H&R Block Gains on Bank Spin-off Deal - Analyst Blog

H&R Block, Inc. HRB announced the signing of a deal between H&R Block Bank and BofI Federal Bank. Per the deal, H&R Block Bank will divest certain of its assets and liabilities to the latter.

Following the announcement, shares of this tax preparer gained 7.32% or $2.08 in the aftermarket trading.

The recent move marks a step forward by H&R Block to free itself from being subjected to regulations by the Federal Reserve Bank as a savings and loan holding company. Earlier in Oct 2012, H&R Block had announced its intention to divest H&R Block Bank.  The decision was evoked in light of the laws that demand higher capital requirements for savings and loan holding companies like H&R Block Bank. These rules were advocated by the Federal Reserve to execute the changes as per the Dodd-Frank Act. As a result, later in Jul 2013, H&R Block inked an agreement with Republic Bank and Trust Company to divest certain assets and transfer the liabilities of H&R Block Bank to the latter.

Both H&R Block Bank and BofI Federal Bank will seek for regulatory approvals. Upon completion of the transaction, besides surrendering its bank charter, H&R Block Bank will merge with its parent, Block Financial LLC.

Apart from regulatory approval, the transaction is also subject to negotiation of additional agreements. Under these agreements, BofI Federal Bank will act as the bank for H&R Block's core financial services products. Such products include Refund Transfers, Emerald Advance lines of credit and the Emerald Prepaid MasterCard.

Following the divestiture, H&R Block will incur a one-time cost of about 1 cent per share in fiscal 2014 and 2–3 cents per share in fiscal 2015. H&R Block also estimates dilution of about 7–9 cents per share on an annualized basis, stemming from the service agreement with BofI Federal Bank.

Moreover, the company will vend off certain available-for-sale securities held by H&R Block Bank. This transaction involves assumption of a loss of approximately 3 cents per share in fiscal year 2014. However, the bank transaction will result in about $200 to $250 million of immediate excess capital.

The Zacks Consensus Estimate for earnings for fiscal 2014 and 2015 is currently pegged at $1.63 and $1.96 per share. We expect these numbers to move south once analysts incorporate the charges in their estimates.

Nonetheless, these efforts are a testimony that H&R Block intends to intensify it focus on core tax business. Previously, it had divested RSM McGladrey to McGladrey & Pullen, LLP in Dec 2011. RSM McGladrey offered accounting, tax and consulting services to middle-market companies.

H&R Block currently carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks worth considering within the same sector include Rentrak Corporation RENT, SouFun Holdings Ltd.  SFUN and Outerwall Inc. OUTR. While Rentrak and SouFun Holdings sport a Zacks Rank #1 (Strong Buy), Outerwall carries a Zacks Rank #2 (Buy).