H&R Block 2Q loss widens; mortgage claims spike

[December 02, 2011]  NEW YORK (AP) -- A spike in claims related to bad loans written by its now-shuttered subprime mortgage unit shouldn't create any new liability for H&R Block Inc., company executives said Thursday after releasing results that showed a wider loss for its fiscal second-quarter.

The nation's largest tax preparer said claims from investors in securities backed by those mortgages, and from insurers who covered those investments, shot up to $483 million during the quarter, from $21 million a year earlier.

Sand Canyon Corp., as the former OptionOne mortgage unit is now called, reviewed $61 million in claims during the quarter, resulting in incurred losses of $3 million.

While the losses remained in line with prior quarters, the new claims totaled more than three times as many as were filed in the previous four quarters combined. But Block executives said the higher claims won't likely result in a similar increase in losses.

Chief Financial Officer Jeff Brown said since May 2009, 85 percent of claims that Sand Canyon has reviewed were found invalid, mainly because OptionOne was a pure subprime lender, which had relatively weak lending standards.

The claims increase led Sand Canyon to set aside an additional $20 million during the quarter to cover losses. But executives said that doesn't portend any increased liability to Block.

"Whether or not claim activity remains at elevated levels in the near future, we believe Sand Canyon's financial position is sufficient to satisfy all valid claims," said Block CEO Bill Cobb during a conference call to discuss the quarterly results.

He noted Sand Canyon is a "separate legal entity" from Block, and the tax preparer believes it is therefore sheltered from having to pitch in cash to cover any claims.

The issue has weighed on Block shares for some time, as Wall Street has fretted it could end up on the hook for buying back millions more in soured mortgages.

The topic's resurgence after a few quarters in the background hurt Block's shares. In after-hours trading after Block released its results, the company's shares fell 43 cents, or 2.6 percent, to $15.63. The stock closed the regular session at $16.06.

Block said it closed its previously announced sale of its RSM McGladrey business consulting unit on Wednesday. And it booked charges for the previously planned shutdown of its ExpressTax unit.

The resulting shifting of funds boosted Block's loss to $141.7 million, or 47 cents per share, for the three months ended Oct. 31. A year earlier, it posted a loss of $109 million, or 36 cents per share.

Block typically posts a second-quarter loss because most of its revenue comes during the U.S. tax season.

Excluding the ExpressTax charges and losses from discontinued operations, H&R Block said it lost 38 cents per share in the recent quarter.

On the revenue side, growth in Block's Australian tax business helped the quarter's revenue rise 8 percent to $129.2 million, from $119.6 million last year.

That performance fell short of analyst projections.

On average, analysts expected an adjusted loss of 35 cents per share, on $328.9 million in revenue, according to data provided by FactSet. Both figures included RSM McGladrey's business. Last year, the consulting unit took in revenue of $203.4 million in the quarter.

[Associated Press; By EILEEN AJ CONNELLY]

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