This Quarterly Report on Form 10-Q, 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 and the Securities Exchange Act of 1934 (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 impact of the coronavirus (COVID-19) pandemic on our business, results of operations and financial condition, results of operations and financial condition, and our response to it, and those identified below, under "Part II, Item 1A. 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 Quarterly Report, unless otherwise specified or the context otherwise requires, "Green Dot," "we," "us," and "our" refer toGreen Dot Corporation and its consolidated subsidiaries. OverviewGreen Dot Corporation is a financial technology leader and bank holding company with a mission to reinvent banking for the masses. Our company's long-term strategy is to create a unique, sustainable and highly valuable fintech ecosystem, in part through the continued evolution of Green Dot's innovative Banking as a Service ("BaaS") platform, that's intended to fuel the engine of innovation and growth for Green Dot and its business partners. Enabled by proprietary technology, our commercial bank charter and our high-scale program management operating capability, our vertically integrated technology and banking platform is used by a growing list of America's most prominent consumer and technology companies to design and deploy their own bespoke financial services solutions to their customers and partners, while we use that same integrated platform for our own leading collection of banking and financial services products marketed directly to consumers through what we believe to be the most broadly distributed, omni-channel branchless banking platforms inthe United States . Our products and services are divided among our two reportable segments: 1) Account Services and 2) Processing and Settlement Services. We also consider our product and service offerings based on our market distribution strategies, which we refer to as our Consumer Business and Platform Services Business. Refer to our latest Annual Report on Form 10-K "Part 1, Item 1. Business" for more detailed information. Financial Results and Trends Our consolidated results of operations for the three and six months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change % 2020 2019 Change % (In thousands, except percentages) Total operating revenues$ 316,240 $ 278,326 $ 37,914 13.6 %$ 678,409 $ 618,840 $ 59,569 9.6 % Total operating expenses 310,850 234,363 76,487 32.6 % 614,170 493,492 120,678 24.5 % Net income 3,294 34,692 (31,398) (90.5) % 50,139 98,735 (48,596) (49.2) % Impact of COVID-19 The unprecedented and rapid spread of the COVID-19 pandemic and the measures implemented to contain it have created a significant amount of economic volatility in our markets. We have taken steps to ensure the health and safety of our employees and continued service to our customers and partners, while at the same time seeking to mitigate the impact of the pandemic on our financial condition and results of operations. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time and the ultimate business and economic impact remains unknown. 26 -------------------------------------------------------------------------------- Table of Contents Our employees and business continuity In response to the pandemic, we enacted business continuity plans inShanghai, China and across theU.S. , mandated that our employees work from home, required contractors to work remotely and implemented strict travel restrictions. To date, ourU.S. employees have been successful in maintaining our operations in a remote work environment and our offices inChina have since reopened consistent with local guidelines. While we experienced disruption in staffing levels at our third-party call centers across the globe during March and the second quarter of 2020 staffing level have been restored to appropriate levels and we continue to monitor the situation, as we evaluate future operating plans. Demand for our products and services Beginning inMarch 2020 , the business and operations of our retail distributors, employers offering our PayCard programs and certain of our BaaS partners have been disrupted, with many experiencing reduced foot traffic or usage of their products and services. The conditions caused by the COVID-19 pandemic adversely affected our customers' spending levels and the ability or willingness to purchase our products and services through our retail distributors, lowered the volume of transactions through our BaaS and PayCard programs and delayed the launching of new products and services. Governmental actions such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) helped mitigate the effects of COVID-19 on our business during the second quarter of 2020. In particular, stimulus funds and incremental unemployment benefits provided under the CARES Act created a higher demand and usage of our products and services. In the second quarter of 2020, our gross dollar volume, purchase volume and the number of active accounts grew year-over-year by 51%, 31% and 10%, respectively. However, the incremental federal unemployment benefits from the CARES Act expired onJuly 31, 2020 and unless the government extends the duration of these additional unemployment benefits and does not significantly reduce these benefits, or offers comparable or better benefits, our customers' spending levels and usage of our products may be impacted, resulting in additional uncertainty on our revenue results for the remainder of the year. Impact on interest income, cost structure and liquidity Interest Income TheFederal Reserve recently announced reductions in short-term interest rates that have lowered the yields on