H&R Block Inc. unexpectedly dropped Banc One Corp. from its tax-refund-anticipation loan program this week, costing the Ohio-based company a lucrative source of interest income.

Banc One officials said they were stunned by the decision. Phillip Sbrochi, a senior vice president in charge of national retail lending at Bank One Columbus, said the bank will continue to make taxpayer loans by allying itself with other tax preparers.

Boon to Mellon

H&R Block never formally announced that it was severing its connection with Banc One. However, a Block official said Thursday that it wanted to increase the amount of business it gives to Pittsburgh-based Mellon Bank Corp.

"To make room for the deal with Mellon, something had to give," said Donald W. Ayers, a Block vice president. "You can only split the company up a certain number of ways."

Earlier this week, Block announced a five-year contract with Mellon that gives the bank the right to provide loans at about half of Block's U.S. offices. Block, in turn, plans to buy an interest of just under 50% in all taxpayer loans made by Mellon.

Mr. Ayers said Block had been renewing its contract with Banc One on a year-to-year basis.

The tax preparer, which is based in Kansas City, Mo., offered the loans this year to about 10.9 million customers who expect refunds and filed their tax returns electronically. Block said its customers borrowed about $6.5 billion in tax-anticipation loans in the first quarter.

And Then There Were 3

Before the new arrangement, Mellon and Banc One each worked with 25% of Block offices that offered the loans.

The other lenders funding Block's booming refund loan business are Beneficial Corp., which works with about 40% of Block's offices, and Sears Roebuck & Co.'s Greenwood Trust Co., which works with about 10%.

The latter two are expected to remain in the program.

Banks have done well in the controversial loan programs, which have been criticized as being unfair to borrowers. Though the loans are interest-free, borrowers pay service fees ranging from $28 to $32, while lenders are repaid within a few weeks.

Lenders, on the other hand, consider the loans creditworthy since the refunds are sent to them directly from the Internal Revenue Service.

When Block began the refund loan program in 1986, it allowed banks to keep the entire fee. This year, lenders kept $26 of the $29 flat fee charged to each customer. Block intends to raise its share to $5 of the fee in 1993, Mr. Ayers said.

Lenders typically show big boosts in net interest margin in their first quarter, when most of the fees are booked. Banc One made $3 billion worth of refund loans to 2.3 million customers during the first quarter, according to a recent report by the chairman, John B. McCoy.

At $26 per customer, that would mean $59.8 million before expenses.

Nancy A. Bush, an analyst at Brown Brothers Harriman & Co., estimated that the refund fees contributed a healthy 57 basis points to Banc One's first-quarter net interest margin of 6.82%.

Mr. Sbrochi of Bank One Columbus said Block's decision would not shut it out of the refund loan market.

"The elimination of our agreement with Block provides us with the ability to look at opportunities we couldn't take advantage of before," he said.

He would not comment on what share of the bank's refund loan business has come from its relationship with Block, which is the nation's largest tax return preparer, with 8,831 offices.

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