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Interpreting the Block Republic Annulment

Adam R.'s picture

Posted October 14, 2013

It is a mistake to belittle the fortunes of  H&R Block just because the tax preparer stepped away from a deal that would have sold its bank to Republic Bank of Kentucky. 

Monday Morning second-guessers seem to think that Block's decision to call off its deal with Republic Bank can be

traced back to how the company decipered the regulatory head winds.

But Monday Morning investors lost their warmth for the company's stock almost as quickly as the newsprint yellowed on the first news of the transaction. Block's shares went to $32 right after the deal was announced, but by the time the sale was rescinded, shares had dropped to just $27. 

Usually investors are right. The stock market exemplifies the wisdom of crowds. Its judgment represents a sympony of opinion made by thinkers of all pedigrees. At the end of the day, Monday Morning second-guessers who have wagered an opinion don't care if they are right or wrong because it just doesn't matter to them. But investors put money behind their conclusions.  

So with that introduction, I'll venture forth to contradict the opinion of the market.

My take is that the problem here was with Republic. 

First, there is the issue of relationship. Republic needed the decision-makers at the Office of the Comptroller of the Currency to sign off on a new charter. The OCC can probably guess that past behavior is the best indicator of future behavior. At this time last year, Republic was in court with the FDIC.

Who wants another regulator's cast-off? A few years back, Republic tried a similar trick with the OTS. Does the OCC want to be the regulator that says "yes" when the other guys say "no?" No, they apparently do not. I can imagine the conversation went something like this:

Republic: We'd like to join the team at the OCC. 

OCC: Can you provide us with a copy of your regulatory references?

Republic: We would prefer not to.

OCC: And you want this done how soon?

Republic: Ninety days. 

OCC: In the summer?

Republic: OK, then maybe by the end of the spring. 

OCC: That's better. 

Republic: So, can you let us know how it is going? Time is of the essence.

Two months pass....

OCC: Hello, Republic. We have sort of a problem here. Uh...yeah.  You apparently didn't put one of the new cover sheets on your TPS report. Yeah....Did you see the memo about this? We are putting new cover sheets on all of those from now on. If you would do that, it would be great.....In the meantime, we'll make sure you get another copy of that memo.  

So while Republic is left holding up a copy of the memo, Block still has a profitable line of financial products that it can sell. Revenues from RACs and prepaid cards have averaged $255 million per year since 2011. To the critique advance by Moody's that no bank will be willing to pay as much for Block Bank as Republic would have, I rebut by saying that no bank would have faced the same problems of cannibalization. There are only so many people that want to buy a check for their tax refund. Growing the share that came from Block stores would probably have meant only that fewer consumers purchased them from stores already served by Republic. 

Who can blame Block for losing patience? Who can blame the OCC for going Bartleby right back at Republic?