our cash and investment balances and therefore, we expect a reduction in the amount of interest income we earn for the remainder of the year. Cost Structure We have experienced and may continue to experience increased costs, including higher call center costs and disputed transaction losses, which were exacerbated by the disruption in staffing levels at our third-party call centers in the first half of 2020. While we have implemented cost-saving measures to offset increased costs and are otherwise working to mitigate the conditions driving our higher costs, the conditions caused by the pandemic could continue to adversely affect our business, results of operations, and financial condition in future periods. Liquidity We have taken steps to strengthen our liquidity position and ensure we have ample flexibility to pursue strategic priorities, including utilizing our revolving credit facility, instituting an enterprise-wide headcount freeze and delaying or reducing non-critical projects. InMarch 2020 , we drew down the full$100 million available to us under our revolving credit facility as a precautionary measure due to the uncertainty associated with the COVID-19 pandemic. We have since repaid the entire balance drawn as ofJune 30, 2020 and continue to have the full amount available to us should we need it to invest in strategic initiatives. Additionally, the CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 31, 2022 . This is expected to provide us with approximately$6 million of additional liquidity during the current year. The duration and magnitude of the effects of COVID-19 remains uncertain and dependent on various factors, including the continued severity and transmission rate of the virus, the nature of and duration for which the preventative measures remain in place, the extent and effectiveness of containment and mitigation actions, the type of stimulus measures and other policy responses that theU.S. government may further adopt, and the impact of these and other factors on our employees, customers, retail distributors, partners and vendors. See Part II, Item 1A, Risk Factors, for an additional discussion of risk related to the COVID-19 pandemic. 27 -------------------------------------------------------------------------------- Table of Contents Total operating revenues Our total operating revenues for the three and six months endedJune 30, 2020 increased$37.9 million , or 14%, and$59.6 million , or 10%, respectively, over the prior year comparable periods, generating revenue growth from both our Account Services and Processing and Settlement Services segments. Account Services Within our Account Services segment, total operating revenues increased year-over-year for the three and six months endedJune 30, 2020 by 18% and 10%, respectively, primarily attributable to growth in BaaS program management service fee revenues earned from platform partners and growth in the number of direct deposit active accounts as new and existing customers utilized our platform to receive stimulus funds and unemployment benefits and in turn, drove gross dollar volume and purchase volume growth of 51% and 31%, respectively. Our account holders enrolled in direct deposit tend to generate higher levels of gross dollar volume and purchase volume than other active accounts, and consequently have a greater impact on the amount of interchange revenue we earn. We also experienced a year-over-year decline in net interest income during the three and six months endedJune 30, 2020 due to lower yields on our cash and investment balances as a result of rate decreases by theFederal Reserve . While we believe gross dollar volume is a strong indicator of our revenue for all our account programs and believe our long term strategy and unique collection of assets provide a competitive advantage to address the competitive pressures we face from new entrants, current economic conditions caused by the COVID-19 pandemic have created mixed trends in our business that make it difficult to forecast future results. We continue to monitor our direct deposit active base to better understand sources of our gross dollar volume. We have seen an increased proportion of ACH deposits coming from government benefits as account holders file for unemployment benefits. While state and federal unemployment benefits afforded under the CARES Act has helped offset erosion in payroll deposits, as we noted above, such benefits have since expired and it is unclear whether or how long such benefits will be extended or whether such benefits will be maintained, significantly reduced or replaced. Processing and Settlement Services Within our Processing and Settlement Services segment, total operating revenues decreased slightly year-over-year by 3% for the three months endedJune 30, 2020 due to a shift in the number of tax refunds processed from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of tax filing deadlines and a year-over-year decline in Simply Paid disbursement transactions, partially offset by growth in the number of cash transfers. The deferral of the deadline to submit tax returns toJuly 2020 in response to the COVID-19 pandemic has shifted volumes from the first half to the second half of the year, but we do not expect it to have a material impact on the number of tax refunds processed for the full year 2020. Total operating revenues increased 7% for the six months endedJune 30, 2020 , as a result of year-over-year growth in the number of cash transfers, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services compared with the prior year periods. Total operating expenses Our total operating expenses for the three and six months endedJune 30, 2020 increased$76.5 million , or 33%, and$120.7 