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H&R Block Bank on Sale

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After a period of nine months in search of alternatives, H&R Block Inc. (HRB - Free Report) finally decided to sell H&R Block Bank. The tax preparer inked an agreement with Republic Bank and Trust Company to divest the assets and transfer the liabilities of H&R Block Bank.

In Oct 2012, H&R Block announced its intention to divest H&R Block Bank. The divestiture will allow the company to be free from being subjected to regulations by the Federal Reserve Bank as a savings and loan holding company.  In light of the proposed laws, which demand higher capital requirements for savings and loan holding companies like H&R Block Bank, H&R Block decided to go for the divestiture.  These laws were proposed by the Federal Reserve to execute the changes as per the Dodd-Frank Act.

H&R Block will have to hold back considerable additional capital due to the proposed rule. Moreover, the implementation of the proposed rule might not align with its strategic plans, operational requirements and growth objectives.

Apart from regulatory approval, the transaction is subject to negotiation of additional agreements. Under these agreements, Republic Bank will act as the bank for H&R Block's core financial services products. The core financial services products include Refund Transfers, Emerald Advance lines of credit and the Emerald Prepaid MasterCard.

Following the divestiture, H&R Block will incur one-time cost of about 3–4 cents per share in fiscal 2014. H&R Block also estimates dilution of about 6–9 cents per share on an annualized basis, stemming from the service agreement with Republic.

H&R Block expects to receive necessary approval as well as finalize on the terms of service agreement with Republic to have a smooth fiscal 2014 tax season. In addition, the vend-off is expected to augment its financial service business. Nevertheless, it will remain equipped to offer financial services through H&R Block Bank for tax season 2014, in case the necessary approval is not obtained in time. Upon closing of the divestiture, H&R Block Bank will surrender its bank charter.

H&R Block has been trying to focus on its core tax business. Previously, it had divested RSM McGladrey to McGladrey & Pullen, LLP in Dec 2011. RSM McGladrey offered accounting, tax and consulting services to middle-market companies.

H&R Block remains focused on its strategic initiatives to improve operational efficiency and ramp up growth. Last year, H&R Block announced an agreement with Sears Holdings Corporation , to focus on 112 best performing Sears locations, while shutting down the rest. This year, it is not renewing its agreement Wal-Mart (WMT - Free Report) in the United States, as the performance and results from the channel failed to match its expectations.

We remain cautious on H&R Block, which carries a Zacks Rank #3 (Hold). However, Outerwall Inc. with a favorable Zacks Rank #2 (Buy) is worth considering.

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