The Company said it lost $86.3 million, or 26 cents a share, in the fiscal second quarter, well above the $72.2 million, or 22 cents-a-share, loss it originally reported in mid-November.
H&R Block's earnings are highly seasonal because of the surge in tax work between January and April and it is not unusual for the company to report losses in its first and second quarters. Management is still talking profits for full-year FY '06, and said it expects HRB to earn between $1.90 and $2.15 a share for the fiscal year.
Better known for its tax-preparation and tax-consulting services, HRB is of investing interest because approximately 50 cents of every dollar in revenue is generated by mortgage services. This operating segment is engaged in the origination of non-prime mortgage loans through an independent broker network, the sale and securitization of mortgage loans, and the servicing of non-prime loans. [ed. note. non-prime means "sub-prime," which means "high-risk."] Of the $12.6 billion in loans generated in the quarter-ended October 31, 2005, approximately 96.6% of this volume originated in sub-prime lending. Rising interest rates are pressuring margins. The Company's recently filed 10Q noted that despite increases in loan origination volume, gains on sales of mortgage loans decreased $120.2 million, primarily as a result of rapidly rising two-year swap rates, additional credit enhancement requirements by rating agencies and moderating demand by loan buyers. Net margins fell to (0.20)% from 1.14% last year.