million , or 24%, respectively, over the prior year comparable periods. This increase was primarily the result of several factors, including higher processing expenses associated with the growth of BaaS account programs, higher sales and marketing expenses attributable to the year-over-year increases in operating revenues generated from products and services that are subject to revenue-sharing arrangements with our distributors and partners, our continued marketing investment in our Green Dot Unlimited Cash Back Bank Account ("Green Dot Unlimited ") and higher compensation and benefits expenses, principally due to accrued bonus compensation for non-executive employees and employee stock-based compensation expenses associated with performance-based equity awards. We also experienced an increase in other general and administrative expenses, primarily due to a year-over-year growth in dispute transaction losses and higher depreciation and amortization of property, plant and equipment as a result of growth in capital expenditures in recent years. While we continue to build operational efficiencies and implement best practices within our customer service operations, in the short-term, we continue to incur significantly higher dispute transaction losses year-over-year, primarily due to higher volumes of customer complaints and reserves for credits to be issued for previously denied disputes. While we do not anticipate these conditions to persist over a long duration, dispute transaction losses have negatively impacted other general and administrative expenses for the three and six months endedJune 30, 2020 and are expected to impact the same during the three months endingSeptember 30, 2020 . 28 -------------------------------------------------------------------------------- Table of Contents Additionally, under our new Walmart MoneyCard agreement, beginningJanuary 1, 2020 , the sales commission rate we pay to Walmart for the MoneyCard program increased from the prior agreement. Consequently, we expect our sales and marketing expenses throughout 2020 to be negatively impacted by the increased commission rate. Income taxes Our income tax expense for the three and six months endedJune 30, 2020 decreased$5.3 million and$9.2 million , respectively, or 58% and 37%, respectively, from the prior year comparable periods. The decrease was primarily due to a decline in operating income generated, offset by a higher effective tax rate year-over-year. Key Metrics We review a number of metrics to help us monitor the performance of, and identify trends affecting, our business. We believe the following measures are the primary indicators of our quarterly and annual revenues: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change % 2020 2019 Change % (In millions, except percentages) Gross Dollar Volume$ 15,107 $ 10,019 $ 5,088 50.8 %$ 29,401 $ 22,996 $ 6,405 27.9 % GDV from Direct Deposit Sources$ 10,568 $ 7,208 $ 3,360 46.6 %$ 21,222 $ 17,425 $ 3,797 21.8 % Number of Active Accounts* 6.25 5.66 0.59 10.4 % n/a n/a n/a n/a Direct Deposit Active Accounts* 3.12 2.31 0.81 35.1 % n/a n/a n/a n/a Purchase Volume$ 8,477 $ 6,470 $ 2,007 31.0 %$ 16,759 $ 14,670 $ 2,089 14.2 % Cash Transfers 12.48 11.25 1.23 10.9 % 24.61 22.23 2.38 10.7 % Tax Refunds Processed 1.90 2.52 (0.62) (24.6) % 11.6 11.91 (0.31) (2.6) % * Represents number of active and direct deposit active accounts as ofJune 30, 2020 and 2019, respectively. Gross Dollar Volume - represents the total dollar volume of funds loaded to our account products from direct deposit and non-direct deposit sources. A substantial portion of our gross dollar volume is generated from direct deposit sources. We use these metrics to analyze the total amount of money moving onto our account programs, 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 Account Services segment products, inclusive of interest income generated on deposits held atGreen Dot Bank , fees charged to account holders and interchange revenues generated through the spending of account balances. The increases in total dollar volume of 51% and 28% during the three and six months endedJune 30, 2020 , respectively, and the increases in gross dollar volume from direct deposit sources of 47% and 22% during the three and six months endedJune 30, 2020 , respectively, from the comparable prior year periods were principally driven by an increase in the number of direct deposit active accounts and stimulus funds and unemployment benefits received under the CARES Act. Number of Active Accounts - represents any bank account within our Account Services segment that is subject to United States Patriot Act compliance and, therefore, requires customer identity verification prior to use and is intended to accept ongoing customer cash or ACH deposits. This metric includes general purpose reloadable prepaid card accounts, demand deposit or checking accounts, and credit card accounts in our portfolio that had a 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. Within our active accounts, we monitor the mix of direct deposit accounts and non-direct deposit accounts. Our direct deposit active accounts, on average, have the longest tenure and generate the majority of our gross dollar volume in any period and thus, generate more revenue over their lifetime than other active accounts. We experienced an increase in direct deposit active accounts of 35% as ofJune 30, 2020 on a year-over-year basis, primarily driven by new and existing customers utilizing our platform to receive stimulus funds and unemployment benefits provided for under the CARES Act. Purchase Volume - represents the total dollar volume of purchase transactions made by our account holders. This metric excludes the dollar volume of ATM withdrawals and in 2020, excludes volume generated by certain BaaS programs where the BaaS partner earns interchange and we earn a platform fee. We use this metric to analyze interchange revenue, which is a key component of our financial performance. Purchase volume increased approximately 31% and 14% during the three and six months endedJune 30, 2020 , respectively, from the comparable prior year periods, in line with the increase in Gross Dollar Volume as described above. 