HR Block 2007 Annual Report Download - page 43

and the job market could result in, among other things, deterioration in extend through various dates. Two waivers are subject to OOMC having
credit quality of our loan portfolio. Our loan portfolio is concentrated in a specified amount of total warehouse capacity. If we do not obtain
the states of Florida, California, New York and Wisconsin, which extensions of facilities and waivers that expire before July 31, 2007 or
represented 18.8%, 16.3%, 12.8% and 9.7%, respectively, of our total expand existing capacity, we would be in violation of this warehouse
mortgage loans held for investment at April 30, 2007. No other state held capacity requirement.
more than 5% of our loan balances. OOMC will not meet this financial covenant at July 31, 2007. We have,
INTEGRATION INTO THE H&R BLOCK BRAND –We are working to however, obtained waivers from a sufficient number of warehouse
foster an advice-based relationship with our tax clients through our providers to allow OOMC to continue its off-balance sheet financing
retail tax office network. This advice-based relationship is key to the activities. At our current origination levels, we estimate we would only
integration of Consumer Financial Services into the H&R Block brand need waivers for between $3.0 billion and $4.0 billion of available
and deepening our current client relationships. If we are unable to capacity at any given time. However, the sale of OOMC is subject to
successfully integrate, it may significantly impact our ability to various closing conditions, including that OOMC maintain at least
differentiate our business from other financial service providers and $8.0 billion of total capacity in its warehouse facilities throughout the
grow our client base. period to the closing date (of which at least $2.0 billion is to be in the
RECRUITING AND RETENTION OF FINANCIAL form of unused capacity at the closing date).
ADVISORS–Attracting and retaining experienced financial advisors is If OOMC cannot obtain extensions or waivers, warehouse facility
extremely competitive in the investment industry. Additionally, in this providers would have the right to terminate their future funding
industry, clients tend to follow their advisors, regardless of their obligations under the applicable warehouse facilities, terminate OOMC’s
affiliated investment firm. The inability to recruit and retain qualified right to service the loans remaining in the applicable warehouse or
and productive advisors, may adversely affect our results of operations. request funding of the 10% guarantee. This termination could adversely
INTEREST RATE RISK –Net interest income is an important source of impact OOMC’s ability to fund new loans and our ability to complete the
revenue for this segment. Our ability to manage interest rate risk could OOMC sales transaction. See additional discussion in Item 7, under ‘‘Off-
impact our financial condition. Our results of operations depend, in Balance Sheet Financing Arrangements.’’
part, on our level of net interest income and our effective management COMPETITIVE POSITION–The majority of our mortgage loan
15 m
of the impact of changing interest rates and varying asset and liability applications are submitted through a network of brokers who have
maturities. Many factors affect interest rates, including governmental relationships with many other mortgage lenders. Unfavorable changes
monetary policies and domestic and international economic and in our pricing, service or other factors could result in a decline in our
political conditions. mortgage origination volume. A significant decline in our servicer
RECURRING OPERATING LOSSES –Continuing operating losses at ratings could adversely affect our pricing and origination volume.
HRBFAmay impact the valuation of goodwill and long-lived assets. Increased competition among mortgage lenders can also result in a
Such losses could also necessitate additional capital contributions to decline in coupon rates offered to our borrowers, which in turn lowers
comply with regulatory requirements. The inability to operate this margins and could adversely affect our gains on sales of mortgage loans.
segment in a profitable manner may adversely affect our results of MARKET RISKS –Our day-to-day operating activities of originating
operations. and selling mortgage loans have many aspects of interest rate risk.
Additionally, the valuation of our retained residual interests and
DISCONTINUED OPERATIONS mortgage servicing rights includes many estimates and assumptions
LIQUIDITY AND CAPITAL –We are dependent on the use of our off- made by management surrounding interest rates, prepayment speeds
balance sheet arrangements to fund our daily non-prime mortgage loan and credit losses. Variation in interest rates or the factors underlying
originations, and depend on the secondary market to securitize and sell our assumptions could affect our results of operations. See Item 7A,
mortgage loans and residual interests. Our off-balance sheet under ‘‘Discontinued Operations’’ for discussion of interest rate risk,
arrangements are subject to certain covenants, including a ‘‘minimum and Item 7, ‘‘Critical Accounting Policies’’ for discussion of our
net income’’ financial covenant. As of April 30, 2007, OOMC did not valuation methodology.
meet the ‘‘minimum net income’’ financial covenant contained in certain Conditions in the non-prime mortgage industry were challenging
of its committed warehouse facilities. This covenant requires OOMC to throughout fiscal year 2007, and particularly in our fourth quarter. Our
maintain a cumulative minimum net income of at least $1 for the four mortgage operations, as well as the entire industry, were impacted by
consecutive fiscal quarters ended April 30, 2007. On April 27, 2007, deteriorating conditions in the secondary market, where reduced
OOMC obtained waivers of the minimum net income financial investor demand for loan purchases, higher investor yield requirements
covenants from all of the warehouse facility providers. These waivers and increased estimates for future losses reduced the value of non-
H&R BLOCK 2007 Form 10K