Edgar Filing: GREEN DOT CORP

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

2014-06-30 Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________________

FORM 10-Q



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34819

GREEN DOT CORPORATION

(Exact name of Registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)		95-4766827 (IRS Employer Identification No.)



3465 E. Foothill Blvd. Pasadena, California 91107 (Address of principal executive offices, including zip code)		(626) 765-2000 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 40,119,261 shares of Class A common stock, par value $.001 per share (which number does not include 5,368,986 shares of Class A common stock issuable upon conversion of Series A Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock) as of July 31, 2014.

GREEN DOT CORPORATION

TABLE OF CONTENTS



		Page

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets – June 30, 2014 (Unaudited) and December 31, 2013	1
	Consolidated Statements of Operations – Three and Six Months Ended June 30, 2014 (Unaudited) and 2013 (Unaudited)	2
	Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2014 (Unaudited) and 2013 (Unaudited)	3
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 (Unaudited) and 2013 (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	40
	Signature	41

Table of Contents

PART I

ITEM 1. Financial Statements

GREEN DOT CORPORATION

CONSOLIDATED BALANCE SHEETS



	June 30, 2014		December 31, 2013
	(unaudited)
Assets	(In thousands, except par value)
Current assets:
Unrestricted cash and cash equivalents	$	679,519	$	423,498
Federal funds sold	492		123
Restricted cash	3,841		—
Investment securities available-for-sale, at fair value	92,158		116,159
Settlement assets	63,863		37,004
Accounts receivable, net	33,488		46,384
Prepaid expenses and other assets	24,366		27,332
Income tax receivable	1,617		15,573
Total current assets	899,344		666,073
Restricted cash	2,287		2,970
Investment securities, available-for-sale, at fair value	78,237		82,585
Accounts receivable, net	74		5,913
Loans to bank customers, net of allowance for loan losses of $414 and $464 as of June 30, 2014 and December 31, 2013, respectively	6,680		6,902
Prepaid expenses and other assets	2,434		1,081
Property and equipment, net	61,339		60,473
Deferred expenses	9,067		15,439
Net deferred tax assets	3,304		3,362
Goodwill and intangible assets	51,055		30,676
Total assets	$	1,113,821	$	875,474
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	19,902	$	34,940
Deposits	459,594		219,580
Obligations to customers	79,391		65,449
Settlement obligations	4,063		4,839
Amounts due to card issuing banks for overdrawn accounts	539		49,930
Other accrued liabilities	48,334		35,878
Deferred revenue	14,173		24,517
Net deferred tax liabilities	3,716		3,716
Total current liabilities	629,712		438,849
Other accrued liabilities	31,865		34,076
Deferred revenue	250		300
Total liabilities	661,827		473,225
Stockholders’ equity:
Convertible Series A preferred stock, $0.001 par value (as converted): 10 shares authorized as of June 30, 2014 and December 31, 2013; 5 and 7 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively	5		7
Class A common stock, $0.001 par value: 100,000 shares authorized as of June 30, 2014 and December 31, 2013; 40,053 and 37,729 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively	40		38
Additional paid-in capital	219,258		199,251
Retained earnings	232,648		203,000
Accumulated other comprehensive income (loss)	43		(47		)
Total stockholders’ equity	451,994		402,249
Total liabilities and stockholders’ equity	$	1,113,821	$	875,474

See notes to unaudited consolidated financial statements

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GREEN DOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands, except per share data)
Operating revenues:
Card revenues and other fees	$	60,892		$	55,029		$	129,059		$	119,697
Cash transfer revenues	45,491			45,633			91,767			89,968
Interchange revenues	42,655			41,913			89,869			88,669
Stock-based retailer incentive compensation	(2,022		)	(1,967		)	(4,410		)	(3,576		)
Total operating revenues	147,016			140,608			306,285			294,758
Operating expenses:
Sales and marketing expenses	57,200			51,680			117,443			107,857
Compensation and benefits expenses	30,215			31,200			57,178			62,954
Processing expenses	17,285			19,948			39,364			41,947
Other general and administrative expenses	20,584			20,425			46,908			41,305
Total operating expenses	125,284			123,253			260,893			254,063
Operating income	21,732			17,355			45,392			40,695
Interest income	1,039			855			2,016			1,674
Interest expense	(29		)	(16		)	(45		)	(33		)
Income before income taxes	22,742			18,194			47,363			42,336
Income tax expense	8,399			6,890			17,715			15,445
Net income	14,343			11,304			29,648			26,891
Income attributable to preferred stock	(1,703		)	(1,798		)	(3,966		)	(4,289		)
Net income allocated to common stockholders	$	12,640		$	9,506		$	25,682		$	22,602

Basic earnings per common share:	$	0.32		$	0.26		$	0.66		$	0.63
Diluted earnings per common share:	$	0.31		$	0.25		$	0.64		$	0.61
Basic weighted-average common shares issued and outstanding:	39,394			35,380			38,433			35,214
Diluted weighted-average common shares issued and outstanding:	40,052			36,686			39,466			36,458

See notes to unaudited consolidated financial statements

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GREEN DOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
	(In thousands)
Net income	$	14,343	$	11,304		$	29,648	$	26,891
Other comprehensive income
Unrealized holding gains (losses), net of tax	53		(137		)	90		(139		)
Comprehensive income	$	14,396	$	11,167		$	29,738	$	26,752

See notes to unaudited consolidated financial statements

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GREEN DOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Six Months Ended June 30,
	2014			2013
	(In thousands)
Operating activities
Net income	$	29,648		$	26,891
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,557			13,003
Provision for uncollectible overdrawn accounts	16,059			28,555
Employee stock-based compensation	8,686			6,509
Stock-based retailer incentive compensation	4,410			3,576
Amortization of premium on available-for-sale investment securities	538			277
Realized gains on investment securities	(29		)	(11		)
Recovery for uncollectible trade receivables	(20		)	1
Impairment of capitalized software	—			1,156
Deferred income tax expense	—			189
Excess tax benefits from exercise of options	(3,563		)	(847		)
Changes in operating assets and liabilities:
Accounts receivable, net	3,458			(29,331		)
Prepaid expenses and other assets	1,983			17,042
Deferred expenses	6,372			4,788
Accounts payable and other accrued liabilities	(16,328		)	2,203
Amounts due to card issuing banks for overdrawn accounts	(49,391		)	1,415
Deferred revenue	(10,394		)	(2,733		)
Income tax receivable	17,523			14,437
Net cash provided by operating activities	24,509			87,120

Investing activities
Purchases of available-for-sale investment securities	(93,388		)	(110,112		)
Proceeds from maturities of available-for-sale securities	83,263			82,062
Proceeds from sales of available-for-sale securities	38,109			38,879
Increase in restricted cash	(601		)	(3		)
Payments for acquisition of property and equipment	(14,096		)	(17,013		)
Net principal collections on loans	222			326
Acquisition, net of cash acquired	(14,860		)	—
Net cash used in investing activities	(1,351		)	(5,861		)

