HR Block 2007 Annual Report Download - page 59

The following table summarizes the key metrics related to our loan restructuring plans, coupled with retention bonuses and higher
servicing business: consulting expenses. See additional discussion of the restructuring
charge in Item 8, note 20 to the consolidated financial statements.
(dollars in 000s)
The pretax loss for the year ended April 30, 2007 was $1.2 billion
Year Ended April 30, 2007 2006
compared to income of $316.9 million in the prior year.
Average servicing portfolio:
The loss from discontinued operations for fiscal year 2007 of
With related MSRs $63,870,378 $56,521,595
$808.0 million is net of tax benefits of $425.0 million, and includes
Without related MSRs 3,314,538 19,106,863
income tax benefits related to OOMC totaling $374.6 million. Income
$67,184,916 $75,628,458
taxes for discontinued operations also included one-time benefits of
Ending servicing portfolio:
$16.2 million related to permanent deductions for the tax basis of
With related MSRs $63,927,976 $62,910,568
investments in two subsidiaries that were abandoned during the year.
Without related MSRs 3,069,073 10,471,509
Assets of discontinued operations held for sale includes deferred tax
$66,997,049 $73,382,077
assets of $393.6 million, net of the related valuation allowance, and
Number of loans serviced 384,156 441,981
deferred tax liabilities of $94.0 million as of April 30, 2007. In addition,
Average delinquency rate 9.77% 5.16%
we recorded a valuation allowance of $55.8 million, which primarily
Weighted average FICO score 621 621
relates to deferred tax assets for capital losses and basis differences in
WACof portfolio 8.08% 7.58%
certain state jurisdictions. Deferred tax assets of $183.2 million relate to
Carrying value of MSRs 253,067 272,472
certain residual assets. Although the tax position associated with these
Loan servicing revenues increased $34.4 million, or 8.6%, compared to deferred tax assets is more likely than not of being sustained, there is a
the prior year. The increase reflects higher late fee income on level of uncertainty associated with the amount of benefit. We believe
delinquent loans. This increase was partially offset by a reduction in our the net deferred tax asset at April 30, 2007 is, more likely than not,
average servicing portfolio, which decreased 11.2%, to $67.2 billion. The realizable.
annualized rate earned on our entire servicing portfolio was 37 basis
points for the current year, compared to 38 basis points in the prior FISCAL 2006 COMPARED TO FISCAL 2005 –Revenues from
year. discontinued operations increased $24.4 million, or 1.9%, over fiscal
31 m
Total expenses for the fiscal year ended April 30, 2007 increased year 2005. Revenues increased as a result of higher loan servicing
$326.4 million, or 33.3%, over the prior year. Cost of services increased revenues and gains on derivatives, partially offset by lower margins on
$28.5 million primarily as a result of higher amortization of MSRs, mortgage loans sold and lower accretion.
partially offset by reductions in compensation and occupancy expenses Despite a 31.5% increase in loan origination volume, gains on sales of
resulting from our mortgage restructuring activities. mortgage loans decreased $163.0 million, primarily as a result of
Cost of other revenues decreased $149.1 million, primarily due to our moderating demand by loan buyers and rising two-year swap rates.
ongoing restructuring plans. As a result, compensation and benefits Market interest rates, based on the two-year swap, increased from an
declined $116.7 million and other expenses declined $27.4 million. average of 3.32% last year to 4.63% in the current year. However, our
In conjunction with our agreement to sell OOMC, we recorded WACincreased only 51 basis points, up to 7.87% from 7.36% in the prior
impairments during the fourth quarter of fiscal year 2007. The purchase year. Due to competitive market conditions, we were unable to align our
price will be calculated as the fair value of the adjusted tangible net WACwith increases in market rates. Because of poor alignment of our
assets of OOMC (as defined by the agreement) at closing less WACwith market rates and increases in our funding costs, our loan sale
$300.0 million. At April 30, 2007, we valued our assets and liabilities held premium declined 135 basis points, to 1.42% from 2.77% in the prior
for sale at estimated fair value at closing, less costs to sell, of year. In fiscal year 2006, we also increased our loss reserves above our
$1.1 billion which resulted in an impairment charge of $345.8 million, normal loss accrual, primarily related to repurchase activity for loans
including the full impairment of goodwill of $152.5 million. Because sold related to early payment defaults, which reduced gains on sales of
conditions may change during the period prior to closing, the adjusted mortgage loans.
tangible net assets of the business at the closing date may be The initial value of MSRs recorded in fiscal year 2006 increased to 61
significantly different than the estimated value we have reported as of basis points from 44 basis points in the prior year, which resulted in an
April 30, 2007. Any changes could change the final impairment amount increase of $113.0 million in gains on sales of mortgage loans. These
recorded at closing. See discussion of additional conditions of the sale increases were primarily due to higher origination volumes, average
in Item 1A, under ‘‘Potential Sale Transaction.’’ loan size and interest rates, coupled with updated valuation
Selling, general and administrative expenses increased $96.1 million assumptions. During fiscal year 2006 we updated our assumptions used
due primarily to severance costs in connection with our ongoing to value our MSRs. The assumptions were updated primarily to reflect
H&R BLOCK 2007 Form 10K