H&R Block said it has entered into an agreement with Republic Bank and Trust Company to sell assets and transfer liabilities from its H&R Block Bank unit to Republic.

The deal, which was announced last Thursday, would allow Republic to act as the bank for H&R Block's main financial services products, including refund transfers, Emerald Advance lines of credit, and the Emerald Prepaid MasterCard.

“We’re pleased to take this important step in the process of exiting our bank and finding the right bank to continue offering our best-in-class financial services products,” said H&R Block president and CEO Bill Cobb in a statement. “We are committed to continuing our long-term strategy of providing tax and related financial solutions to our clients and this agreement will help us accomplish our goals.”

The deal in part reflects the decline of the refund anticipation loan business at H&R Block and other large tax prep chains. The RALs had been heavily criticized by consumer advocates for their steep effective interest rates, prompting federal banking regulators to crack down on them and the Internal Revenue Service to remove an indicator that allowed the tax prep chains to assess a taxpayer's likelihood of getting the refund. Most of the major tax prep vendors like Block have been forced to exit the RAL business.

As part of the transaction, Republic will acquire H&R Block Bank’s non-cash assets, projected to be approximately $3 million at closing. In addition, Republic will assume approximately $470 million in projected customer deposits. The net amount of projected non-cash deposits less projected assets, estimated at approximately $467 million, will be paid in cash by Block to Republic at closing.

The deal is subject to regulatory approval. Both H&R Block Bank and Republic are applying for the required regulatory approvals. After obtaining the necessary approvals, and fulfilling the closing conditions, H&R Block Bank will complete the transaction, merge with and into its parent, Block Financial, LLC, and surrender its bank charter.

“Our hope is to complete the transaction and have the financial services agreements with Republic in place in time to execute tax season 2014 with Republic,” said Cobb. “If regulatory approval is not received in time to accomplish this, we have contingency plans in place to offer financial services products through H&R Block Bank for tax season 2014.”

The agreement requires that all regulatory approvals must be received by Sept. 30, 2013 in order for the transaction to occur in 2013. If any regulatory approvals are obtained after Sept. 30, 2013, the agreement requires that the transaction will occur between April 30, 2014 and June 18, 2014. Republic said its goal is to complete the transaction in 2013. Its ability to offer H&R Block-branded financial services products to H&R Block’s clients under the new arrangement will be contingent upon the successful completion of the transaction.

The transaction and related costs are expected to result in one-time expenses to H&R Block of approximately $0.03 to $0.04 per share in fiscal year 2014 (based on current fully diluted shares outstanding), contingent on the timing of regulatory approval. Block expects the net financial impact of the service agreement with Republic to be dilutive by approximately $0.06 to $0.09 per share (based on current fully diluted shares outstanding), on an annual basis. Results will vary depending on the volumes of financial services products sold.

“H&R Block is the world’s largest consumer tax services provider and we are excited about the possibility of serving their clients on a long term basis,” said Republic chairman and CEO Steve Trager in a statement.

H&R Block’s shares advanced Friday after Thursday’s announcement. H&R Block announced in October 2012 that it was seeking strategic alternatives for H&R Block Bank that would result in H&R Block, Inc. no longer being regulated by the Federal Reserve Bank as a savings and loan holding company. This decision was prompted by proposed rules that would impose higher capital requirements on savings and loan holding companies such as H&R Block, Inc. The Federal Reserve proposed the rules in order to implement changes required by the Dodd-Frank Act.

“The proposed rules would require us to hold significant levels of additional capital, which does not properly align with our capital-light business model,” said H&R Block CFO Greg Macfarlane. "We believe it is in the best strategic interests of our company and our shareholders to cease being regulated as a savings and loan holding company and are taking the appropriate steps to do so.”

Goldman, Sachs & Co. and First Annapolis Consulting, Inc. acted as financial advisors to H&R Block for the transaction, and Stinson Morrison Hecker LLP and Morrison & Foerster LLP acted as H&R Block's legal counsel.

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