Green Dot Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Green Dot is a financial technology company and registered bank holding company offering consumer and business banking products, cards, payroll and money-movement services through Consumer Services, B2B Services and Money Movement Services.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $343.7m (+1.3%) | $339.5m | $1,107.1m (+0.4%) | $1,102.4m |
| Operating income | $10.8m | $8.8m | $86.3m | $74.6m |
| Operating margin | 3.1% | 2.6% | 7.8% | 6.8% |
| Net income | $4.7m | $7.3m | $58.3m | $58.0m |
| Diluted EPS | $0.09 | $0.13 | $1.07 | $1.04 |
Q3 net income fell 36%, despite modest revenue growth and improved operating income; other expense was $4.2m, versus $0.8m of other income in Q3 2021. Nine-month operating expenses declined 0.7% to $1,020.8m, while processing expenses rose 22% to $349.7m and sales and marketing fell 24% to $227.9m. The nine-month effective tax rate was 24.3%, compared with 23.6%.
Cash flow: Nine-month operating cash flow was $252.1m, up from $147.2m. Investing activities used $828.1m, chiefly reflecting net purchases of investment securities, capital expenditures of $60.6m and a $35.0m TailFin contribution. Financing provided $69.5m, including $182.7m of net deposit inflows, offset in part by share repurchases.
Liquidity and balance sheet: September 30 unrestricted cash was $813.2m; available-for-sale securities had a $2,393.8m fair value. The company reported $3,476.6m in customer deposits and $780.1m in stockholders’ equity. Its $100m revolving facility was undrawn at quarter-end, with the company reporting covenant compliance. There is no material debt balance reported.
Available-for-sale securities carried $436.8m of gross unrealized losses, principally attributed to rising interest rates. The company said it did not intend to sell the securities and was more likely than not not required to sell them before recovery. Nine-month other comprehensive loss was $304.8m, contributing to the decline in equity.
Material changes and operating trends
- Consumer Services weakened: Q3 revenue declined 18.9% and segment profit 10.2%. Active accounts fell 25.7%, gross dollar volume 19.3% and purchase volume 16.7% year over year. Management cited the absence of prior-year stimulus, reduced GO2bank marketing due to elevated acquisition costs, and retail-channel trends.
- B2B Services grew: Q3 revenue rose 33.9% and segment profit 21.1%. Gross dollar volume increased 37.5%, despite active accounts declining 8.5% and purchase volume falling 2.2%. Higher processing costs and some fixed-profit partner arrangements constrained margins.
- Money Movement Services declined: Q3 revenue fell 17.4% and segment profit 21.6%, primarily due to fewer cash transfers and timing of tax-refund processing. For the nine months, tax refunds processed rose 19.6%, partly offsetting lower cash-transfer volumes.
- Across the company, Q3 gross dollar volume increased 13.9%, but active accounts declined 19.4% and purchase volume fell 12.4%. Nine-month purchase volume declined 23.5%.
- Net interest income increased to $11.4m for Q3 and $31.0m for the nine months, aided by higher interest rates and a larger investment portfolio.
Outlook, risks and unusual items
- Management expects consolidated operating profit to decline year over year in fiscal 2023. It cited partner contract non-renewals expected to negatively affect Consumer and B2B results in 2023, retail-channel trends, planned investment and the timing of technology-related savings.
- Green Dot plans to invest in GO2bank marketing, a modern core banking and card-management platform, and anti-money-laundering controls. Management expects higher platform-related costs through 2022 and duplicative costs in 2023; it expects some processing costs and margins to improve after implementation.
- Higher short-term rates may support interest income, but BaaS partners share in a significant portion of interest earned on certain deposits. Portfolio unrealized losses reflect rate increases; management says it can hold the securities through recovery.
- A single BaaS partner generated 35% of Q3 revenue and 29% for the nine months, without a corresponding concentration in gross profit. Walmart represented 19% and 20%, respectively. Loss or deterioration of major partner relationships could materially affect results.
- Other general and administrative expenses included a $13m legal settlement earlier in 2022; nine-month legal settlement expenses were $16.4m. The filing also describes ongoing securities litigation, with loss exposure not estimable, and litigation involving Uber.
- Green Dot committed to annual $35m TailFin Labs contributions through January 2024. It repurchased $74.1m of stock in the first nine months and had approximately $26m remaining under its authorization at September 30.
- Key risks include regulatory and AML compliance, fraud and transaction losses, technology conversion and service interruptions, consumer weakness and inflation, and reliance on retail, tax-preparation and BaaS partners. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the expected 2023 partner non-renewals and other relationship changes materially affect revenue, active accounts and segment profit.
- Whether B2B growth can translate into profit growth given processing-cost increases and fixed-profit partner arrangements.
- Progress, costs and execution risks of the core banking platform transition, including expected timing of savings and any service disruptions.
- Changes in the concentrated BaaS partner and Walmart relationships, and the effect of higher interest rates after partner revenue sharing.
- Further movements in securities’ unrealized losses, deposit and cash balances, and capital levels; confirm management’s ability to maintain liquidity and regulatory capital.
- Developments in the securities and Uber litigation, the legal settlement expense, and compliance or AML matters.