Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, (the "Securities Act") and the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may” and “assumes,” variations of such words and similar expressions are intended to identify forward-looking statements. 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 continuing impacts of the coronavirus ("COVID-19") pandemic, increasing inflation and interest rates and other macroeconomic impacts on our business, results of operations and financial condition and governmental and our responses to such events, including those identified above, under “Part I, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
In this Annual Report, unless otherwise specified or the context otherwise requires, “Green Dot,” “we,” “us,” and “our” refer to Green Dot Corporation and its consolidated subsidiaries.
Overview
Green Dot Corporation is a financial technology and registered bank holding company ("BHC") committed to giving all people the power to bank seamlessly, affordably, and with confidence. Our technology platform enables us to build products and features that address the most pressing financial challenges of consumers and businesses, transforming the way they manage and move money, and making financial empowerment more accessible for all. 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 tax refund processing, cash deposits and disbursements.
Our Chief Operating Decision Maker (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. 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, certain other investment income earned by our bank, interest profit sharing arrangements with certain BaaS partners (a reduction of revenue), eliminations of inter-segment revenues and expenses, and unallocated corporate expenses that are not considered when our CODM evaluates the performance of our three reportable segments are recorded in Corporate and Other expenses. Refer to " Part 1, Item 1. Business " for more detailed information regarding the organization of our business.
Consolidated Financial Results and Trends
Our consolidated results of operations for the years ended December 31, 2022 and 2021 were as follows:
Year Ended December 31,
2022 2021 Change %
(In thousands, except percentages)
Total operating revenues $ 1,449,566 $ 1,433,197 $ 16,369 1.1 %
Total operating expenses 1,355,191 1,366,723 (11,532) (0.8) %
Net income 64,212 47,480 16,732 35.2 %
Refer to "Segment Results" below for a summary of financial results of each of our reportable segments.
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Total operating revenues
Our total operating revenues for the year ended December 31, 2022 increased $16.4 million , or 1% over the prior year comparable period, generating revenue growth from our B2B Services segment and higher net interest income in our Corporate and Other segment, partially offset by lower revenues earned from our Consumer Services and Money Movement Services segments.
Our deposit account programs within our Consumer Services and B2B Services segments have previously benefited from shifts in consumer behavior towards electronic payments throughout the COVID-19 pandemic, which created a higher demand and usage of our products and services. In part, this was driven by the economic stimulus funds and incremental unemployment benefits provided under federal and state programs to new and existing customers in 2021. Relief funds from such programs have since expired and the absence of these programs in 2022 has created more challenging year-over-year comparisons. The timing and magnitude of these programs in 2021, as well as our strategic decision to reduce marketing spend on GO2bank in our Direct channel throughout 2022 due to higher than expected acquisition costs per account, have resulted in an 18% decrease in our consolidated active accounts and a 21% decrease in purchase volume, as compared to the year ended December 31, 2021. Despite some of these headwinds, gross dollar value increased 4% for the year ended December 31, 2022 driven by growth from certain BaaS partners. We expect our key performance indicators to moderate on a year-over-year basis as the effect from federal and state governmental actions continues to lessen.
In our Consumer Services segment, revenues decreased during the year ended December 31, 2022 by 16% over the prior year comparable period. As compared to the year ended December 31, 2021, gross dollar volume and purchase volume each declined 26% and 23%, respectively, while the average number of active accounts and direct deposit accounts declined by 26% and 24%, respectively. We believe these decreases are attributable to several factors, including the timing of stimulus payments and other federal benefits received by our cardholders in 2021 and lower account acquisition from reduced marketing spend on GO2bank in our Direct channel as discussed above, as well as changes in consumer traffic within the retail locations of our distribution partners. These factors had a corresponding impact on the amount of revenue we generated from monthly maintenance fees, ATM fees and interchange fees. These revenue declines in our Consumer Services segment were partially offset by customer adoption of recently-introduced features, such as our optional overdraft protection program services made available to cardholders across our portfolios, 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.
Within our B2B Services segment, revenues increased by 30% during the year ended December 31, 2022 over the prior year comparable period. Gross dollar volume grew by 28%, however, purchase volume decreased by 15%, and the average number of active accounts in this segment across the year decreased by 12% for the year ended December 31, 2022. Overall, many of our BaaS partners within our B2B Services segment were impacted by similar trends seen in our Consumer Services segment, leading to a lower number of active accounts and lower purchase volume. However, growth in gross dollar volume from certain programs resulted in a net increase in segment revenue due to higher program management service fees earned from our BaaS partners. Revenues within this segment also increased due to double-digit growth year-over-year in gross dollar volume and purchase volume in our Employer channel.
Money Movement Services segment revenues for the year ended December 31, 2022 decreased by 7% compared with the prior year comparable period. The decrease in our Money Movement Services was primarily attributable to the number of cash transfers processed, which decreased by 11% compared with the prior year comparable period, partially offset by an increase in our tax processing revenues. The Green Dot Network is a service provider to accountholders in our Consumer Services and B2B Services segments, as well as third-party programs. The decrease in cash transfers was the result of fewer active accounts within our Consumer Services and B2B Services segments discussed above.
Our tax processing revenues increased year-over-year for the year ended December 31, 2022 as a result of a 20% increase in the number of tax refunds processed. The increase in number of tax refunds processed for the year ended December 31, 2022 was principally attributable to higher volumes from our online consumer tax channels.
Net interest income earned by Green Dot Bank, a component of our Corporate and Other segment, increased for the year ended December 31, 2022 by 124% over the prior year comparable period. The increase in net interest income was attributable to the increase in the overall size of our investment securities portfolio, as well as an increase in short-term interest rates by the Federal Reserve, which have resulted in an increase in the amount of net interest income generated compared to the prior year.
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Total operating expenses
Our total operating expenses for the year ended December 31, 2022 decreased $11.5 million, or 1%, over the prior year comparable period. This net decrease was the result of several factors, including lower sales and marketing expenses principally due to a decrease in sales commissions from lower revenues on products subject to tiered revenue-sharing agreements and reduced marketing spend associated with GO2bank, and lower compensation and benefits expenses principally due to lower stock-based compensation, accrued bonus compensation and third-party call center support costs within our Consumer Services and B2B Services segments. These decreases were partially offset by an increase in processing expenses within our B2B Services segment associated with the growth of certain BaaS account programs.
Our third-party call center support costs have decreased in part due to a decline in active accounts, but also as a result of our efforts to improve our customer service over the course of 2021. In 2021, we increased our third-party call center support costs to meet the increased demand in our customer service center to improve our customers' overall experience. These investments resulted in reduced third-party call center costs throughout 2022.
We have continued to see meaningful improvements in overall transaction losses (a component within other general and administrative expenses) compared to the prior year period, in part as a result of decreases in gross dollar volume and purchase volume across different segments, but also from improvements in operational efficiencies to more effectively manage customer disputes and fraud. Other general and administrative expenses also decreased year-over-year due to lower professional services fees, telecommunication expenses and amortization of intangible assets. Although we have seen reduced costs in these areas, our total other general and administrative expenses remained flat over the prior year comparable period. These expenses were negatively impacted from a $13 million legal settlement with a prior business acquisition target earlier in 2022, as well as an increase in software licenses associated with our technology roadmap and the implementation of our modern banking platform, and impairment charges for certain internal-use software.
