Delay in H&R Block Bank Deal Dashes Buyer's Tax-Time Profit Hopes

The Office of the Comptroller of the Currency is showing that its timetable matters the most when examining mergers.

H&R Block disclosed late Sunday that, due to delays getting OCC approval, a plan to sell its bank to BofI Holding in San Diego would not close in advance of 2015's tax season. H&R Block Bank generates nearly all of its revenue during tax season, so the delay is a clear disappointment.

The companies started vetting the deal with regulators last December; the agreement was formally announced in April.

"They knew we were looking for approval in time for this tax season, and obviously we were up against the date," Bill Cobb, H&R Block's president and chief executive, said during a conference call Monday. "They did give us direct feedback that they need more time."

Regulators have not informed the companies of any specific issues that would be "problematic or a showstopper," Greg Garrabrants, BofI's president and chief executive, said in a separate conference call that took place an hour after H&R Block held its call.

Deals between healthy and ordinary banks have been taking four to six months from announcement to completion in the current environment, though deals with unusual elements can take longer, industry observers say. Though regulators consider when the banks would like the deal completed, they make no qualms about taking longer than expected when issues arise.

"If something political or otherwise noteworthy comes up, all bets are off," said Brennan Ryan, a partner at Nelson Mullins. He pointed out that regulators have been willing to move expeditiously in situations like bankruptcy auctions, which typically involve sick banks in need of capital.

"Regulators work closely with the banks and are receptive to expectations, but they are not going to put the economics of the deal at the top of their list," Ryan said. "They are always going to address their own concerns first."

To analysts, the lag is more a reflection on the regulators than it is on the H&R Block Bank deal given the lengthy vetting period and a lack of information on the bottleneck's cause.

"I'm disappointed that the regulators are unable to work with banks' discrete circumstances — like tax season — without giving the banks permission to provide more information to shareholders as to why they need more time," said Juliana Balicka, an analyst at Keefe, Bruyette & Woods.

Shareholders voted with their feet on Monday, sending shares of H&R Block down nearly 6%. BofI's shares fell more than 3%.

Balicka, who still believes the deal will close, has advised her clients to consider the BofI sell-off as an opportunity to get into a stock she considers an outperformer.

BofI declined to comment for this story. H&R Block did not return a call for comments. The Office of the Comptroller of the Currency doesn't comment on specific banks.

The H&R Block deal is not exactly a straight-forward arrangement since it deals in products like tax-refund advances. The companies often note that the products are not new — H&R Block has offered them for seven years — and regulators examine them. Also, H&R Block last week announced a partnership with Consumer Financial Protection Bureau to encourage consumer savings during tax season.

BofI, through the deal, was also set up to become the issuing bank for H&R Block's Emerald prepaid debit card and to provide refund transfer services for individuals filing their taxes through the tax preparation firm for the upcoming tax season.

This is H&R Block's second attempt to exit banking. In July 2013, the firm agreed to sell the bank to Republic Bancorp in Louisville, Ky., but that deal fell apart. Greg MacFarlane, H&R Block's chief financial officer, said during Monday's call that analysts shouldn't draw connections between the deals.

"To compare this with the Republic situation is a mistake," MacFarlane said. "I think that's night and day differences. We have been under application here since April. … The regulator has been working in earnest over that time frame. Our expectations, obviously, were different than what their reality is."

Still, industry observers said the refund products and the prior deal with Republic likely complicate the transaction.

"The history of tax-advance products is a hot button issue with the OCC and always has been," said Chip MacDonald, a partner at Jones Day. "Again, the fact that the OCC has looked at the bank in another deal isn't helpful. It is a hard deal to do."