29 -------------------------------------------------------------------------------- Table of Contents 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. Our cash transfers increased 11% during the three and six months endedJune 30, 2020 , respectively, over the prior year comparable periods primarily due to an increase in transactions and the number of third-party account programs that utilize the Green Dot Network to accept funds through our cash processing network. Number of Tax Refunds Processed - represents the total number of tax refunds processed in a specified period. Due to seasonality, the number of tax refunds processed is most concentrated during the first half of each year and is minimal during the second half of each year. We review this metric as a measure of the size and scale of our tax refund processing platform and as an indicator of customer engagement and usage of its products and services. The overall decrease in the number of tax refunds processed of 3% during the six months endedJune 30, 2020 compared to the prior year period is primarily attributable to a shift in volume from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of the tax filing deadline toJuly 2020 . 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 GPR 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 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. 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 GPR 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. Processing and Settlement Service Revenues - Processing and settlement service revenues consist of cash transfer revenues, tax refund processing service revenues and Simply Paid disbursement revenues. 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 30 -------------------------------------------------------------------------------- Table of Contents 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 atGreen Dot Bank . Interest-earning assets include customer deposits, loans, and investment securities. Our interest-bearing liabilities held atGreen 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. 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 platform partners, advertising and marketing expenses, and the costs of manufacturing and distributing card packages, placards and promotional materials to our retail distributors and personalized GPR and GoBank cards to consumers who have activated their cards. We generally establish commission percentages in long-term distribution agreements with our retail distributors and platform 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 platform 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 GPR and GoBank 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 service fees, telephone and communication costs, depreciation and amortization of our property and equipment and intangible assets, changes in contingent consideration, 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, 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. OnMarch 27, 2020 , the CARES Act was signed into law, which among 31 -------------------------------------------------------------------------------- Table of Contents other things, includes certain income tax provisions for individuals and corporations; however, these benefits do not impact our current tax provision. Critical Accounting Policies and Estimates Reference is made to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Except as disclosed in Note 2 - Summary of Significant Accounting Policies under Recently Adopted Accounting Pronouncements to the Consolidated Financial Statements included herein, there have been no changes to our critical accounting policies and estimates during the six months endedJune 30, 2020 . Recent Accounting Pronouncements Reference is made to the recent accounting pronouncements disclosed in Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included herein. Comparison of Three-Month Periods EndedJune 30, 2020 and 2019 Operating Revenues The following table presents a breakdown of our operating revenues among card revenues and other fees, processing and settlement service revenues, interchange revenues and net interest income: Three Months Ended June 30, 2020 2019 % of Total % of Total Amount Operating Revenues Amount Operating Revenues (In thousands, except percentages) Operating revenues: Card revenues and other fees$ 152,681 48.3 %$ 121,613 43.7 % Processing and settlement service revenues 65,450 20.7 67,073 24.1 Interchange revenues 95,970 30.3 81,334 29.2 Interest income, net 2,139 0.7 8,306 3.0 Total operating revenues$ 316,240 100.0 %$ 278,326 100.0 % Card Revenues and Other Fees - Card revenues and other fees totaled$152.7 million for the three months endedJune 30, 2020 , an increase of$31.1 million , or 25.6%, from the comparable prior year period. Our card revenues and other fees increased principally as a result of BaaS program management service fee revenues earned from platform partners. This increase was offset partially by an increase in estimated cash back rewards that we record as a reduction to card revenues and other fees. Our estimate of cash rewards varies based on multiple factors including the terms and conditions of the cash back program, customer activity