Income taxes
Our income tax expense for the year ended December 31, 2022 increased $3.5 million, or 22% over the prior year comparable period. The increase in our income tax expense was due primarily to a 32% increase in income before taxes, partially offset by a decrease in our effective tax rate. Our effective tax rate for the years ended December 31, 2022 and 2021 was 23.5% and 25.5%, respectively. The decrease in our effective tax rate was primarily attributable to a reduced IRC 162(m) limitation on the deductibility of certain executive compensation and higher tax benefits from general business credits, partially offset by tax shortfalls from stock-based compensation and higher expenses related to state taxes, net of federal benefits.
On August 16, 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law. The IRA contains a number of revisions to the IRC, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. These tax law changes have no immediate effect and we do not expect that they will have a material impact on our results of operations in future periods.
Outlook and Other Trends Affecting Our Business
We intend to continue to make growth-oriented investments and incur other expenditures that we believe will benefit our long-term financial results. Our growth-oriented investments are focused on re-engaging in marketing initiatives in support of our GO2bank product 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. To support our efforts in building a modern banking platform, we expect our hosting costs and software licenses, a component of other general and administrative expenses, and salary and wage expenses, a component of compensation and benefits expenses to increase year-over-year in 2023. We also expect to continue to incur duplicative processing and other costs associated with the implementation of our modern banking platform as we expect to continue to operate redundant platforms until our technology transformation is completed. Once the implementation is completed, we expect a portion of our processing expenses to reduce and have a favorable impact to our margins. In addition, while we expect to continue to invest in and incur additional expenses in connection with our anti-money laundering ("AML") program, including improvements to our compliance controls, policies and procedures throughout 2023, we believe these investments will ultimately help mitigate and reduce our fraud losses over the long term.
During the second quarter of 2022, we announced contract renewal negotiations, but after extensive negotiations, could not agree upon terms that would best serve the long-term interests of both us and our partners. These non-renewals only had a modest impact on our key metrics and financial results for the year ended
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December 31, 2022. However, we expect these non-renewals to have a greater negative impact on our key metrics and financial results in our Consumer Services and B2B segments in 2023.
In response to the economic impact caused by COVID-19, the Federal Reserve announced reductions in short-term interest rates in March 2020, which in recent years has impacted the yields on our cash and investment balances. Over the past year, the Federal Reserve has announced several increases in the federal funds rate, resulting in a current range of 4.50% to 4.75%. It is widely expected that the Federal Reserve will continue to maintain elevated interest rates until the effects of economic inflation are abated. The Federal Reserve's decision-making policies for short-term interest rates will continue to impact the amount of net interest income we earn in the future. In general, while increases in short-term interest rates benefit the yield we earn on our cash, certain of our BaaS partner arrangements allow for the BaaS partner to share in a significant portion of the interest earned from accountholder deposits (which are recorded as a reduction of revenue in our consolidated financial statements), and yields on our investment portfolio tend to lag interest rate increases as securities mature and proceeds are reinvested. Accordingly, we expect the net effect to have a negative impact on our consolidated financial statements in 2023 compared to 2022.
Based on the overall macro-economic environment, expected interest rate impacts, our commitment to making growth-oriented investments and the timing of the related expense savings from our technology transformation, the non-renewals in our Consumer Services and B2B segments, and trends occurring within our retail channel in our Consumer Services segment, we believe our consolidated operating profit will decline year-over-year in fiscal year 2023.
Further, the duration and magnitude of the continuing effects of COVID-19 remain uncertain and dependent on various factors. See "Part II, Item 1A, Risk Factors," for an additional discussion of risks related to the COVID-19 pandemic.
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Consolidated Key Metrics
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 revenues:
Year Ended December 31, Year Ended December 31,
2022 2021 Change % 2021 2020 Change %
(In millions, except percentages)
Gross dollar volume $ 73,484 $ 70,822 $ 2,662 3.8 % $ 70,822 $ 58,203 $ 12,619 21.7 %
Number of active accounts* 4.15 5.07 (0.92) (18.1) % 5.07 5.45 (0.38) (7.0) %
Purchase volume $ 26,687 $ 33,736 $ (7,049) (20.9) % $ 33,736 $ 31,220 $ 2,516 8.1 %
Number of cash transfers 36.06 40.51 (4.45) (11.0) % 40.51 48.71 (8.2) (16.8) %
Number of tax refunds processed 14.57 12.14 2.43 20.0 % 12.14 12.46 (0.32) (2.6) %
* Represents number of active accounts as of December 31, 2022 , 2021, and 2020 respectively.
See “Segment Results” for additional information and discussion regarding key metrics performance by segment. The definitions of our key metrics are as follows:
Gross Dollar Volume — Represents the total dollar volume of funds loaded to our account products from direct deposit and non-direct deposit sources. A substantial portion of our gross dollar volume is generated from direct deposit sources. We use this metric to analyze the total amount of money moving onto our account programs, and to determine the overall engagement and usage patterns of our account holder base. This metric also serves as a leading indicator of revenue generated through our Consumer Services and B2B Services segments, inclusive of fees charged to account holders and interchange revenues generated through the spending of account balances.
Number of Active Accounts — Represents any bank account within our Consumer Services and B2B Services segments that is subject to the USA PATRIOT Act of 2001 compliance and, therefore, requires customer identity verification prior to use and is intended to accept ongoing customer cash or ACH deposits. This metric includes checking accounts, general purpose reloadable prepaid card accounts, and secured credit card accounts in our portfolio that had at least one purchase, deposit or ATM withdrawal transaction during the applicable quarter. We use this metric to analyze the overall size of our active customer base and to analyze multiple metrics expressed as an average across this active account base.
Our direct deposit active accounts within our Consumer Services segment, 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. Refer to sub-section entitled Consumer Services under “Segment Results” below for key metric results for direct deposit active accounts.
Purchase Volume — Represents the total dollar volume of purchase transactions made by our account holders. This metric excludes the dollar volume of ATM withdrawals and volume generated by certain BaaS programs where the BaaS partner receives interchange and we earn a platform fee. We use this metric to analyze interchange revenue, which is a key component of our financial performance.
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. This metric excludes disbursements made through our Simply Paid wage disbursement platform. 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.
Number of Tax Refunds Processed — Represents the total number of tax refunds processed in a specified period. 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.
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Key components of our results of operations
Operating Revenues
We classify our operating revenues into the following four categories:
Card Revenues and Other Fees — Card revenues consist of monthly maintenance fees, ATM fees, new card fees and other revenues. We charge maintenance fees on prepaid cards, checking accounts and certain cash transfer products, such as MoneyPak, pursuant to the terms and conditions in our customer agreements. We charge ATM fees to cardholders when they withdraw money at certain ATMs in accordance with the terms and conditions in our cardholder agreements. We charge new card fees, if applicable, when a consumer purchases a prepaid card, gift card, or a checking account product through our Retail channel. 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, such as our overdraft protection program, and cash-back rewards we offer to cardholders. Our cash-back rewards are recorded as a reduction to card revenues and other fees. Also included in card revenues and other fees are program management fees earned from our BaaS partners for programs we manage on their behalf.
Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active accounts in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the mix of products in our portfolio at any given point in time and upon the extent to which fees are waived based on various incentives provided to customers in an effort to encourage higher usage and retention. Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction. The average fee per ATM transaction depends upon the mix of products in our portfolio at any given point in time and the extent to which cardholders use ATMs within our free network that carry no fee for cash withdrawal transactions. Our aggregate new card fee revenues vary based upon the number of prepaid cards and checking accounts activated and the average new card fee. The average new card fee depends primarily upon the mix of products that we sell since there are variations in new account fees based on the product and/or the location or source where our products are purchased. The revenue we earn from each of these fees may also vary depending upon the channel in which the active accounts were acquired. For example, certain BaaS programs may not assess monthly maintenance fees and as a result, these accounts may generate lower fee revenue than other active accounts. 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.
Cash Processing Revenues — Cash processing revenues (which we have previously referred to as processing and settlement services 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. Our aggregate cash transfer revenues vary based upon the mix of locations where reload transactions occur, since reload fees vary by location. We earn tax refund processing service revenues at the point in time when a customer of a third-party tax preparation company chooses to pay his or her tax preparation fee through the use of our tax refund processing services. 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.
Interest Income, net — Net interest income represents the difference between the interest income earned on our interest-earning assets and the interest expense on our interest-bearing liabilities held at Green Dot Bank. Interest-earning assets include cash from customer deposits, loans, and investment securities. Our interest-bearing liabilities held at Green Dot Bank include interest-bearing deposits. Our net interest income and our net interest margin fluctuate based on changes in the federal funds interest rates and changes in the amount and composition of our interest-bearing assets and liabilities.
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Operating Expenses
We classify our operating expenses into the following four categories:
Sales and Marketing Expenses — Sales and marketing expenses consist primarily of the commissions we pay to our retail distributors, brokers and partners, advertising and marketing expenses, and the costs of manufacturing and distributing card packages, placards and promotional materials to our retail distributors and personalized debit cards to consumers who have activated their cards. We generally establish commission percentages in long-term distribution agreements with our retail distributors and partners. Aggregate commissions with our retail distributors are determined by the number of account products and cash transfers sold at their respective retail stores. Commissions with our partners and, in certain cases, our retail distributors are determined by the revenue generated from the ongoing use of the associated card programs. We incur advertising and marketing expenses for television, sponsorships, online and in-store promotions. Advertising and marketing expenses are recognized as incurred and typically deliver a benefit over an extended period of time. For this reason, these expenses do not always track changes in our operating revenues. Our manufacturing and distribution costs vary primarily based on the number of accounts activated by consumers.
Compensation and Benefits Expenses — Compensation and benefits expenses represent the compensation and benefits that we provide to our employees and the payments we make to third-party contractors. While we have an in-house customer service function, we employ third-party contractors to conduct call center operations, handle routine customer service inquiries and provide consulting support in the area of IT operations and elsewhere. Compensation and benefits expenses associated with our customer service and loss management functions generally vary in line with the size of our active account portfolio, while the expenses associated with other functions do not.
Processing Expenses — Processing expenses consist primarily of the fees charged to us by the payment networks, which process transactions for us, the third-party card processors that maintain the records of our customers' accounts and process transaction authorizations and postings for us and the third-party banks that issue our accounts. These costs generally vary based on the total number of active accounts in our portfolio and gross dollar volume transacted by those accounts. Also included in processing expenses are bank fees associated with our tax refund processing services and gateway and network fees associated with our Simply Paid disbursement services. Bank fees generally vary based on the total number of tax refund transfers processed and gateway and network fees vary based on the numbers of disbursements made.
Other General and Administrative Expenses — Other general and administrative expenses consist primarily of professional services fees, telephone and communication costs, depreciation and amortization of our property and equipment, amortization of our intangible assets, impairment charges of long-lived assets, transaction losses (losses from customer disputed transactions, unrecovered customer purchase transaction overdrafts and fraud), rent and utilities, and insurance. We incur telephone and communication costs primarily from customers contacting us through our toll-free telephone numbers. 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, impairment charges of long-lived 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. As discussed above, while the recently enacted IRA includes a number of revisions to the IRC, these tax law revisions have no immediate effect and we do not expect that they will have a material impact on our results of operations going forward.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, current circumstances and various other assumptions that our management believes to be reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial
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statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the critical accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
Revenue Recognition
As prescribed under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, we recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services, as determined under a five-step process.
We charge new card fees, if applicable, when a consumer purchases a prepaid card, gift card, or a demand deposit account product through our Retail channel. Our new card fee provides our cardholders a material right and accordingly we defer and recognize new card fee revenues on a straight-line basis over the period commensurate with our performance obligation to our customers. We consider the performance obligation period to be the average card lifetime, which is currently less than one year for our deposit account programs acquired through our Retail channel. The average card lifetime is determined based on recent historical data using the period from sale (or activation) of the card through the date of last positive balance. We reassess average card lifetime quarterly for prepaid cards and checking accounts and annually for gift cards. Average card lifetimes may vary in the future as cardholder behavior changes relative to historical experience because customers are influenced by changes in the pricing of our services, the availability of substitute products, and other factors.
We also defer commissions paid to retail distributors related to new card sales as costs to obtain contracts and expense ratably over the average card lifetime commensurate with our deposit account programs acquired through our Retail channel.
Transaction prices related to our account services are based on stand-alone fees stated within the terms and conditions and may also include certain elements of variable consideration depending upon the product’s features, such as cash-back rewards and fee assessments that may overdraw an account. We estimate such amounts using historical data and customer behavior patterns to determine these estimates which are recorded as a reduction to the corresponding fee revenue. Additionally, while the number of transactions that a cardholder may perform is unknown, any uncertainty is resolved at the end of each daily service contract.
The amount of cash-back rewards on our programs varies based on multiple factors, including the terms and conditions for cardholder eligibility, the redemption amount based on cardholder activity, and the cardholder redemption rates. Our estimated cash-back rewards are recorded as a reduction to card revenues and other fees on our consolidated statements of operations and as a component of other accrued liabilities on our consolidated balance sheets. Cash rewards have decreased by approximately 36% for the year ended December 31, 2022 compared to the prior year period, as our cash-back programs have declined, principally from our decision to shift from our legacy products to our GO2bank product which does not have a cash rewards feature. Increases or decreases in our estimate of cash-back rewards is dependent upon cardholder behavioral changes and we periodically evaluate our estimation process and assumptions based on developments in redemption patterns, dollars redeemed and other cardholder behavioral trends. A relatively small change in any of our assumptions could result in a sizable increase or decrease in the amount of cash-back rewards we accrue. For example, on our Green Dot Unlimited product, a combination of a 1% increase in cardholder eligibility and a $1 increase in the average redemption amount would translate to additional cash rewards of approximately $0.7 million. Differences between actual results and our estimates are adjusted in the period that each cardholder's annual rewards cycle is completed.
Reserve for Uncollectible Overdrawn Accounts
For cardholders who are not enrolled or do not meet the eligibility requirements of our overdraft protection program, we generally decline authorization attempts for amounts that exceed the available balance in a cardholder’s account, however, the application of card association rules, the timing of the settlement of transactions and the assessment of the card’s monthly maintenance fee, among other things, can still result in overdrawn accounts. These overdrawn account balances are deemed to be receivables due from cardholders, and are included as a component of accounts receivable, net, on our consolidated balance sheets.
We generally recover overdrawn account balances from those cardholders that perform a reload transaction and, in some cases, through enforcement of payment network rules, which allow us to recover the amounts from the merchant where the purchase transaction was conducted. However, we are exposed to losses from any unrecovered overdrawn account balances. The probability of recovering these amounts is primarily related to the
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number of days that have elapsed since an account had transaction activity, such as a purchase, ATM transaction or fee assessment. We generally recover approximately 50-60% of overdrawn account balances in accounts that have had transaction activity in the last 30 days and less than 10% when more than 30 days have elapsed. As such, we establish a reserve for uncollectible overdrawn accounts.
