Richard C. Breeden, H&R Block Inc.'s chairman, is once again sounding less than enamored with its thrift — even though a new credit line offering tied to the unit's prepaid cards is proving to be a profit generator.
This week Mr. Breeden moved closer to the hard-line stance he had taken last summer, when he was an activist shareholder campaigning for a board seat and insisted that capital requirements made the thrift too burdensome to keep.
On a conference call with investors Thursday, Mr. Breeden once again argued that H&R Block could offer banking products like the Emerald card through partners, instead of through the thrift. "We do not believe that ownership of a bank is mandatory, and operating in partnership with independently owned banks is definitely an option for the future, and it's one that, as we review strategy, we will consider," he said.
In December, a month after he became chairman, Mr. Breeden had
The outcome of the deliberations will determine the fate of H&R Block's decade-old experiment in financial services started by its previous chairman and chief executive, Mark Ernst, who resigned in November.
Parts of that experiment — most notably the 1997 acquisition of Option One Mortgage Corp. — have turned out to be an albatross for the company. But other parts, such as the Emerald card, have shown more promise.
The final decision on the thrift will likely depend on the willingness of the Office of Thrift Supervision to lift its requirement that the holding company maintain a minimum 3% in adjusted tangible capital to adjusted total assets.
The requirement was put in place as a safeguard when the thrift was chartered in 2006 and H&R Block's now shuttered subprime unit, Option One, was still up and running.
Mr. Breeden, a former chairman of the Securities and Exchange Commission, said Thursday that he has spoken with the OTS several times in recent months about lifting the capital requirement.
That is "a discussion that goes on with our regulator and obviously they have the final say on that, though it will affect our calculations of whether we move forward owning a bank or partnering with third-party banks," he said.
Scott Schneeberger, an analyst at Oppenheimer & Co. Inc., said Mr. Breeden was probably pressured to ease his stance in December because banking products like the Emerald card brought in revenue.
"He didn't have a choice when we were coming into tax season," Mr. Schneeberger said. But on Thursday, "he did kind of back off of it and lean towards his old stance."
After the market closed Wednesday, H&R Block, of Kansas City, Mo., reported that for its fiscal third quarter, which ended Jan. 31, pretax profits from the thrift nearly doubled from a year earlier, to $12.3 million. The unit's revenue rose 75%, to $39.3 million.
The number of Emerald cardholders rose 25%, to 2.3 million. And the line of credit, introduced in December, has found 900,000 takers and generated $400 million of receivables. Aside from boosting the thrift's revenue, H&R Block said, the credit line has
H&R Block also said it has taken further steps to reduce its exposure to Option One, whose origination arm it closed last year after a deal to sell the unit to Cerberus Capital Management LP fell through.
There are multiple bidders for Option One's servicing unit, H&R Block said, which is still in operation and still generates revenue.
Mr. Schneeberger said that Mr. Breeden's bargaining power with the OTS will likely improve once H&R Block clears out its remaining mortgage liabilities.
Those liabilities are "close to gone," he said, but Mr. Breeden's position "will be even more strong if he has it all gone."
Mr. Schneeberger said he doubted that H&R Block would decide on the thrift's fate before summer at the earliest, unless Mr. Breeden manages to accelerate the disposal of the remaining subprime assets.
In the long run, Mr. Schneeberger said, Mr. Breeden's recent comments made him doubt the thrift had a future with the company. "If you forced my hand, I think they will ultimately get rid of it."