Financing activities
Proceeds from exercise of options	3,348			2,420
Excess tax benefits from exercise of options	3,563			847
Net increase in deposits	240,014			2,908
Net (decrease) increase in obligations to customers	(13,693		)	23,004
Net cash provided by financing activities	233,232			29,179

Net increase in unrestricted cash, cash equivalents, and federal funds sold	256,390			110,438
Unrestricted cash, cash equivalents, and federal funds sold, beginning of year	423,621			296,591
Unrestricted cash, cash equivalents, and federal funds sold, end of period	$	680,011		$	407,029

Cash paid for interest	$	46		$	34
Cash paid for income taxes	$	219		$	818

See notes to unaudited consolidated financial statements

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization

Green Dot Corporation (“we,” “us” and “our” refer to Green Dot Corporation and its wholly-owned subsidiaries) is a bank holding company with a mission to reinvent personal banking for the masses. Our prepaid products and services are available in more than 90,000 retail stores nationwide and online at Greendot.com. Our products include: Green Dot MasterCard and Visa-branded prepaid debit cards and several co-branded reloadable prepaid card programs, collectively referred to as our GPR cards; Visa-branded gift cards; our MoneyPak and swipe reload proprietary products, collectively referred to as our cash transfer products, which enable cash loading and transfer services through our Green Dot Network; and GoBank, an innovative checking account developed for use via mobile phones. GoBank is available online at GoBank.com and via the Apple App Store and Google Play. The Green Dot Network enables consumers to use cash to reload our prepaid debit cards or to transfer cash to any of our Green Dot Network acceptance members, including competing prepaid card programs and other online accounts.

We market our products and services to banked, underbanked and unbanked consumers in the United States using distribution channels other than traditional bank branches, such as third-party retailer locations nationwide and the Internet. Our prepaid debit cards are issued by our wholly-owned subsidiary, Green Dot Bank and third-party issuing banks including The Bancorp Bank, Sunrise Banks, N.A., and prior to February 2014, GE Capital Retail Bank. We also have multi-year distribution arrangements with many large and medium-sized retailers, such as Walmart, Walgreens, CVS, Rite Aid, 7-Eleven, Kroger, Kmart, and Dollar Tree, and with various industry resellers, such as Blackhawk Network and Incomm. We refer to participating retailers collectively as our “retail distributors.”

We completed a business acquisition during the six months ended June 30, 2014 which was not material to our consolidated financial statements. The aggregate cash consideration paid, net of cash acquired, was $14.9 million. Of the total consideration transferred, we allocated $3.3 million to goodwill and $17.4 million to acquired intangible assets. The intangible assets acquired will be amortized over their estimated useful lives of approximately 10 years.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements in accordance with generally accepted accounting principles in the United States of America, or GAAP. We consolidated our wholly-owned subsidiaries and eliminated all significant intercompany balances and transactions.

We have also prepared the accompanying unaudited consolidated financial statements in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X and, consequently, they do not include all of the annual disclosures required by GAAP. Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2013 for additional disclosures, including a summary of our significant accounting policies. There have been no changes to our significant accounting policies during the six months ended June 30, 2014. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal and recurring items, except as otherwise noted, necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for the six months ended June 30, 2014 are not necessarily indicative of future results.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (ASU 2014-04), which intends to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. ASU 2014-04 is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2014. We will adopt this standard effective January 1, 2015. Our adoption of ASU 2014-14 is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 2—Summary of Significant Accounting Policies (continued)

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

Note 3 — Investment Securities

Our available-for-sale investment securities were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
June 30, 2014
Corporate bonds	$	48,166	$	60	$	—		$	48,226
Commercial paper	28,625		8		—			28,633
Negotiable certificate of deposit	4,400		1		—			4,401
U.S. Treasury notes	8,696		13		—			8,709
Agency securities	9,998		8		—			10,006
Mortgage-backed securities	32,061		39		(105		)	31,995
Municipal bonds	12,804		24		(1		)	12,827
Asset-backed securities	25,576		22		—			25,598
Total investment securities	$	170,326	$	175	$	(106	)	$	170,395

December 31, 2013
Corporate bonds	$	70,965	$	45	$	(13	)	$	70,997
Commercial paper	49,307		15		(1		)	49,321
Negotiable certificate of deposit	4,400		3		—			4,403
U.S. Treasury notes	14,265		14		(1		)	14,278
Agency securities	14,946		13		—			14,959
Mortgage-backed securities	4,169		—		(168		)	4,001
Municipal bonds	19,017		28		(14		)	19,031
Asset-backed securities	21,750		9		(5		)	21,754
Total investment securities	$	198,819	$	127	$	(202	)	$	198,744

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 3 — Investment Securities (continued)

As of June 30, 2014 and December 31, 2013, the gross unrealized losses and fair values of available-for-sale investment securities that were in unrealized loss positions were as follows:



	Less than 12 months					12 months or more					Total fair value		Total unrealized loss
	Fair value		Unrealized loss			Fair value		Unrealized loss			Total fair value		Total unrealized loss
	(In thousands)
June 30, 2014
Corporate bonds	$	—	$	—		$	—	$	—		$	—	$	—
Commercial paper	—		—			—		—			—		—
U.S. Treasury notes	—		—			—		—			—		—
Mortgage-backed securities	7,059		(41		)	1,550		(64		)	8,609		(105		)
Municipal bonds	4,483		(1		)	—		—			4,483		(1		)
Asset-backed securities	—		—			—		—			$	—	$	—
Total investment securities	$	11,542	$	(42	)	$	1,550	$	(64	)	$	13,092	$	(106	)

December 31, 2013
Corporate bonds	$	24,104	$	(13	)	$	—	$	—		$	24,104	$	(13	)
Commercial paper	4,490		(1		)	—		—			4,490		(1		)
U.S. Treasury notes	5,212		(1		)	—		—			5,212		(1		)
Mortgage-backed securities	4,002		(168		)	—		—			4,002		(168		)
Municipal bonds	8,546		(14		)	—		—			8,546		(14		)
Asset-backed securities	11,797		(5		)	—		—			11,797		(5		)
Total investment securities	$	58,151	$	(202	)	$	—	$	—		$	58,151	$	(202	)

We did not record any other-than-temporary impairment losses during the three and six months ended June 30, 2014 or 2013 on our available-for-sale investment securities. We do not intend to sell these investments and we have determined that it is more likely than not that we will not be required to sell these investments before recovery of their amortized cost bases, which may be at maturity.

