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NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial statements for a
discussion of recently issued accounting pronouncements.
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION
Banking Ratios (dollars in 000s)
We report our financial results in accordance with generally accepted
accounting principles (GAAP). However, we believe certain non-GAAP
Year Ended April 30, 2007
performance measures and ratios used in managing the business may
Efficiency Ratio:
Total Consumer Financial Services expenses $325,709
provide additional meaningful comparisons between current year
Less: Interest and non-banking expenses 309,498
results and prior periods, by excluding certain items that do not
Non-interest banking expenses $16,211
represent results from our basic operations. Reconciliations to GAAP
Total Consumer Financial Services revenues $388,090
financial measures are provided below. These non-GAAP financial
Less: Non-banking revenues and interest expense 343,876
measures should be viewed in addition to, not as an alternative for, our
Banking revenue —net of interest expense $44,214
reported GAAP results.
37%
Net Interest Margin:
Discontinued Operations –Origination Margin(dollars in 000s)
Net banking interest revenue $23,963
Year Ended April 30, 2007 2006 2005 Divided by average earning assets $888,320
Total expenses $1,307,582 $981,137 $783,548 2.70%
Add: Expenses netted against gain Pretax Return on Average Assets:
on sale revenues 171,374 387,911 378,304 Total Consumer Financial Services pretax income $19,811
Less: Less: Non-banking pretax loss (3,275)
Cost of services 380,186 351,676 253,461 Pretax banking income $23,086
Cost of acquisition 36,703 150,981 169,621
Allocated support departments 29,323 26,176 24,161 Divided by average assets $888,320
Impairment of assets 350,878 –– 2.60%
m46 Other 113,126 63,149 21,633
Total cost of origination $568,740 $777,066 $692,976
Divided by origination volume $27,073,467 $40,779,763 $31,001,724
Cost of origination 2.10% 1.91% 2.23%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
INTEREST RATE RISK –We have a formal investment policy to help Our short-term borrowings at April 30, 2007 totaled $1.6 billion, and
minimize the market risk exposure of our cash equivalents and AFS consisted of $1.0 billion in commercial paper, $500.0 million drawn on a
securities, which are primarily affected by credit quality and movements new credit facility and $75.0 million in FHLB advances. For fiscal year
in interest rates. These guidelines focus on managing liquidity and 2007, the average issuance term of our commercial paper was 45 days
preserving principal and earnings. Most of our interest rate-sensitive and the average outstanding balance was $1.0 billion. As commercial
assets and liabilities are managed at the subsidiary level. paper and bank borrowings are generally seasonal, interest rate risk
Our cash equivalents are primarily held for liquidity purposes and are typically increases through our third fiscal quarter and declines to zero
comprised of high quality, short-term investments, including qualified by fiscal year-end. However, at April 30, 2007, $1.0 billion in commercial
money market funds. As of April 30, 2007, our non-restricted cash and paper was outstanding due to working capital needs, primarily due to
cash equivalents had an average maturity of less than three months with operating losses in our mortgage operations. In April 2007, we obtained
an average credit quality of AAA. With such a short maturity, our a $500.0 million credit facility to provide funding for the $500.0 million
portfolio’s market value is relatively insensitive to interest rate changes. of 8
1
/
2
% Senior Notes which were due April 16, 2007. The facility, which
We hold investments in fixed-income securities at our captive insurance was fully drawn at closing, matures on December 20, 2007. While the
subsidiary. See the table below for sensitivities to changes in interest market value of short-term borrowings is relatively insensitive to
rates. See additional discussion of interest rate risk included below in interest rate changes, interest expense on short-term borrowings will
Consumer Financial Services and Discontinued Operations. increase and decrease with changes in the underlying short-term
H&R BLOCK 2007 Form 10K