Steve Trager, chairman and chief executive of Republic Bancorp (RBCAA), once again has a reason to be giddy about April 15.
Republic agreed last week to buy the deposits of H&R Block Bank, a small thrift owned by the nation's largest consumer tax services provider. The deal would bring Republic about $470 million in deposits.
The real draw for Trager is an opportunity to increase the Louisville, Ky., company's stake in the tax preparation business by pairing with H&R Block (HRB).
H&R Block was "looking to identify a bank that could take over their banking business," Trager said in an interview Friday. "They selected us because, in a period of time when others have come and gone from the tax business, we are here and have been at it for 18 years."
The companies are still hammering out the details of how they will work together. The general plan would involve H&R Block exiting the banking business while offering its branded products in its nearly 11,000 offices through Republic.
The timing is excellent for the $3.3 billion-asset Republic.
In the last two years, Republic's tax business has changed dramatically. After a protracted fight with the Federal Deposit Insurance Corp., the company agreed to stop offering refund anticipation loans, or short-term loans that fronted customers the money until their refunds were processed. The regulators let Republic have a final hurrah with the product in the 2012 tax season.
The company still has its processing services, which earned $72 million last year, but that business was jeopardized when Jackson Hewitt Technology Services and Liberty Tax Service said they were severing their contracts because Republic was no longer making refund loans. Republic is disputing those terminations.
Before the change-up, the tax business contributed 40% to 65% of Republic's revenues. The refund-anticipation loans made up about a quarter of that segment. With the refund loans gone and the relationships with its two largest tax processors severed, the company made $12 million on the business in the first quarter. Overall, Republic's core earnings were 60 cents per share in the first quarter of this year, down significantly from $3.12 a year earlier.
Republic forecasted that, if it can finalize and close its deal with H&R Block by the end of this year, the new relationship could add 57 cents to 75 cents annually. That income would primarily show up in the first quarter during tax season.
"From a size perspective, this puts us back in a good range with Jackson Hewitt and Liberty," Trager said. "This continues the business at a level that we previously processed."
Investors clearly welcomed the news, with Republic's stock rising more than 15% on Friday. H&R Block's stock also reacted favorably to the deal, with the stock up nearly 3%.
With the tax business challenges, Republic has been looking for other ways to diversify, including an expansion of its mortgage business and the acquisition of two failed banks from the FDIC.
Republic's two listed equity research analysts Ross Demmerle of Hilliard Lyons, and Daniel Cardenas of Raymond James had made mentions in first-quarter reports about Republic that the company was becoming more traditional.
"I didn't expect this, but they are known for always trying to do something a little different," Demmerle says.
"This puts them right back in the tax business," Demmerle adds. "They are not going to make as much money as they did last year, but this is going to make them a few bucks."
H&R Block will keep a $339 million portfolio of mortgages, which it had to have for its thrift charter. Once the deal is complete, the company plans to surrender its charter. H&R Block's management has said that it wants to make sure that the transition is seamless for the company's customers.
"For all intents and purposes, it's really H&R Block that will continue to be the stewards here, obviously with Republic doing their job to support that," William Cobb, H&R Block's president and chief executive, said during a conference call on Friday.