HR Block 2011 Annual Report Download - page 34

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Pretax income for the year ended April 30, 2010 of $58.7 million compares to $96.1 million in fiscal year 2009.
Pretax margin for the segment decreased from 10.7% in fiscal year 2009, to 6.8% in fiscal year 2010, primarily due to
poor results in our capital markets business and a reduction of revenue in our core businesses.
CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from U.S. passive investments, interest expense on
borrowings, net interest margin and gains or losses relating to mortgage loans held for investment, real estate
owned, residual interests in securitizations and other corporate expenses, principally related to finance, legal and
other support departments.
Year Ended April 30, 2011 2010 2009
Corporate – Operating Results (in 000s)
Interest income on mortgage loans held for investment $ 24,693 $ 31,877 $ 46,396
Other 7,448 6,854 7,295
Total revenues 32,141 38,731 53,691
Interest expense 84,288 79,929 92,945
Provision for loan losses 35,567 47,750 63,897
Compensation and benefits 49,463 53,607 48,973
Other, net 2,299 (614) 31,651
Total expense 171,617 180,672 237,466
Pretax loss $ (139,476) $ (141,941) $ (183,775)
FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010
Interest income earned on mortgage loans held for investment decreased $7.2 million, or 22.5%, from the prior year,
primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased
$12.2 million, or 25.5%, from the prior year as a result of the continued run-off of our portfolio.
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations was 38.1% for the fiscal year ended April 30, 2011, compared to
37.6% in the prior year. This increase resulted from a decline in gains from investments in company-owned life
insurance assets which are not subject to tax, an increase in the state effective tax rate and other favorable net
discrete adjustments booked in the current year compared to unfavorable adjustments recorded in the prior year.
FISCAL YEAR 2010 COMPARED TO FISCAL YEAR 2009
Interest income earned on mortgage loans held for investment for the fiscal year ended April 30, 2010 decreased
$14.5 million, or 31.3%, from fiscal year 2009, primarily as a result of non-performing loans. Interest expense
decreased $13.0 million, or 14.0%, due to lower funding costs related to our mortgage loan portfolio and lower
corporate borrowings. Our provision for loan losses decreased $16.1 million from fiscal year 2009.
Other expenses declined $32.3 million primarily due to gains of $9.0 million on residual interests in fiscal year
2010, compared to impairments of $3.1 million recorded in fiscal year 2009. Additionally, we transferred liabilities
relating to previously retained insurance risk to a third-party, and recorded a gain of $9.5 million in fiscal year 2010.
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations was 37.6% for the fiscal year ended April 30, 2010, compared to
38.9% in fiscal year 2009. Our effective tax rates declined from fiscal year 2009 due to a reduction in our valuation
allowance related to tax-planning strategies and favorable tax benefits related to investment gains on our
corporate owned life insurance investments.
DISCONTINUED OPERATIONS
Sand Canyon Corporation (“SCC”, previously known as Option One Mortgage Corporation) ceased originating
mortgage loans in December of 2007 and, in April 2008, sold its servicing assets and discontinued its remaining
operations. The sale of servicing assets did not include the sale of any mortgage loans. SCC retained contingent
liabilities that arose from the operations of SCC prior to its disposal, including certain mortgage loan repurchase
obligations, contingent liabilities associated with litigation and related claims, lease commitments, and employee
termination benefits. SCC also retained residual interests in certain mortgage loan securitization transactions
prior to cessation of its origination business. The net loss from discontinued operations totaled $13.3 million,
$9.7 million and $27.4 million for the fiscal years ended April 30, 2011, 2010 and 2009, respectively.
In connection with the securitization and sale of mortgage loans, SCC made certain representations and
warranties. In the event that there is a breach of a representation and warranty and such breach materially and
22 H&R BLOCK 2011 Form 10K