We classify overdrawn accounts by transaction type and age groups based on the number of days since the account last had activity. We then calculate a reserve factor for each transaction type and age group based on the average recovery rate for the most recent six months discussed above. These factors are applied to these groups to estimate our overall reserve. We rely on these historical rates because they have remained relatively consistent over time. Generally, when more than 60 days have passed without any activity in an account, we consider recovery to be remote and charge off the full amount of the overdrawn account balance against the reserve for uncollectible overdrawn accounts. Our actual recovery rates and related estimates thereof may change in the future in response to factors such as customer behavior, product pricing and features that impact the frequency and velocity of reloads and other deposits to such accounts. We include our provision for uncollectible overdrawn accounts related to purchase transactions in other general and administrative expenses in our consolidated statements of operations. See Note 5—Accounts Receivable for more information.
Allowance for Credit Losses
We establish an allowance for estimated credit losses inherent in our loan portfolio over the life of the loans, including our secured credit cards. For each portfolio of loans, we analyze historical loss rates and other factors to determine a loss rate, and consider if adjustments are needed for current conditions, and other reasonable and supportable forecasts beyond our balance sheet date that may differ from historical results. We also consider adjustments based on qualitative factors which in our judgment may affect the expected credit losses including, but not limited to, changes in prevailing economic or market conditions and the estimated value of the underlying collateral for collateral dependent loans. We separately establish specific allowances for impaired loans based on the present value of changes in cash flows expected to be collected, or for impaired loans that are considered collateral dependent, the estimated fair value of the collateral less estimated costs to sell, if any. Overdrawn balances associated with our overdraft protection program are subject to a similar reserve methodology discussed above under "Reserve for Uncollectible Overdrawn Accounts." See Note 6—Loans to Bank Customers for more information.
Goodwill and Intangible Assets
We review the recoverability of goodwill at least annually or whenever significant events or changes occur, which might impair the recovery of recorded costs. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill may not be recoverable include a decline in our stock price and market capitalization, declines in the market conditions of our products, reductions in our future cash flow estimates, and significant adverse industry or economic market trends. We test for impairment of goodwill by first assessing various qualitative factors with respect to developments in our business and the overall economy to determine if it is more likely than not our goodwill is impaired. In the event it is more likely than not the carrying value of our reporting units is greater than its fair value, we calculate the estimated fair value of the reporting unit and record an impairment charge for the difference between the carrying value of the reporting unit and its fair value, not to exceed the carrying amount of goodwill. The estimate of fair value requires management to make a number of assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes. We completed our annual goodwill impairment test as of September 30, 2022 and concluded there was no impairment in any of our reporting units.
Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to, the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the underlying assets; and significant adverse industry or market economic trends. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future net cash flows expected from the use of the assets and their eventual disposition. In the event that the carrying value of assets is determined to be unrecoverable, we would estimate the fair value of the assets and record an impairment charge for the excess of the carrying value over the fair value. The estimate of fair value requires management to make a number of assumptions and projections, which could include, but would not be limited to, future revenues, earnings and the probability of certain outcomes. No impairment charges were recognized related to our intangible assets for the years ended December 31, 2022 and 2021. See Note 9—Goodwill and Intangible Assets for more information.
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Results of Operations
Pursuant to instruction 1 of the instructions to paragraph 303(b) of Regulation S-K, discussion of the results of operations for the fiscal year ended December 31, 2021 to fiscal year ended December 31, 2020 has been omitted. Such omitted discussion can be found under "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 28, 2022.
Comparison of Consolidated Results for the Years Ended December 31, 2022 and 2021
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:
Year Ended December 31,
2022 2021
Amount % of Total
Operating Revenues Amount % of Total
Operating Revenues
(In thousands, except percentages)
Operating revenues:
Card revenues and other fees $ 876,318 60.5 % $ 788,834 55.0 %
Cash processing revenues 235,445 16.2 245,539 17.1
Interchange revenues 295,646 20.4 380,037 26.6
Interest income, net 42,157 2.9 18,787 1.3
Total operating revenues $ 1,449,566 100.0 % $ 1,433,197 100.0 %
Card Revenues and Other Fees — Card revenues and other fees totaled $876.3 million for the year ended December 31, 2022, an increase of $87.5 million, or 11%, from the comparable prior year period. Card revenues and other fees increased primarily due to growth in gross dollar volume in our B2B Services segment programs, which resulted in higher program management service fees earned from our BaaS partners. In addition, card revenues and other fees also increased due to customer adoption of optional features 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 back 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. These increases were partially offset by decreases in cardholder fees, such as monthly maintenance fees and ATM fees for the reasons discussed above in our "Overview."
Cash Processing Revenues — Cash processing revenues totaled $235.4 million for the year ended December 31, 2022, a decrease of $10.1 million, or 4%, from the comparable prior year period. The decrease is primarily due to a decline in the number of cash transfers processed year-over-year as a result of fewer active accounts within our Consumer Services and B2B Services segments, partially offset by higher overall tax processing revenues due to a 20% increase in the number of tax refunds processed.
Interchange Revenues — Interchange revenues totaled $295.6 million for the year ended December 31, 2022, a decrease of $84.4 million, or 22%, from the comparable prior year period. The decrease was primarily due to a 21% decrease in purchase volume during the year ended December 31, 2022.
Interest Income, net — Net interest income totaled $42.2 million for the year ended December 31, 2022, an increase of $23.4 million, or 124%, 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, funded primarily from the use of our cardholder deposit account programs. In addition, the Federal Reserve has instituted several increases in interest rates in 2022 to manage the effects of inflation, which also increased the amount of interest income we earn on our deposits and recent investments.
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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:
Year Ended December 31,
2022 2021
Amount % of Total
Operating Revenues Amount % of Total
Operating Revenues
(In thousands, except percentages)
Operating expenses:
Sales and marketing expenses $ 297,900 20.6 % $ 382,163 26.7 %
Compensation and benefits expenses 243,939 16.8 264,686 18.5
Processing expenses 481,460 33.2 389,284 27.2
Other general and administrative expenses 331,892 22.9 330,590 23.1
Total operating expenses $ 1,355,191 93.5 % $ 1,366,723 95.5 %
Sales and Marketing Expenses — Sales and marketing expenses totaled $297.9 million for the year ended December 31, 2022, a decrease of $84.3 million, or 22% compared to the year ended December 31, 2021. This decrease was primarily driven by a decrease in sales commissions due to lower revenues generated from certain products that are subject to tiered revenue-sharing agreements and lower supply chain expenses, which consists of debit card plastics and related materials, as a result of a lower number of active accounts for the comparable periods. In addition, our marketing expenses decreased as a result of our strategic decision to reduce marketing spend on GO2bank in our Direct channel to manage our acquisition costs per account.
Compensation and Benefits Expenses — Compensation and benefits expenses totaled $243.9 million for the year ended December 31, 2022, a decrease of $20.8 million, or 8%, compared to the year ended December 31, 2021. The decrease was primarily due to lower stock-based compensation, principally due to forfeited awards associated with certain former executive employees and fluctuations in the expected achievement of certain performance-based equity awards, as well as a reduction in third-party call center support costs due to a decline in active accounts and our investments to improve customer service over the course of 2021.