and customer redemption rates. Cash rewards have increased steadily year-over-year as our cash-back programs have grown, principally from those launched in 2016 and to a lesser extent, new cash-back programs launched in 2019. Processing and Settlement Service Revenues - Processing and settlement service revenues totaled$65.5 million for the three months endedJune 30, 2020 , a decrease of$1.6 million , or 2%, from the comparable prior year period. The decrease is attributable in part to a shift in the timing of tax refunds processed from the second quarter of 2020 to the third quarter of 2020 as a result of the extension of the tax filing deadline toJuly 2020 , partially offset by growth in the number of cash transfers. Interchange Revenues - Interchange revenues totaled$96.0 million for the three months endedJune 30, 2020 , an increase of$14.7 million , or 18%, from the comparable prior year period. The increase was primarily due to an increase in the amount of purchase volume during the three months endedJune 30, 2020 compared to the prior year period, which we attribute primarily to stimulus funds and unemployment benefits made available under the CARES Act, partially offset by a decline in the interchange rate earned as a result of an increase in the average dollar amount purchased per transaction. Interest Income, net - Net interest income totaled$2.1 million for the three months endedJune 30, 2020 , a decrease of$6.2 million , or 75%, from the comparable prior year period. The decrease was principally the result of lower yields on our investment securities portfolio and customer funds on deposit as a result of rate decreases by theFederal Reserve during the first quarter of 2020. 32 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table presents a breakdown of our operating expenses among sales and marketing, compensation and benefits, processing, and other general and administrative expenses:
Three Months Ended
2020 2019 % of Total % of Total Amount Operating Revenues Amount Operating Revenues (In thousands, except percentages) Operating expenses: Sales and marketing expenses$ 106,811 33.8 %$ 87,432 31.4 % Compensation and benefits expenses 58,867 18.6 48,298 17.4 Processing expenses 71,371 22.6 49,222 17.7 Other general and administrative expenses 73,801 23.3 49,411 17.7 Total operating expenses$ 310,850 98.3 %$ 234,363 84.2 % Sales and Marketing Expenses - Sales and marketing expenses totaled$106.8 million for the three months endedJune 30, 2020 , an increase of$19.4 million , or 22% from the comparable prior year period. This increase was primarily driven by an increase in sales commissions associated with higher revenues generated from products that are subject to revenue-sharing agreements and an increase in advertising expenses in continued support of ourGreen Dot Unlimited product launched in the second half of 2019. Under our new agreement with Walmart, beginning onJanuary 1, 2020 , the sales commission rate we pay for the MoneyCard program increased from the prior agreement. As such, we expect our sales and marketing expenses in 2020 to be negatively impacted by the increased commission rate. Compensation and Benefits Expenses - Compensation and benefits expenses totaled$58.9 million for the three months endedJune 30, 2020 , an increase of$10.6 million or 22% from the comparable prior year period. The increase was due to higher salaries and wages of$8.6 million , a portion of which was attributable to accrued bonus compensation for non-executive employees and an increase in stock-based compensation expense of approximately$5.2 million due to certain performance-based awards. These increases were partially offset by lower third-party contractor and employee benefit expenses. Processing Expenses - Processing expenses totaled$71.4 million for the three months endedJune 30, 2020 , an increase of$22.2 million or 45% from the comparable prior year period. This increase was principally due to growth in BaaS account programs within our Account Services segment and overall volume of transactions processed through our platform. Other General and Administrative Expenses - Other general and administrative expenses totaled$73.8 million for the three months endedJune 30, 2020 , an increase of$24.4 million or 49%, from the comparable prior year period. This increase was primarily due to a year-over-year growth in dispute transaction losses, as discussed above, and higher depreciation and amortization of property, plant and equipment as a result of growth in capital expenditures in recent years. Income Tax Expense The following table presents a breakdown of our effective tax rate among federal, state and other: Three Months Ended
2020
2019
U.S. federal statutory tax rate 21.0 % 21.0 % State income taxes, net of federal tax benefit 3.0
1.8
General business credits (6.6)
(1.6)
Employee stock-based compensation (0.5) (3.3) IRC 162(m) limitation 40.2 2.5 Nondeductible expenses 1.1 0.2 Capital loss valuation allowance release (4.4) - Other (0.2) 0.2 Effective tax rate 53.6 % 20.8 % 33
