The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in "Risk Factors."

NetSpend is a leading program manager for FDIC-insured depository institutions that issue general-purpose reloadable prepaid debit cards, or GPR cards, and provide related alternative financial services to underbanked consumers in the United States. The programs managed by the Company empower underbanked consumers by providing them with innovative and affordable financial products and services tailored to meet their particular financial services needs and preferences in a manner that traditional banking institutions have not historically met. In addition, the products and services we manage provide our distributors an opportunity to enhance their customer relationships and generate incremental, ongoing revenue streams.

Cardholders may use their GPR cards to make purchase transactions at any merchant that participates in the MasterCard, Visa or PULSE networks and to withdraw funds from participating ATMs. MetaBank holds the majority of the cardholder funds. We own approximately 3.6% of the outstanding equity interests in Meta Financial Group, Inc. ("MFG"), MetaBank's holding company.

Our principal operating company, predecessor and current subsidiary, NetSpend Corporation ("NetSpend"), was incorporated in Texas in 1999. In May 2004, Oak Investment Partners acquired a controlling equity interest in NetSpend through a recapitalization transaction pursuant to which we, as a newly-formed holding company incorporated in Delaware, acquired all of the capital stock of NetSpend. In 2008, we acquired Skylight Financial, Inc. ("Skylight"), a payroll card provider, in a stock-for-stock merger. Entities affiliated with one of our significant shareholders, the JLL Funds, were previously the majority owners of Skylight.

We have built an extensive and diverse distribution and reload network in the United States to support the marketing and ongoing use of the GPR cards we manage. We market cards through multiple distribution channels, including alternative financial service providers, traditional retailers, direct-to-consumer and online marketing programs and to corporate employers as an alternative method of wage payment for their employees. Beginning in 2008, we decided to focus primarily on GPR cards and we ceased marketing gift cards entirely in August 2010.

We have developed and operate a proprietary technology platform. Our in-house platform is end-to-end in that it encompasses the critical functions required for us to acquire cardholders, process transactions, maintain account-level data, communicate with cardholders, manage risk, ensure regulatory compliance and connect to our Issuing Banks and distributors. These integrated capabilities allow us to customize our products and services for different markets, distribution channels and customer segments. Further, by processing transactions on our own platform, we gain unique and extensive insight into the attitudes, characteristics and purchasing behavior of the holders of the cards we manage.

We are pursuing a bank diversification strategy and we are distributing our card issuing activities across three issuing banks, in addition to the banks that issue our payroll cards. We are focused on balancing our diversification strategy with the protection of existing cardholder and direct deposit

relationships and other operational considerations. In furtherance of this strategy we entered into an agreement with The Bancorp Bank ("Bancorp") in January 2011 pursuant to which Bancorp serves as an Issuing Bank for some of our new and existing card programs, including the cards we distribute through traditional retailers. We have also signed an agreement with BofI Federal Bank ("BofI") pursuant to which we will manage GPR and payroll cards to be issued by it. BofI began issuing GPR cards in January 2013.We are continuing our discussions with other prospective issuing banks.

In May 2011, we amended our agreement with Inter National Bank ("INB") to extend the date by which we agreed to transition the GPR cards issued by INB to another bank from July 2011 to September 2011. We have transitioned the distributors of cards issued by INB to other Issuing Banks and we transferred INB's cardholder portfolio to Bancorp in February 2013. We and INB are engaged in an active dispute regarding the contractual obligations of the parties in connection with the transition of INB's portfolio.

U.S. Bank ("USB") and SunTrust Bank ("SunTrust") act as issuers of our payroll cards. We currently intend to transfer the USB portfolio to BofI. Our contract with SunTrust has been extended to September 2015. We are actively seeking to sign agreements with additional banks to act as issuers of payroll cards. As a result of these efforts, we signed an agreement with Regions Bank pursuant to which we will act as the program manager for the payroll cards to be issued by it.

