HR Block 2008 Annual Report Download - page 33

increase in loan delinquencies and declining collateral values. As a result of similar trends in our loan portfolio, we
recorded significant loan loss provisions during fiscal year 2008.
Our loan portfolio is concentrated in the states of Florida, California, New York and Wisconsin, which
represented 19.9%, 17.3%, 12.8% and 8.8%, respectively, of our total mortgage loans held for investment at
April 30, 2008. No other state held more than 5% of our loan balances. If adverse trends in the residential
mortgage loan market continue, particularly in geographic areas in which we own a greater concentration of
mortgage loans, we could incur additional significant loan loss provisions.
Mortgage loans purchased from OOMC and its affiliates represented approximately 75% of total loans held for
investment at April 30, 2008. These loans have been subject to higher delinquency rates than other loans in our
portfolio, and may expose us to greater risk of credit loss.
Downturns in the securities markets increase the credit risk associated with margin lending and stock
loan transactions.
We permit customers to purchase securities on margin. A downturn in the securities markets may impact the value
of collateral held in connection with margin receivables and may reduce its value below the amount borrowed,
potentially creating collections issues with our margin receivables. In addition, we frequently borrow securities
from and lend securities to other broker-dealers. Under regulatory guidelines, when we borrow or lend securities,
we must generally simultaneously disburse or receive cash deposits. A sharp change in security market values may
result in losses if counterparties to the borrowing and lending transactions fail to honor their commitments.
Our ability to retain and attract qualified financial advisors is critical to the success of our business and
the failure to do so may materially adversely affect our performance.
Attracting and retaining experienced financial advisors is extremely competitive in the investment industry.
Additionally, in this industry, clients tend to follow their advisors, regardless of their affiliated investment firm. The
inability to recruit and retain qualified and productive advisors may cause our revenues or profitability to decline.
Changes in interest rates may adversely affect our business, including net interest income and earnings.
Net interest income is an important source of revenue for this segment. Our results of operations depend, in part,
on our level of net interest income and our effective management of the impact of changing interest rates and
varying asset and liability maturities.
HRB Bank raises funds by, among other things, accepting deposits from depositors, which we use to make loans
to customers and invest in debt securities and other interest-earning assets. We earn interest on these loans and
assets and pay interest on the money we borrow and on the deposits we accept from depositors. Changes in
interest rates, including changes in the relationship between short-term rates and long-term rates, may have
negative effects on our net interest income and earnings. Changes in interest rates and responses by our
competitors to those changes may affect the rate of customer prepayments for mortgages and the level of
mortgage loan delinquencies. These changes can reduce the overall yield on our assets. Changes in interest rates
and responses by our competitors to these changes may also affect customer decisions to maintain balances in the
deposit accounts they have with us. These changes may require us to replace withdrawn balances with higher-cost
alternative sources of funding.
HRBFA holds interest bearing receivables from customers, brokers and dealers, which consist primarily of
amounts due on margin transactions and also earns a spread on customer balances held in FDIC-insured bank
accounts. We fund short-term margin balances with short-term variable rate liabilities from customers, brokers
and dealers, including stock loan activity. Our fixed income portfolio is affected by changes in market rates and
prices.
DISCONTINUED OPERATIONS
OOMC is subject to potential contingent liabilities stemming from discontinued mortgage operations,
which may result in significant financial losses.
Litigation. Although OOMC terminated its mortgage loan origination activities and sold its loan servicing
business during fiscal year 2008, it remains subject to investigations, claims and lawsuits pertaining to its loan
origination and servicing activities prior to such termination and sale. The costs involved in defending against
and/or resolving these investigations, claims and lawsuits may be substantial in some instances and the ultimate
resulting liability is difficult to predict. In the current non-prime mortgage environment, the number and frequency
of investigations, claims and lawsuits has increased over historical experience and is likely to continue at
increased levels. In the event of unfavorable outcomes, the amount OOMC may be required to pay in the discharge
of liabilities or settlements could be substantial and, because OOMC’s operating results are included in our
consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
H&R BLOCK 2008 Form 10K 13