-------------------------------------------------------------------------------- Table of Contents Our income tax expense decreased by$5.3 million to$3.8 million for the three months endedJune 30, 2020 from the comparable prior year period primarily due to a decline in our operating income. The increase in the effective tax rate for the three months endedJune 30, 2020 , as compared to the same period in 2019, was primarily due to a decline in excess tax benefits from stock-based compensation and an increase in the IRC 162(m) limitation on the deductibility of certain executive compensation. The IRC 162(m) limitation increased principally due to performance-based stock awards granted in connection with the recent hiring of certain executive officers. These increases were partially offset by the impact of general business credits and the release of the valuation allowance reserve on capital losses. The "Other" category in our effective tax rate consists of a variety of permanent differences, none of which were individually significant. Comparison of Six-Month Periods EndedJune 30, 2020 and 2019 Operating Revenues The following table presents a breakdown of our operating revenues among card revenues and other fees, processing and settlement service revenues, interchange revenues and net interest income: Six Months Ended June 30, 2020 2019 % of Total % of Total Amount Operating Revenues Amount Operating Revenues (In thousands, except percentages) Operating revenues: Card revenues and other fees$ 294,075 43.3 %$ 251,190 40.6 % Processing and settlement service revenues 188,516 27.8 174,652 28.2 Interchange revenues 186,836 27.6 173,875 28.1 Interest income, net 8,982 1.3 19,123 3.1 Total operating revenues$ 678,409 100.0 %$ 618,840 100.0 % Card Revenues and Other Fees - Card revenues and other fees totaled$294.1 million for the six months endedJune 30, 2020 , an increase of$42.9 million , or 17%, from the comparable prior year period. This increase was driven by the same factors discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Revenues-Card Revenues and Other Fees." Processing and Settlement Service Revenues - Processing and settlement service revenues totaled$188.5 million for the six months endedJune 30, 2020 , an increase of$13.8 million , or 8%, from the comparable prior year period. This increase was driven primarily by year-over-year growth in transaction volume associated with cash transfers, expanded adoption of our taxpayer advance programs and the introduction of new tax processing services for the six months endedJune 30, 2020 compared to the prior year period. Interchange Revenues - Interchange revenues totaled$186.8 million for the six months endedJune 30, 2020 , an increase of$12.9 million , or 7%, from the comparable prior year period. This increase was driven by the same factors discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Revenues-Interchange Revenues." Interest Income, net - Net interest income totaled$9.0 million for the six months endedJune 30, 2020 , a decrease of$10.1 million , or 53%, from the comparable prior year period. This decrease was driven by the same factors discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Revenues-Interest Income, net." 34 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table presents a breakdown of our operating expenses among sales and marketing, compensation and benefits, processing, and other general and administrative expenses: Six Months Ended June 30, 2020 2019 % of Total % of Total Amount Operating Revenues Amount Operating Revenues (In thousands, except percentages) Operating expenses: Sales and marketing expenses$ 223,549 33.0 %$ 186,133 30.1 % Compensation and benefits expenses 111,932 16.5 109,773 17.7 Processing expenses 142,466 21.0 100,854 16.3 Other general and administrative expenses 136,223 20.0 96,732 15.6 Total operating expenses$ 614,170 90.5 %$ 493,492 79.7 % Sales and Marketing Expenses - Sales and marketing expenses totaled$223.5 million for the six months endedJune 30, 2020 , an increase of$37.4 million , or 20% from the comparable prior year period. This increase was driven by the same factors as discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Expenses-Sales and Marketing Expenses." Compensation and Benefits Expenses - Compensation and benefits expenses totaled$111.9 million for the six months endedJune 30, 2020 , an increase of$2.1 million or 2% from the comparable prior year period. This increase was driven by the same factors as discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Expenses-Compensation and Benefits Expenses." Processing Expenses - Processing expenses totaled$142.5 million for the six months endedJune 30, 2020 , an increase of$41.6 million or 41% from the comparable prior year period. This increase was driven by the same factors as discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Expenses-Processing Expenses." Other General and Administrative Expenses - Other general and administrative expenses totaled$136.2 million for the six months endedJune 30, 2020 , an increase of$39.5 million or 41%, from the comparable prior year period. This increase was driven by the same factors as discussed above under "Comparison of Three-Month Periods EndedJune 30, 2020 and 2019-Operating Expenses-Other General and Administrative Expenses." Income Tax Expense The following table presents a breakdown of our effective tax rate among federal, state and other: Six Months Ended
2020
2019
U.S. federal statutory tax rate 21.0 % 21.0 % State income taxes, net of federal tax benefit (0.6)
1.7
General business credits (6.6)
(1.5)
Employee stock-based compensation 1.8 (3.7) IRC 162(m) limitation 8.1 2.4 Nondeductible expenses 0.7 0.1 Other (0.5) 0.2 Effective tax rate 23.9 % 20.2 % Our income tax expense decreased by$9.2 million to$15.8 million for the six months endedJune 30, 2020 from the comparable prior year period primarily due to a decline in our operating income. The increase in the effective tax rate was primarily due to a year-over-year increase of$2.4 million as a result of the IRC 162(m) limitations on the deductibility of certain executive compensation and a year-over-year decline of$5.8 million in excess tax benefits from stock-based compensation, partially offset by the impact of general business credits. The "Other" category in our effective tax rate consists of a variety of permanent differences, none of which were individually significant. 35 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The following table summarizes our major sources and uses of cash for the periods presented:
