H & R Block Inc (HRB) 2005 Q4 法說會逐字稿

Good afternoon ladies and gentlemen.

My name is Derek and I will be your conference facilitator.

At this time I would like to welcome everyone to the H&R Block fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Mark Ernst, Chairman, President and CEO.

Please go ahead, sir.

Thank you, good afternoon and we appreciate you joining us to discuss our fiscal 2005 fourth quarter and our year end results.

With me are Jeff Yabuki, our EVP and Chief Operating Officer, Bill Trubeck, our EVP and Chief Financial Officer, and Bob Dubrish who is President of our mortgage businesses.

Before I begin my formal remarks I need to remind you that various comments we make include certain estimates, projections and other forward-looking statements.

The words "will", "plan", "estimate", "approximate", "project", "intends", "remain", "expect", "believe" and variations thereof, and similar expressions are intended to identify forward-looking statements.

These statements speak only as of the date on which they are made and are not guarantees of future performance.

Actual results may differ materially from those expressed, implied or forecasted in the forward-looking statements.

Some factors that could cause actual results to differ include the uncertainty that the company will achieve its revenue earnings and earning per share expectations for fiscal 2006, or any quarter thereof, and that actual financial results for fiscal 2006 or any quarter thereof will fall within the guidance provided by the company, the uncertainty of the impact and effect of the company's restatement of its financial statements, changes in economic, political, regulatory or competitive environments, and the effects of such changes, the inability of H&R Block subsidiaries to successfully expand their businesses, litigation involving H&R Block and its subsidiaries and other risks described from time to time in H&R Block's press releases, forms 10-K, forms 10-Q, forms 8-K and other filings with the Securities and Exchange Commission.

H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks.

H&R Block provides a detailed discussion of risks and fact in periodic SEC filings and you are encouraged to review these filings.

You should also note that in conjunction with today's call we've posted supplemental information to the Investor Relations section of our Web site at hrblock.com to facilitate your analysis.

In addition a copy of these prepared remarks will be posted to our website shortly after the conclusion of this call.

Before discussing our results and outlook for fiscal 2006 let me start by acknowledging the outstanding performance of our associates this year.

This was an important year for all of our businesses in different ways.

Our associates led the charge, making the necessary changes to improve our competitiveness, improve our ability to serve our various clients well, and making those changes that will serve the interests of our shareholders for the long-term.

Your commitment building a stronger company consistent with our corporate values places news a great position for growth and success in the coming years.

Thank you for me and for all of us who have had the good fortune to work with such a dedicated group of professionals.

As we get started, let me highlight six-point that are critical in understanding current performance and the state of the company moving forward.

First, we completed a successful year financially, in the face of strong competition in several of our lines of business, and set ourselves up to deliver better results in the future.

Second, building from the strength of this year, we expect even better results in fiscal 2006, resulting in our earnings estimates of between $4.25 and $4.65 per share.

Third, we will be restating our reported results for fiscal years 2003 and 2004, to reflect mostly offsetting changes resulting primarily from reporting errors in prior periods that on a cumulative basis require correction.

Fourth, we have not recorded additional costs associated with RAL litigation in light of the reject of our settlement proposal by the court.

Fifth, we will share our plans and outlook for our H&R Block financial advisors business and, sixth, today our board has approved both a 13% increase in our dividend payment and a split of our stock.

Financially we concluded the year in very strong shape.

Our fourth quarter results combined to allow to us finish the year with earnings of $635 million, or $3.76 per diluted share.

We had record revenues of $4.4 billion, and we continue to invest in our businesses to support future organic growth, and long-term shareholder value.

As we reported in our earnings release today, we will restate results for fiscal years 2004 and 2003.

We believe at this time that the restatement will result in relatively small changes in the previously reported numbers for those years.

Initially we believe the net impact will be to increase reported EPS in 2004 by $0.06 per share and decrease reported EPS in 2003 by $0.08 per share.

Although we believe that these errors were not material in any previously issued financial statements, we determined that the cumulative effect of the errors would be material if they were simply recorded in the current fiscal year.

Accordingly, we determined that the errors were both appropriately corrected through restatement of previously issued statements.

Also, the effect of the restatement will result in increases in our mortgage and investment services earnings and decrease our consolidated provision for income taxes from earlier this fiscal year.

As a result the previously reported results for the nine months ended January 31, 2005, increased by approximately $23 million, or $0.14 per share.

Bill Trubeck will review the impact of the restatement later in the call.

Operationally, there were several notable items that are leading to our solid results this year.

We made good progress this year in the retail tax business.

We gained traction in expanding the size and capacity of our office network, and the ability to serve more clients.

Importantly, the actions we took stopped the client decline for the last two years.

The steps we have taken to expands systems capacity set us up well for future improvements in growth.

Earnings results for the for the tax segment were somewhat below our expectations, due to a weaker than anticipated close to the tax season combined with weaker than expected growth in our digital business.

However, we successfully absorbed both the costs of this year's significant office expansion, along with the offseason cost associated with the ago session of our former major franchise operation in the previous years and still increased segment earnings by 4% for the year.

Our earnings results for the quarter reflect no new additions to our litigation reserves for RAL related cases.

As you are aware the court did not accept the settlement that we had previously announced.

As a result, we have not reported the charge we previously communicated to that settlement.

In light of the potential exposure we have in outstanding cases, we believe that the reserves that we have previously recorded remain appropriate.

Although our mortgage earnings declined in a more challenging market environment, we made significant progress in managing our business for growth as evidenced in the third, and notably the fourth quarters results results.

Even in an increasingly competitive market environment, fourth quarter loan originations grew a very strong 49% over the previous year, and 11% over the third quarter.

And we are seeing evidence that our efforts to lower our costs of origination are paying off.

Business services had a great year.

The achieved a 55% increase in earnings over the prior year on a 15% increase in revenues.

I believe that we are on a new track with this business.

We have the opportunity over the next few years to significantly increase our earnings and cash flows from this business, while delivering a unique set of services to our middle market clients.

In January, I said that you could expect to us comment further on our plans and outlook for the investment services segment today.

Let me do that now.

Over the past five months, we've implement a series of actions designed to determine the best way for to us deliver long-term value to shareholders.

We have looked at whether we can integrate this business in a strategically relevant way with our tax client opportunities, aggressively manage the business for near term financial performance, and establish the business model fundamentals necessary to make this a meaningful part of H&R Block for the future.

We don't have all the answers to those questions, but we have enough evidence that suggests that steps taken thus far are putting the business on the correct footings, including changes in leadership, reductions in our expense structure, and tightening of the group's focus on driving current results.

Fourth quarter results from investment services were stronger than we had anticipated and reflect the beginning of a critical change for this business.

While Jeff will talk more about our plans, the actions that have been taken in the past five months have indicative of the aggressive performance management and performance improvements that we are demanding from this line of business.

At the same time, significant increases in tax integration results when combined with the structural changes lead me to believe that we can generate meaningful near term financial performance and improvement.

This is evidenced in part by solid performance improvements in the fourth quarter versus both the prior year and the sequential quarter.

Importantly we filed an application for a Federal bank charter with the Office of Thrift Supervision in early May.

We had been through the eligibility exams, and we expect a decision sometime in this fiscal year.

One of our goals, in owning a bank, is to leverage the bank's capabilities with our investment services businesses.

We believe the bank will be an important vehicle to extend our financial services capabilities and will lead to increased levels of differentiation for our tax clients.

Its potential to contribute to improved earnings power from assets currently within H&R Block Financial Advisors could have a meaningful impact on the profit profiles for the company.

The actions that we have taken when fully effective will create additional flexibility for this business.

We will carefully monitor the progress and the performance of the changes both that have been taken, and that are contemplated over the coming months to assess whether they are having the impact that we must see from this business.

Our strong financial performance, along with management of our stock based compensation costs, led to today's announcement of a board approved two for one stock split of the Company's common stock as well.

Shareholders of record on August 1, 2005, will receive one additional share for each share held as of that date, and distribution of those shares will be made on August 22.

Trading will begin on a split adjusted basis on August 23.

In addition, we will increase the quarterly dividend by 13%, effective with the quarterly dividend payment on October 3, 2005, which is due shareholders of record on September 12, 2005, reflecting the stock split, the quarterly cash dividend will increase from $0.11 cents to $0.125 per share.

Let me now turn to Jeff, who is going to provide a more in depth analysis of our tax season, and discuss our plans to build upon this year's progress.

Thanks Mark and good afternoon.

Before I talk about our specific results this season, let me comment briefly about some of the broader trends in the tax filing market.

The IRS data provided so far this year, suggests that there were some share shift from paid preparation to do-it-yourself.

I would first caution that historically those data change through the course of the year and can be unstable at this point.

The final taxpayer usage study, when released, will give a clearer view on the magnitude of any share shift that may have occurred this year.