Processing Expenses — Processing expenses totaled $481.5 million for the year ended December 31, 2022, an increase of $92.2 million, or 24%, compared to the year ended December 31, 2021. This increase was principally due to growth in gross dollar volume on certain 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 $331.9 million for the year ended December 31, 2022, an increase of $1.3 million, or 0.4%, from the comparable prior year period. Other general and administrative expenses increased primarily due to a $13 million legal settlement associated with a previous business acquisition target in 2022, as well as an increase in software licenses associated with our technology roadmap and the implementation of our modern banking platform, and impairment charges for certain internal-use software, partially offset by decreases in professional services fees, telecommunication expenses and amortization of intangible assets.
Income Tax Expense
The following table presents a breakdown of our effective tax rate among federal, state and other:
Year Ended December 31,
2022 2021
U.S. federal statutory tax rate 21.0 % 21.0 %
State income taxes, net of federal tax benefit 2.2 1.2
General business credits (3.2) (2.2)
Stock-based compensation 3.2 (2.6)
IRC 162(m) limitation 0.8 8.0
Other (0.5) 0.1
Effective tax rate 23.5 % 25.5 %
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Our income tax expense totaled $19.7 million for the year ended December 31, 2022, representing an increase of $3.5 million from the comparable prior year period. The increase in income tax expense was primarily driven by the increase in our operating income, partially offset by a decrease in our effective tax rate.
Our effective tax rate for the year ended December 31, 2022 is higher than our statutory federal income tax rate primarily due to higher taxes from non-deductible executive compensation, tax shortfalls from stock-based compensation, and expenses related to state taxes, net of federal benefits. Our effective tax rate for the year ended December 31, 2021 is higher than our statutory federal income tax rate primarily due to higher taxes from non-deductible executive compensation and expenses related to state taxes, net of federal benefits.
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
Year Ended December 31,
2022 2021 Change %
(In thousands, except percentages)
Financial Results
Segment revenues $ 586,798 $ 694,725 $ (107,927) (15.5) %
Segment expenses 364,650 471,121 (106,471) (22.6) %
Segment profit $ 222,148 $ 223,604 $ (1,456) (0.7) %
Key Metrics (In millions, except percentages)
Gross dollar volume $ 23,257 $ 31,455 $ (8,198) (26.1) %
Number of active accounts* 2.37 3.10 (0.73) (23.5) %
Direct deposit active accounts* 0.63 0.76 (0.13) (17.1) %
Purchase volume $ 18,136 $ 23,640 $ (5,504) (23.3) %
* Represents number of active and direct deposit active accounts as of December 31, 2022 and 2021, respectively.
As additional supplemental information, our key metrics within our Consumer Services segment is presented on a quarterly basis as follows:
2022 2021
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In millions)
Key Metrics
Gross dollar volume $ 5,426 $ 5,495 $ 5,715 $ 6,621 $ 6,300 $ 6,811 $ 8,188 $ 10,156
Number of active accounts* 2.37 2.51 2.78 3.04 3.10 3.38 3.97 4.07
Direct deposit active accounts* 0.63 0.66 0.67 0.69 0.76 0.83 0.92 0.97
Purchase volume $ 4,229 $ 4,302 $ 4,588 $ 5,017 $ 4,881 $ 5,166 $ 6,455 $ 7,138
* Represents number of active and direct deposit active accounts as of each period end.
Segment revenues within Consumer Services for the year ended December 31, 2022 decreased $107.9 million, or 16%, compared to the prior year comparable period, while our segment expenses for the year ended December 31, 2022 decreased $106.5 million, or 23%.
Our gross dollar volume, the average number of active accounts and the average number of direct deposit active accounts across the year decreased during the year ended December 31, 2022 by 26%, 26% and 24%, respectively, from the comparable prior year period, primarily due to the timing of stimulus payments and other federal benefits received by our cardholders in 2021. Relief funds from such programs have since expired and no such economic stimulus packages were enacted in 2022. In addition, we reduced marketing spend on GO2bank to manage our acquisition costs per account and observed changes in consumer traffic within the retail locations of our distribution partners, both of which negatively impacted account acquisition. In turn, our purchase volume decreased by 23% during the year ended December 31, 2022 from the comparable prior year period.
Our monthly maintenance fees, ATM revenue and interchange revenues decreased as a result of the decreases in each of our key metrics stated above. These decreases were partially offset by increased customer adoption of
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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.
Despite a sizable decrease in total revenue, our segment profit for the year ended December 31, 2022 decreased by less than 1%. Consumer Services expenses for the year ended December 31, 2022 decreased from the comparable prior year period due to several factors, including a decrease in sales commissions from lower revenues on products subject to tiered revenue-sharing agreements, a decrease in third-party call center support costs in part due to a decline in active accounts, but also as a result of our investments to improve our customer service over the course of 2021, a decrease in transactions losses due to lower gross dollar volume and improvement in loss rates, and a decrease in marketing and supply chain expenses in connection with GO2bank.
B2B Services
Year Ended December 31,
2022 2021 Change %
(In thousands, except percentages)
Financial Results
Segment revenues $ 594,468 $ 458,584 $ 135,884 29.6 %
Segment expenses 508,096 385,428 122,668 31.8 %
Segment profit $ 86,372 $ 73,156 $ 13,216 18.1 %
Key Metrics (In millions, except percentages)
Gross dollar volume $ 50,227 $ 39,367 $ 10,860 27.6 %
Number of active accounts* 1.78 1.97 (0.19) (9.6) %
Purchase volume $ 8,551 $ 10,096 $ (1,545) (15.3) %
* Represents number of active accounts as of December 31, 2022 and 2021, respectively.
As additional supplemental information, our key metrics within our B2B Services segment is presented on a quarterly basis as follows:
2022 2021
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In millions)
Key Metrics
Gross dollar volume $ 14,584 $ 13,187 $ 11,641 $ 10,815 $ 10,053 $ 9,593 $ 9,211 $ 10,510
Number of active accounts* 1.78 1.82 1.83 1.89 1.97 1.99 2.06 2.28
Purchase volume $ 2,063 $ 2,141 $ 2,172 $ 2,175 $ 2,184 $ 2,190 $ 2,415 $ 3,307
* Represents number of active accounts as of each period end.
Segment revenues within our B2B Services for the year ended December 31, 2022 increased $135.9 million, or 30%, compared to the prior year period, while our segment expenses for the year ended December 31, 2022 increased $122.7 million, or 32%.
Our total gross dollar volume during the year ended December 31, 2022 increased by 28% from the comparable prior year period, despite the average number of active accounts across the year decreasing by 12% year-over-year. We have continued to experience organic growth from both new and existing users in certain BaaS programs that tend to yield higher gross dollar volume per active user, in addition to the general demand that remains prevalent for digital payments. Purchase volume decreased by approximately 15% for the year ended December 31, 2022.
Overall, many of our BaaS partners within our B2B Services segment were impacted by similar trends seen in our Consumer Services segment, however, growth in gross dollar volume from certain programs resulted in a net increase in segment revenue due to higher program management service fees earned from BaaS partners, despite a lower number of active accounts and lower purchase volume. This increase was partially offset by a decrease in the amount of interchange revenue earned associated with the decrease in purchase volume. Revenues within this segment also increased due to double-digit growth year-over-year in gross dollar volume and purchase volume in our Employer channel. As a result of our revenue growth in this segment for the year ended December 31, 2022, our segment profit increased by approximately 18% over the comparable prior year period.