As of June 30, 2014, the contractual maturities of our available-for-sale investment securities were as follows:



	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	92,096	$	92,158
Due after one year through five years	23,778		23,828
Due after five years through ten years	342		345
Due after ten years	—		—
Mortgage and asset-backed securities	54,110		54,064
Total investment securities	$	170,326	$	170,395

The expected payments on mortgage-backed and asset-backed securities may not coincide with their contractual maturities because the issuers have the right to call or prepay certain obligations.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 4—Accounts Receivable

Accounts receivable, net consisted of the following:



	June 30, 2014			December 31, 2013
	(In thousands)
Overdrawn account balances due from cardholders	$	12,064		$	14,749
Reserve for uncollectible overdrawn accounts	(8,555		)	(10,363		)
Net overdrawn account balances due from cardholders	3,509			4,386

Trade receivables	11,001			4,302
Reserve for uncollectible trade receivables	(22		)	(42		)
Net trade receivables	10,979			4,260

Receivables due from card issuing banks	18,044			42,137
Other receivables	1,030			1,514
Accounts receivable, net	$	33,562		$	52,297

Activity in the reserve for uncollectible overdrawn accounts consisted of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Balance, beginning of period	$	9,165		$	15,424		$	10,363		$	15,677
Provision for uncollectible overdrawn accounts:
Fees	6,663			12,489			14,403			27,156
Purchase transactions	906			596			1,656			1,399
Charge-offs	(8,179		)	(15,260		)	(17,867		)	(30,983		)
Balance, end of period	$	8,555		$	13,249		$	8,555		$	13,249

Note 5—Loans to Bank Customers

The following table presents total outstanding loans, gross of the related allowance for loan losses, and a summary of the related payment status:



	30-59 Days Past Due			60-89 Days Past Due			90 Days or More Past Due			Total Past Due			Total Current or Less Than 30 Days Past Due			Total Outstanding
	(In thousands)
June 30, 2014
Real estate	$	—		$	—		$	—		$	—		$	3,262		$	3,262
Commercial	—			—			—			—			1,049			1,049
Installment	5			—			—			5			2,778			2,783
Total loans	$	5		$	—		$	—		$	5		$	7,089		$	7,094

Percentage of outstanding	0.1		%	—		%	—		%	0.1		%	99.9		%	100.0		%

December 31, 2013
Real estate	$	—		$	—		$	11		$	11		$	3,372		$	3,383
Commercial	—			—			—			—			1,474			1,474
Installment	—			—			3			3			2,506			2,509
Total loans	$	—		$	—		$	14		$	14		$	7,352		$	7,366

Percentage of outstanding	—		%	—		%	0.2		%	0.2		%	99.8		%	100.0		%

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 5—Loans to Bank Customers (continued)

Nonperforming Loans

The following table presents the carrying value, gross of the related allowance for loan losses, of our nonperforming loans, other than purchased credit impaired, or PCI loans. See Note 2–Summary of Significant Accounting Policies to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2013 for further information on the criteria for classification as nonperforming.



	June 30, 2014		December 31, 2013
	(In thousands)
Real estate	$	15	$	117
Commercial	68		106
Installment	253		250
Total loans	$	336	$	473

Credit Quality Indicators

We closely monitor and assess the credit quality and credit risk of our loan portfolio on an ongoing basis. We continuously review and update loan risk classifications. We evaluate our loans using non-classified or classified as the primary credit quality indicator. Classified loans are those loans that have demonstrated credit weakness where we believe there is a heightened risk of principal loss, including all impaired loans. Classified loans are generally internally categorized as substandard, doubtful or loss, consistent with regulatory guidelines.

The table below presents the carrying value, gross of the related allowance for loan losses, of our loans within the primary credit quality indicators related to our loan portfolio:



	June 30, 2014				December 31, 2013
	Non-Classified		Classified		Non-Classified		Classified
	(In thousands)
Real estate	$	3,100	$	162	$	3,003	$	380
Commercial	982		67		1,323		151
Installment	2,263		520		2,058		451
Total loans	$	6,345	$	749	$	6,384	$	982

Impaired Loans and Troubled Debt Restructurings

When, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession for other than an insignificant period of time to a borrower that we would not otherwise consider, the related loan is classified as a Troubled Debt Restructuring, or TDR. Our TDR modifications involve an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The following table presents our impaired loans and loans that we modified in TDRs as of June 30, 2014 and December 31, 2013:



	June 30, 2014				December 31, 2013
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
	(In thousands)
Real estate	$	100	$	15	$	194	$	117
Commercial	317		68		344		106
Installment	388		253		500		250

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 5—Loans to Bank Customers (continued)

Allowance for Loan Losses

Activity in the allowance for loan losses consisted of the following:



	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(In thousands)
Balance, beginning of period	$	435		$	450	$	464		$	475
Provision for loans	—			—		—			10
Loans charged off	(27		)	—		(60		)	(35		)
Recoveries of loans previously charged off	6			10		10			10
Balance, end of period	$	414		$	460	$	414		$	460

Note 6—Employee Stock-Based Compensation

We currently grant stock options and restricted stock units to employees and directors under our 2010 Equity Incentive Plan. Additionally, through our 2010 Employee Stock Purchase Plan, employees are able to purchase shares of our Class A common stock at a discount through payroll deductions. We have reserved shares of our Class A common stock for issuance under these plans.

The following table summarizes stock options and restricted stock units granted under our 2010 Equity Incentive Plan:



	Six Months Ended June 30,
	2014		2013
	(In thousands, except per share data)
Stock options granted	106		1,588
Weighted-average exercise price	$	20.92	$	16.57
Weighted-average grant-date fair value	$	9.52	$	5.55

Restricted stock units granted	452		497
Weighted-average grant-date fair value	$	19.09	$	16.55

We estimated the fair value of each stock option grant on the date of grant using the following weighted-average assumptions:



	Six Months Ended June 30,
	2014		2013
Risk-free interest rate	1.8	%	0.9	%
Expected term (life) of options (in years)	5.79		5.49
Expected dividends	—		—
Expected volatility	47.3	%	43.7	%

The total stock-based compensation expense recognized was $4.7 million and $8.7 million for the three and six months ended June 30, 2014, respectively, and $3.6 million and $6.5 million for the three and six months ended June 30, 2013, respectively. Total stock-based compensation expense includes amounts related to awards of stock options and restricted stock units and purchases under our 2010 Employee Stock Purchase Plan.

Note 7—Deposits

In February 2014, we completed the transition of all outstanding customer deposits associated with our GPR card program with GE Capital Retail Bank to Green Dot Bank. The total funds transferred to Green Dot Bank were approximately $260 million and are now classified as deposits on our consolidated balance sheet and are included as "GPR deposits" within non-interest bearing deposit accounts below. In conjunction with this transition, we made a payment of approximately $50 million to GE Capital Retail Bank to settle our liability associated with overdrawn cardholder account balances, which, as of December 31, 2013, was included in our consolidated balance sheet as "amounts due to card issuing banks for overdrawn accounts."