For the last several years, the paid preparation market has experienced growth in excess of the overall tax market.

We continue to believe that taxpayer preferences favorable professional assistance over the long-term, and that trend is likely to continue.

Over the last 20 years, there have been several periods in which paid preparation share has declined, and that has not been a sign of a long-term shift in tax preparation preference.

Most recently, paid preparation share declined in the tax year 2000 and rebounded strongly in the succeeding year.

Based on what we have observed to date, we don't believe this year to be any different.

We believe there were several factors converging that accelerated growth in the do-it-yourself market.

These included significant television advertising, targeted at do it yourselfers not seen previously on a national scale.

We also saw the introduction of free tax preparation for all taxpayers, through the IRS free file alliance.

We believe the combined impact of those factors could have had the effect of accelerating several years of digital migration during this tax season, which would have the impact of putting downward pressure on paid tax preparation share this year.

We also believe that as a byproduct of this movement we could see volatility, up and down in paid preparation market share over the next several years, as taxpayers settle into their normal preferences be it digital or paid preparation.

With that as context, our tax services segment which includes U.S., international and digital tax services, along with refund settlement products had a good year, despite the softer than expected end to the tax season.

For the fiscal year, tax segment revenues increased 7.6%, or $167 million.

Revenues from retail operations increased $138 million.

Digital tax solutions were up $9 million.

Settlement products increased $8 million, and revenues from international operations were up $12 million.

Pretax income for the tax segment increased $26 million, or 4%.

The results for the year included incremental losses of $17 million, related to real estate expansion, and $11 million in incremental offseason operating losses from the former major franchises.

Volumes from tax preparation and related fees in all offices were up 7% for the season.

The increase is driven primarily by client served volume that was essentially flat to the prior year and about an 8% increase in average fee per client.

The higher than anticipated average charge primarily came from an increase in individual tax return complexity, along with a continuation of the overall growth of more complex client segments, which impacts the complexity of our overall client base.

As we mentioned earlier, we continue to see positive results in our pricing strategy with our price value satisfaction measure up 4.3 points on a 100-point scale, over the prior year, a significant improvement.

For the tax operations segment, margins, excluding results from international operations, decreased 90 basis points over the prior year.

Several items drove this decrease.

As we had expected, both our office and capacity expansion efforts negatively impacted margins for the year.

This is partially offset by improved margins in digital and our settlement products portfolio.

Retail margins were also compressed due to the volume implications of a weaker than expected finish to the season, in combination with increases in stock base and other compensation expenses, legal costs and operating supplies.

We have increased our internal focus on managing controllable expenses and expect to achieve increased performance in fiscal '06.

Settlement product pretax earnings increased $9 million for the year, primarily due to increases in refund loan amounts and great demand for our Refund Anticipation Check or RAC product.

As the number of clients who choose our lower-cost RAC (Refund Anticipation Check) increase, RALs processed in H&R Block retail offices decline by 1.3% over the previous tax season to 4.2 million loans with participation revenues of $183 million.

Total settlement products selected by retail clients, which include both Refund Anticipation Loans and Refund Anticipation Checks, increased by 7% to 6.5 million, we remain committed to providing clients industry leading best practices along with appropriate settlement options so clients can make the best decision for their personal situation.

This translates to increased satisfaction, and long-term loyalty to the company.

Although the number of clients we served during tax season was at the bottom ends of our guidance, we were below our internal expectations.

Our results for the first half of the season were strong; offset by a weaker than expected second half.

This variability in performance by time period provided us with important insights as to what worked and what did not.

And also, context for actions we have taken to improve performance next year.

While we won't share those insights now for competitive reasons, we are confident that we have identified actions that should allow us to improve performance.

New tax clients were up for the year and were strongest in the first peak of the tax season.

Client retention results were up as well, with a 43 basis point improvement in company locations this year.

As we discussed previously, there are many levers to enhancing retention, which vary by client type, time of the year in which the service is delivered and number of unique relationships that a client has with H&R Block.

Our goal is to continue to differentiate our tax services on the basis of actionable advice that we believe leads to enhanced economic results.

As shown on page six of the supplemental materials tax services loyalty is greatly enhanced as clients act on the advice we provide them through the purchase of appropriate Financial Services.

Depending on the service that is provided to the client there is a loyalty advantage of five to 12 percentage points relative to their peers.

In addition to advice, we have been improving our core client experience, which is also helping to increase client satisfaction.

Overall client satisfaction was up two full points over the prior year and we continued to take steps that build long-term royalties and improved retention.

A critical strategic imperative we took on this year was to expand the capacity of our retail distribution system.

We believe that we can accomplish this in two primary ways.

First, by increasing the points of presence in the system, and also by enhancing the existing capacity of our network to serve clients at times when we are capacity constrained.

It is our belief that both of these initiatives will allow us to serve more clients which has the beneficial impact of blunting the effects of competitive expansion.

We made meaningful progress on both fronts this year.

We added over 1200 new points of presence in our office network and partner sites.

Each of these points of presence vary in terms of capacity, and the ultimate number of clients that will be served in the location.

To be clear about what investors should expect when we are adding additional offices to our network, it is completely within our expectation that both the average number of clients per office and the returns done in older offices go down as a result of our expansion.

Office volumes typically build over an approximate five year period, so new offices are open, they both open with fewer clients than mature offices, and they serve clients, some of which are from previously opened offices.

In addition we have expanded into smaller formats, such as being inside Wal-Mart.

These locations will always serve fewer clients than our additional mature office.

The addition of stand-alone offices is the core of our expansion effort and carries the best long-term economic rewards.

We opened 609 new company offices this year versus 72 in the prior year and are pleased with their performance.

In fact, this year's new offices outperform last year's group of new offices, on a significantly larger base, by 7% in total clients served.

The evidence this year supports our belief that growing the overall size and convenience of our distribution system, will enhance short and long-term performance.

We are also making a series of modifications to our approach that we believe will lead to better new office performance in the future.

Just as important, we are also focused on delivering enhanced same-office performance next year on the large class of 2005 new offices.

We expect to open 500 to 700 new offices in fiscal year '06 across the company owned and franchise network.

We are still evaluating expansion within partner sites and don't have any specifics for those locations at this point in the year.

We are also focused on reducing the level of capital required for each new location.

As a result of our progress, we have lowered our estimates for capital outlay on a per location basis this year by 15%, versus the prior year.

In addition to adding locations, we are focused on adding peak capacity to our existing network.

We estimate that there are 300 to 400,000 potential clients who enter an office and do not complete their returns for reasons that are likely scented on a lack of service capacity.

We are focused on capturing this significant opportunity through a combination of better services to clients as they enter our network, collectively adding capacity to offices that is are peak capacity constrained, and increasing staff levels during periods of strong demand.

Although we made some progress this year, there remain significant upside to capture the existing demand for our services.

Full year revenues from digital tax services grew by 8%, and pretax earnings increased by 21% this year.

Our team managed profitability well in a highly competitive environment.

Total Federal software units sold this tax season decreased by 11% to 1.8 million units.

While software revenues rose 1% as a result of clients migrating to our higher SKU TaxCut products, and improved the cash rates for our add-on products.

It appears that our decline in software client growth was largely due to the competitive advertising discussed earlier.

We believe this advertising added the growth to the software, which demonstrated a strong preference for our competition.

This creates a limited short term software segment growth, and an apparent share shift.

It may also have resulted in a reduction in overall software category profitability.

We were disappointed with our software business performance this year.

We were caught off guard by the competitive actions, and we will not allow that to happen to us again.

Although online tax preparation clients served were up 2% for the tax season, our results in both the paid and premarkets were softer than we expected.

Full year revenues increased 10% over the prior year.

We continue to have success with clients selecting higher-end online products, and also attaching to add on products on a more frequent basis.

While this increases profitability, it does not help us achieve our target levels of market share.

As in the software business online services were also impacted by the effect of the competitive advertising.

In addition, we observed what we believed to be long-term irrational pricing models, and marketing actions inside which we were just not willing to participate.

Our online business was also affected by the Free For all offerings within the FFA program, which we reluctantly matched to maintain offer parity.

The FAA program experienced 46% increase in Federal return growth, which we believe was driven primarily by the unrestricted free offers and the publicity that was garnered from those offers.

Although the free offers didn't have a material impact on our prior year digital clients, we do believe that many new online clients that would have otherwise paid for a Federal tax return used the free service.

Given the stage of the industry today we believe that FFA offers opportunities to capture new clients into the brand, however, we do not support a program that offers free tax preparation for all taxpayers, regardless of their ability to pay for the service.

We will review our continuing participation in FFA over the summer.

We are not satisfied with the Tax Season 2005 digital results and accordingly are aggressively focused on accelerating our digital market share in this fiscal year.

Our international tax operation increased revenues $12 million, or 13% over last year, and pretax earnings were flat compared to last year.

