HR Block 2005 Annual Report Download - page 89

comprehensive income. We recorded a gain of $40.7 million in the Cost of services increased $28.3 million, or 14.7%, as a result of
prior year on similar transactions. a higher average servicing portfolio, particularly loans with MSRs,
Impairments of residual interests in securitizations of which also resulted in an increase in MSR amortization.
$12.2 million were recognized during the year compared with Cost of non-service revenues increased $36.7 million, or 12.8%,
$26.1 million in the prior year. The prior year impairments were over the prior year. Compensation and benefits increased
due primarily to loan performance of older residuals and changes $28.0 million as a result of a 25.4% increase in the number of
in assumptions to more closely align with the economic and employees, reflecting resources needed to support higher loan
interest rate environment. production volumes.
Total accretion of residual interests decreased $48.9 million Selling, general and administrative expenses increased
from the prior year. This decrease is primarily due to the sale of $49.7 million, or 32.2%, due to $12.1 million in increased retail
previously securitized residual interests during fiscal year 2004, marketing expenses and $7.4 million in additional consulting
which eliminated future accretion on those residual interests. expenses.
During fiscal year 2005, our residual interests continued to Pretax income decreased $192.4 million, or 27.9%, for fiscal
perform better than expected compared to internal valuation year 2005.
models. As a result of this performance, our residuals have FISCAL 2006 OUTLOOK ⬎⬎⬎
produced, or are expected to produce, more cash proceeds than We believe we can continue to grow our origination volumes in
projected in previous valuation models. We recorded favorable fiscal year 2006. Lowering our cost of origination will be a key
pretax mark-to-market adjustments, which increased the fair priority for the upcoming year and we have begun to implement
value of our residual interests $154.3 million during the year. new technologies to enhance the underwriting and origination
These adjustments were recorded, net of write-downs of processes.
$58.3 million and deferred taxes of $36.6 million, in other Based upon these assumptions, we expect loan origination
comprehensive income and will be accreted into income growth to exceed 20% at net margins in the range of .90% to 1.15%
throughout the remaining life of the residual interests. Future in fiscal year 2006.
changes in interest rates, actual loan pool performance or other
assumptions could cause additional favorable or unfavorable FISCAL 2004 COMPARED TO FISCAL 2003 ⬎⬎⬎
adjustments to the fair value of the residual interests and could Mortgage Services’ revenues increased $173.6 million, or 15.1%,
cause changes to the accretion of these residual interests in compared to fiscal year 2003. This increase was primarily a result
future periods. Additionally, sales of residual interests results in of increased production volumes, higher servicing income and
decreases to accretion income in future periods. accretion.
The following table summarizes the key drivers of loan- Gains on sales of mortgage loans increased $123.6 million, or
servicing revenues: 15.6%, for the year ended April 30, 2004. The increase over the
prior year is a result of a significant increase in loan origination
(dollars in 000s) volume, an increase in the average loan size and the closing ratio,
Year Ended April 30, 2005 2004 partially offset by a decrease in our gross margin and increased
Average servicing portfolio: loan sale repurchase reserves. During 2004, we originated
With related MSRs $ 41,021,448 $ 32,039,811 $23.3 billion in mortgage loans compared to $16.6 billion in 2003,
Without related MSRs 13,838,769 6,481,069 an increase of 40.3%. Our gross margin decreased primarily due to
$ 54,860,217 $ 38,520,880 lower WACs. The loan sale repurchase reserves, which are netted
Number of loans serviced 435,290 324,364 against gains on sales, increased $25.5 million over 2003. This
Average delinquency rate 4.85% 6.04% increase is primarily a result of an increase in loan sales coupled
Weighted average FICO score 610 596 with the increase in whole loan sales compared to securitizations,
Value of MSRs $ 166,614 $ 113,821 for which higher reserves are provided at the time of sale for
Loan-servicing revenues increased $61.3 million, or 29.0%, over estimated repurchases. As previously discussed, we reclassified
the prior year. The increase reflects a higher average loan- $103.3 million from interest income to gains on sales for fiscal
servicing portfolio. The average servicing portfolio for fiscal year year 2003.
2005 increased 42.4%. In November 2002, we completed the sale of previously
securitized residual interests and recorded a gain of $93.3 million.
H&R BLOCK 2005 Form 10K
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