In November 2011, our board of directors approved a $25 million share repurchase program that was completed in February 2012. In June 2012, our board of directors approved a $75 million share repurchase program that was completed in August 2012. The share repurchases were made through a 10b5-1 plan and through block trades. We intend to hold the repurchased shares in treasury for general corporate purposes. During 2012, we repurchased approximately 10.3 million shares of common stock at an average price of $9.00 per share pursuant to these programs. The average price paid per share is calculated on a trade date basis and excludes commissions.

As a leading manager of providers of GPR card programs and related alternative financial services to underbanked consumers, we evaluate a number of business metrics to monitor our performance and manage our business. We believe the following metrics are the primary indicators of our performance.

Number of Active Cards-represents the total number of GPR cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination. The programs we manage had approximately 2,352,000, 2,063,000 and 2,100,000 active cards as of December 31, 2012, 2011 and 2010, respectively.

Number of Active Cards with Direct Deposit-represents the number of active cards that have had a direct deposit load within three months of the date of determination. We managed 1,082,000, 865,000 and 719,000 direct deposit active cards as of December 31, 2012, 2011 and 2010, respectively. Our strategy is to focus on increasing the number of cards that receive direct deposits because cardholders who use direct deposit generate more revenue for us than those who do not. Additionally, consumers who receive direct deposits tend to remain in our programs longer than non-direct deposit cardholders.

Percentage of Active Cards with Direct Deposit-represents the percentage of active GPR cards that have had a direct deposit load within three months of the date of determination. The percentage of active cards that were direct deposit active cards as of December 31, 2012, 2011 and 2010, was approximately 46%, 42%, and 34%, respectively.

Gross Dollar Volume ("GDV")-represents the total dollar volume of debit transactions and cash withdrawals made using the GPR cards we manage. Our gross dollar volume, also known in the industry as purchase volume, was $13.2 billion, $11.2 billion and $9.8 billion for the years ended December 31, 2012, 2011 and 2010, respectively. Approximately 82.7%, 78.0% and 71.8% of the gross dollar volume for the years ended December 31, 2012, 2011 and 2010, respectively, was made using active cards with direct deposit.

Operating Revenues

Our operating revenues primarily consist of a portion of the service fees and interchange revenues received by our Issuing Banks in connection with the programs we manage.

Cardholders are charged fees in connection with our programs, as follows:

º •
º Transactions-Cardholders are typically charged a fee for each PIN and signature-based purchase transaction made using their GPR cards, unless the cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as applicable. Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.

º •
º Customer Service and Maintenance-Cardholders are typically charged fees for balance inquiries made through our call centers. Cardholders are also charged a monthly maintenance fee after a specified period of inactivity.

º •
º Additional Products and Services-Cardholders are charged fees associated with additional products and services offered in connection with certain of our cards, including the use of overdraft features, a variety of bill payment options, custom card designs and card-to-card transfers of funds initiated through our call centers.

º •
º Other-Cardholders are charged fees in connection with the acquisition and reloading of our GPR cards at distributors and we receive a portion of these amounts in some cases.

Revenue resulting from the service fees charged to our cardholders described above is recognized when the fees are charged because the earnings process is substantially complete, except for revenue resulting from the initial activation of our cards and annual subscription fees. Revenue resulting from the initial activation of our cards is recognized ratably, net of commissions paid to our distributors, over the average account life, which is approximately one year for our GPR cards (three months for the gift cards we marketed prior to August 2010). Revenue resulting from annual subscription fees is recognized ratably over the annual period to which the fees relate.

Our revenues also include fees charged in connection with program management and processing services we provide for private-label programs, as well as fees charged to MetaBank based on interest earned on cardholder funds. Under our current arrangement with MetaBank, we would only be entitled to receive interest on cardholder funds if market interest rates rose significantly above current levels. Revenue resulting from these fees is recognized when we have fulfilled our obligations under the underlying service agreements.

