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Mortgage woes weigh on H&R Block profit

/ Source: The Associated Press

H&R Block Inc., the largest U.S. income tax preparer, reported a quarterly net loss on Thursday, weighed down by the subprime mortgage unit it has put up for sale, but revenue from its tax and banking businesses rose sharply.

Shares of H&R Block, down nearly 12 percent over the past year, rose 3 percent in after-market electronic trade.

The Kansas City company had a net loss of $44.7 million, or 14 cents a share, for the fiscal third quarter ended January 31, compared with net earnings of $12.1 million, or 4 cents per share, a year earlier.

Excluding results from its Option One Mortgage unit, Block reported earnings from continuing operations of $25 million, or 8 cents a share.

That was below analysts’ average expectation of 12 cents a share, according to Reuters Estimates.

A year earlier, the company had a loss from continuing operations of $30.2 million, or 9 cents, due to soaring legal costs.

Several suitors are studying Option One’s books and the company still expects to announce the results of its strategic review next month, H&R Block Chief Executive Mark Ernst told reporters on a conference call.

Ernst also said he remains confident the sale price will exceed the unit’s $1.3 billion carrying value.

Option One makes home loans to borrowers with subprime — poor — credit, a business under pressure as the U.S. housing market cools and loans made in recent years go sour.

This downturn again took a hit out of Block earnings. The company increased its loan loss reserves for the business by $111 million, reflecting expectations that more loans may go bad.

On the other hand, Ernst said early payment default trends improved, indicating that tighter underwriting standards it adopted recently are paying off.

“We think this (drag on earnings) is now behind us,” Ernst said. “We’ve aggressively sold loans into the market and took our lumps. We have for the most part disposed of the loans were coming back to us or increased the reserve levels against our remaining exposure.”