Russ Smyth, the new chief executive and president of H&R Block Inc., says he wants not only to keep its thrift — whose fate has been uncertain for a year — but also to expand its product lines and customer base.
"We have no plans to sell the bank," Mr. Smyth said in an interview Friday. "We think it's an important part of our strategic plan to grow our retail tax business."
He stopped well short of signaling a return to the expansive "everyday financial services" strategy of his predecessor Mark Ernst, who resigned in November. When asked to describe his vision for H&R Block's financial services, Mr. Smyth replied, "We're a tax company."
Last week was the first time Mr. Smyth shared his thoughts on the $1 billion-asset thrift, and on financial services, since joining H&R Block on Aug. 1. His remarks varied in tone from those of Richard Breeden, who advocated selling the thrift when he was a dissident shareholder and has expressed mixed feelings about it since becoming chairman in November.
The thrift lets H&R Block directly offer its Emerald prepaid debit cards and lines of credit, which have proven popular with tax customers. The Kansas City, Mo., company issued more than 2.6 million of the cards during the fiscal year that ended April 30, and Mr. Smyth said he plans to be "aggressive" about increasing that volume and the thrift's offerings.
"Right now our biggest focus for the coming 12 months is on the Emerald card and some of the existing products, and leveraging and scaling those more rapidly," he said. "There's always a lot of product development in the works," but the new offerings will be unveiled around "tax season [in] 2010 and beyond," he said.
Mr. Smyth also said he hopes to expand the card's role from a customer-retention to a customer-acquisition tool for the tax business. "We think that by touching customers year-round it's going to help us," he said. "If people currently are not tax customers but we can get them with an Emerald card, and [they] understand our brand and our flexibility, then that's a way into having them become retail tax customers."
Mr. Smyth said he also plans to expand the cardholder base beyond the underbanked to college students and "anybody else who has a debit card today" who could be a tax client. (He said he planned to give an Emerald card to his son, a college freshman, "so that we can let him run on his own but control the amount of money that goes into it. I'd rather do that than put him on one of my own personal cards.")
When asked whether he is committed to keeping the thrift for the long term, Mr. Smyth said, "Never say 'never.' " But he later said, "We have no plans to sell it, we have not entertained ideas, we're not thinking about it."
As chairman, Mr. Breeden has unloaded the unprofitable subprime mortgage and financial advisory businesses that Mr. Ernst built up. When Mr. Breeden was campaigning for a board seat last year, he advocated that H&R Block offer products like the Emerald card through third parties. Mr. Smyth said Friday that this is a much less attractive option — one that H&R Block had tried in less than successful pilot tests.
"We keep an open mind on financial partners," he said. But "our bank has done a far superior job in terms of delivering tailored products that work for us operationally, with better speed-to-market than any other bank has been able to do — and more cost-effective than any other bank has been able to do."
On a conference call last week — Mr. Smyth's first since he became CEO — he told analysts, "We don't see the bank as a core independent area of business. … That doesn't mean the bank will be disposed of, or that it isn't important. It is just that we see the repositioned bank as really a factory for creating products that will be used in support of the tax business."
Matthew Kaufler, a portfolio manager for Clover Capital Management Inc., said he interpreted Mr. Smyth's remarks on the call as "a statement of near-term support" for continuing to own the thrift, but "I don't see it as a statement of unequivocal support."
Selling the thrift is "not a priority, but if they could figure out a way to get out of the bank business in an economically efficient manner," while still offering the Emerald products, "they'd gladly do it," Mr. Kaufler said.
The thrift swung to a pretax loss of $14.1 million in H&R Block's fiscal first quarter, which ended July 31, from a year-earlier profit of $4.8 million. Rising foreclosures and declining home values caused the unit to write down foreclosed properties by $5 million and set aside $15 million of loan-loss reserves.
Mr. Smyth cautioned Friday against letting mortgage problems "overshadow" the thrift's value.
"Don't judge the bank by" its results "today, because we're still unwinding ourselves out of the mortgage business," he said. "If you separate out the mortgage piece of the bank, they actually perform extremely well financially."
Mr. Smyth, 51, worked for 21 years at McDonald's Corp. and resigned as its president for Europe in 2005. Since then he worked at private-equity firms and was on several companies' boards.
