While I recently suggested that regulators would delay approval ("Why Republic Won't Buy H&R Block Bank This Year"), another view on the likely response from regulators to the proposed acquisition of H&R Block Bank by Republic Bank of Kentucky is that the deal would
never have been announced were it not for some kind of positive signal from the FDIC and the OCC. The sale includes several discrete steps which will ultimately require the approval by both the OCC and the FDIC. In some ways, it is no surprise that Republic emerged as the buyer for Block. It fits on several levels. For one, Durbin means that a bank with less than $10 billion in assets has the most to gain. Smaller banks qualify for a higher rate of interchange, all things being equal. But there is also a match with their customers. Both work with many underbanked households and both have lots of experience with tax time. The window to make this kind of deal closes as tax time approaches. As a company, Block treads water for most of the year. Most of its earnings come during the first quarter of the year. Moreover, the lion's share of their returns are filed in just the two-month period between the start of tax season and March 15th. But even though customers might not arrive in mass until after the first of the year, Block has to have everything in place much earlier. Thus, the stipulation that approval happens prior to Sept. 30th is a hard stop - any later and Block has to buckle down and prepare to run the ship on its own for one more year. But getting approval in 75 days is close to unprecedented. "We had a look at transactions of over $25 million made over the last two years," said Matthew Kelley, who covers community banks and tracks teh prepaid industry for Sterne Agee, "and on average it took 182 days. So closing in this time would be quite impressive, in our view." “As they noted on the conference call last week," he added, "both companies have had extensive conversations will their regulators. When it comes to regulatory approval timelines for bank deals, the recent trend has been longer wait times, not shorter." But even then, it must be acknowledged that this is such an unusual transaction. Deposits held by prepaid issuers fluctuate dramatically. Then there is the question of how any seller of a bank product can manage its relationship with tax preparers. One thing that makes it easier, however, is that Sand Canyon Capital will not be coming across to Republic. Block holds the soured Option One loans that it had to buy back in this division. In one court case, a servicer found that 56 percent of its Option One loans had either been liquidated, modified, or were seriously delinquent. Option One was the brainchild of Mark Ernst, who felt that the company needed to diversify its lines of business. Unfortunately, Option One didn't have the right chemistry. I remember meeting with some of the bank's staff on their underwriting. I asked them to reconsider their policy of approving loans with debt-to-income ratios above 50 percent. Paraphrasing --- "No," they said, "that decision is up to the borrower."