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 7—Deposits (continued)

Deposits were categorized as non-interest or interest-bearing deposits as follows:



	June 30, 2014		December 31, 2013
	(In thousands)
Non-interest bearing deposit accounts
GPR deposits	$	427,624	$	204,171
Other demand deposits	15,949		—
Total non-interest bearing deposit accounts	443,573		204,171
Interest-bearing deposit accounts
Negotiable order of withdrawal (NOW)	1,324		1,401
Savings	6,984		6,410
Time deposits, denominations greater than or equal to $100	5,749		5,310
Time deposits, denominations less than $100	1,964		2,288
Total interest-bearing deposit accounts	16,021		15,409
Total deposits	$	459,594	$	219,580

The scheduled contractual maturities for total time deposits are presented in the table below:



	June 30, 2014
	(In thousands)
Due in 2014	$	1,826
Due in 2015	3,360
Due in 2016	1,177
Due in 2017	748
Due in 2018	47
Thereafter	555
Total time deposits	$	7,713

Note 8—Income Taxes

Income tax expense for the six months ended June 30, 2014 and 2013 differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows:



	Six Months Ended June 30,
	2014		2013
U.S. federal statutory tax rate	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.8		1.9
General business credits	(1.1	)	(2.6	)
Employee stock-based compensation	1.1		2.0
Other	0.6		0.2
Effective tax rate	37.4	%	36.5	%

The effective tax rate for the six months ended June 30, 2014 and 2013 differs from the expected statutory federal income tax rate of 35% primarily due to state income taxes, net of federal tax benefit, general business credits and non-deductible employee stock based compensation. The increase in the effective tax rates for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is primarily attributable to the expiration of general business credits on December 31, 2013. Additionally, we recognized a discrete benefit in the six months ended June 30, 2013 related to the reinstatement of 2012 general business credits.

We establish a valuation allowance when we consider it more-likely-than-not that some portion or all of the deferred tax assets will not be realized. As of June 30, 2014, we did not have a valuation allowance on any of our deferred tax assets as we believed it was more-likely-than-not that we would realize the benefits of our deferred tax assets.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 8—Income Taxes (continued)

We are subject to examination by the Internal Revenue Service, or IRS, and various state tax authorities. Our consolidated federal income tax returns for the five-months ended December 31, 2009 and the years ended December 31, 2010 and 2011 are currently under examination by the IRS. We remain subject to examination of our federal income tax return for the year ended December 31, 2012. We generally remain subject to examination of our various state income tax returns for a period of four to five years from the respective dates the returns were filed.

As of June 30, 2014, we have net operating loss carryforwards of approximately $29.7 million and $28.4 million for federal and state tax purposes, respectively, which will be available to offset future income. If not used, these carryforwards will expire between 2025 and 2031. In addition, we have state business tax credits of approximately $1.2 million that will expire between 2028 and 2033 and other state business tax credits of approximately $1.1 million that can be carried forward indefinitely. Certain limitations may be placed on net operating loss carryforwards as a result of changes in control as defined in Section 382 of the Internal Revenue Code. In the event a change in control occurs, it will have the effect of limiting the annual usage of the operating loss carryforwards.

As of June 30, 2014 and 2013, we had a liability of $4.4 million and $2.7 million, respectively, for unrecognized tax benefits related to various federal and state income tax matters excluding interest, penalties and related tax benefits. The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is as follows:



	Six Months Ended June 30,
	2014		2013
	(In thousands)
Beginning balance	$	3,724	$	1,481
Increases related to positions taken during prior years	—		500
Increases related to positions taken during the current year	676		741
Ending balance	$	4,400	$	2,722

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate	$	4,400	$	2,722

We recognized accrued interest and penalties related to unrecognized tax benefits as of June 30, 2014 of approximately $0.3 million. We did not have accrued interest or penalties related to unrecognized tax benefits as of June 30, 2013.

Note 9—Stockholders’ Equity

Non-Employee Stock-Based Payments

On March 3, 2009, we entered into a sales and marketing agreement with a third party that contained a contingent warrant feature. The warrant provided the third party with an option to purchase 3,426,765 shares of our common stock at a per share price of $23.70 if certain sales volume or revenue targets were achieved. A further 856,691 shares could have become eligible for purchase under the warrant had either of these targets been achieved and additional specified marketing and promotional activities had taken place.

The warrant expired on March 3, 2014 as the third-party did not achieve the specified volume or revenue targets.

Convertible Preferred Stock

During the six months ended June 30, 2014, 1,491 shares of Series A Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock converted into 1,491,000 shares of Class A Common Stock.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 10—Earnings per Common Share

In August 2013, the issued and outstanding shares of our Class B Common Stock declined to less than 10% of the aggregate number of issued and outstanding shares of our Class A Common Stock and Class B Common Stock. Pursuant to the terms of Article V of our Certificate of Incorporation, the issued and outstanding shares of our Class B common stock automatically converted into shares of our Class A common stock. Following this automatic conversion, there is now only a single class of our common stock outstanding. For the three and six months ended June 30, 2013, we grouped the components of Class B common stock basic earnings per common share, or EPS, and diluted EPS with Class A common stock, as if they were one class, to conform to the current period presentation. This regrouping did not impact EPS previously reported in this period.

The calculation of basic and diluted EPS was as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands, except per share data)
Basic earnings per Class A common share
Net income	$	14,343		$	11,304		$	29,648		$	26,891
Income attributable to preferred stock	(1,703		)	(1,798		)	(3,966		)	(4,289		)
Income attributable to common stock subject to repurchase	(138		)	(230		)	(324		)	(583		)
Net income allocated to Class A common stockholders	$	12,502		$	9,276		$	25,358		$	22,019
Weighted-average Class A shares issued and outstanding	39,394			35,380			38,433			35,214
Basic earnings per Class A common share	$	0.32		$	0.26		$	0.66		$	0.63

Diluted earnings per Class A common share
Net income allocated to Class A common stockholders	$	12,502		$	9,276		$	25,358		$	22,019
Re-allocated earnings	26			60			96			137
Diluted net income allocated to Class A common stockholders	12,528			9,336			25,454			22,156
Weighted-average Class A shares issued and outstanding	39,394			35,380			38,433			35,214
Dilutive potential common shares:
Stock options	515			1,099			831			1,090
Restricted stock units	138			205			195			154
Employee stock purchase plan	5			2			7			—
Diluted weighted-average Class A shares issued and outstanding	40,052			36,686			39,466			36,458
Diluted earnings per Class A common share	$	0.31		$	0.25		$	0.64		$	0.61

As of June 30, 2014, 368,052 shares of Class A common stock issued to Walmart were subject to our repurchase right. Basic and diluted EPS for these shares were the same as basic and diluted EPS for our Class A common stock for the three and six months ended June 30, 2014 and June 30, 2013.

For the three and six months ended June 30, 2013, we excluded from the computation of basic EPS all shares issuable under an unvested warrant to purchase 4,283,456 shares of our Class A common stock, as the related performance conditions had not been satisfied.

