HR Block 2005 Annual Report Download - page 8

6
Letter t o Shareholders
Actions Taken to Improve
Financial Advisors’ Performance
We are disappointed that H&R Block Financial
Advisors did not meet our financial expectations again
this year. While revenues increased 4 percent, we
saw only a very slight improvement to the pretax loss.
On the positive side, the actions we put in place near
the end of the year to improve this business segment’s
performance are taking hold. Those actions included
restructuring the business and more closely aligning
costs with near-term revenue potential.
In addition, we’ve implemented strict financial
advisor production standards while also strengthening
our programs that build financial advisor/tax
professional partnerships. These partnerships
provided more than 100,000 direct leads to financial
advisors this past tax season, an 82 percent increase
over last year. Clients continue to demonstrate a
desire to have a financial advisor relationship with
H&R Block.
As we continue to focus on attracting and retaining
productive advisors, along with the measures
mentioned above, we expect this segment’s results
must substantially improve in fiscal 2006.
Option One Addresses
A Changing M ortgage M arket
For a number of years, we have highlighted Option
One’s unique business and outstanding financial
results, while at the same time knowing that market
dynamics would change and present challenges to
this business. We saw that change this year, with
revenues declining 6 percent to $1.2 billion and
earnings dropping 28 percent to $496.1 million from
the previous year. Although the market dynamics
generated disappointing financial results, we are
still pleased with the way our organization responded
to the market challenges.
As short-term interest rates began to rise early in
our fiscal year, production volume growth began to
slow and industry pricing became very competitive.
We undertook an aggressive expansion in the
number of account executives and support staff,
which allowed more clients to access Option One’s
industry-leading mortgage service quality. In the
process, we increased loan production more than
33 percent to $31 billion.
At the same time, we were highly focused on cost
management, reducing our cost of originating loans
by 47 basis points in the fourth quarter when
compared to the same period in the previous year.
We expect continued production growth in fiscal
2006 and believe our ongoing efforts can deliver a
net cost of origination of 175 to 200 basis points by
the end of the fiscal year.
We also began utilizing technology solutions to
enhance our competitive position within the market.
Our recently introduced prequalification technology
will enable Option One to more efficiently serve our
growing network of broker clients, while our new
automated underwriting process will be implemented
in the coming year.
Option One’s mortgage servicing business continues
to grow, as we increased the number of loans serviced
by more than 34 percent. Likewise, our servicing
portfolio saw a healthy increase of 50 percent to
$68 billion at year’s end.
H&R Block Mortgage, our retail mortgage subsidiary,
continues to increase the number of loans made to
our tax clients, as programs to strengthen the
integration between our income tax and mortgage
businesses resulted in the largest number of qualified
referrals to H&R Block Mortgage in the company’s
history. This segment of our mortgage business
originated nearly 30 percent more loans this year
than last.
Our business and the mortgage industry as a whole
have benefited from appreciating home values and
historically low interest rates. However, these
factors can’t last forever. Undoubtedly, we will face
new challenges in the future. The actions that we