Six Months Ended
2020 2019 (In thousands) Total cash provided by (used in) Operating activities$ 161,516 $ 167,068 Investing activities (24,732) (78,803) Financing activities 734,473 (82,868)
Increase in unrestricted cash, cash equivalents and restricted cash
$ 871,257 $ 5,397 For the six months endedJune 30, 2020 and 2019, we financed our operations primarily through our cash flows generated from operations and customer funds held on deposit. As ofJune 30, 2020 , our primary source of liquidity was unrestricted cash and cash equivalents totaling$1.9 billion . We also consider our$241.5 million of available-for-sale investment securities to be highly-liquid instruments. 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 our current unrestricted cash and cash equivalents, cash flows from operations and financing from our revolving credit facility will be sufficient to meet our working capital, capital expenditure and other commitments for at least the next 12 months, as discussed below. We continue to monitor the impact of COVID-19 on our business to ensure our liquidity and capital resources remain appropriate throughout this period of uncertainty. Cash Flows from Operating Activities Our$161.5 million of net cash provided by operating activities during the six months endedJune 30, 2020 was the result of$50.1 million of net income, adjusted for certain non-cash operating items of$71.0 million and increases in net changes in our working capital assets and liabilities of$40.3 million . Our$167.1 million of net cash provided by operating activities during the six months endedJune 30, 2019 was primarily the result of$98.7 million of net income, adjusted for certain non-cash operating items of$67.6 million and increases in net changes in our working capital assets and liabilities of$0.7 million . Cash Flows from Investing Activities Our$24.7 million of net cash used in investing activities during the six months endedJune 30, 2020 was primarily due to the acquisition of property and equipment of$31.4 million , and capital contributions related to our investment inTailFin Labs, LLC of$35.0 million , partially offset by proceeds from the sale and maturities of available-for-sale investment securities, net of purchases, of$40.9 million . Our$78.8 million of net cash used in investing activities during the six months endedJune 30, 2019 was due to the purchase of available-for-sale investment securities, net of proceeds from sales and maturities, of$39.8 million and the acquisition of property and equipment of$37.7 million . Cash Flows from Financing Activities Our$734.5 million of net cash provided from financing activities during the six months endedJune 30, 2020 was principally the result of a net increase in customer deposits of$826.2 million , offset by a net decrease of$56.6 million in obligations to customers and net repayments on our revolving credit facility of$35.0 million . Our$82.9 million of net cash used in financing activities during the six months endedJune 30, 2019 was primarily the result of$100 million used for stock repurchases under our stock repurchase program, a$60.0 million voluntary prepayment of our note payable, a net decrease of$48.3 million in obligations to customers and$16.9 million in tax payments made to net settle equity awards, offset by a net increase in customer deposits of$140.1 million . Commitments While the effect of COVID-19 has created economic uncertainty and impacted how we manage our liquidity and capital resources, we anticipate we will continue to purchase property and equipment we consider necessary to support our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including when we begin hiring new employees, the rate of change of computer hardware and software used in our business and our business outlook as a result of the COVID-19 pandemic. We intend to continue to invest in new products and programs we believe are critical, new features for our existing products and IT infrastructure to scale and operate effectively to meet our strategic 36 -------------------------------------------------------------------------------- Table of Contents objectives. However, we do not expect these capital expenditures will exceed the amount of our capital expenditures in the previous year. 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 makes it difficult to predict the amount and timing of such cash requirements. We may also be required to raise additional financing to complete future acquisitions. See Note 17-Commitments and Contingencies of the Notes to our Consolidated Financial Statements for additional financial commitments. We may also make periodic cash contributions to our subsidiary bank,Green Dot Bank , to maintain its capital, leverage and other financial commitments at levels we have agreed to with our regulators. 