We earn revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by the Networks. Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the Networks for services they provide in processing transactions routed through them. Interchange revenue is recognized during the period that the purchase transactions occur. Also included in interchange revenue are fees earned from branding agreements with the Networks.

Our quarterly operating revenues fluctuate as a result of certain seasonal factors. The most significant increases in the number of our active cards and our GDV typically occur in the first three months of each year as a result of consumers acquiring new cards and loading them with their tax refunds. We expect this seasonal variance to become more pronounced in 2013 due to an agreement with Intuit, Inc. ("Intuit") pursuant to which we will provide the only GPR card that can be ordered through the use of its TurboTax software. We began marketing cards under this program in early 2013.

Operating Expenses

We classify our operating expenses into the following categories:

Direct Operating Costs-Direct operating costs consist primarily of the commissions we pay to members of our distribution and reload network for their services, ATM processing fees, card supply costs, costs for fraud and other losses related to the card programs we manage, customer verification costs, customer service costs and fees paid to our Issuing Banks. These costs are driven by transaction volumes and the number of active cards.

Salaries, Benefits and Other Personnel Costs-Salaries, benefits and other personnel costs consist of the compensation costs associated with our employees, including base salaries, benefits, bonus compensation and stock-based compensation. This excludes any personnel costs associated with customer service personnel. Costs associated with these employees are included in direct operating costs.

Advertising, Marketing and Promotion Costs-Advertising, marketing and promotion costs primarily consist of the costs of our efforts to market the products we manage to potential cardholders including direct mailings, internet and television advertising, promotional events run in conjunction with our distributors, conferences, trade shows and the creation of marketing collateral and other materials.

Other General and Administrative Costs-Other general and administrative costs primarily consist of costs for legal, accounting, information technology, travel, facility and other corporate expenses.

Depreciation and Amortization-Depreciation and amortization consists of depreciation of our long-lived assets and amortization of finite-lived intangibles.

Other Losses-Other losses consist of legal contingencies and settlements and other infrequent losses.

Other Income (Expense)

Other income (expense) primarily consists of interest income and interest expense. Interest income represents interest we receive on our cash and cash equivalents. Interest expense is associated with our long-term debt and capital leases.

Income Tax Expense

Income tax expense primarily consists of corporate income taxes on our profits.

                   Consolidated Statements of Operations Data

                                                        Year Ended December 31,
                                                     2012        2011        2010
                                                       (in thousands of dollars)
    Operating Revenues                             $ 351,332   $ 306,255   $ 275,387
    Operating Expenses
    Direct operating costs                           169,066     146,199     130,783
    Salaries, benefits and other personnel costs      56,328      52,736      54,032
    Advertising, marketing and promotion costs        20,127      14,230      14,038
    Other general and administrative costs            21,116      20,135      18,234
    Depreciation and amortization                     13,778      15,031      12,725
    Other losses                                      36,988         515       4,300

    Total operating expenses                         317,403     248,846     234,112

    Operating income                                  33,929      57,409      41,275
    Other Income (Expense)
    Interest income                                      139         108          85
    Interest expense                                  (2,598 )    (2,457 )    (3,526 )
    Loss on extinguishment of debt                         -           -        (734 )

    Total other expense                               (2,459 )    (2,349 )    (4,175 )

    Income before income taxes                        31,470      55,060      37,100
    Provision for income taxes                        12,603      21,814      14,368

    Net income                                     $  18,867   $  33,246   $  22,732



                                                       As a Percentage of Total
                                                          Operating Revenues
                                                        Year Ended December 31,
                                                      2012         2011      2010
     Operating Revenues                                 100.0 %     100.0 %   100.0 %
     Operating Expenses
     Direct operating costs                              48.1        47.7      47.5
     Salaries, benefits and other personnel costs        16.1        17.2      19.6
     Advertising, marketing and promotion costs           5.7         4.7       5.1
     Other general and administrative costs               6.0         6.6       6.6
     Depreciation and amortization                        3.9         4.9       4.6
     Other losses                                        10.5         0.2       1.6