B2B Services expenses increased for the year ended December 31, 2022 principally due to higher processing expenses with the growth of certain BaaS account programs and higher overall transaction losses as a result of the
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increase in gross dollar volume. This segment also experienced margin compression because certain BaaS partnerships were structured based on a fixed profit and therefore, our segment profit for certain arrangements will not scale with revenue growth.
Money Movement Services
Year Ended December 31,
2022 2021 Change %
(In thousands, except percentages)
Financial Results
Segment revenues $ 222,192 $ 239,735 $ (17,543) (7.3) %
Segment expenses 104,362 123,770 (19,408) (15.7) %
Segment profit $ 117,830 $ 115,965 $ 1,865 1.6 %
Key Metrics (In millions, except percentages)
Number of cash transfers 36.06 40.51 (4.45) (11.0) %
Number of tax refunds processed 14.57 12.14 2.43 20.0 %
As additional supplemental information, our key metrics within our Money Movement Services segment is presented on a quarterly basis as follows:
2022 2021
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(In millions)
Key Metrics
Number of cash transfers 9.03 9.16 9.00 8.87 9.95 10.05 10.19 10.32
Number of tax refunds processed 0.20 0.28 4.48 9.61 0.12 0.43 4.15 7.44
Segment revenues within our Money Movement services for the year ended December 31, 2022 decreased $17.5 million, or 7%, from the comparable prior year period, and segment expenses for the year ended December 31, 2022 decreased $19.4 million, or 16%.
The decrease in segment revenues for the year ended December 31, 2022 was driven primarily by a lower number of cash transfers processed, which decreased by 11% from the prior year comparable period. The Green Dot Network is a service provider to accountholders in our Consumer Services and B2B Services segments, as well as third-party programs. The decrease in cash transfers was the result of lower active accounts within our Consumer Services and B2B Services segments discussed above. This decrease was partially offset by an increase in our tax processing revenues, driven by a 20% increase in the number of tax refunds processed from the prior year comparable period.
Although segment revenues decreased by 7%, our segment expenses declined for the year ended December 31, 2022 by 16% and segment profit increased by approximately 2% year-over-year. Segment expenses decreased for the year ended December 31, 2022 primarily due to a decrease in sales commissions from lower cash transfer volumes.
Corporate and Other
Year Ended December 31,
2022 2021 Change %
(In thousands, except percentages)
Financial Results
Unallocated revenue and inter-segment eliminations $ 20,151 $ (5,169) $ 25,320 (489.8) %
Unallocated corporate expenses and inter-segment eliminations 207,747 190,592 17,155 9.0 %
$ (187,596) $ (195,761) $ 8,165 (4.2) %
Revenues within Corporate and Other are comprised of net interest income, certain other investment income earned by our bank, interest profit sharing arrangements with certain BaaS partners (a reduction of revenue) and eliminations of inter-segment revenues. Unallocated corporate expenses include eliminations of inter-segment expenses and our fixed expenses such as salaries, wages and related benefits for our employees, professional
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services fees, software licenses, telephone and communication costs, rent, 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. Non-cash expenses such as stock-based compensation, depreciation and amortization of long-lived assets, impairment charges and other non-recurring expenses that are not considered by our CODM when evaluating our overall consolidated financial results are excluded from our unallocated corporate expenses above. Refer to Note 24—Segment Information to the Consolidated Financial Statements included herein for a summary reconciliation.
Net interest income increased year-over-year for the year ended December 31, 2022 as a result of an increase in the size of our investment securities portfolio and recent increases in interest rates by the Federal Reserve. This increase was partially offset by a portion of the interest we share with certain BaaS partners.
Unallocated corporate expenses for the year ended December 31, 2022 increased year-over-year by approximately 9%, as a result of higher salaries and wages and software licenses each in support of our investments to build a modern and scalable core banking and card management platform, as well as other growth initiatives, partially offset by lower professional services fees, accrued bonus compensation and telecommunication expenses.
Capital Requirements for Bank Holding Companies
Our subsidiary bank, Green Dot Bank, is a member bank of the Federal Reserve System and our primary regulators are the Federal Reserve Board and the Utah Department of Financial Institutions. We and Green Dot Bank are subject to various regulatory capital requirements administered by the banking agencies. 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 and Green Dot Bank 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.
The Basel III rules, which were promulgated by the Federal Reserve and other U.S. banking regulators, provide for risk-based capital, leverage and liquidity standards. 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%. Either or both of Green Dot Corporation and Green Dot Bank may qualify for and opt to use, from time to time, the community bank leverage ratio framework under the Federal Reserve’s version of the U.S. Basel III Rules. Under the community bank leverage ratio framework, a qualifying community banking organization may generally satisfy its capital requirements (and capital conservation buffer) under the U.S. Basel III rules provided that it has a Tier 1 leverage ratio greater than 9% and satisfies other applicable conditions. Commencing in 2021, Green Dot Corporation and Green Dot Bank qualified for (including, in the case of Green Dot Bank, through grace periods) and opted to use the community bank leverage ratio framework. We expect that Green Dot Corporation will continue to qualify for and use the community bank leverage ratio framework, and that Green Dot Bank will calculate and disclose its risk-based capital ratios and Tier 1 leverage ratio under standardized approach of the U.S. Basel III Rules.
As of December 31, 2022 and 2021, we and Green Dot Bank were categorized as "well capitalized" under applicable regulatory standards. To be categorized as "well capitalized," we and Green Dot Bank must maintain specific total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There were no conditions or events since December 31, 2022 which management believes would have changed our category as "well capitalized."
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The definitions associated with the amounts and ratios below are as follows:
Ratio Definition
Tier 1 leverage ratio
Tier 1 capital divided by average total assets
Common equity Tier 1 capital ratio
Common equity Tier 1 capital divided by risk-weighted assets
Tier 1 capital ratio
Tier 1 capital divided by risk-weighted assets
Total risk-based capital ratio
Total capital divided by risk-weighted assets
Terms Definition
Tier 1 capital and
Common equity Tier 1 capital Includes common stock and retained earnings, adjusted for items primarily related to accumulated OCI, goodwill, deferred tax assets and intangibles.
