Richard C. Breeden, the chairman of H&R Block Inc. who treated the company's thrift like an albatross when he campaigned for a seat on the board this past summer, appears to be softening his stance on the issue.
Recent comments by Mr. Breeden suggest that he has taken another look at the depository and discovered some strategic value for the tax preparer. However, observers said it would be difficult right now to sell the thrift — which the company started last year and stuffed with loans made by its subprime lending unit, Option One Mortgage Corp. — so making the most of it may be the most realistic near-term option.
On a conference call with investors Monday afternoon, Mr. Breeden said it would be "entirely premature" to discuss how to dispose of the $1.2 billion-asset H&R Block Bank. He also said he hopes to persuade the Office of Thrift Supervision to drop a 3% capital requirement imposed on the holding company; doing so would "substantially change the economics of continued ownership of the bank in a favorable way," he said.
Moreover, he said, "the bank is something that creates some very interesting strategic potential … to support our tax business with credit products that competitors may not be able to replicate."
In August, when he was waging a proxy fight as a dissident shareholder, Mr. Breeden told American Banker it was "not wise" for H&R Block to own a bank. "It's not a smart thing if you are in a high-yielding business to start eyeing … a lower-yielding business," he said then.
Mark Ernst, H&R Block's chairman and chief executive at the time, had made the prepaid Emerald card a cornerstone of its strategy for providing financial services to the underbanked. (Mr. Ernst retired last month, and Mr. Breeden, who was elected to the board in September, succeeded him as chairman.)
"Green is one of my favorite colors," Mr. Breeden said in August, but "offering somebody a green MasterCard is something you can easily do without owning a bank. … You don't need to own an insured depository and have your entire company regulated as a bank and treated as a bank in the stock market in order to offer banking products." Instead, a third-party provider could issue the card.
But on Monday, Mr. Breeden said that whether or not it keeps the savings bank, H&R Block "will continue to find … ways to offer the Emerald suite of products," which he said "are directly related to success in our tax business."
In fact, in the coming tax season the Kansas City, Mo., company plans to fund its refund-anticipation loans directly through the thrift instead of using HSBC Holdings PLC as it has done in past years. (The London banking company quit offering certain tax-refund loan products this year.) H&R Block said it had also added bill payment and money-transfer capabilities to the Emerald card, as well as a line of credit called the Emerald Advance.
Brian Horey, an analyst with Aurelian Management LLC in New York, said he suspected that grim prospects for selling the thrift may have forced Mr. Breeden to reconsider its potential. "This is not an opportune time to sell the bank," he said. "Trying to get top dollar for that asset at this point is probably not that realistic."
Mr. Breeden said he has met with the OTS several times to discuss lifting the holding-company capital requirement, which he said was imposed to protect the thrift from potential problems at Option One. "The 3% rule was crafted to … deal with risks that would no longer exist once we … are no longer in the subprime mortgage lending" business, Mr. Breeden said. "People assume that requirement will always be there. I don't think that's necessarily a good assumption."
H&R Block closed Option One's origination arm this month, and Mr. Breeden said it hopes to have a buyer for the remaining servicing unit by early next year. He also assured investors that the thrift would not buy any more whole loans or mortgage securities.
A spokesman for the OTS said that capital requirements for holding companies can be changed periodically if the companies' risk profiles change.
V. Gerard Comizio, a partner at Thacher Proffitt & Wood LLP and a former OTS official, said that in recent years it was a "fairly rare occurrence" for the OTS to impose capital requirements on a holding company before acquiring or chartering a thrift. Hence, there is "not a lot of recent precedent" for revising such requirements, he said.
"They might do that if they were comfortable enough with the institution and its management and its operations," Mr. Comizio said. But "they obviously had something in mind when they imposed it, and the question is, is that addressed?"