     Total operating expenses                            90.3        81.3      85.0

     Operating income                                     9.7        18.7      15.0
     Other Income (Expense)
     Interest income                                      0.1         0.1         -
     Interest expense                                    (0.8 )      (0.8 )    (1.3 )
     Loss on extinguishment of debt                         -           -      (0.2 )

     Total other expense                                 (0.7 )      (0.7 )    (1.5 )

     Income before income taxes                           9.0        18.0      13.5
     Provision for income taxes                           3.6         7.1       5.2

     Net income                                           5.4 %      10.9 %     8.3 %

Operating Revenues

Our operating revenues totaled $351.3 million in fiscal 2012, an increase of $45.0 million, or 14.7%, from the $306.3 million seen in fiscal 2011. Service fees represented approximately 77.5% of our revenue for fiscal 2012 with the balance of our revenue consisting of interchange fees. Service fee revenue increased $34.5 million, or 14.5%, from $237.6 million in fiscal 2011 to $272.1 million in fiscal 2012. This year-over-year increase in service fee revenue was substantially driven by the increase in direct deposit accounts (cardholders with direct deposit generally initiate more transactions and generate more revenues for us than those that do not take advantage of this feature) and, to a lesser extent, the expansion of product features across our direct deposit customer base.

Interchange revenue represented approximately 22.5% of our revenue for fiscal 2012 and 22.4% of our revenue for fiscal 2011. Interchange revenue increased $10.6 million, or 15.5%, from $68.6 million in fiscal 2011 to $79.2 million in fiscal 2012. This increase was primarily the result of a 17.9% year-over-year increase in our gross dollar volume.

Operating Expenses

    The following table presents the breakdown of operating expenses among
direct operating costs, personnel costs, advertising and marketing costs, other
general and administrative costs, depreciation and amortization and other
components of operating expenses:

                                          Year Ended December 31,
                                    2012                          2011
                                      Percentage of                 Percentage of
                                          Total                         Total
                                        Operating                     Operating
                          Amount        Revenues        Amount        Revenues        Change
                                              (in thousands of dollars)
Operating Expenses
Direct operating costs   $ 169,066              48.1 % $ 146,199              47.7 % $ 22,867
Salaries, benefits and
other personnel costs       56,328              16.1      52,736              17.2      3,592
Advertising, marketing
and promotion costs         20,127               5.7      14,230               4.7      5,897
Other general and
administrative costs        21,116               6.0      20,135               6.6        981
Depreciation and
amortization                13,778               3.9      15,031               4.9     (1,253 )
Other losses                36,988              10.5         515               0.2     36,473

Total operating
expenses                 $ 317,403              90.3 % $ 248,846              81.3 % $ 68,557

Direct Operating Costs-Our direct operating costs were $169.1 million in fiscal 2012, an increase of $22.9 million, or 15.7%, from fiscal 2011. As a percentage of revenues, our direct operating costs increased from 47.7% in fiscal 2011 to 48.1% in fiscal 2012. This net increase, as a percentage of revenue, was primarily caused by an increase in investment in our distribution activities through traditional retailers and direct-to-consumer acquisition activities and an increase in our provision for fraud-related losses. This percentage increase was partially offset by a decrease, as a percentage of revenue, in commissions paid to our distributors caused by a greater proportion of cardholder loads being generated through our online, direct marketing and traditional retail channels because we do not pay distributor commissions on these loads.

Salaries, Benefits and Other Personnel Costs-Our salaries, benefits and other personnel costs were $56.3 million in fiscal 2012, an increase of $3.6 million, or 6.8%, from fiscal 2011. As a percentage of revenues, our salaries, benefits and other personnel costs decreased from 17.2% of revenues in fiscal 2011 to 16.1% in fiscal 2012. This decrease was primarily the result of relatively consistent levels of

stock based compensation expenses during a period of increasing revenues, and, to a lesser extent, an increase in capitalized personnel costs (which has the effect of reducing salaries, benefits and other personnel costs) associated with the internal development of software for our processing platforms.

