dollar volume increased 56% during the three months ended March 31, 2021, from the comparable prior year period.

Consequently, the number of active accounts also increased by 12% as of March 31, 2021 on a year-over-year basis and purchase volume increased approximately 21%, each contributing to our revenue growth within the segment.

These increases drove an increase in our BaaS program management service fee revenues earned from our platform partners and increases in interchange revenue and monthly maintenance fee assessments, partially offset by lower Simply Paid disbursement revenues due to the effects of the COVID-19 pandemic on the rideshare industry.

Despite year-over-year revenue growth, our segment profit decreased $2.3 million, due to increased staffing of third-party call center support to meet the increased demand in our customer service center as a result of the federal relief programs.

* Represents number of active accounts as of June 30, 2021 and 2020, respectively.

Segment revenues within our B2B Services for the three and six months ended June 30, 2021 increased $36.0 million, or 47%, and $68.1 million, or 45%, respectively, compared to the prior year comparable periods, while our segment expenses for the three and six months ended June 30, 2021 increased $34.1 million, or 57%, and $68.6 million, or 60%, respectively.

Our total gross dollar volume increased 43% and 50% during the three and six months ended June 30, 2021, from the comparable prior year periods, despite the number of active accounts decreasing by 4% year-over-year as of June 30, 2021 for the reasons noted in our Consumer Services segment above.

Although impacted by the timing of stimulus payments as discussed above, we also continue to experience organic growth in certain BaaS programs as the demand for digital payments continues.

Purchase volume also increased approximately 3% and 13% for the three and six months ended June 30, 2021 from the comparable prior year periods.

The increase in gross dollar volume and purchase volume drove an increase in our BaaS program management service fee revenues earned from our platform partners and increases in interchange revenue and monthly maintenance fee assessments, partially offset by lower Simply Paid disbursement revenues due to the effects of the COVID-19 pandemic on the rideshare industry.

Despite year-over-year revenue growth for the three and six months ended June 30, 2021, our segment profit has been impacted by the increased staffing of third-party call center support to meet the increased demand in our customer service center and growth in disputed transaction losses for the same reasons discussed above.

This segment also experienced margin compression because some of our BaaS partnerships were structured based on a flat profit and therefore, our segment profit for these arrangements has not scaled with revenue growth.

BaaS is our newest channel of business and we remain focused on investing behind it and exploring new partnership agreements moving forward.

BaaS is our newest channel of business and we remain focused on investing in it and exploring new partnership agreements moving forward.

Money Movement Services

Three Months Ended March 31,

2021 2020 Change %

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

2021 2020 Change % 2021 2020 Change %

(In thousands, except percentages)

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Tax Refunds Processed 4.15 1.90 2.25 118.4 % 11.59 11.60 (0.01) (0.1) %

Segment revenues within our Money Movement services decreased $29.7 million for the three months ended March 31, 2021, or 24.7%, from the comparable prior year period and segment expenses decreased $11.8 million or 22.1%.

The decrease in revenues and expenses is attributable in part to a shift in the timing of tax refunds processed from the first quarter to the second quarter of 2021, as a result of the extension of the tax filing deadline to the latter part of the second quarter of 2021.

We also experienced a 15% decline year-over-year in the number of cash transfers processed in part due to our decision not to renew a reload partner agreement in the fourth quarter of 2020.

However, the impact to segment profit is limited due to the lower profitability of this arrangement.

Segment revenues within our Money Movement services for the three and six months ended June 30, 2021 increased $0.4 million, or 0.5%, and decreased $29.3 million, or 15.8%, respectively, from the comparable prior year periods, and segment expenses for the three and six months ended June 30, 2021 decreased $10.0 million, or 26.4%, and $21.8 million, or 23.9%, respectively.

Tax processing revenues increased during the three months ended June 30, 2021, primarily due to timing shifts in the number of tax refunds processed for the comparable periods.

The decrease in revenues and expenses for the six months ended June 30, 2021 from the comparable prior year period is attributable to the same reasons discussed above.

Corporate and Other

Three Months Ended March 31,

2021 2020 Change %

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

2021 2020 Change % 2021 2020 Change %

(In thousands, except percentages)

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Unallocated revenue and intersegment eliminations $ (2,763) $ (4,906) $ 2,143 (43.7) % $ (3,641) $ (5,179) $ 1,538 (29.7) %

Unallocated corporate expenses 45,636 44,540 1,096 2.5 %

Unallocated corporate expenses and intersegment eliminations 46,469 52,425 (5,956) (11.4) % 92,105 96,965 (4,860) (5.0) %

$ (49,232) $ (57,331) $ 8,099 (14.1) % $ (95,746) $ (102,144) $ 6,398 (6.3) %

Revenues within Corporate and Other are comprised of net interest income earned by our bank and inter-segment eliminations.

Unallocated corporate expenses include our fixed expenses such as salaries, wages and related benefits for our employees, professional service fees, software licenses, telephone and communication costs, rent and utilities, and insurance.

These costs are not considered when our CODM evaluates the performance of our three reportable segments since they are not directly attributable to any reporting segment.

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Refer to Note 19— Segment Information to the Consolidated Financial Statements included herein for a summary reconciliation.

Unallocated revenue declined year-over-year as a result of lower yields on our investment securities portfolio and customer funds on deposit as a result of rate decreases by the Federal Reserve in March 2020.