The improvement in revenues was primarily due to a strong tax season in Canada, the previously announced strength in Australia and exchange rate benefit of a weak U.S. dollar.

Our Canadian operations had a very strong year, reporting about 4% growth for the season.

However, I need to point out that the Canadian tax season ended on May 2nd, which is beyond our fiscal year end.

As April 30th fell on a Saturday the filing deadline was extended to the next business day, and returns carry over to that date.

As a result of the extended deadline, there were approximately 47,000 returns picked up and paid for by clients on May 1 and 2.

This will have the effect of increasing revenue and income for the 2006 fiscal year.

We will highlight this treatment and provide footnote explanation in the tax service operating statistics schedule included in our Form 10-K.

Full year results for investment services were disappointing.

However, we saw improvements in revenue and expense management in a very strong fourth quarter, and made meaningful progress in referring tax clients to our financial advisors.

Fourth quarter revenues were $70 million, an increase of 13%, compared to last year's fourth quarter and an increase of 12% sequentially.

The fourth quarter marks our strongest quarter in production revenue since 2001.

Revenues for the full year improved 4% to $239 million.

The pretax loss in the fourth quarter improved $10 million to $13 million, versus the $23 million loss in the comparable quarter last year, and a $5 million improvement over the sequential quarter.

This year's fourth quarter includes a $3 million charge related to a reduction in staff.

Each of the quarters results include $7 million of intangible amortization.

Within our revenues, total production revenue improved 8% over the fourth quarter last year and 10% sequentially.

We continue to transition the business towards an advice based model with 49% coming from annuitized revenues, fee- based accounts, mutual funds, and annuities, compared to 43% in the fourth quarter of last year.

Net interest income increased 44%, compared to the fourth quarter last year to $12 million primarily from increased margin rates.

Average margin balances were essentially flat compared to last year and the sequential quarter

Our effort to provide Financial Services to tax clients continued to build this year.

We had over 9,500 tax professionals enrolled in our Tax and Financial Advisors Team program of which 6400 were active participants.

A total of 26,000 tax professionals provided nearly 106,000 direct leads to advisors during the past tax season, which was an 82% increase over the prior year.

As shown on Slide 7 of the supplemental materials, we continue to grow our level of business model integration in both revenue and assets from tax clients.

We are pleased with our progress in this area.

As Mark referenced, we focused significant energy on improving performance in the business.

We have already implemented a series of actions that are not production dependent to enhance performance.

We have reduced fixed expenses, and implemented strict advisor product standards on low producing advisors whose results negatively impact financial results.

We will terminate advisors who don't meet our standards.

We have also modified our pricing strategies in the areas where we were underpriced relative to the market opportunity.

These steps are in place and are largely not market dependent.

Our plans require increases in production from advisors we have today.

We have significant energy on increasing productivity, and believe this to be the biggest risk in our fiscal '06 financial performance.

We've also set very tight standards on the advisors that we will hire, and have made excellent progress today.

We are managing this area aggressively, and will continue to update you on our progress.

The net of these actions is that we expect substantially improved financial results from investment services this year.

In the aggregate, we expect to reduce the investment services loss in fiscal '06 by 25 million to $35 million.

Finally, as Mark noted, offering banking services is another way we expect to build a financial partnership with our clients.

Today we have a variety of programs such as express IRA that encourage clients to asset that we place at various institutions.

A bank charter would enable to us move existing depository assets out of third party banks and into an H&R Block bank.

That change would allow to us to capture the interest rate spread benefit of those assets that we don't earn today.

We expect that we will accumulate client assets in the 7 billion to $8 billion range over the next several years.

However, we don't expect nor would we necessarily intend, to move all of those assets to an owned institution.

We will continue to look for opportunities to accumulate client funds through additional programs that will be additive to what we do today.

Let me now turn the call back to Mark for a review of our mortgage and business services operation.

Our mortgage operations had a very strong fourth quarter capping off a year in which we have taken the steps necessary to succeed in a changed market environment.

We've increased our ability to capture market share.

We've begun to see the benefits of the client technology that we've been investing in, and we've done this while managing our cost structure to ensure both current and future profitability.

Fourth quarter loan production totalled a record $9 billion, an increase of 49% over the fiscal year 2004 and an increase of 11% from the sequential quarter.

This growth was achieved through increased productivity of our sales organization and effective management of the flow of business into our organization.

Consistent with what you've been hearing from us all year, our results continue to reflect competitive pricing pressures.

Pretax earnings for the fourth quarter decreased from the prior year 5% to $166 million.

Pretax earnings for the year declined 28% to $495 million, compared to $683 million in the previous year.

Full year pretax income includes a gain from the sale of residual assets of $15 million, which is compared to $41 million in the fiscal year 2004.

During the past quarter, we began to see moderation in the competitive environment along with the benefits of the actions that we've taken to better position ourselves in the market.

Pricing remains reasonably aggressive.

Despite this we were successful in increasing the weighted-average coupon on new originations during the quarter to 7.45%, up from 7.06% a year ago, and 7.3% from the previous quarter and by way of comparison, for May of this year, our WAC is now up to 7.57%.

Despite a continued rise in the market funding rates during the quarter, our fourth quarter net gain on sale, gross margins increased 23 basis points compared to the third quarter.

The non-prime industry has traditionally lagged behind market rate changes.

Coupled with current year competitive pressures, increases to WAC this year have been significantly less than changes in other credit markets.

The average two-year swap rate, which we use as a benchmark for our loan sales, rose 135 basis points for the fiscal year from 101.97% to 3.32%.

Cost management is an area in which we continue to make progress.

We reduced our origination costs, excluding broker acquisition costs, throughout the year by 47 basis points from 261 basis points in the fourth quarter of last year, to 214 basis points in this year's fourth quarter.

This continued improvement resulted primarily from prudent spending, and greater leverage of newly hired account executives and support staff.

We continue to work toward a net cost origination improvement of 50 to 75 basis points from our second quarter fiscal '05 level and believe that we can approach a very competitive cost structure by the end of fiscal year 2006.

Since the second quarter, we reduced our cost of origination by 33 basis points thus far.

Credit quality remains strong in our non-prime originations.

Our average FICO scars for non-prime origination average 618 for current quarter origination, compared to 615 last quarter.

Our loan to value increased slightly, to 79.6% from 79.3%.

These increases are influenced by interest only funding that generally required higher credit quality, have higher leverage, and have higher loan balances.

In the fourth quarter, IO loan fundings, with average FICO scores of 646, represented 21% of our overall loan production.

At quarter end option one servicing portfolio was $68 billion, an increase of $23 billion over the last year and $9 billion over the previous quarter.

Servicing revenue for the quarter was $79 million.

For the long-term, we expect to see further production growth, will continue to emphasize reducing origination costs, enhancing service levels and offering technology solutions that keep pace or stay ahead of market standards.

Our recently introduced prequalification technology continues to gain traction in efficiently serving brokers with increased usage, and acceptance from the customer base.

The automated underwriting process will be rolled out later in fiscal 2006.

H & R Block Mortgage's fourth quarter origination volume increased by 42% over the previous fiscal year to $1 billion.

Fourth quarter retail non-prime origination volume increased 54% over last year and 4% over the previous quarter.

Retail prime origination increased 22% over last year's comparable quarter.

On a sequential quarter, prime growth of 60% was driven by an increased tax client referrals during the tax season, contributing significantly to our strategic objective of extending our tax client relationship through financial service offerings.

For the total number of retail loans originated for profitable non-prime volume represented 68% of the total, compared to 63% last year and 76% last quarter.

For the fiscal year, we continued to see imperatively superior execution in the whole loan market with 92% of our non-prime loans sold through this channel and the balance securitized directly.

In the fourth quarter all of our sales settled through the whole loan market.

The mix between whole loan sales and securitization is dependent upon a number of factors, but is essentially driven by the highest execution value with a bias towards cash earning.

Loan performance remained -- trends remained positive. 12 months season and beyond delinquency rates since the high in January, 2002, of 14.8%, have been holding in the 11 to 12% range, resulting from higher credit quality and continuing strong service practices.

At the ends of April, 31 days plus delinquency rates were 10.2%.

As both our whole loan sales and securitizations are non-recourse transactions, it's important to note that our risk, as it relates to loan performance, is primarily limited to the tax affected value of residual assets and mortgage servicing rights on our balance sheet.

As the value of these residual assets is based on future performance, we continually monitor the reasonableness of our evaluation assumptions relative to actual loan performance and performance in the market.

Overall, our residual assets continue to trend better than expected during the year, due primarily to lower than modeled losses, and favorable prepayment fees partially offset by the effect of increased interest rates.

Although we experience a modest net write down in the fourth quarter of $3 million, we recognized a net write up of $96 million for the full year, which was reported in other comprehensive income on the balance sheet net of deferred taxes.

