I had a productive trip to Kansas City on Thursday.
H&R Block's annual shareholder's meeting was held in the theater of the Kansas City Repertory Theater. There was a table set up in the lobby. I signed in. I was the third visitor. The letters "H.K" had been scrawled in the previous entry.
From the start, the leadership at H&R Block was extremely gracious. The General Counsel met to go over some basic ground rules for the meeting. He explained the agenda and directed me to a seat near a microphone. A few minutes later, Alan Bennett introduced himself.
As soon as I sat down, a man in a blue embroidered polyester vest and matching pants turned around. He raised his eyebrows. The message was: I'm with you here.
"I'm going to let them know a few things," he said.
"This is my 31st annual meeting, out of the last 36 annual meetings," he said.
This was "H.K." H.K. was not a staff member at Block, but another shareholder.
"I live in Yonkers, New York. I always pay my way. I don't ask for nothing. I speak my mind. I don't speak from a teleprompter, unlike the 44th President of the United States. I have attended 271 annual meetings. I attended my first meeting at noon, April 23, 1971. I attended my first meeting of the shareholder's of H&R Block at 11 a.m, on Sept. 2, 1974."
The Meeting Itself
After the Secretary attended to some perfunctory recitations of legally required disclosures and the results of balloting, Chairman Richard Breeden stepped up to a podium. Mr. Breeden offered a general review of the company's performance. Alan Bennett followed with a more explicit analysis of some of the issues facing the company:
- customer retention
- the end of the debt indicator
- unemployment in a core customer group: A Northeastern University study that documents the very high levels of unemployment among people with historical incomes of between $1 and $25,000.
Each of these is a genuine challenge for Block. Block had a net loss of 700,000 customers in the previous year. Unemployment is approximately 30 percent and 18 percent, respectively, among people with incomes below $13,000 and from $13,000 to $25,000.
Soon it was my turn. I challenged the company to explain its insistence in continuing to offer refund loans, absent the security of the debt indicator as an underwriting tool. The Kansas City Business Journal included a quote that summarized my logic.
A few takeaways:
The desire on the part of Block to use refund loans as an option for settlement will not end with the expiration of their contract with HSBC. My sense is that Block still thinks that RALs can create a competitive advantage for their company. They will not walk away from the RAL market, even if the other competitors in the space were no longer able to or willing to offer the product.
The costs are going to go up. The risks are going to go up, so Block is going to expect more reward. The IRS won't let Block use its own bank, Block Bank (OTS) to make the loans that are facilitated by its tax preparers. Thus the need for a relationship with HSBC.
Not even some of the senior staff at Block have read the Jan. 12th, 2010 amended agreement with HSBC that requires Block to buy back the share of participation interests (loans) that HSBC would have otherwise kept, if those loans are not collectible. That means that Block could be forced to try to collect on hundreds of thousands of refund loans that have gone bad when Treasury blocked those refunds due to an outstanding debt.
They don't believe that an ancillary product can get in the way of their core mission. Block wants to be identified by the quality and value of its tax preparation. Alan Bennett emphasized that point. Management doesn't see the conflict between that and the loans that they offer, even when those loans are the sole message in their advertisements. Remember "I Got People?" Those ads ran on buses in Durham, and those words were usually used to explain how someone got their money back so quickly from the IRS.
They are playing a blame game. Bennett did go over the settlement product situation. To me, he was a bit off base, though. He faulted the IRS for its decision to cease providing the debt indicator. Perhaps there is some truth to that perspective. At the same time, it isn't answering the right question. The real question is "what should Block do in response to the IRS' decision?" They are going to raise RAL prices, which they also attributed to the IRS.
The Emerald Card platform is going to become very significant to their business model over the next few years. The card has a line of credit, but unlike the MetaBank/NetSpend program, it is a lot more friendly to the consumer. Block says that consumers loaded $8 billion in deposits on to the cards in the last year. It makes me wonder if Treasury will include Block among the institutions that it partners with for its new debit card program.
I think that the IRS has left a political opening for the tax preparers to criticize their decision-making after the 2011 tax season. It seems likely that a lot of returns are going to be held up next year, as they are in any other year. (According to the IRS, more than 844,000 RAL applications were offset in 2005.) That's going to be a big problem, and it will hurt not just the preparers, but also the households that are suddenly facing a judgment. All of that anger could easily be directed back to Mark Ernst and the IRS.