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H&R Block Declines After Hiring Goldman to Advise on Bank

H&R Block Hires Goldman to Advise on Bank as Capital Rule Looms
H&R Block Inc. doesn’t “foresee regulatory flexibility” regarding its capital levels and is considering a status change so it would no longer fall under Fed oversight, the firm said yesterday in a filing. Photographer: Scott Eells/Bloomberg

H&R Block Inc., the largest U.S. tax preparer, slid the most in more than five months after hiring Goldman Sachs Group Inc. to advise on alternatives for its bank.

H&R Block tumbled 5.4 percent to close at $16.67 in New York, the biggest decline since April 26. The shares have gained 2.1 percent this year, compared with a 14 percent advance in the Standard & Poor’s 500 Index.

The tax preparer may drop its designation as a savings and loan holding company after the Federal Reserve proposed rules requiring such firms to keep additional capital, the Kansas City, Missouri-based company said today in a statement. H&R Block is considering “a number of alternatives” for its bank with New York-based Goldman Sachs, Chief Executive Officer Bill Cobb said in the statement without listing them.

A sale or wind-down of the bank could reduce H&R Block’s profit from lines of credit and prepaid cards, Mike Turner, an analyst at Compass Point Research & Trading LLC, wrote in a research note.

“We view the announcement as neutral to modestly negative near-term,” Turner wrote. H&R Block “will need to forfeit some of the economics (and control) of the transactions that are processed at the bank.”

H&R Block doesn’t “foresee regulatory flexibility” regarding its capital levels and is considering a status change so it would no longer fall under Fed oversight, the firm said yesterday in a filing.

‘Closely Supervise’

“The Federal Reserve will closely supervise and likely restrict other capital allocation decisions, including stock repurchases, acquisitions and other forms of strategic investment,” H&R Block said in the filing. “Such regulatory constraints are inconsistent with our strategic plans, operational needs and growth objectives.”

The tax preparer joins insurers that are also working to avoid the increased regulation that comes with bank status. MetLife Inc., the largest U.S. life insurer, is seeking to sell deposits to General Electric Co. and drop its designation as a bank holding company after regulators blocked the firm from repurchasing shares.

American International Group Inc., the insurer whose largest shareholder is the U.S., said in August it was weighing whether to close its bank. Hartford Financial Services Group Inc., Allstate Corp. and Ameriprise Financial Inc. have also retreated from banking.

Sand Canyon

H&R Block is grappling with lost revenue from refund-anticipation loans after U.S. regulators prompted HSBC Holdings Plc to stop financing the products for H&R Block in December 2010. In response, the company has promoted similar refund-anticipation checks and offered them free to some clients earlier this year.

The tax preparer agreed in April to pay more than $28 million to resolve Securities and Exchange Commission claims that its Option One Mortgage Corp. unit, now known as Sand Canyon Corp., didn’t tell stockholders it may not be able to afford the cost of buying back faulty mortgages sold to investors unless it gets assistance.

H&R Block Bank had $1.2 billion in total assets and 58 employees as of June 30, according to the Federal Deposit Insurance Corp.’s website. The bank’s website advertises the company’s Emerald prepaid cards, which Cobb said the company was “very committed to” in a Sept. 5 conference call.

“It’s a great source of growth for us,” Cobb said. “It’s a great service to our clients.”

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