For the periods presented, we excluded all shares of convertible preferred stock and certain stock options outstanding, which could potentially dilute basic EPS in the future, from the computation of diluted EPS as their effect was anti-dilutive. The following table shows the weighted-average number of anti-dilutive shares excluded from the diluted EPS calculation:



	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
	(In thousands)
Class A common stock
Options to purchase Class A common stock	673	1,101	608	1,609
Restricted stock units	57	17	35	27
Conversion of convertible preferred stock	5,369	6,859	6,011	6,859
Total options, restricted stock units and convertible preferred stock	6,099	7,977	6,654	8,495

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 11—Fair Value Measurements

Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

We determine the fair values of our financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value.

For more information regarding the fair value hierarchy and how we measure fair value, see Note 2–Summary of Significant Accounting Policies to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2013.

As of June 30, 2014 and December 31, 2013, our assets carried at fair value on a recurring basis were as follows:



	Level 1		Level 2		Level 3		Total Fair Value
June 30, 2014	(In thousands)
Corporate bonds	$	—	$	48,226	$	—	$	48,226
Commercial paper	—		28,633		—		28,633
Negotiable certificate of deposit	—		4,401		—		4,401
U.S. Treasury notes	—		8,709		—		8,709
Agency securities	—		10,006		—		10,006
Mortgage-backed securities	—		31,995		—		31,995
Municipal bonds	—		12,827		—		12,827
Asset-backed securities	—		25,598		—		25,598
Total	$	—	$	170,395	$	—	$	170,395

December 31, 2013
Corporate bonds	$	—	$	70,997	$	—	$	70,997
Commercial paper	—		49,321		—		49,321
Negotiable certificate of deposit	—		4,403		—		4,403
U.S. Treasury notes	—		14,278		—		14,278
Agency securities	—		14,959		—		14,959
Mortgage-backed securities	—		4,001		—		4,001
Municipal bonds	—		19,031		—		19,031
Asset-backed securities	—		21,754		—		21,754
Total	$	—	$	198,744	$	—	$	198,744

We based the fair value of our fixed income securities held as of June 30, 2014 and December 31, 2013 on quoted prices in active markets for similar assets. We had no transfers between Level 1, Level 2 or Level 3 assets during the three and six months ended June 30, 2014 or 2013.

Note 12—Fair Value of Financial Instruments

The following describes the valuation technique for determining the fair value of financial instruments, whether or not such instruments are carried at fair value on our consolidated balance sheets.

Short-term Financial Instruments

Our short-term financial instruments consist principally of unrestricted and restricted cash and cash equivalents, federal funds sold, settlement assets and obligations, and obligations to customers. These financial instruments are short-term in nature, and, accordingly, we believe their carrying amounts approximate their fair values. Under the fair value hierarchy, these instruments are classified as Level 1.

Investment Securities

The fair values of investment securities have been derived using methodologies referenced in Note 2–Summary of Significant Accounting Policies to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2013. Under the fair value hierarchy, our investment securities are classified as Level 2.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 12—Fair Value of Financial Instruments (continued)

Loans

We determined the fair values of loans by discounting both principal and interest cash flows expected to be collected using a discount rate commensurate with the risk that we believe a market participant would consider in determining fair value. Under the fair value hierarchy, our loans are classified as Level 3.

Deposits

The fair value of demand and interest checking deposits and savings deposits is the amount payable on demand at the reporting date. We determined the fair value of time deposits by discounting expected future cash flows using market-derived rates based on our market yields on certificates of deposit, by maturity, at the measurement date. Under the fair value hierarchy, our deposits are classified as Level 2.

Fair Value of Financial Instruments

The carrying values and fair values of certain financial instruments that were not carried at fair value, excluding short-term financial instruments for which the carrying value approximates fair value, at June 30, 2014 and December 31, 2013 are presented in the table below.



	June 30, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Financial Assets
Loans to bank customers, net of allowance	$	6,680	$	5,864	$	6,902	$	5,926

Financial Liabilities
Deposits	$	459,594	$	459,531	$	219,580	$	219,534

Note 13—Commitments and Contingencies

We monitor the laws of all 50 states to identify state laws or regulations that apply (or may apply) to prepaid debit cards. We have obtained money transmitter licenses (or similar such licenses) where applicable, based on advice of counsel or when we have been requested to do so. If we were found to be in violation of any laws and regulations governing banking, money transmitters, electronic fund transfers, or money laundering in the United States or abroad, we could be subject to penalties or could be forced to change our business practices.

In the ordinary course of business, we are a party to various legal proceedings. We review these actions on an ongoing basis to determine whether it is probable that a loss has occurred and use that information when making accrual and disclosure decisions. We have not established reserves or possible ranges of losses related to these proceedings because, at this time in the proceedings, the matters do not relate to a probable loss and/or the amounts are not reasonably estimable.

From time to time we enter into contracts containing provisions that contingently require us to indemnify various parties against claims from third parties. These contracts primarily relate to: (i) contracts with our card issuing banks, under which we are responsible to them for any unrecovered overdrafts on cardholders’ accounts; (ii) certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities, and other claims arising from our use of the premises; (iii) certain agreements with our officers, directors, and employees, under which we may be required to indemnify these persons for liabilities arising out of their relationship with us; and (iv) contracts under which we may be required to indemnify our retail distributors, suppliers, vendors and other parties with whom we have contracts against claims arising from certain of our actions, omissions, violations of law and/or infringement of patents, trademarks, copyrights and/or other intellectual property rights.

Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with these types of agreements are not explicitly stated, the overall maximum amount of the obligation cannot be reasonably estimated. With the exception of overdrafts on cardholders’ accounts, historically, we have not been required to make payments under these and similar contingent obligations, and no liabilities have been recorded for these obligations in our consolidated balance sheets.

For additional information regarding overdrafts on cardholders’ accounts, refer to Note 4 — Accounts Receivable.

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GREEN DOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Note 14—Significant Customer Concentration

A credit concentration may exist if customers are involved in similar industries, economic sectors, and geographic regions. Our retail distributors operate in similar economic sectors but diverse domestic geographic regions. The loss of a significant retail distributor could have a material adverse effect upon our card sales, profitability, and revenue growth.

Revenues derived from our products sold at our four largest retail distributors represented the following percentages of our total operating revenues:



	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Walmart	54%	65%	58%	66%
Three other largest retail distributors, as a group	24%	22%	22%	22%

Excluding stock-based retailer incentive compensation of $2.0 million for the three months ended June 30, 2014 and 2013, and $4.4 million and $3.6 million for the six months ended June 30, 2014 and 2013, respectively, revenues derived from our products sold at our four largest retail distributors represented the following percentages of our total operating revenues:



	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Walmart	55%	65%	58%	66%
Three other largest retail distributors, as a group	22%	21%	22%	21%

The concentration of GPR cards activated (in units) and the concentration of sales of cash transfer products (in units) derived from our products sold at our four largest retail distributors was as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Concentration of GPR cards activated (in units)	71%	85%	72%	84%
Concentration of sales of cash transfer products (in units)	80%	87%	81%	88%

Settlement assets derived from our products sold at our four largest retail distributors comprised the following percentages of the settlement assets recorded on our consolidated balance sheet:



	June 30, 2014	December 31, 2013
Walmart	37%	34%
Three other largest retail distributors, as a group	35%	39%

Other concentrations

At December 31, 2013, the customer funds underlying the Walmart co-branded GPR cards were held by GE Capital Retail Bank. These funds were held in trust for the benefit of the customers, and we had no legal rights to the customer funds. Additionally, we had receivables due from GE Capital Retail Bank that were included in accounts receivable, net, on our consolidated balance sheets.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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 to Green Dot Corporation and its consolidated subsidiaries.

