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Mortgage Costs Hit H&R Block

It posts a wider-than-expected second-quarter loss and cuts its fiscal-year outlook.
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H&R Block

(HRB) - Get Free Report

, citing profit weakness in its mortgage-services business, reported a sharply wider second-quarter loss and chopped its full-year earnings forecast.

The Kansas City, Mo., company, best known for its tax-preparation services, posted a second-quarter loss of $72.2 million, or 22 cents a share, compared with a year-earlier loss of $49.9 million or 15 cents a share. The company's revenue rose 14% to $620 million from $542 million.

The results were worse than analysts' expectations calling for a loss of 16 cents a share and revenue of $636 million, according to Thomson First Call. H&R Block, which typically posts losses outside of its tax-preparing season, said good performances in its tax services, RSM McGladrey and financial adviser businesses were offset by weak mortgage earnings.

"Though mortgage originations and revenues were up during the second quarter, industry pricing pressure and rising funding rates combined to limit mortgage earnings," said Chairman and Chief Executive Mark Ernst in a statement. "Despite the mortgage rate increases we put into effect during the second quarter, rising funding costs in the secondary market limited our ability to realize margin improvement during the quarter."

The company expects further rate increases it put into place to help restore margins "meaningfully" in the third quarter and to "acceptable levels" by the fourth. Still, H&R Block lowered its fiscal 2006 earnings expectation to $1.90 to $2.15 a share, citing market dynamics and the pace of secondary market-rate increases.

Previously, H&R Block projected earnings of $2.12 to $2.32 a share. Analysts, on average, predict earnings of $2.10 a share for the year.

"This change in earnings outlook is entirely associated with mortgage expectations and is partially offset by improving results in our other lines of business," Ernst said.

H&R Block shares recently dropped 4.4% in after-hours trading, to $22.80.