Despite Streamlining, Unemployment to Stunt HRB Growth

Tax preparation and financial firm H&R Block (HRB) reported lower losses from discontinued operations such as its former subprime arm Option One. On HRB's FQ209 conference call, execs spoke about how unemployment will affect company growth, continued loan losses despite a narrowing this quarter and about a special short term credit product they are offering. The company's retail outlets are traditionally located in malls or strip malls, so they will take advantage of the downturn's effect on mall operators and landlords.

Where that holiday spend might come from—but at exorbitant interest rates:

We’ve enhanced our Emerald Advance line of credit product this tax season, making it available to both new and existing clients and increasing the amount available to existing clients up to $1,000.

With annual percentage rates between 9 and 36%, the Emerald Advance is a far more affordable option than the other financial services clients might use for short term credit. This year round line of credit was created with the FDIC’s proposed approach for consumer friendly, small dollar lending in mind. And given these tough economic times, we expect this compelling product to drive more tax clients in a safe and affordable manner.

Unemployment:

Due to job losses in calendar 2008, we are currently expecting overall growth in IRS tax filings, excluding one time economic stimulus act or ESA filers to be near zero. As you recall, we reported our growth last year, excluding one time ESA filers and we will continue that approach this year.

Loan losses continue even after divesting its subprime arm Option One and as even reworked loans often default:

Underlying collateral values on the mortgage loan portfolio continued to decline. As a result, we increased our expected loss severity used to estimate loss reserves on loans less than 60 days past due to 37.5% at October 31. That compares to approximately 30% at July 31.

Because the original loan to value on the Bank’s portfolio was approximately 76%, our current loss severity assumption covers a more than 50% decline in property values from the appraisal and origination. During the second quarter, 30 to 89 day delinquencies held flat at 4.4% compared to the end of July. Loans more than 90 days delinquent increased to 7.2% in October from 5.2% in the prior quarter.

More mall troubles:

Regarding real estate, you know we’re seeing the effects of the real estate market on our mortgage business. That hurts us. We need to take advantage of a down real estate market. We’ve got a lot of locations, whether it’s tax offices at H&R Block or corporate offices with RSM McGladrey that we’ve got we think a unique opportunity right now to go in and aggressively re-negotiate those leases with our landlords.