H&R Block Banks On Getting Out of Banking

If at first you don't succeed, try, try again. U.S. tax prep specialist H&R Block  (NYSE: HRB  )  will try once more to shed its banking business, announcing that BofI Holding  (NASDAQ: BOFI  )  will buy it for an undisclosed sum, though it anticipates that the deal will generate excess capital of about $200 million to $250 million.

Block originally announced the decision to sell its banking operations in October 2012 and attempted to unload the unit on Republic Bancorp (NASDAQ: RBCAA  ) last year, but the financial institution backed out at the last minute after failing to win regulator approval.

Because Block was deemed a savings-and-loan holding company by the passage of the Frank-Dodd Act of 2010, it came under strict Federal Reserve oversight and was required to hold significantly higher levels of capital than previously mandated. Moreover, the law weakened federal pre-emption rules that suddenly exposed similar non-bank "banks" to state consumer protection laws that created new levels of difficulty for compliance, which is why Block chose to exit the business.

Source: Company.

In addition to acquiring H&R Block Bank, which offers traditional banking services including checking and savings accounts, IRAs, and CDs, BofI's Federal Bank unit will receive about $450 million to $550 million in customer deposits and balances on prepaid cards, while offering Block-branded financial services under a program management agreement between the two. BofI, which operates Bank of Internet USA and claims it's the oldest online bank in the country, expects to generate revenues of between $26 million and $28 million annually from that portion of the deal alone.

Block said it anticipates taking one-time charges of about penny per share and will recognize a loss of $0.03 per share this year on the unit's sale. Divesting itself of the bank will also reduce net income by $0.07 to $0.09 per share in fiscal year 2015. While certain bank assets won't be sold, Block will give up its bank charter once the deal is complete.

Although Frank-Dodd was supposed to rein in the excesses of the financial titans that caused the collapse of the financial markets, those banks deemed "too big to fail" seem to have only gotten bigger in the years since its passage while small community banking operations have declined. Analysts note the number of federally insured institutions fell below 7,000 for the first time since the Depression, and anticipate they'll fall below 5,000 over the next decade.
 
While consolidation is credited for part of the reduction, an unwillingness to deal with the increased complexity of regulation, such as that driving Block to sell its bank, has claimed its share too. There's a three-step regulatory process for Block to go through to complete the sale to BofI, and though it may prove taxing to its immediate returns, going back to its tax-prep roots is worth the cost of shedding the yoke of oversight.

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