Business services segment delivered its most successful year ever, with double-digit revenue in earnings growth primarily from our core tax and accounting businesses.

Overall, fiscal year revenues were $573 million, an increase of 15%.

Pretax earnings were up $11 million over the prior year to $30 million.

Fourth quarter revenues increased 13% to $202 million, pretax earnings were $39 million, compared to 29 million in the fourth quarter last year.

These results are a reflection of both the industry dynamics that are making our focus on mid-sized businesses very attractive, as well as executing on growth strategies to better capture this market opportunity.

Our emerging businesses: financial process outsourcing, retirement plan administration, payroll and benefit administration, and wealth management, continue to build scale and represent a source of significant future growth for us.

For example, our financial process outsourcing business is rapidly growing from its unique focus as a specialty outsourcer.

RSM McGladrey continues to enhance its visibility through an ongoing brand awareness campaign.

Increasingly, the business is linking mid-size business owners to its various financially focused services and demonstrating benefits of choosing one provider relationship over maintaining multiple providers.

These businesses, while currently small in their overall contribution to net earnings, are emerging as a great source of growth for us, and are expected to make a much more meaningful contribution in the coming year.

With that let me turn the call over to Bill, who is going to discuss some of our key financial statement items.

As Mark mentioned earlier, the restatement we announced today, is primarily from reporting errors in prior periods, that on a cumulative basis became material to our 2005 results.

And in part , the outcome of our Sox-404 work, which identifies a number of accounting adjustments that while individually immaterial collectively caused to us to ensure that investors have a fully accurate view of past performance.

The affected items include: purchase accounting adjustments for damaging deferred taxes, the timing of gain recorded in connection with sale of previously securitized residual interest, treatment of lease expense related to free rent provisions in some of our leases, remediation of previously disclosed efficiencies relating to accounting for income taxes, correction for the timing of incentive compensation approvals, write off of inappropriately capitalized costs relating to one of our branch offices.

Two of these items had already been identified and reflected in previous financial reports for the year.

We believe the operating performance now appropriately reflects the correct costs in each business unit, and the tax rate is properly reflected.

Tax rate for fiscal year '05 was 38%, and as you can see, or as you can use this rate now for your estimates for fiscal year '06 modeling.

Additionally, part of the correction relates to a controlled weakness noted in last year's 10-K and our corporate tax accounting function.

These weaknesses related specifically to the reconciliation and level of detailed support of both current and deferred tack accounts.

We also noted that we expected these decision need to be corrected by end of fiscal year '05 and I believe this has been substantially completed.

Keep in mind the numbers are still subject to change as we complete the audit process.

In addition we are currently in decisions with Price Waterhouse Coopers, our former auditors, on issues relating to the period in which they provided an opinion.

We are working diligent to the file a 10-K within the required time frame.

However it may be necessary to file for an extension, as a result.

Turning to the balance sheet cash balances were at our seasonal high in fiscal year end, reflecting strong seasonal cash earnings generation in the fourth quarter.

Residual interest declined slightly compared to last year, as a result of the success of our disposition strategy, which improved cash proceeds and reduced balance sheet risks.

Only 8% of the mortgage production was securitized in fiscal year '05, down from 24% in fiscal '04.

Beneficial interest and trust component was higher than a year ago. 250 million compared with 154 million, largely due to increased origination volume and timing of loan sales.

We had several sales which occurred in May, which led to an increase in the balance of loans in the warehouse trust at year end.

This was slightly offset by a lower than anticipated execution price on those loans.

We should also note that during 2005, we reclassified the accrued interest on our beneficial interest and trust on receivables to beneficial interest and trust.

Mortgage servicing rights were up 46% compared to a year ago as originations were up considerably.

Average loan balances increased, and as is customary for us mouth loans were sold with servicing rights retained.

As at typical year end, the Company had no short term debt outstanding.

As disclosed previously, the Company issued 400 million of ten-year notes while 250 million of debt matured this year.

Although this increased long-term debt, the total debt to capital ratio of 31%, was below the company's target of 35%.

The desired equity level , relative to the balance sheet, was achieved at fiscal year end, and we believe the company is appropriately capitalized given our asset mix.

In line with our view, that excess capital generated should be returned to shareholders, we repurchased 11.3 million shares, and paid out 143 million in dividends this year.

We expect a similar capital allocation strategy to be deployed in the coming year.

You should also note that our reported GAAP earnings include numerous items that are non-cash items.

Earnings include 44 million of stock based compensation expense for this year compared to 26 million last year.

And our second year for expensing stock based compensation.

We also incurred 54 million in amortization of intangibles, and the effect of this is that our cash flow generation remains very healthy.

Finally I would like to comment briefly on our stock compliance efforts and note that we are very close to completing the compliance reviews for the year.

As you know our auditors must complete their work before we can comment further on results.

We are very pleased, however with the dedicated professional work of our Sox team in identifying and providing guidance on various complaints topics.

With that I will turn the call back over to Mark for the performance outlook.

Thanks, Bill.

Fiscal 2006 looks to be a very strong year for H&R Block, and our mix of businesses.

We have been investing across many of our businesses in a variety of ways and the benefits of those investments are expected to begin paying off this year.

We expect overall fiscal 2006 revenue growth within our long-term guidance range of ten to 15%, and earnings in the range of $4.25 to $4.65 cents per share.

As we discussed, we will continue to invest in tax office expansion, and increase the existing service capacity of our locations, which will benefit 2006 client growth but will generally be a drag on earnings as new office tenure over time.

However, we will continue to aggressively claim the H & R Block position in the market and reinforce our competitive position for the long-term.

Our focus on differentiation will continue, as we work to expand client loyalty and retention.

On additional tax front we expect to compete aggressively in tax season '06 and deliver enhanced client growth.

For fiscal 2006 planning purposes, we are anticipating high single-digit revenue growth, and margins flat to slightly up over the fiscal '05 levels, absorbing the cost of future investments within our current operating margins.

In investment services, we will aggressively manage the performance of this business, and expect to experience significant improvements from tight expense management and significantly improved production levels from our advisors.

We expect decreased operating losses by 25 to $35 million this year without any benefit to a potential banking operations.

In mortgage services, we continue to focus on growing originations and reducing costs through process improvement and technology.

In the wholesale and national accounts segment, we will continue to differentiate our brands through our industry leading service.

We are focused on increasing productivity with our existing active brokers as well as converting inactive brokers to active status.

In our retail operation, we will focus on the tax client base with a strategy that makes it easier and faster for a tax client to get a mortgage loan from us than going anywhere else.

We expected the Capital Markets demands for our product will remain high as a current competitive environment on the origination side of the business will continue to put pressure on margins.

We have a number of aggressive initiatives around reducing costs that we believe will have a positive impact in fiscal '06.

For planning purposes, we are anticipating pretax profit margins on originations to remain fairly constant over the course of the year.

Our business services segment continues to offer tremendous potential for growth, as its core and emerging services integrate and gain traction in the marketplace.

We expect the past investment in our various businesses to begin driving improved earnings beginning this year.

However, we continue to make investments into this business that in the short term reduced the reported earnings for the segment.

Overall we expect to sea earnings growth of 30% or more from this business in the coming year.

As Bill noted, we expect our capital allocation practice to remain consistent with the past years.

We announced today that we are increasing our dividends by $0.12 per share annually before the stock split.

The bulk of our excess capital will continue to be dedicated to share repurchases.

To conclude, we value the confidence and the support of our many clients, and we appreciate the contributions of our associates and their focus on controlled value driven growth.

We will continue to focus on opportunities that we can -- where we can improve operating performance in areas we can grow our businesses to generate sustainable shareholder value.

We greatly appreciate the long-term focus that our many shareholders have for our businesses.

Thank you for joining you us, and operator, I think we will now be ready to open the lines for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Kelly Flynn with UBS.

Thanks, guys.

First of all, on the bank charter you mentioned, that was helpful, I was hoping you could give a little bit more color recognizing you probably don't want to give that much color , but first of all on what visibility you have on what level of confidence you have that you are actually going to be granted a charter, and then secondly, I know you've given some color in the past on what type of earnings you might be realize as a result of getting the charter.

Could you elaborate on the logistics of how it would actually work, that would you monetize the assets that you currently have in custody, where those assets currently lie and then literally what would be the procedure whereby you'd actual would make more money on them, that knows?

Kelly, this is Mark.

You're right, we want to be very cautious, in terms of anything that we would say about the progress we are making toward that charter.

We have been studying and in the development of the plan for that charter application that we now have on file for some time, so I think at this stage it would probably be premature for to us say much about the prospects for that approval.

In terms of the source of value that's there, fundamentally we think there's an opportunity to better serve our tax clients through offering a variety of sort of specialty services that a banking charter will allow us to do.