Overview

Green Dot Corporation is a technology-centric, pro-consumer bank holding company with a mission to reinvent personal banking for the masses. We believe that we are the largest provider of prepaid debit card products and prepaid card reloading services in the United States, as well as a leader in mobile banking with our GoBank mobile bank account offering, an innovative checking account developed for use via smartphones and other mobile devices. Our products are available to consumers at more than 90,000 retailers nationwide, online and via the leading app stores. Our products and services include Green Dot-branded and co-branded GPR cards, Visa-branded gift cards, reload services through our Green Dot Network, through retailers’ specially-enabled POS devices or using our MoneyPak product, and GoBank.

Financial Results and Trends

Total operating revenues for the three and six months ended June 30, 2014 were $147.0 million and $306.3 million, respectively, compared to $140.6 million and $294.8 million for the three and six months ended June 30, 2013, respectively. During the three and six months ended June 30, 2014, total operating revenues were favorably impacted by increases in card revenues and other fees and interchange revenues. Card revenues and other fees increased primarily due to higher volume of monthly maintenance fees and new card fee revenues and interchange revenues increased primarily due to period-over-period growth in purchase volume, which is described below. During the six months ended June 30, 2014, total operating revenues were favorably impacted by an increase in cash transfer revenues primarily due to period-over-period growth in the number of cash transfers.

Total operating expenses for the three and six months ended June 30, 2014 were $125.3 million and $260.9 million, respectively, compared to $123.3 million and $254.1 million for the three and six months ended June 30, 2013, respectively. Total operating expenses were adversely impacted by increases in sales and marketing expenses and other general and administrative expenses and partially offset by reductions in compensation and benefits expenses and processing expenses. Sales and marketing expenses increased primarily due to a May 2013 increase of approximately 4% in the sales commission rate we pay to Walmart for the MoneyCard program and period-over-period growth in the number of cash transfers sold. Other general and administrative expenses increased primarily due to increases in transaction losses and depreciation and amortization of property and equipment. Compensation and benefits expenses decreased primarily due to an increase to our overall capitalization rate associated with internally-developed software, a decline in retention-based incentives associated with our acquisition of Loopt, and a decrease in third-party contractor expenses. Processing expense decreased primarily due to a reduction in third-party issuing bank fees.

Income tax expense for the three and six months ended June 30, 2014 was $8.4 million and $17.7 million, respectively, compared to $6.9 million and $15.4 million for the three and six months ended June 30, 2013, respectively. Income tax expense increased primarily as a result of generating higher income before income taxes.

We expect to incur additional sales and marketing expenses during the second half of 2014 related to manufacturing and distribution costs associated with new products and partnerships. We recognize the cost of manufacturing and distributing new card packages over the related sales period, the cost of merchandising those new card packages as

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incurred, and the cost of personalized GPR cards, when activated, over the average card lifetime, as defined within our Annual Report on Form 10-K for the year ended December 31, 2013 under "Critical Accounting Policies and Estimates." We introduced a number of new products and partnerships during the second half of 2013 and the first half of 2014, and expect we will continue to do so during the second half of 2014. It follows that we expect our sales and marketing expenses to increase on a year-over-year basis in absolute dollars and as a percentage of revenues during the second half of 2014.

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.

Number of Cash Transfers — represents the total number of POS swipe reload transactions and MoneyPaks that we sell through our retail distributors in a specified period. We sold 11.66 million and 11.32 million POS swipe reload transactions and MoneyPaks in the three months ended June 30, 2014 and 2013, respectively, and 23.33 million and 22.57 million POS swipe reload transactions and MoneyPaks in the six months ended June 30, 2014 and 2013, respectively.

Number of Active Cards — represents the total number of GPR cards in our portfolio that had a purchase, reload or ATM withdrawal transaction during the previous 90-day period. We had 4.71 million and 4.39 million active cards outstanding as of June 30, 2014 and 2013, respectively.

Gross Dollar Volume — represents the total dollar volume of funds loaded to our GPR card and reload products. Our gross dollar volume was $4.6 billion and $4.4 billion for the three months ended June 30, 2014 and 2013, respectively, and $9.9 billion and $9.5 billion for the six months ended June 30, 2014 and 2013, respectively. We review this metric in conjunction with purchase volume and give greater weight to our purchase volume when assessing our operating performance because we believe it is a better indicator of interchange revenue performance.

Purchase Volume — represents the total dollar volume of purchase transactions made by customers using our GPR and gift card products. This metric excludes the dollar volume of ATM withdrawals. Our purchase volume was $3.4 billion and $3.2 billion for the three months ended June 30, 2014 and 2013, respectively, and $7.3 billion and $6.8 billion for the six months ended June 30, 2014 and 2013, respectively.

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 to cardholders on a monthly basis pursuant to the terms and conditions in our cardholder 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 when a consumer purchases a GPR or gift card in a retail store. Other revenues consist primarily of fees associated with optional products or services, which we generally offer to consumers during the card activation process. Optional products and services include providing a second card for an account and expediting delivery of the personalized GPR card that replaces the temporary card obtained at the retail store.

Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the mix of Green Dot-branded and co-branded cards in our portfolio and upon the extent to which fees are waived based on significant usage. 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 Green Dot-branded and co-branded active cards in our portfolio and the extent to which cardholders enroll in our VIP program, which has no ATM fees, or conduct ATM transactions on our fee-free ATM network. Our aggregate new card fee revenues vary based upon the number of GPR cards 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 card fees between Green Dot-branded and co-branded products and between GPR cards and gift cards.

Cash Transfer Revenues — We earn cash transfer revenues when consumers fund their cards through a POS swipe reload transaction in a retail store or purchase and use a MoneyPak. Our aggregate cash transfer revenues vary based upon the total number of POS swipe reload transactions and MoneyPaks sold and the average price per POS swipe reload transaction or MoneyPak . The average price per POS swipe reload transaction or MoneyPak depends upon the relative numbers of cash transfer sales at our different retail distributors and on the mix of POS

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swipe reload transactions and MoneyPaks at certain retailers that have different fees for the two types of reload transactions.

Interchange Revenues — We earn interchange revenues from fees remitted by the merchant’s bank, which are based on rates established by the payment networks, when customers make purchase transactions using our products. Our aggregate interchange revenues vary based primarily on the number of active cards in our portfolio, the average transactional volume of the active cards in our portfolio and on the mix of cardholder purchases between those using signature identification technologies and those using personal identification numbers.