Unallocated corporate expenses increased approximately 3% year-over-year as a result of higher salaries and wages, principally due to the timing of accrued bonus compensation, partially offset by lower travel and entertainment costs, professional expenses and rent expense.

Net interest income increased slightly year-over-year for the three months ended June 30, 2021 as a result of an increase in the size of our investment securities portfolio and customer funds on deposit.

However, total net interest income in the first half of the year has remained flat to prior year comparable period as a result of lower yields on our investment securities portfolio due to the rate decreases by the Federal Reserve in March 2020.

Unallocated corporate expenses for the three and six months ended June 30, 2021 decreased year-over-year by approximately 11% and 5%, respectively, as a result of lower corporate reserves, professional expenses and rent expense.

These decreases were partially offset by higher salaries and wages and related employee benefits, principally due to the timing of accrued bonus compensation, and higher software licenses and telecommunication expenses.

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 $ 398,605 $ 871,257

For the three months ended March 31, 2021 and 2020, we financed our operations primarily through our cash flows generated from operations and customer funds held on deposit.

For the six months ended June 30, 2021 and 2020, we financed our operations primarily through our cash flows generated from operations and customer funds held on deposit.

From time to time, we may also finance short term working capital activities through our borrowings under our credit facility.

As of March 31, 2021, our primary source of liquidity was unrestricted cash and cash equivalents totaling $2.7 billion.

We also consider our $996.2 million of available-for-sale investment securities to be highly-liquid instruments.

As of June 30, 2021, our primary source of liquidity was unrestricted cash and cash equivalents totaling $1.9 billion.

We also consider our $1.1 billion of available-for-sale investment securities to be highly-liquid instruments.

We use trend and variance analysis as well as our detailed budgets and forecasts to project future cash needs, making adjustments to the projections when needed.

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Cash Flows from Operating Activities

Our $80.7 million of net cash provided by operating activities during the three months ended March 31, 2021 was the result of $25.7 million of net income, adjusted for certain non-cash operating items of $42.0 million and increases in net changes in our working capital assets and liabilities of $13.0 million.

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 $33.6 million and increases in net changes in our working capital assets and liabilities of $23.7 million.

Our $119.5 million of net cash provided by operating activities during the six months ended June 30, 2021 was the result of $50.7 million of net income, adjusted for certain non-cash operating items of $88.1 million and decreases in net changes in our working capital assets and liabilities of $19.3 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.

Cash Flows from Investing Activities

Our $108.3 million of net cash used in investing activities during the three months ended March 31, 2021 was primarily due to the acquisition of property and equipment of $10.5 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 $55.8 million.

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 $265.7 million of net cash used in investing activities during the six months ended June 30, 2021 was primarily due to purchases of available-for-sale investment securities, net of proceeds from sales and maturities, of $139.8 million, the purchase of bank-owned life insurance policies of $50.0 million, capital contributions related to our investment in TailFin Labs, LLC of $35.0 million, and the acquisition of property and equipment of $23.8 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.

Cash Flows from Financing Activities

Our $1.2 billion of net cash provided from financing activities during the three months ended March 31, 2021 was principally the result of a net increase in customer deposits of $859.9 million and a net increase of $395.5 million in obligations to customers.

Total customer deposit balances have increased as compared to December 31, 2020, principally as a result of additional economic stimulus funds and other government benefits received by our cardholders.

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 $0.5 billion of net cash provided from financing activities during the six months ended June 30, 2021 was principally the result of a net increase in customer deposits of $125.5 million and a net increase of $425.8 million in obligations to customers.

Total customer deposit balances have increased year-over-year, principally as a result of additional economic stimulus funds and other government benefits received by our cardholders.

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.

Other Sources of Liquidity:

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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.

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.

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, 2021, we were in compliance with all such covenants.

At June 30, 2021, we were in compliance with all such covenants.

Material Cash Requirements

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We expect to fund these capital expenditures primarily through our cash flows provided by operating activities.

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

We have used cash to acquire businesses and technologies, including most recently, our commitment to purchase Tax Refund Solutions, a business segment of Republic Bank & Trust Company, for approximately $165 million in cash, and we anticipate that we may continue to do so in the future.

The nature of these transactions, however, makes it difficult to predict the amount and timing of such cash requirements.

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banking regulators, provide for risk-based capital, leverage and liquidity standards.

Basel III rules contain capital standards that change the composition of capital, increase minimum capital ratios and strengthen counter-party credit risk capital requirements.

The Basel III rules also include a new definition of common equity Tier 1 capital and require that certain levels of such common equity Tier 1 capital be maintained.

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 March 31, 2021 and December 31, 2020, we were categorized as "well capitalized" under the regulatory framework for prompt corrective action.

As of June 30, 2021 and December 31, 2020, 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, 2021 which management believes would have changed our category as "well capitalized."

There are no conditions or events since June 30, 2021 which management believes would have changed our category as "well capitalized."

The definitions associated with the amounts and ratios below are as follows:

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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 March 31, 2021 and December 31, 2020 were as follows:

March 31, 2021

The actual amounts and ratios, and required "well capitalized" minimum capital amounts and ratios at June 30, 2021 and December 31, 2020 were as follows:

June 30, 2021

Amount Ratio Regulatory Minimum "Well-capitalized" Minimum

24 unchanged sentences

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