Most notably, we have been developing approaches to offer savings products to our low and moderate income clients through IRAs.

We would like to extend that to nonqualified forms of savings.

So there's a service expansion opportunity that we think is significant into the client base that we have.

I think it's most often noted, and I think we can say just a few things about this, that there are sources of assets that are currently resident within the organization, if you will, through various lines of business.

Jeff noted that, as well as did I, that we have something in the order of 1 billion to $1.5 billion of assets in the financial advisors client accounts that are currently being spread at a different, at other banking institutions.

We do think there's an earnings opportunity that, from those assets at some level, that would substantially change the earnings profile of the financial advisors business.

So to a degree I think we are being patient with the view, the ultimate view of financial advisors to see if that opportunity can play out for us in the short term.

I would say, Kelly, that we have not, we try actually not to give direct guidance on the bank but said for certain buckets of assets we see certain spread opportunities against those buckets.

And so whether it's $1 billion or $2 billion in financial advisors, for example, I think we said that we thought that might generate somewhere in the, call it 20 to $40 million range.

But today, until we have a charter in hand we think it's too early to provide any specific guidance as to those, as to those earnings.

But what about the assets?

I think you said 7 to 8 billion in the past.

Can you just speak to what's that mortgage and why you have that cash to begin with?

That's the question I've thought before -- ?

Sure, it's actually, there are I guess we would put them into three major buckets.

One is assets that are currently on deposit at financial advisors that are being directed through other banking institutions.

That number is, Jeff --

A couple of, 2.5,

-- a couple billion dollars.

We also have escrow account deposits in our servicing operation at the mortgage business, that represents a couple billion dollars and then we have other assets scattered in various places like our Express IRA product, like our payroll business within RSM McGladrey, various different places that represent additional amounts.

When we've talked about 7 to 8 billion it's really made up of things scattered throughout the different lines of business that we are in, and some expectation that as the opportunity to bring those assets into an institution will play out over the next couple of years, as these are growing sources of assets for us so that's where we get to those numbers.

Great.

Just another one, unrelated but could you differentiate between a location and an office just to clarify?

It's the 5 to 700 is offices, would that be consistent on a location basis with what you added in '05?

Sure, when we talk about locations or points of presence, we sometimes refer to it, it really is a variety of different formats that we now offer our tax services through.

Probably most notably we have a large number of smaller format locations inside of Wal-Mart and Sears stores, that don't have the kind of capacity that a traditional location would have.

So, -- or traditional office would have.

So when we talk about locations we are talking about some total of all the different points of presence that we have.

When we talk about offices, those are more traditional stand alone units, where we have more capacity within those units.

The, what we are saying today is that we expect to add 5 to 700 additional offices, and we really don't know at this point whether we will expands the number of smaller footprint locations, than where we are at in the past.

Great.

Thank you very much.

Your next question comes from John Healy with FTN Midwest.

Good afternoon guys.

Wanted to talk briefly on the tax side, and wanted to get a little more color on the tax side on what you guys are expecting to see in pricing.

I know it's early but should we expect to see price increases similar in 2006 to what we saw in 2005, also wanted to get your guys thoughts on some expectations for same store sales growth for next year.

I will answer that as best I can and maybe let Jeff supplement.

First of all, I think it's too early for to us say what our pricing strategy will be for next year.

I think the closest thing that I can say with some confidence is that our internal planning would suggest high single-digit kind of revenue growth overall within that business, as we get sort of deeper into our plans and our expansion we will have a better sense of what the mix of that is.

Certainly there is pricing power, we believe, that we are seeing that there's greater pricing value satisfaction coming out of this past tax season than we have seen historically so thing doing to enhance client service is translating into potential but we have not made any decisions on the pricing side yet at all.

We would typically do some survey work to try to get a better sense from our clients to gauge what the elements of our pricing strategy would be but that would not be complete until probably after the summer.

Any expectation for same store growth.

The comment we try to make in the script but it was a long script, maybe it wasn't clear, I apologize for that.

You would have to expect, if we are expanding numbers of the locations that same office numbers will have to decline.

It's just mathematically and the way the business works is when you open up a new office it does two things.

It does not open at the same scale as a mature office.

And new offices tended to pull clients away from other mature offices.

So as a consequence, you have to expect that the average returns per even mature office, will go down as we are expanding the number of points of presence.

Now we think there is a sweet spot where that should go to, but the numbers of clients per location is probably less relevant of a metric ultimately, rather than some measure of system capacity, which is not a metric that we have readily available for you or for ourselves that looks tax desks and the amount of throughput we would have available to us in the offices in the various size of offices that we have in the system but net/net somehow expect the number to go down.

For clarity, though, John, I would say that when we think about same office growth we do think about them in ten-year groups, and I think there is some confusion, as Mark talks about we do expect that certainly the more mature offices would probably have their growth on an average basis reduced, but would would still expect to see growth across all of the early ten-year bands, first year, second year, third year, fourth year, et cetera, up until offices gained maturity.

They may end up maturing at a lower level, because mathematically they have to.

But that doesn't imply that we would not continue to see growth in all of the earlier years as offices build to maturity.

One final question on the financial advisor business.

You seem really focused on reenergizing that group, and improving performance there.

Should we expect to see maybe some changes in the commission structure for investment advisors, is that something that's in your strategic plans.

I would say given sort of all the detailed changes that we are looking at and how we are looking to optimize that business, it would probably not be appropriate to talk about some of of that level of detail.

Thanks, guys.

Your next question comes from Mike Hodes with Goldman Sachs.

Yeah, hi, guys, congratulations on a strong mortgage showing.

You first, just on the tax side, particularly in the digital tax area, it does seem like there was a large share lost into it this year and I'm curious if you go to a little bit more depth about what your strategy is for recouping the share.

In the past price discounting hasn't given you a lot of incremental share.

Are you guys telegraphing a broader television campaign for digital tax prep and also in tax, I was hoping could you elaborate a little bit more on what happened in the back half of the season.

I didn't walk away with a sense of why that was soft, versus expectations in the first half.

Let me take the first part and then Jeff will sort of cover the split throughout the season.

On the digital side, I don't think it's probably, certainly even if we had the full plans would it not be appropriate at this point, to be talking about them relative to our digital strategy.

I think the key thing you could take away from the comments today and our view of this is that this is not a market where we are going to sort of happily cede space.

We think that we can be more aggressive and will be much more aggressive to compete in this channel going forward.

Exactly what this look likes I think it's too early to the answer and again even if we knew the answer I don't think now would be the time to answer it.

On the seasonality question, Jeff.

Yeah, I would say that we were, as we alluded to, not pleased with what happened at the end of the season, and it's our take that we had a -- I guess the best way to say it is a bit of a deficit in new clients in those periods, and specifically kind of in the period of March and early April, not at the end of the season.

From our perspective, one of the important insights that we got based on the strength of our marketing promotion is we are well served to be much more targeted in our messaging and in our integrated campaigns at different times of the year.

We believe that we are -- not we believe but we will have a more targeted integrated campaign at different times of the year which is not historically consistent with what we've done.

I'm trying to softpedal this a little bit, because I am nervous about telegraphing anything competitively.

But I can tell you that you should expect to see a different approach for us based on the types of people that we are talking to at different times of the year and in January we will give it much more detail.

But we also I would say, continued to gain in our more kind of mass affluent and affluent segments this year on a year over year growth basis.

Those continue to be the segments that would be growing at the highest percentage, now given they have a smaller base.

But they are taking that learning in combination with the, with the targeted campaign learning and really linking that into something that we talked about in January, at the investor conference, and that is what the are the benefits of business segmentation, so looking at all three of those to accelerate second half growth and at the same time, we think we actually had a lot of opportunity to build on the first half growth.

We think we left as I mentioned, several hundred thousand clients effectively on the table, people who walk into our offices and didn't go through even the tax experience, and so our goal is to capture them as well.

Just two other quick questions.

In mortgage, Mark, based on your comments I take it that the bulk of the growth that we expect to see will be volume driven?

In general I would tell you we are expecting that it's going to be another competitive year on the pricing front.

We think we can further bring our cost origination down but we are currently expecting, or planning that much of that will have to flow through to consumers, will go through to keep competitive so we are generally not looking for much margin improvement, net margin improvement, we are looking for much of the improvement to come through volume.

Just lastly on the operating cash flows, they were down much more year over year than net income.

I was wondering if you could give us a little color on that?

I am pulling out the schedules and talking from the same thing.

It seems like most of the swing was in working capital.

Working capital and as I recall the drivers of change in working capital builds over here pulling out the details.

Give me just a second.

Maybe we will get back to you off-line.

We will obviously be putting all this detail out.

I don't know what it is off the top of my head.

You know what, I do know what it is off the top of my head.

The changes in deferred tax is a very big, it's tax payments and the level of deferred taxes is a big chunk of what's moving that number.