Stock-based retailer incentive compensation — In May 2010, we issued to Walmart 2,208,552 shares of our Class A common stock, subject to our right to repurchase them at $0.01 per share upon a qualifying termination of our prepaid card program agreement with Walmart. We recognize each month the fair value of the 36,810 shares issued to Walmart for which our right to repurchase has lapsed using the then-current fair market value of our Class A common stock. We would be required to recognize the fair value of all shares still subject to repurchase if there were an early expiration of our right to repurchase, which could occur if we experienced certain changes in our control or under certain other limited circumstances, such as a termination of our commercial agreement with Walmart. We record the fair value recognized as stock-based retailer incentive compensation, a contra-revenue component of our total operating revenues.

Operating Expenses

We classify our operating expenses into the following four categories:

Sales and Marketing Expenses — Sales and marketing expenses consist primarily of the sales commissions we pay to our retail distributors and brokers, advertising and marketing expenses, and the costs of manufacturing and distributing card packages, placards and promotional materials to our retail distributors and personalized GPR cards to consumers who have activated their cards. We generally establish sales commission percentages in long-term distribution agreements with our retail distributors, and aggregate sales commissions are determined by the number of prepaid cards and cash transfers sold at their respective retail stores and, in certain cases, by the revenue generated from the ongoing use of those cards. We incur advertising and marketing expenses for television, 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 cards activated.

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 card 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 processor that maintains the records of our customers' accounts and processes transaction authorizations and postings for us, and the third-party banks that issue our prepaid cards. These costs generally vary based on the total number of active cards in our portfolio and gross dollar volume.

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, 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 cards 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 and intangible assets, and 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.

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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 ended December 31, 2013. There have been no changes to our critical accounting policies and estimates during the six months ended June 30, 2014.

Recent Accounting Pronouncements

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

Comparison of Three-Month Periods Ended June 30, 2014 and 2013

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, cash transfer revenues and interchange revenues as well as contra-revenue items:



	Three Months Ended June 30,
	2014					2013
	Amount			% of Total Operating Revenues		Amount			% of Total Operating Revenues
	(In thousands, except percentages)
Operating revenues:
Card revenues and other fees	$	60,892		41.4	%	$	55,029		39.1	%
Cash transfer revenues	45,491			30.9		45,633			32.5
Interchange revenues	42,655			29.0		41,913			29.8
Stock-based retailer incentive compensation	(2,022		)	(1.4	)	(1,967		)	(1.4	)
Total operating revenues	$	147,016		100.0	%	$	140,608		100.0	%

Card Revenues and Other Fees — Card revenues and other fees totaled $60.9 million for the three months ended June 30, 2014, an increase of $5.9 million, or 10.7%, from the comparable period in 2013. The increase was primarily due to higher monthly maintenance fees of $5.0 million, driven by growth in the number of active cards, and an increase of $1.5 million in new card fee revenues, driven by period-over-period growth in new cards activated.

Cash Transfer Revenues — Cash transfer revenues totaled $45.5 million for the three months ended June 30, 2014, a decrease of $0.1 million, or 0.2%, from the comparable period in 2013. Although we had period-over-period growth of 3.0% in the number of cash transfers, we had a greater number of fee-free cash transfers as compared to the same period in 2013. The increase in fee-free cash transfers was driven by customer adoption of one of our recently introduced products at Walmart. Throughout the remainder of 2014, we expect to continue phasing out the PIN reload method of adding cash to prepaid cards. As such, the current MoneyPak PIN reload product will be fully replaced by other methods of card reloading by the end of the first quarter of 2015. While we do not expect the phase-out of the MoneyPak PIN product to have any material impact to our revenue in the remainder of 2014, we are unable to predict the long-term impact to our reloading customer behavior, if any, and corresponding revenues in 2015 and successive years.

Interchange Revenues — Interchange revenues totaled $42.7 million for the three months ended June 30, 2014, an increase of $0.7 million, or 1.7%, from the comparable period in 2013. The increase was primarily the result of period-over-period growth of 4.9% in purchase volume, partially offset by a decline in the effective interchange rate we earn on purchase volume. This rate decline was the result of a shift in the mix of payment networks and payment types.

Stock-based Retailer Incentive Compensation — Stock-based retailer incentive compensation was $2.0 million for the three months ended June 30, 2014, which remained consistent with the comparable period in 2013. Our right to repurchase lapsed as to 110,430 shares issued to Walmart during the three months ended June 30, 2014. We recognized the fair value of the shares using the then-current fair market value of our Class A common stock. The minimal movement in the stock-based retailer incentive compensation is the result of a similar average stock price in the three months ended June 30, 2014 compared with the corresponding period in 2013.

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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:



	Three Months Ended June 30,
	2014				2013
	Amount		% of Total Operating Revenues		Amount		% of Total Operating Revenues
	(In thousands, except percentages)
Operating expenses:
Sales and marketing expenses	$	57,200	38.9	%	$	51,680	36.8	%
Compensation and benefits expenses	30,215		20.6		31,200		22.2
Processing expenses	17,285		11.8		19,948		14.2
Other general and administrative expenses	20,584		14.0		20,425		14.5
Total operating expenses	$	125,284	85.3	%	$	123,253	87.7	%

Sales and Marketing Expenses — Sales and marketing expenses totaled $57.2 million for the three months ended June 30, 2014, an increase of $5.5 million, or 10.6% from the comparable period in 2013. This increase was primarily the result of an increase of $3.4 million in sales commissions, driven by a May 2013 increase of approximately 4% in the sales commission rate we pay to Walmart for the MoneyCard program and period-over-period growth of 3.0% in the number of cash transfers sold. Sales and marketing expenses also increased due to $1.8 million of additional costs of manufacturing and distributing card packages. In the second half of 2014, we expect to incur additional sales and marketing expenses, as discussed above under "Financial Results and Trends."

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $30.2 million for the three months ended June 30, 2014, a decrease of $1.0 million or 3.2% from the comparable period in 2013. This decrease was primarily the result of an increase to our overall capitalization rate associated with internally-developed software and the absence of retention-based incentives associated with our acquisition of Loopt for the three months ended June 30, 2014, which had favorable impacts of $3.4 million and $1.9 million, respectively. These favorable impacts were partially offset by an increase of $4.6 million in employee salaries and related benefits.

Processing Expenses — Processing expenses totaled $17.3 million for the three months ended June 30, 2014, a decrease of $2.6 million or 13.1% from the comparable period in 2013. This decrease was primarily due to our reduction of $2.7 million in third-party issuing bank fees as we transitioned our card issuing program with GE Capital Retail Bank to Green Dot Bank in February 2014. While we expect processing expenses to be favorably impacted by the February 2014 transition of our card issuing program with GE Capital Retail Bank to Green Dot Bank, there can be no assurance that our processing expenses will decline on a year-over-year basis in absolute dollars or as percentage of total operating revenues in 2014 or in future years because these expenses are subject to a variety of factors, many of which are outside our control.

