HR Block 2009 Annual Report Download - page 28

Details of our mortgage loans held for investment and the related allowance at April 30, 2009 and 2008 are as
follows:
Outstanding
Principal Balance
Loan Loss
Allowance
% 30-Days
Past Due Average FICO
(dollars in 000s)
As of April 30, 2009:
Purchased from SCC $ 531,233 $78,067 28.74% 639
All other 290,604 6,006 4.44% 715
$ 821,837 $84,073 20.23% 666
As of April 30, 2008:
Purchased from SCC $ 683,889 $43,769 17.53% 664
All other 320,751 1,632 2.07% 721
$1,004,640 $45,401 11.71% 682
Mortgage loans held for investment include loans originated by our affiliate, SCC, and purchased by HRB Bank
totaling $531.2 million, or approximately 65% of the total loan portfolio at April 30, 2009. Loans originated by and
purchased from SCC have characteristics which are representative of Alt-A loans — loans to customers who have
credit ratings above sub-prime, but may not conform to government-sponsored standards. As such, we have
experienced higher rates of delinquency and have greater exposure to loss with respect to this segment of our loan
portfolio. Cumulative losses on our original loan portfolio purchased from SCC and retained for investment,
including losses on loans now classified as other real estate, totaled approximately 14% at April 30, 2009. Our
remaining loan portfolio totaled $290.6 million and is characteristic of a prime loan portfolio, and we believe
subject to a lower loss exposure.
We recorded a provision for loan losses on our mortgage loans held for investment of $63.9 million during the
current year, compared to $42.0 million in the prior year. Our loan loss provision increased primarily as a result of
continued declines in residential home prices, particularly in certain states where we have a higher concentration
of loans. In addition, loan loss reserves increased due to higher projected delinquencies and higher reserves on
modified loans. Our allowance for loan losses as a percent of mortgage loans was 10.23%, or $84.1 million, at
April 30, 2009, compared to 4.49%, or $45.4 million, at April 30, 2008. This allowance represents our best estimate of
losses inherent in the loan portfolio as of the balance sheet dates.
Residential real estate markets are experiencing significant declines in property values and mortgage default
rates are increasing. If adverse market trends continue, including trends within our portfolio specifically, we may
be required to record additional loan loss provisions, and those losses may be significant.
Other revenue increased $10.0 million, or 25.2%, primarily due to incremental fees earned related to our H&R
Block Prepaid Emerald MasterCard»program.
Non-interest expenses increased $32.9 million, or 81.6%, from the prior year, primarily related higher expenses
from the H&R Block Prepaid Emerald MasterCard»and Emerald Advance line of credit programs, reflecting
higher volumes. The revenues and expenses from these programs are shared with the Tax Services segment.
The pretax loss for fiscal year 2009 was $14.5 million compared to prior year income of $11.5 million, primarily
due to a $21.9 million increase in provision for loan losses.
FISCAL 2008 COMPARED TO FISCAL 2007 – Consumer Financial Services’ revenues, net of interest expense and
provision for loan loss reserves, for fiscal year 2008 increased $11.2 million, or 27.7%, over fiscal year 2007.
Net interest income increased $30.4 million due to interest income received on our Emerald Advance loan
products and an increase in average mortgage loans held for investment, partially offset by an increase in average
deposits. The following table summarizes the key drivers of net interest income:
Year Ended April 30, 2008 2007 2008 2007
Average Balance Average Rate Earned (Paid)
(dollars in 000s)
Mortgage loans held for investment, net $1,157,360 $746,387 6.40% 6.80%
Emerald Advance lines of credit 68,932 – 32.31% – %
Investments 196,262 117,350 3.64% 5.25%
Deposits, interest-bearing 904,836 596,104 (4.74%) (5.39%)
24 H&R BLOCK 2009 Form 10K