I see the income taxes is paid up over 100 million.

That's a big chunk and of it.

Okay.

Thanks.

Your next question comes from Mark Sproule with Thomas Weisel Partners.

Thanks.

On the tax side, you guys mentioned that your new stores from this year grew at a faster rate than last year's stores, and I think the way Jeff was speaking kind of first through four-year old stores, you mentioned were still, you would assume that they would be growing in the future, so I am assuming that they grew year over year this year.

Is that indicative that your older, more mature stores are continuing to see disappointing client retention situations as we go out?

I'm not sure I would call that disappointing performance in the more mature stores.

Although we actually as offices, we refer to them as offices.

But from our perspective, we have a very significant group of our offices at maturity.

And one of the challenges when you are at maturity and because you have the peak nature of the filing season, is you are unable to grow your tax base at peak.

And when you are full in a mature location.

So from our perspective, one of the things that we are beginning to do is try to actually intentionally reduce the level of returns that are being done, or clients that are being served in these more mature offices, and by moving tax professionals from existing locations to new locations to create capacity both in the mature location as well as to energize the new location.

So, yes, we did see lower performance in those offices, some of which was planned but also as I've said several times we did not do as well as we had hoped at the end of the season, and so we we'll make adjustments commensurate to the compensate for that.

Were the majority of your new store builds last years and your expectation going forward, going to be capacity related?

New office locations as opposed to kind of new regional areas?

Is that done not only just on a capacity side but also to kind of confront some of the growing competition that you are seeing in those areas?

Our selection about where to expand is a sort of a bit of an internal science that we have not I guess shared externally.

I mean it is a combination strategically of a variety of things.

To some extent it's to expand to new geographies and new trade areas that are growing.

In some cases it's to blunt competitive actions that are going on in a market, and sometimes it's to relieve capacity constrains that we have within a mature trade area.

It's a combination of all those things, and our decisions in any given year, about where and how many are serving which purpose really is sort of internal science that we, for competitive reasons try not to talk about.

I guess one more question on the time side, and a quick question about mortgages, would it be safe to assume then that as you build out new stores in your discussion of capacity constraint issues new stores longer term when they mature will all be less profitable or less profitable on a client side, number of clients that existing in more mature locations.

I don't think that's for the long-term the that that's a safe assumption.

We are looking at what the sort of profit profile is, different size locations and how do you optimize that against the opportunity to attract clients.

So while in the past we might have looked at the profitability at the office level or at the location level we are increase single trying to understand that the clients level based on the capacity of any one format were the optimal mix to hit.

I think it's too early to the say that, that is inevitably going to lead at a lower per client profitability.

Two quick thing real quick.

On the mortgage market.

Have you guys started to see, I guess with the sort of a little bit of bump up of up and then flattening out of your expectations.

Are you starting to see some of the alleviation of the idiocy in pricing that some of the other competitors were deploying to build their servicing portfolio?

And then following up on the banking side, maybe this is a little too early but if you get your bank charter, is there any indications or thoughts about trying to build out to a broader Financial Services offering to some of the lower income consumers through your 11,000 plus locations?

I will try to hit both of those.

On the banking question and in our strategy I think it would be inappropriate to comment beyond what we have described in the charter application for what our plan is there.

But clearly serving the low and moderate income clients within the block franchise we think is a big opportunity to make a real difference for those clients.

So that is clearly part of, a major part of that strategy.

On the mortgage pricing side, mortgage pricing question, I do think that we have seen sort of a settling down, if you will of what people are doing in terms of pricing and we saw during the past three, four months sort of -- people trying to kind of get back in step with where market rates are moving with their wax and with their market rates.

So there's less downward pressure to kind of squeeze margins than what we were seeing as recently as four, five months ago.

I don't know if that's reversing just yet, and frankly from our vantage point, we are not planning that it's going to reverse at all, but I think the downwards pressure that we were experiencing six months ago has really slowed down.

Bob, anything to add to that?

I think that's right.

We are also seeing more competition for the long-term loans on Wall Street which I think is giving us a little bit higher --

Yes, that's right.

Thanks.

Your next question comes from John Neff with William Blair.

I was wondering if you could offer a little color on things like the ready return free filing movement in California, and what, if any impact if any that's had?

Yeah, you know, the ready return for those people who don't know what that is, ready return is sort of a version of return prefiling that the state of California has been testing, I guess, over the course of the last year or so.

We, it's hard for to us see that that's had any dent at all just yet.

The fact of the matter is from a consumer perspective they need to deal with both the Federal filing as well as the state filing and what that is really a single state sort of event.

So we can't see that that's had an effect just yet and in fact one of the things that we also can see is that for the number of clients there are potential people for whom ready return was offered, the proportion that actually used it was to me, surprisingly low, people were not as confident that the government could tell them what their tax liability was and not second guess that.

So all in all I think it's a little bit early to the tell but because the state return is disconnected from the Federal return, people still need to file.

It hasn't had, that we can tell a significant effect on our business.

Okay.

Great.

Can you give us an update on your current share buy-back authorization.

Yeah, we have about 15 million shares remaining on the existing authorization.

And I was wondering if you could comment on what kind of a contribution that Sox 404 has made to RSM McGladrey's revenue growth, and is that recurring?

There's probably a couple of things about that.

Clearly it affects us in a couple of different ways.

We have a risk management practice, and that risk management practice has done very, very well in its own right, and we think there's some residual, recurring aspect of that insight of our consulting practice, that is probably, that is the one place where some of those revenues are a little bit at risk.

We don't think we are going to see the kind of growth we have seen, but we think there are other risk management driven revenues that we have an opportunity to capture, because of the move toward separating the various things that different accounting firms can do for their clients, and how the Big Four are constrained in offering those services.

Perhaps the more significant thing that we are seeing is that with the significant increase in Sox work overall within the industry, and the pressure that's it's putting on for the Big Four to deliver service to their larger clients we believe we are seeing the opportunity that we expected might come from this, which is that small or mid-size clients are finding themselves underserved by their traditional big core providers and they are in many cases looking for somebody who specializes in serving their needs.

We are that specialist and so we are picking up a lot of business that is clearly recurring business and recurring relationships.

They are not one time engagement that should set us up for a very nice growth trajectory in that business.

Okay.

Great.

A couple other questions if I could.

You said you've been through a certain part of the application process for the bank charter.

I was just wondering, could you say that again what that was and what does it mean that you are now through it?

Yeah, John.

We are, we are, we filed our application.

We are kind of jointly going through the process both with OTS and FDIC.

We completed our eligibility exams which we believe went well, and so we are just kind of queued up in the process.

It's our belief, and you can actually check the OTS website and it will give you some indication for what their timing is for ruling on the application, although I would caution you to necessarily believe that date moves all the time, but it's our believe that some time in the fall towards the ends of the calendar year, we would get our answer on it. but right now we believe that the process is going well.

It's been determined that will you are eligible to apply.

Well, we have applied.

Yeah, we physically filed our applications inside May and we have completed the he will I didn't believe built exams through both the OTS, who is the governing body, and the FDIC obviously, who will has to insure the institution.

We are through that. we are fairly deep into the process right now.

And last question just a clarification really.

You are saying, the press release it said that your retail unit volumes down in the tax business, were down negative 0.1%, the last update was 0.0%.

Is that, do I have that right?

Yeah, I assume it's the last 15 days of the season, which we typically don't think about as being tax season, but there was a, probably a softer than expected, not a softer than expected but a less returns carry over to the 16th, to the 30th than there did in the prior year.

John, I don't think that's anything material.

You are probably talking about a few thousand returns.

Conversely I can tell you that returns for May are up over the prior May.

But it's such a small number of returns it's not meaningful.

The number of returns were down during the last two weeks of April.

So the two weeks after the tax season has ended by 25,000 clients.

That's what's driving it.

Okay.

Thank you.

Thanks, thank you.

Your next question comes from [Andy Schaeffer] with Farley Capital.

Hi, everyone.

Hi, Andy.

With regards to your guidance for mortgage for '06 you are talking about, you are assuming that mortgage rates were steady.

I was wondering, what leads you to believe this as opposed to mortgage rates either going up or down for the year?

And then also you said you were assuming origination volume growth.

Well, how much growth are you assuming and then again, kind of what do you look at when you come up with that assumption?

Sure, when we say steady rate environment what I really maybe I misspoke or something but what we were essentially trying to suggest is that we think that the change in WAC, and therefore the change in value relative to the secondary markets will be no worse, it will squeeze us no less -- or no more than we can reduce our costs.

And therefore our net operating margin will be similar in the upcoming year as we experienced this last year.

Now frankly, what will that means I think, mathematically is we are working on lowering our cost origination.

That would suggest if we held our margin where it's been that we would give all of that back up, through lower rates to consumers.

How those rates match up with the change in market rates, I guess is going to be imbedded in that sort of overall mix.