2019 Revolving Facility InOctober 2019 , we entered into a revolving credit agreement withWells Fargo Bank, National Association , and other lenders party thereto. The credit agreement provides for a$100 million five-year revolving facility and matures inOctober 2024 . At our election, loans made under the credit agreement bear interest at 1) a LIBOR rate (the "LIBOR Rate") or 2) a base rate determined by reference to the highest of (a)the United States federal funds rate plus 0.50%, (b) the Wells Fargo prime rate, and (c) one-month LIBOR rate plus 1.0% (the "Base Rate"), plus in either case an applicable margin. The applicable margin for borrowings depends on our total leverage ratio and varies from 1.25% to 2.00% for LIBOR Rate loans and 0.25% to 1.00% for Base Rate loans. During the first quarter of 2020, we drew the maximum amount available of$100 million as a precautionary measure due to the uncertainty associated with the COVID-19 pandemic, but have since repaid the entire balance resulting in there being no borrowings outstanding as ofJune 30, 2020 . We are also subject to certain financial covenants, which include maintaining a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio at the end of each fiscal quarter, as defined in the agreement. AtJune 30, 2020 , we were in compliance with all such covenants. Stock Repurchase Program In previous years, we have repurchased shares of our Class A Common Stock under an authorized stock repurchase program. InMay 2017 , our Board of Directors authorized, subject to regulatory approval, expansion of our stock repurchase program by an additional$150 million . We sought and received regulatory approval during the second quarter of 2019, at which point we made an up-front payment of$100 million to enter into an accelerated share repurchase agreement. InAugust 2019 , we completed final settlement of shares purchased under this agreement, receiving in total approximately 2.1 million shares at an average repurchase price of$48.26 . We have an authorized$50 million remaining under our current stock repurchase program for any additional repurchases. Contractual Obligations There have been no material changes in our contractual obligations 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 endedDecember 31, 2019 . Off-Balance Sheet Arrangements OnJanuary 2, 2020 , we effectuated our agreement with Walmart to jointly establish a new fintech accelerator under the nameTailFin Labs, LLC , with a mission to develop innovative products, services and technologies that sit at the intersection of retail shopping and consumer financial services. See Note 7-Equity Method Investments of the Notes to our Consolidated Financial Statements for additional information. As of and for the six months endedJune 30, 2019 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Capital Requirements for Bank Holding Companies Our subsidiary bank,Green Dot Bank , is a member bank of theFederal Reserve System and our primary regulators are theFederal Reserve Board and theUtah Department of Financial Institutions . We 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 must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under 37 -------------------------------------------------------------------------------- Table of Contents 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 theFederal Reserve and otherU.S. banking regulators, provide for risk-based capital, leverage and liquidity standards. TheU.S. 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 ofJune 30, 2020 andDecember 31, 2019 , we were categorized as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," we must maintain specific total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events sinceJune 30, 2020 which management believes would have changed our category as "well capitalized." As a result of the economic disruption caused by the COVID-19 pandemic, inMarch 2020 the joint federal bank regulatory agencies issued an interim final rule (the "Interim Rule") that allows banking organizations that were required to implement the Current Expected Credit Loss ("CECL") accounting standard in 2020 optional relief that delays an estimate of the impact of CECL on its regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. We did not adopt the option provided by the Interim Rule because the impact of adopting CECL was not material to our financial statements and regulatory capital. 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 Common equity Tier 1 capital divided by risk-weighted assets ratio 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 Primarily includes common stock, retained earnings and Common equity Tier 1 capital accumulated OCI, net of deductions and adjustments primarily related to goodwill, deferred tax assets and intangibles. Under the regulatory capital rules, certain deductions and adjustments to these capital
figures are phased in through
January 1, 2018 . Total capital Tier 1 capital plus supplemental capital items such as the allowance for loan 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 38
-------------------------------------------------------------------------------- Table of Contents The actual amounts and ratios, and required "well capitalized" minimum capital amounts and ratios atJune 30, 2020 andDecember 31, 2019 were as follows: June 30, 2020 Amount Ratio Regulatory Minimum "Well-capitalized" Minimum (In thousands, except ratios)Green Dot Corporation : Tier 1 leverage$ 494,218 16.0 % 4.0 % n/a Common equity Tier 1 capital$ 494,218 81.9 % 4.5 % n/a Tier 1 capital$ 494,218 81.9 % 6.0 % 6.0 % Total risk-based capital$ 500,168 82.9 % 8.0 % 10.0 % Green Dot Bank: Tier 1 leverage$ 234,384 9.0 % 4.0 % 5.0 % Common equity Tier 1 capital$ 234,384 87.3 % 4.5 % 6.5 % Tier 1 capital$ 234,384 87.3 % 6.0 % 8.0 % Total risk-based capital$ 235,092 87.6 % 8.0 % 10.0 % December 31, 2019 Amount Ratio Regulatory Minimum "Well-capitalized" Minimum (In thousands, except ratios)Green Dot Corporation : Tier 1 leverage$ 400,445 22.2 % 4.0 % n/a Common equity Tier 1 capital$ 400,445 70.5 % 4.5 % n/a Tier 1 capital$ 400,445 70.5 % 6.0 % 6.0 % Total risk-based capital$ 404,469 71.2 % 8.0 % 10.0 % Green Dot Bank: Tier 1 leverage$ 204,141 13.9 % 4.0 % 5.0 % Common equity Tier 1 capital$ 204,141 82.8 % 4.5 % 6.5 % Tier 1 capital$ 204,141 82.8 % 6.0 % 8.0 % Total risk-based capital$ 205,548 83.4 % 8.0 % 10.0 % 39
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