Total capital
Tier 1 capital plus supplemental capital items such as the allowance for credit losses, subject to certain limits
Average total assets
Average total consolidated assets during the period less deductions and adjustments primarily related to goodwill, deferred tax assets and intangibles assets
Risk-weighted assets
Represents the amount of assets or exposure multiplied by the standardized risk weight (%) associated with that type of asset or exposure. 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 December 31, 2022 and 2021, were as follows:
December 31, 2022
Amount Ratio Regulatory Minimum "Well-capitalized" Minimum
(In thousands, except ratios)
Green Dot Corporation:
Tier 1 leverage $ 661,404 16.6 % 4.0 % n/a
Common equity Tier 1 capital $ 661,404 40.1 % 4.5 % n/a
Tier 1 capital $ 661,404 40.1 % 6.0 % 6.0 %
Total risk-based capital $ 675,043 40.9 % 8.0 % 10.0 %
Green Dot Bank:
Tier 1 leverage $ 389,541 9.6 % 4.0 % 5.0 %
Common equity Tier 1 capital $ 389,541 31.2 % 4.5 % 6.5 %
Tier 1 capital $ 389,541 31.2 % 6.0 % 8.0 %
Total risk-based capital $ 397,870 31.8 % 8.0 % 10.0 %
December 31, 2021
Amount Ratio Regulatory Minimum "Well-capitalized" Minimum
(In thousands, except ratios)
Green Dot Corporation:
Tier 1 leverage $ 637,338 15.9 % 4.0 % n/a
Common equity Tier 1 capital $ 637,338 54.0 % 4.5 % n/a
Tier 1 capital $ 637,338 54.0 % 6.0 % 6.0 %
Total risk-based capital $ 648,038 54.9 % 8.0 % 10.0 %
Green Dot Bank:
Tier 1 leverage $ 329,162 9.1 % 4.0 % 5.0 %
Common equity Tier 1 capital $ 329,162 40.7 % 4.5 % 6.5 %
Tier 1 capital $ 329,162 40.7 % 6.0 % 8.0 %
Total risk-based capital $ 336,461 41.6 % 8.0 % 10.0 %
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Liquidity and Capital Resources
The following table summarizes our major sources and uses of cash for the periods presented:
Year Ended December 31,
2022 2021
(In thousands)
Total cash provided by (used in)
Operating activities $ 277,686 $ 167,033
Investing activities (820,188) (1,368,487)
Financing activities 36,707 1,030,393
Decrease in unrestricted cash, cash equivalents and restricted cash $ (505,795) $ (171,061)
During the years ended December 31, 2022 and 2021, we financed our operations primarily through our cash flows provided by operating activities 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 December 31, 2022, our primary source of liquidity was unrestricted cash and cash equivalents totaling $813.9 million. We also consider our $2.4 billion of investment securities available-for-sale 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. We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity under our credit facility will be sufficient to meet our working capital, capital expenditures, equity method investee capital commitments, and any other capital needs for at least the next 12 months. We are currently not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months. We continue to monitor the impact of material trends on our business to ensure our liquidity and capital resources remain appropriate throughout this period of uncertainty.
Cash Flows from Operating Activities
Our $277.7 million of net cash provided by operating activities during the year ended December 31, 2022 principally resulted from $64.2 million of net income, adjusted for certain non-cash operating expenses of $168.7 million, and an increase in net working capital assets and liabilities of $44.8 million.
Our $167.0 million of net cash provided by operating activities during the year ended December 31, 2021 principally resulted from $47.5 million of net income, adjusted for certain non-cash operating expenses of $184.9 million, and a decrease in net working capital assets and liabilities of $65.3 million.
Cash Flows from Investing Activities
Our $820.2 million of net cash used in investing activities during the year ended December 31, 2022 primarily reflects purchases of available-for-sale investment securities, net of proceeds from sales and maturities of $634.3 million, payments for the development and acquisition of property and equipment of $84.3 million, net changes in loans of $32.1 million, purchases of bank-owned life insurance policies of $31.9 million, and capital contributions related to our investment in TailFin Labs, LLC of $35.0 million.
Our $1.4 billion of net cash used in investing activities during the year ended December 31, 2021 primarily reflects purchases of available-for-sale investment securities, net of proceeds from sales and maturities of $1.2 billion, payments for the development and acquisition of property and equipment of $57.4 million, net changes in loans of $28.4 million, purchases of bank-owned life insurance policies of $55.0 million and capital contributions related to our investment in TailFin Labs, LLC of $35.0 million.
Cash Flows from Financing Activities
Our $36.7 million of net cash provided by financing activities for the year ended December 31, 2022 was principally the result of a net increase in customer deposits of $157.1 million and net borrowings on our revolving credit facility of $35.0 million, partially offset by share repurchases of our Class A common stock of $95.5 million and a net decrease in obligations to customers of $54.0 million.
Our $1.0 billion of net cash provided by financing activities for the year ended December 31, 2021 was principally the result of a net increase in customer deposits of $555.1 million, and a net increase in obligations to customers of $488.7 million.
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Other Sources of Liquidity: 2019 Revolving Facility
In October 2019, we entered into a revolving credit agreement with Wells Fargo Bank, National Association, and other lenders party thereto. The credit agreement provides for a $100.0 million five-year revolving facility and matures in October 2024. At our election, loans made under the credit agreement bear interest at 1) a LIBOR rate (the “LIBOR Rate") or 2) a base rate determined by reference to the highest of (a) the United States federal funds rate plus 0.50%, (b) the Wells Fargo prime rate, and (c) one-month LIBOR rate plus 1.0% (the “Base Rate"), plus in either case an applicable margin. The applicable margin for borrowings depends on our total leverage ratio and varies from 1.25% to 2.00% for LIBOR Rate loans and 0.25% to 1.00% for Base Rate loans. The interest rate on our outstanding balance as of December 31, 2022 was 5.52%.
The terms of our existing agreement also provide for a method to determine an alternative benchmark interest rate in anticipation of the discontinuation of LIBOR under reference rate reform. This alternative benchmark rate will be selected between the parties taking into consideration recommendations from regulatory bodies or based on prevailing market conventions at the time the alternative rate is established, and may include the Secured Overnight Financing Rate.
As of December 31, 2022, we had $35.0 million outstanding on the 2019 Revolving Facility, with $65.0 million available for use.
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 December 31, 2022, we were in compliance with all such covenants.
Material Cash Requirements
While the effect of COVID-19, increasing inflation and interest rates and other macro-economic events have created economic uncertainty and impacted how we manage our liquidity and capital resources, we anticipate that we will continue to develop and invest in property and equipment as necessary in the normal course of our business. The amount and timing of these payments and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including the hiring of new employees, the rate of change of computer hardware and software used in our business and our business outlook as a result of macro-economic uncertainties. We intend to continue to invest in new products and programs, including GO2bank, new features for our existing products and IT infrastructure such as our core banking and card management systems in order to scale and operate effectively to meet our strategic objectives. While we expect these capital expenditures in 2023 will be at similar levels to our capital expenditures in 2022, 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. The nature of these transactions, however, makes it difficult to predict the amount and timing of such cash requirements.
Additionally, we may make periodic cash contributions to our subsidiary bank, Green Dot Bank, to maintain its capital, leverage and other financial commitments at levels we have agreed to with our regulators. If another economic relief package is signed into law that provides for substantial additional direct payments and unemployment benefits, we may need to increase the size of our cash contributions to Green Dot Bank to maintain its capital, leverage and other financial commitments.
We also have certain contractual payment obligations, in each case, as described in more detail below.
Contractual Obligations
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. We hold a 20% ownership interest in the entity, in exchange for annual capital contributions of $35.0 million per year from January 2020 through January 2024. See Note 7—Equity Method Investment of the Notes to our Consolidated Financial Statements for additional information.
Our remaining leases have terms of less than 1 year to approximately 10 years, subject to renewal options of varying terms, and as of December 31, 2022, we had a total lease liability of $8.4 million. See Note 20—Leases of the Notes to our Consolidated Financial Statements for additional information regarding our lease liabilities as of December 31, 2022.
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In the normal course of business, we enter into various agreements with our vendors and retail distributors that may subject us to minimum annual requirements. While our contractual commitments will have an impact on our future liquidity, we believe that we will be able to adequately fulfill these obligations through cash generated from operations and from our existing cash balances.
Statistical Disclosure by Bank Holding Companies
The following section presents supplemental information for Bank Holding Companies. The tables in this section include Green Dot Bank information only.