But we are really looking at sort of a flat operating margin from origination is the real thing that we are planning for.

That does imply where our origination volume is.

We think that the level of volume that we saw inn our fourth quarter is certainly very sustainable.

There's nothing unusual as we can tell in this quarter.

It really is a reflection of the productivity list that we are getting out of the sales force expansion that we've done over the course of the last year, and those people really are kind of ramping up, as we've been talking about through the course of much of the year.

We think that the volume that we are seeing in the fourth quarter is sort of directionally extrapolatable into the next year with some expectation for even further growth from there.

Okay.

Thanks.

Your next question comes from Tamara Schweitzer with Newman Research.

This is Mike Millman.

With Soleil.

A couple of subjects.

One following up on the mortgage business.

Are WACs typically provide off the ten-year or off the two-year swap?

In our case, it depend on the product but we have a mixed of both fixed and variable product.

Our product inside the overall production so WACs are really based on what type of product type it is.

When we talk about WACs when we are comparing them because much of the way in which we cell our loan production is through benchmark off the two-year point of the curve, we think about it as being priced or overall WAC in comparison to the two-year swap.

It's the bust way to think about movements in the WAC, relative to movements in the market rate.

As I understood, did you say that you did about a 15 million renim in the fourth quarter?

It wasn't that big.

We had I think it was a over the conference of the entire year we had $15 million of renim, but I think the fourth quarter we may have picked up four, five, something like that.

One of the things that we are looking at is how do you optimize the amount of a cash coming out of the portfolio of resids, and I think we did something in the fourth quarter but it wasn't big.

On the bank charter how much can you immediately turn over, put into your own system if you got the green light?

Well, the application that we filed is limited to, in terms of how fast we would look to grow that.

So we are, this is a little bit why we are being cautious about discussing this in general.

Because we don't want to get ahead of ourselves.

But I don't think, it's certainly in our planning for next year and the guidance that we provided, we are not assuming any contribution from a bank in the guidance for next year.

What do you calculate as the spread now between, an owned bank can do versus the market?

Well, certainly today I would suggest that you think that the net margin you could pick up is certainly 250 basis points or more.

So and depending on the nature of the asset base, that we are talking about today we maybe are getting 70, 60, 70, as best on some of these assets, maybe a little bit more than that in some cases, but certainly not 250.

250 is total of versus kind of 60 to 70 today?

It's not 250 in addition?

I think Mark was really referring to the incremental, Mike.

The incremental spread that we would get over and above what we would do today.

Would be 250.

And I think that's before expenses and it depends on, I mean it depends on what you are doing with durations.

I mean there's a whole bunch, a whole host of things that would you have to look at.

But I think that's a fair statement.

Again, depending on what are the underlying assets, what durations are they in, what you are matching and not matching.

On the accounting restatements, that's $0.14 that took place in the first nine months that's included in the full year, does that get you up to where you need to be?

In other words, the restatements are done, there's nothing included in the fourth quarter, or no changes in how you account going into next year?

Yeah, I will, I think put this in the context and then business bill can give that detail.

The things that happened in the first nine months of this year that were really sort of out of period adjustments that were formally charged this year, that were immaterial in their own right but because we are doing the restatement we are putting it in a correct period so it took expenses out of our first second and third quarter's and put them into principally our into '04.

But what you should take away from this I think is that the '05 numbers certainly the fourth quarter '05 numbers and now the full year '05 is really sort of, is a good clean read of the operating results for the business.

But I guess maybe I didn't say it clearly, has there been, aside from this catch up, is there some change that's taking place in how you are accounting today for certain things compared with how did you them previously?

Probably the best thing to do is, I think the only thing that would be in that would be our tax rates assumption because of some of the thing we are doing around clarifying the use of the tax rate.

What I would refer you to I guess is two things on this.

One is in the supplemental information that we've posted, we have a page on the adjusted items, page four, and I really refer you to that.

The other thing is we will for clarity's sake provide an 8-K filing, I think first thing in the morning if it's not out already but it should be available first thing in the morning, that lays out all this in more detail and I guess I would refer you to that so I don't misstate it.

So the bottom line is that there's now a lower tax rate than in the past?

Yeah, as Bill noted, the net tax rate for the year was 38% and we think that that's a fair estimate for when would you want to use the

And that excludes the $0.14?

In other words, the $0.14.

No, I think the $0.14, although it's not real big, includes some of that tax rate benefit.

Okay.

Some questions on tax now.

Jeff talked a little bit about but maybe you can clarify the ten-year?

In particular, I think you said earlier in the script that your first year average office was up -- did 7% more returns than last year's first year.

Yes.

Could you give us similar numbers for kind of two through five?

No.

We do not believe that there is any, let me step back for a minute.

We do not think it is competitively prudent for us to put out, en masse all of the performances of all of our offices because that would in effect telegraph to our competition what size are all of our offices, which offices are mature, where should people target and I think there's enough of that that happens on its own.

We prefer not to put that out.

I will tell you, though, Mike, that because we had talked about this in Q3, that our offices in the second year ended outperforming at a level that was below that of the current year and that was, I'm sorry, than the prior year and that was largely consistent with the drop-off in performance that we saw at the end of the year for the system in general.

So I don't think there's anything systemic about that.

We were generally very pleased with how our new offices performed and again I think we have room to improve that performance over time.

And I guess you talk about the strength in the first half compared to your disappointment with the second half tax season, and I guess I thought that the first half tax season you were actually down on a day-to-day basis.

Is that incorrect?

When we talk about the first half of the season, early season, we are looking at numbers through middle of February, and we felt that that early season performed reasonably well for us.

Even though when I think when you reported the mid-February numbers, you I guess generally indicated that that was down on a day-to-day basis through mid-February?

But, again, I'm not sure you can judge it the way you are describing because of the change in the calendar and the way it works.

But while we would say that through mid-February I think the number was unit growth was up 4.5% or something on a year-to-date basis, and that had a little bit of a date shift in it and so probably a little bit generous to call that all increase in clients at that point.

But in general that's, that was indicative of the strength of the beginning of the season.

Okay.

And final, could you give us a more color some more color on complexity?

In other words, if you had more clients with complex returns, or did the average client have more attachments that you raised the prices on returns, on additional returns, that type of color?

Sure, the complexity really came from two discrete areas.

The first one was that we saw more clients have individual complexities.

So a unique taxpayer or a discrete taxpayer had more forms or more complexity within their return.

Now complexity has a lot of different elements, as you know.

It could be that they had five more stock transactions, or it could be that they had a new depreciation form, or it could be that we had, that they had a couple of new dependents or a variety of different things.

That all adds to complexity.

The other thing that happened is as you look at the tax client base in the aggregate, we had more complexity periods.

So the mix of our clients shifted to a more complex mix than we had anticipated at the beginning of the year, and that leaves, those two things together ends up giving us the complexity benefit that we had gotten, I'm sorry, the complex is the benefit that we realized this year larger than we had anticipated prior to the start of the season.

I think those are both relatively good news items.

I want to clarify one thing before I go to the next question I think I had it pointed out that I misspoke about the question about the renim gain.

We did have $15 million of renim gain game in the mortgage section and that was the amount for the full year.

That would be about $0.06 per share?

You do that faster in your head than I can.

About $0.05, $0.06, that's about right.

Thank you, Mark.

Your next question comes from Adam Weinrich with Bernstein Partners.

A question on the balance sheet, listed of held for trading of 215 million.

I think if you look at the prior quarter that number was 132 million.

And I was hoping you could tell me what portion of that resulted from new securitizations and what portion was results from the mark-to-market on those instruments?

On the mark-to-market portion where on the income statement does that show up?

Neither of those.

Beneficial interest in trust trading is really the value of the loans that is have been placed into the off balance sheet warehouse trust that have not yet been delivered into either a whole loan trade or securitized.

So they are, that number will float around or be varied depending upon the timing, the timing of disposition of loans and to a lesser degree the pricing of the whole loan, advanced loan or the forward loan sales that we've made.

It won't be driven by securitizations in their own right.

The places, if a securitization were to occur and we had, we would say a residual interest of sorts, it would be in the line above that which is residual interest and securitizations, the numbers that actually went, looking at a year over year comparison went to 205 million at the end of the fiscal year.

So the 215 represents entirely different loans than any amounts in the prior quarter?

That's right.

And the 215 is really the quarter to quarter variation in that is completely dependent on the timing of disposition of loans.

Sure.

So typically we are holding a loan for, I don't know, 45 days, 50 days, something like that.

If they happened to be timed like this time which is you get that number a little bit higher.

Thank you very much.

Your next question comes from Sharat Shroff with Morgan Stanley.

A couple of questions, starting off with the tax segment first.

Do you believe there was some benefit in the first half of the season because of the investment marketing plan that you guys used during the season?