Advertising, Marketing and Promotion Costs-Our advertising, marketing and promotion costs were $20.1 million in fiscal 2012, an increase of $5.9 million, or 41.5% from fiscal 2011. This increase was largely due to an increase in our investment in direct-to-consumer marketing through internet, television and direct mail advertising. We expect to see increased investment in our advertising costs in future periods.

Other General and Administrative Costs-Our other general and administrative costs were $21.1 million in fiscal 2012, an increase of $1.0 million, or 5.0%, from fiscal 2011. As a percentage of revenues, our other general and administrative costs decreased from 6.6% in fiscal 2011 to 6.0% in fiscal 2012. This decrease, as a percentage of revenue, was primarily a result of greater efficiencies of scale.

Depreciation and Amortization-Our depreciation and amortization costs were $13.8 million in fiscal 2012, a decrease of $1.2 million, or 8.0%, from fiscal 2011. This decrease was primarily the result of fully amortizing certain long-lived assets during 2012.

Other Losses-Other losses of $37.0 during fiscal 2012 related to accruals for legal contingencies and settlements, primarily Alexsam ($24.0 million) and INB ($10.5 million) (see "Item 3. Legal Proceedings" contained in this Annual Report on Form 10-K). Other losses of $0.5 million during fiscal 2011 primarily related to severance and other related restructuring costs incurred in connection with the consolidation of some of our processing platforms and call center activities.

Income Tax Expense

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

                                                     Year Ended December 31,
                                                     2012              2011
    U.S. federal income tax                               35.0 %            35.0 %
    State income taxes, net of federal benefit             2.4               2.8
    Other                                                  2.6               1.8

    Income tax expense                                    40.0 %            39.6 %

Our income tax expense was $12.6 million in fiscal 2012, a decrease of $9.2 million from fiscal 2011. This decrease was primarily the results of a period-over-period decrease in our taxable income.

Operating Revenues

Our operating revenues totaled $306.3 million in fiscal 2011, an increase of $30.9 million, or 11.2%, from $275.4 million seen in fiscal 2010. Service fees represented approximately 77.6% of our revenue for fiscal 2011 with the balance of our revenue consisting of interchange fees. Service fee revenue increased $21.8 million, or 10.1%, from $215.8 million in fiscal 2010 to $237.6 million in fiscal 2011. This year-over-year increase in service fee revenue was substantially driven by the increase in direct deposit accounts (cardholders with direct deposit generally initiate more transactions and generate more revenues for us than those that do not take advantage of this feature) and, to a lesser extent, the expansion of product features across our direct deposit customer base.

Interchange revenue represented approximately 22.4% of our revenue for fiscal 2011 and 21.6% of our revenue for fiscal 2010. Interchange revenue increased $9.0 million, or 15.1%, from $59.6 million in fiscal 2010 to $68.6 million in fiscal 2011. This increase was primarily the result of a 14.3% year-over-year increase in our gross dollar volume, combined with more favorable rates on some of our interchange revenue contracts negotiated during the later part of 2010.

Our total operating revenues of $306.3 million in fiscal 2011 was comprised of $305.1 million related to our GPR cards and the remaining $1.2 million related to our gift cards. Our GPR card related revenues increased by $36.0 million, or 13.4%, from fiscal 2010. Our gift card related revenues decreased by $5.1 million, or 81.0%, from fiscal 2010 as we ceased marketing gift cards in August 2010.

Operating Expenses

    The following table presents the breakdown of operating expenses among
direct operating costs, personnel costs, advertising and marketing costs, other
general and administrative costs, depreciation and amortization and other
components of operating expenses:

                                          Year Ended December 31,
                                    2011                          2010
                                      Percentage of                 Percentage of
. . .