Distribution of Assets, Liabilities and Stockholders' Equity
The following table presents average balance data and interest income and expense data for our banking operations, as well as the related interest yields and rates for the years ended December 31, 2022, 2021 and 2020:
Year ended December 31,
2022 2021 2020
Average
balance Interest income/
interest expense Yield/
rate Average
balance Interest income/
interest expense Yield/
rate Average
balance Interest income/
interest expense Yield/
rate
(In thousands, except percentages)
Assets
Interest-bearing assets
Loans (1) $ 19,608 $ 2,273 11.6 % $ 25,101 $ 2,316 9.2 % $ 22,533 $ 2,454 10.9 %
Taxable investment securities 2,581,235 40,349 1.6 1,271,329 13,831 1.1 506,152 7,031 1.4
Non-taxable investment securities 27,852 727 2.6 28,956 712 2.5 11,481 278 2.4
Federal reserve stock 7,693 324 4.2 7,069 322 4.6 5,473 272 5.0
Fee advances 9,672 2,061 21.3 6,756 1,491 22.1 7,775 1,455 18.7
Cash 965,070 13,085 1.4 2,012,597 2,539 0.1 1,769,837 5,709 0.3
Total interest-bearing assets 3,611,130 58,819 1.6 % 3,351,808 21,211 0.6 % 2,323,251 17,199 0.7 %
Non-interest bearing assets 258,260 286,441 131,612
Total assets $ 3,869,390 $ 3,638,249 $ 2,454,863
Liabilities
Interest-bearing liabilities
Checking accounts $ 2,204 $ 38 1.7 % $ 5,345 $ 5 0.1 % $ 9,271 $ 54 0.6 %
Savings deposits 16,004 289 1.8 26,745 25 0.1 20,702 41 0.2
Time deposits, denominations greater than or equal to $250 1,833 40 2.2 1,827 26 1.4 1,146 16 1.4
Time deposits, denominations less than $250 3,313 31 0.9 3,142 37 1.2 3,682 37 1.0
Total interest-bearing liabilities 23,354 398 1.7 % 37,059 93 0.3 % 34,801 148 0.4 %
Non-interest bearing liabilities 3,683,481 3,304,652 2,173,578
Total liabilities 3,706,835 3,341,711 2,208,379
Total stockholders' equity 162,555 296,538 246,484
Total liabilities and stockholders' equity $ 3,869,390 $ 3,638,249 $ 2,454,863
Net interest income/yield on earning assets $ 58,421 (0.1) % $ 21,118 0.3 % $ 17,051 0.3 %
___________
(1) Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
The following table presents the amount of changes in interest income and interest expense due to changes in both average volume and average rate for the years ended:
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December 31, 2022 December 31, 2021
Total Change in Interest Income/ Expense Change Due to Rate (1) Change Due to Volume (1) Total Change in Interest Income/ Expense Change Due to Rate (1) Change Due to Volume (1)
(In thousands)
Interest-earning assets
Loans $ (43) $ (294) $ 251 $ (138) $ (543) $ 405
Taxable investment securities 26,518 7,896 18,622 6,800 (1,139) 7,939
Non-taxable investment securities 15 40 (25) 434 4 430
Federal reserve stock 2 (13) 15 50 (20) 70
Fee advances 570 (50) 620 36 134 (98)
Cash 10,546 11,141 (595) (3,170) (4,092) 922
Change in interest income $ 37,608 $ 18,720 $ 18,888 $ 4,012 $ (5,656) $ 9,668
Interest-bearing liabilities
Checking accounts $ 33 $ 34 $ (1) $ (49) $ (29) $ (20)
Savings deposits 264 270 (6) (16) (36) 20
Time deposits, denominations greater than or equal to $250 14 14 — 10 — 10
Time deposits, denominations less than $250 (6) (8) 2 — 1 (1)
Change in interest expense 305 310 (5) (55) (64) 9
Change in net interest income and expense $ 37,303 $ 18,410 $ 18,893 $ 4,067 $ (5,592) $ 9,659
___________
(1) The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.
Maturities and Sensitivities to Changes in Interest Rates
The following table presents contractual maturities of loans by type. All of our loans due after one year are based upon fixed interest rates under the stated terms of the loan agreements:
Due in one year or less Due after one year through five years Due after five years through fifteen years Due after fifteen years Total
(In thousands)
Residential $ 182 $ 325 $ 3,757 $ — $ 4,264
Commercial 2,512 30 — — 2,542
Installment — 1,327 80 — 1,407
Consumer 14,446 — — — 14,446
Secured credit card 7,840 — — — 7,840
Total fixed-income securities $ 24,980 $ 1,682 $ 3,837 $ — $ 30,499
Allocation of Reserve of Credit Losses
The following table shows the reserve for credit losses allocated to each loan category:
December 31, 2022 December 31, 2021
Amount Percent of loans in each category to total loans Amount Percent of loans in each category to total loans
(In thousands, except percentages)
Residential $ 83 0.9 % $ 87 1.6 %
Commercial 29 0.3 32 0.6
Installment 38 0.4 42 0.8
Consumer 7,880 86.8 4,384 78.9
Secured credit card 1,048 11.6 1,010 18.1
Total $ 9,078 100.0 % $ 5,555 100.0 %
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Deposits
The following table shows Green Dot Bank’s average deposits and the annualized average rate paid on those deposits for the years ended December 31, 2022, 2021, and 2020:
December 31, 2022 December 31, 2021 December 31, 2020
Average Balance Weighted-Average Rate Average Balance Weighted-Average Rate Average Balance Weighted-Average Rate
(In thousands, except percentages)
Interest-bearing deposit accounts
Checking accounts $ 2,204 1.7 % $ 5,345 0.1 % $ 9,271 0.6 %
Savings deposits 16,004 1.8 26,745 0.1 20,702 0.2
Time deposits, denominations greater than or equal to $250 1,833 2.2 1,827 1.4 1,146 1.4
Time deposits, denominations less than $250 3,313 0.9 3,142 1.2 3,682 1.0
Total interest-bearing deposit accounts 23,354 1.7 % 37,059 0.3 % 34,801 0.4 %
Non-interest bearing deposit accounts 3,286,137 2,926,280 1,898,216
Total deposits $ 3,309,491 $ 2,963,339 $ 1,933,017
Our aggregate deposits in denominations that met or exceeded FDIC limits were $215 million, $180 million and $115 million as of December 31, 2022, 2021 and 2020, respectively. Our time deposits portfolio in excess of FDIC limits is not material at December 31, 2022.
Key Financial and Credit Ratios
The following tables show certain of Green Dot Bank’s key financial and credit ratios for the years ended December 31, 2022, 2021, and 2020:
December 31, 2022 December 31, 2021 December 31, 2020
Net return on assets 3.3 % 2.0 % 2.0 %
Net return on equity 79.2 24.6 19.7
Equity to assets ratio 4.2 8.1 10.0
Allowance for credit losses to total loans outstanding 29.8 22.4 3.5
Nonaccrual loans to total loans outstanding 7.3 3.4 6.3
Allowance for credit losses to nonaccrual loans 405.4 648.9 55.5
December 31, 2022 December 31, 2021 December 31, 2020
Net charge-offs during the period to average loans outstanding: (In thousands)
Consumer
Net charge-off during the period $ 34,699 $ 18,798 $ —
Average amount outstanding 16,337 7,578 —
Secured credit card
Net charge-off during the period 517 1,382 1,269
Average amount outstanding 10,924 14,062 14,703
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.