Just curious if you could give us your thoughts on what you planned to do next year, if there is any change in strategy and how that might in fact grow?

Shroff, you don't expect us to answer that, do you?

Maybe if you could assure that none of the competition is going to listen we could answer, but I would say that we had, we are moderately pleased with our performance in the first part of the season.

And I think we will look to accelerate the success that we saw this year but we can't say anything else besides that.

In terms of the growth, would that exceed revenue growth for the tax segment?

I'm sorry, can you say that again?.

No, the growth in your marketing budgets, would that exceed the revenue growth in the tax segment?

No.

And the, our marketing expenditures outside of the expenditures to support local, the kind of the new offices were basically flat to down.

So we didn't spend any more money.

We think we were more effective with the spend outside of the limited dollars we spent to support the new offices on a local basis.

No intensification necessarily in the second half next year?

No, I thought you were asking about the first half, Sharat, I'm sorry.

I think you will see intensification in the second half but it's just too soon for to us talk about it and we wouldn't talk about it publicly anyway except to say we are going to have better in the second half.

And going back to your prepared comment about new client growth, could you by source or channel, i.e. what percentage of new clients came through from competition versus self-prepared, and a related question would be because there is likely to be some volatility, in the mix shift between paid and sell how do you anticipate that going for the next two years.

Certainly for competitive reasons we are not going to disclose or discuss the insight that we have about client sources and most effective sources, so I'm not sure we can go quite where you just asked.

In terms of the movement between paid and self prep, or do-it-yourself, it's a little bit hard to read exactly what happened this year.

Certainly there were a lot of different forces that we think were having an effect on the data that we've seen so far about the number of do it yourselfers, and a slight movement toward do-it-yourself this year.

We have also know the data that we are all looking at is a little bit unstable and really settles down through the course of the year.

So it's a little hard to judge it just yet.

We don't think, certainly in all the research that we've done on this whole sort of consumer attitude about the category, that there is some kind of latent trend out there that's weighting to hit back towards self prep.

We think that the longer term trend toward paid professionals is really routed in sort of consumer demand for the convenience that paid prep offers.

We don't think this is the beginning of something.

My final question is on the mortgage segment.

Can you give us an update on the facility that you talked about in the past, when you are going to roll it out and what kind of impact you might have?

We really don't have an update on that at this point.

Okay.

Thanks.

Your next question comes from Chris Gutek with Morgan Stanley.

I had a couple follow up questions.

In the last couple of quarters, the earning release and the presentation on your Web site had you a detailed income statement for all four of your reportable segments, and this quarter you only had it for the mortgage business.

Especially for the tax business going forward, will you not give that and do we have to wait for the 10-K and is that in response to rising competition?

No, it's essentially because of the restatement and wanted to ensure that anything that we might put out is completely accurate and we don't want to run the risk of having to rush something out to this date and this call and later have to tell you that we made a mistake.

Ok.

And the tax business as well, and on a going-forward basis, I know it's probably premature to ask the question but I'll ask it anyway, what do you guys expect for volume growth in fiscal '06, fiscal '07 as you roll-out more offices and further refine your marketing message?

Are you confident you can get into positive territory?

Yes, Chris and after that period what I would say is we understand the tenuring effect of new offices, and we know that as we install new offices or other points of distribution into the system as those mature, we will get a cumulative effect that will build on where we are today.

So we won't say specifically what it is but we do expect that we will continue to show positive growth and that our goal and our objective which we believe we will achieve is that we will build our model to deliver growth that is long term sustainable in excess of the market.

I think you guys also said that in general you expect flat margins going forward in the tax business.

I guess in the context of the cost to open new offices and potentially increase marketing spending, is that flat margin assumption president created on the assumption you are going to have positive volume growth and therefore volume growth is relatively flat or is it that margin compression going forward?

I would say, Chris, that just to clarify we, we, nothing has, in the environment has changed to suggest that over the long haul our margins won't continue to build in excess of where they are today.

But as we invest in these new locations I think we mentioned that we had about a $17 million hit this year on the increment for the new offices, those will tenure and we will see margin benefit coming from that.

But over -- you have this cumulative effect as you open for the first three years as you open, these three big peer groups of offices, that we will see some flattening out, but after this year it's actually our belief that margins will then begin to turn positive regardless of the number of offices that we opened, for example, in '07.

We will start to get that catch up effect.

When you say turn positive you mean prove positive, not turn positive?

Okay.

Final question but for those of us who aren't financial service analysts I'm confused if you expect to get an additional 250 basis points of spread on top of the 60 to 70 you are getting kind of product that's presumably some type of low interest rate savings account is when would you put these clients into that would allow you to capture that much of the spread, and again since I'm not a Financial Services analyst aren't there any fiduciary responsibility that you have to put your clients in a higher yielding account with less spread captured by the company?

Well, many of the assets we are talking about are sitting in money market vehicles today so we would have characteristics of a short term sort of savings account or savings product.

And those are typically lower yielding and what people give up and sort of yield they gain through either liquidity or security of capital.

So, principal, so that's I guess the quick answer to that.

Fundamentally the one thing that we do know is if you look at virtually anything else in this business weather it's the E- Trade, the Schwabs of the world or the Countrywides of the world, a banking platform provides lots of different ways that you can more effectively serve clients and we think that over time we will find a variety of ways that we can do that and at the moment it's, the way we are headed toward sort of the early uses of a charter assuming that we are awarded one, is to expand the ways that we can serve our clients.

I would also add to that, Chris, that it has much more to do with what are the assets invested in?

And so if you take the assets and you invest them in even prime mortgages, at call it 550 basis points and you are paying out, you are paying out 200 basis points on those assets, you got a 350 basis points spread, so we shouldn't assume for this conversation that all the durations are going to perfectly match the way the banks make money is they mismatch their durations and you do it with a very high degree of safety.

But that is, that is certainly what we would be looking to do.

And the other thing I would clarify is the, call it 250 basis points that Mark referenced of net interest margin, there is still operating expenses that would be paid within the bank and other expenses.

But those kind of spreads are not at all unusual.

In fact that would not be top quartile performance for any banking institution in the U.S.

Great.

Thank you.

Thanks.

Your next question is a follow-up question from Andy Schaeffer with Farley Capital.

Hi, quick follow up regarding mortgage again.

You are assuming basically a constant pretax margin in that business throughout the year.

And since you are reducing your acquisition cost and operating costs that would imply a contraction in your gross gain on sales margin.

And I'm wondering, kind of where do you get that from?

Is it from loans you have in the pipeline or loans you sold forward at a certain rate?

No, it's being cautious on our guidance.

Okay.

Okay.

All right.

Thanks.

Your next question comes from Robert Tracy with [Kinios].

I had three questions.

Number one, the guidance, the $4.25 to $4.65, I want to make sure I'm clear on this.

That number is basically assuming you are going to do loan origination of 36 billion to 40 billion for 2006?

I don't think we said precisely what will we think we are going to do, but certainly if you look at the amount that we did in the fourth quarter, 9.3 billion we think that that's right in the range of kind of what we believe is sustainable over the course of the year.

So.

But over 36 billion.

We think that's fair.

And then in the current quarter loans how many of those were interest only loans?

I think it was 21%.

21%.

And finally, there's been a lot of news flow about the interest only loans, could you give us your sense on what your thoughts are on that particular product?

Maybe I will let Bob do that.

It's sort of close to the market and what we are seeing out there with that product.

I know that our 21% is low compared to most of the other originators out there.

There is some negativity relating to the product and we look at it and look at our typical loan, and over the three-year loan life or estimated loan life there is not much amortization going on in the principal, and the difference between interest only and am there is not that much difference, the average FICO of our IO customer is about 646, so it is quite a bit higher than the norm, the average balance is a little bit higher, but debt to equity ratio isn't much higher than our normal loans which is not somebody that's cash strapped trying to borrow more money.

So in performance wise so far I don't know how those two rate they are performing and first is from performing as well or better, as the FICO would indicate, higher FICOs would indicate.

We've been somewhat cautious on this product as many of our competitors were rolling this product out very aggressively we took a more studied approach to it and I think that we have pretty fair confidence that this product is going to provide good value for us.

And aluminum just say one thing, there is also I am reading some of the same articles that there's a bit difference between an interest only and a negative amortization.

We did not originate any negative amortization loans.

Sometimes these tends to get grouped together so some of a negative articles relate to the negative amortization feature that has been in some of the loans.

Gotcha.

Thanks.

That's all of my questions.

Ladies and gentlemen, we have reached the ends of the allotted times for questions and answers.

Mr. Ernst, any closing remarks?

I would just conclude by saying thanks for joining us and as always if you have follow up questions you should feel free to get a hold of us and we would be happy to answer those.

Thanks for joining us for a long call.

That concludes today's H&R Block fourth quarter earnings release conference call.

You may now disconnect.