H&R Block Inc. said its deal to sell its financial adviser unit to Ameriprise Financial Inc. would complete a restructuring of the tax preparation company, signaling that it plans to keep its thrift — for now.
Since becoming H&R Block's chairman in November, Richard Breeden has voiced mixed feelings about the thrift. One of his biggest objections to owning the $1.3 billion-asset depository was an onerous capital requirement imposed on the parent company by the Office of Thrift Supervision. The regulator lifted those requirements in May after H&R Block disposed of the remaining pieces of the subprime lender Option One Mortgage Corp.
As recently as last month, Mr. Breeden lumped the financial adviser unit in with the thrift, whose Emerald prepaid debit card and lines of credit have proved popular with H&R Block's tax customers. On a conference call to discuss results for the company's fiscal fourth quarter, which ended April 30, Mr. Breeden said that though the thrift's revenue increased by almost half, to $53 million, "neither H&R Block Bank nor H&R Block Financial Advisors contributed meaningful operating earnings to the company in fiscal '08 and both units involve corporate-level overhead and risks that cannot be ignored."
Also, in a letter to shareholders last month, Mr. Breeden wrote that the financial adviser unit's "overall performance has continued to improve. … At the same time, however, as with the bank, we have yet to prove that … [the financial adviser unit] can generate an adequate return on the capital it consumes in light of the risks in its business."
The Kansas City, Mo., company announced Tuesday after the market closed that it had agreed to sell H&R Block Financial Advisors to Ameriprise for $315 million in cash. The deal is expected to close in four to six months.
"When this transaction closes, we will have completed the strategic realignment that we promised shareholders," Mr. Breeden said in a press release. The adviser unit, which provides investment and traditional brokerage services, "simply did not have the size to be able to compete," he said.
H&R Block said executives were unavailable for interviews Wednesday. Nancy Mays, a spokeswoman for the company, said the deal should not be "looked at as a signal that we are also selling the bank." But "every business always has to deliver results," she said. (She later said the thrift, which was chartered two years ago, "has not had the opportunity to establish a solid record.")
H&R Block "has been working to realign and focus more on our core, which is tax" preparation, Ms. Mays said. The thrift "plays a very important role" in that core business: "It attracts new clients, it helps us retain existing clients, and our Emerald suite [of products] is very successful."
Analysts interpreted Mr. Breeden's latest comments to mean that H&R Block will keep the thrift for the immediate future.
"It's been a very transaction-oriented company for the past year," said Matthew Kaufler, a portfolio manager for Clover Capital Management Inc. "They want to really lock on to optimizing the tax business now and the thrift is something that they'll get to."
Mr. Kaufler pointed out that H&R Block's president and chief executive, Russ Smyth, has been in his new job for less than two weeks. "This transaction was underway well before the new CEO was named" last month, he said. "We have yet to hear what his thoughts are, whether he views the thrift as a long-term strategic asset."
Scott Schneeberger, an analyst at Oppenheimer & Co. Inc., said that after the financial adviser unit is sold, "there's not the sense of urgency there" to sell the thrift. "They've done their low-hanging fruit for now," he said.
A year ago, as an activist shareholder campaigning for a board seat, Mr. Breeden advocated selling the thrift. In last month's conference call, he took a middle ground, citing a 30% increase in its Emerald cards, to more than 2.6 million, and nearly 1 million Emerald Advance lines of credit.
"We expect to expand these numbers considerably in support of our retail tax business," he said.
But his primary reason for becoming more comfortable with the thrift came from the OTS, which in May lifted its requirement that the holding company maintain a minimum 3% in adjusted tangible capital to adjusted total assets. Because of that decision, "continued ownership of the bank is now feasible from a capital structure perspective," Mr. Breeden said last month.
Still, in his letter to shareholders, he wrote that "one must recognize the overhead, operating costs and risks that owning a bank entails. Longer run, the bank has to deliver results that justify the capital deployed and the risks involved, not just offer the theoretical ability to do so." The thrift's focus has shifted from mortgages to products like the Emerald card, Mr. Breeden wrote.
"The bank's balance sheet holds high levels of capital compared to thrift and banking industry norms, and we intend to keep it that way," he wrote. "If we are going to own a bank, we will own a strong one." (According to the Federal Deposit Insurance Corp., on March 31, the most recent date for which data is available the thrift had a core capital ratio of 23.21%, compared with 9.83% for thrifts with assets of $1 billion to $5 billion and 7.87% for all depositories.)