HR Block 2008 Annual Report Download - page 49

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investment, partially offset by an increase in average deposits. The following table summarizes the key drivers of
net interest revenue on banking activities:
Year Ended April 30, 2008 2007 2008 2007
Average Balance Average Rate Earned (Paid)
(dollars in 000s)
Mortgage loans held for investment $1,169,644 $746,387 6.40% 6.80%
Emerald Advance lines of credit 63,743 –36.00% –%
Other investments 196,262 117,350 3.64% 5.25%
Deposits 1,094,161 700,707 (3.92%) (4.59%)
Although the interest rate target on Federal Funds decreased during the third quarter, the impact to HRB Bank’s
net interest margin was minimal. On an annualized basis, the rate decrease should have a positive impact to net
interest margin, although we expect our average deposits to decline in fiscal year 2009.
Detail of our mortgage loans held for investment and the related allowance at April 30, 2008 and 2007 is as
follows:
Outstanding
Principal Balance
Loan Loss
Allowance
%30-Days
Past Due
Outstanding
Principal Balance
Loan Loss
Allowance
%30-Days
Past Due
2008 2007Year Ended April 30,
(dollars in 000s)
Purchased from OOMC and affiliates $ 734,658 $ 44,180 16.30% $ 1,010,028 $ 3,341 4.70%
Purchased from third-parties 269,982 1,221 1.90% 340,864 107 0.50%
Total mortgage loans held for investment $ 1,004,640 $ 45,401 11.71% $ 1,350,892 $ 3,448 3.86%
We recorded a provision for loan losses on our mortgage loans held for investment of $42.0 million during the
current year, compared to $3.6 million in the prior year. Our loan loss provision increased significantly during the
current year as a result of declining collateral values due to declining residential home prices, and increasing
delinquencies occurring in our portfolio. Our loan loss reserve as a percent of mortgage loans was 4.49%, or
$45.4 million, at April 30, 2008, compared to 0.25%, or $3.4 million, at April 30, 2007.
Mortgage loans held for investment includes loans originated by OOMC and affiliates and purchased by HRB
Bank. Those loans have experienced higher rates of delinquency than other loans in our portfolio and expose us to
a higher risk of potential credit loss. Residential real estate markets are experiencing significant declines in
property values and mortgage default rates are increasing. If adverse market trends continue, including trends
within our portfolio specifically, we may be required to record additional loan loss provisions, and those losses
may be significant.
Total expenses rose $34.0 million, or 10.6%, from the prior year. Compensation and benefits increased
$23.3 million, or 17.1%, primarily due to higher commission and bonus payouts resulting from improved
production revenue and a higher number of recently recruited advisors. Other cost of services increased
$9.3 million, or 33.8%, primarily due to additional expenses associated with the H&R Block Prepaid Emerald
MasterCard»program.
Amortization of intangible assets decreased $15.3 million, or 41.7%, as the related intangible assets were fully
amortized in November 2007.
Selling, general and administrative expenses increased $16.1 million, or 17.3%, primarily due to expenses
associated with the Emerald Advance lines of credit, coupled with gains on the disposition of certain assets
recorded in the prior year.
Pretax income for fiscal year 2008 was $10.1 million compared to prior year income of $19.8 million.
FISCAL 2007 COMPARED TO FISCAL 2006 – Consumer Financial Services’ revenues, net of interest expense and
provision for loan losses, for fiscal year 2007 increased $58.3 million, or 20.7%, over fiscal year 2006, primarily as a
result of HRB Bank, which commenced operations May 1, 2006 and contributed $38.3 million. HRBFA revenues
increased $20.0 million over fiscal year 2006.
Financial advisor production revenue, which consists primarily of fees earned on assets under administration
and commissions on customer trades, increased $9.2 million, or 4.8%, over fiscal year 2006 due primarily to higher
annuitized revenues. The following table summarizes the key drivers of production revenue:
Year Ended April 30, 2007 2006
Client trades 907,075 974,625
Average revenue per trade $ 126.54 $ 119.11
Ending balance of assets under administration (billions) $ 33.1 $ 31.8
Annualized productivity per advisor $ 216,000 $ 194,000
H&R BLOCK 2008 Form 10K 29