Other General and Administrative Expenses — Other general and administrative expenses totaled $20.6 million for the three months ended June 30, 2014, an increase of $0.2 million or 1.0%, from the comparable period in 2013. This slight increase was primarily the result of a $1.3 million increase in depreciation and amortization of property and equipment associated with our investment in technology to support our new product launches and infrastructure, partially offset by a decrease of $0.9 million in telecommunication and professional service expenses.

Income Tax Expense

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



	Three Months Ended June 30,
	2014		2013
U.S. federal statutory tax rate	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.7		1.9
General business credits	(0.6	)	(1.6	)
Employee stock-based compensation	0.6		2.2
Other	0.2		0.4
Effective tax rate	36.9	%	37.9	%

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Our income tax expense increased by $1.5 million to $8.4 million in the three months ended June 30, 2014 from the comparable period in 2013 due to an increase in income before income taxes, partially offset by a decrease in our effective tax rate by 1.0 percentage point from 36.9% to 37.9%, primarily driven by a reduction in non-deductible stock-based compensation.

Comparison of Six-Month Periods Ended June 30, 2014 and 2013

Operating Revenues

The following table presents a breakdown of our operating revenues among card revenues and other fees, cash transfer revenues and interchange revenues as well as contra-revenue items:



	Six Months Ended June 30,
	2014					2013
	Amount			% of Total Operating Revenues		Amount			% of Total Operating Revenues
	(In thousands, except percentages)
Operating revenues:
Card revenues and other fees	$	129,059		42.1	%	$	119,697		40.6	%
Cash transfer revenues	91,767			30.0		89,968			30.5
Interchange revenues	89,869			29.3		88,669			30.1
Stock-based retailer incentive compensation	(4,410		)	(1.4	)	(3,576		)	(1.2	)
Total operating revenues	$	306,285		100.0	%	$	294,758		100.0	%

Card Revenues and Other Fees — Card revenues and other fees totaled $129.1 million for the six months ended June 30, 2014, an increase of $9.4 million, or 7.9%, from the comparable period in 2013. The increase was primarily the result of higher monthly maintenance fees of $10.9 million, of which $5.6 million related to additional fee revenue from the removal of courtesy fee waivers on certain accounts during the first quarter of 2014. Card revenues and other fees also increased due to an increase of $3.0 million in new card fee revenues, driven by period-over-period growth in new cards activated. These increases were partially offset by a $2.2 million decline in our gift card program.

Cash Transfer Revenues — Cash transfer revenues totaled $91.8 million for the six months ended June 30, 2014, an increase of $1.8 million, or 2.0%, from the comparable period in 2013. The increase was primarily the result of period-over-period growth of 3.4% in the number of cash transfers sold, partially offset by a greater number of fee-free cash transfers compared to the same period in 2013. The increase in fee-free cash transfers was driven by customer adoption of one of our recently introduced products at Walmart.

Interchange Revenues — Interchange revenues totaled $89.9 million for the six months ended June 30, 2014, an increase of $1.1 million, or 1.2%, from the comparable period in 2013. The increase was primarily the result of period-over-period growth of 6.7% in purchase volume, partially offset by a decline in the effective interchange rate we earn on purchase volume. This rate decline was the result of a shift in the mix of payment networks and payment types.

Stock-based Retailer Incentive Compensation — Stock-based retailer incentive compensation was $4.4 million for the six months ended June 30, 2014, an increase of $0.8 million, or 22.2%, from the comparable period in 2013. Our right to repurchase lapsed as to 220,860 shares issued to Walmart during the six months ended June 30, 2014. We recognized the fair value of the shares using the then-current fair market value of our Class A common stock. The increase was the result of a higher average stock price in the six months ended June 30, 2014 compared with the corresponding period in 2013.

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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:



	Six Months Ended June 30,
	2014				2013
	Amount		% of Total Operating Revenues		Amount		% of Total Operating Revenues
	(In thousands, except percentages)
Operating expenses:
Sales and marketing expenses	$	117,443	38.3	%	$	107,857	36.6	%
Compensation and benefits expenses	57,178		18.7		62,954		21.4
Processing expenses	39,364		12.9		41,947		14.2
Other general and administrative expenses	46,908		15.3		41,305		14.0
Total operating expenses	$	260,893	85.2	%	$	254,063	86.2	%

Sales and Marketing Expenses — Sales and marketing expenses totaled $117.4 million for the six months ended June 30, 2014, an increase of $9.5 million, or 8.8% from the comparable period in 2013. This increase was primarily the result of an increase of $10.9 million in sales commissions, driven by a May 2013 increase of approximately 4% in the sales commission rate we pay to Walmart for the MoneyCard program and period-over-period growth of 3.4% in the number of cash transfers sold. This increase was partially offset by a decline of $1.3 million in the cost of manufacturing and distributing card packages and advertising and marketing expenses.

Compensation and Benefits Expenses — Compensation and benefits expenses totaled $57.2 million for the six months ended June 30, 2014, a decrease of $5.8 million or 9.2% from the comparable period in 2013. This decrease was primarily the result of an increase to our overall capitalization rate associated with internally-developed software and the absence of retention-based incentives associated with our acquisition of Loopt for the six months ended June 30, 2014, which had favorable impacts of $6.2 million and $3.9 million, respectively, as well as a reduction of $1.4 million in third party contractor expenses. These favorable impacts were partially offset by an increase of $5.7 million in employee salaries and related benefits.

Processing Expenses — Processing expenses totaled $39.4 million for the six months ended June 30, 2014, a decrease of $2.5 million or 6.0% from the comparable period in 2013. The decrease was primarily due to a reduction of $5.0 million in third-party issuing bank fees as we transitioned our card issuing program with GE Capital Retail Bank to Green Dot Bank in February 2014. The decrease in processing expenses was partially offset by an increase of $2.6 million in processing and payment network costs, driven by period-over-period growth of 6.7% in purchase volume.

Other General and Administrative Expenses — Other general and administrative expenses totaled $46.9 million for the six months ended June 30, 2014, an increase of $5.6 million or 13.6%, from the comparable period in 2013. This increase was primarily the result of a $5.8 million increase in transaction losses, primarily associated with customer disputed transactions, and a $2.6 million increase in depreciation and amortization of property and equipment associated with our investment in technology to support our new product launches and infrastructure. These increases were partially offset by a decrease of $2.1 million in telecommunication and professional service expenses.

Income Tax Expense

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



	Six Months Ended June 30,
	2014		2013
U.S. federal statutory tax rate	35.0	%	35.0	%
State income taxes, net of federal tax benefit	1.8		1.9
General business credits	(1.1	)	(2.6	)
Employee stock-based compensation	1.1		2.0
Other	0.6		0.2
Effective tax rate	37.4	%	36.5	%