Bank of the Internet says that it has reached an agreement to buy Block Bank. It is the second time that Block has reached such an agreement in the last year. Last time the buyer was Republic Bank, but it was held up by regulators. The same contingency is on everyone's mind this time as well.
Back in November, I wrote that B of I was the likely suitor: My suspicion hinged on the announcement that B
of I would suddenly sell new equity. They did not indicate how they intended to use those dollars, but timing was probably not a coincidence.
Last year, Block agreed to sell to Republic Bank of Kentucky, but regulators did not give their approval prior to the agreed-upon termination date at the end of September. Block and Republic clearly wanted to have things nailed down prior to the run-up of the 2014 tax season. When it didn't look like that would be possible, the banks called it off.
I've always felt that the loss of that opportunity would have a downward impact on whatever price the company ultimately attained. But that did not seem to be the case. But there were five or six banks that wanted Block Bank last time. According to Block, that round included interest from Bank of the Internet.
Block said that the sale would free up $250 million, cost the company about three cents per share in transaction costs, and drop earnings by about 7 to 9 percent in future years. Block said they would lose earnings going forward when they talked about the sale to Republic and it was the same story here. In fact, even if the company is right to say that it "frees up" $250 million, that is only a product of their internal capital structure. The deal makes it possible for Block to free up equity that it had in the Bank.
B of I will assume all of Block's liabilities (deposits). B of I estimates that deposits held on Emerald prepaid cards will amount to between $450 and $550 million. Right now, B of I has about $1.8 billion in a combination of demand, savings, and CDs on its books. But the great majority is in the latter two, where B of I runs high-yield online accounts that mimic the kinds of offerings that used to available from ING.
B of I will also get Block's refund transfer and Emerald Advance Line of Credit products. Block will still be involved going forward, but only as the agent selling those products from its stores and its web site.
It looks like Block is going to keep its soured portfolio of old Option One mortgages.
About that regulatory approval
CEO Cobb said that the company has been engaging with its regulator throughout the due diligence period, so perhaps the a priori assumption should be that this sale will go through. But it didn't sound as if Block reached out to any advocates. Certainly, I didn't hear from anyone today who said that they had heard from Block. So Block may have skipped on a fairly relevant constituency.
The important issues from the perspective of consumer advocates are likely to hinge on how those products change once the deal is complete.
On the good side, B of I is clearly an expert in offering savings accounts and this could mean that it tries to find a way to encourage its future Emerald account holders to begin putting away more money in savings. That would be a significant win. Similarly, B of I already has all kinds of services appended to its existing transaction accounts that will play well with the underbanked: pop money, text messaging, remote deposit, mobile banking and mobile apps. The underbanked like immediacy. A stodgy bank might hold back on remote deposit and pop money. As well, B of I currently rebates any ATM fees that any customer experiences. The bank does that because they have no branches. Certainly, that would be a very valuable service. But there are limits to free; low-balance cards may challenge that generosity.
But there are also some downsides: For one, B of I has overdraft on its accounts. Most advocates (at least the ones that are not covert double agents) feel strongly that overdraft is a poor fit for the typical needs of a prepaid card user.
Then there are the known unknowns that could or could not be downsides. At $39.95 for federal and state service, Block's refund transfer service is among the most expensive out there. Will the price remain that high? On the other hand, people who put a tax refund onto an Emerald Card don't pay anything at all for the card. That's a good deal from a consumer perspective.
Perhaps even more significant is the Emerald Advance Line of Credit. With its heavy discounting for deeper relationships, the EA has avoided much in the way of scrutiny. It has also been the case that Block was careful to suspend the EA during tax season.