NOTE 4: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS

The composition of our mortgage loan portfolio as of April 30, 2012 and 2011 is as follows:


	(dollars in 000s)
	2012					2011
As of April 30,	Amount		% of Total			Amount		% of Total
Adjustable-rate loans	$	238,442		56	%	$	333,828		58	%
Fixed-rate loans		190,870		44	%		239,146		42	%
		429,312		100	%		572,974		100	%
Unamortized deferred fees and costs		3,429					4,121
Less: Allowance for loan losses		(26,540)					(92,087)
	$	406,201				$	485,008

Activity in the allowance for loan losses for the years ended April 30, 2012, 2011 and 2010 is as follows:


	(in 000s)
Year ended April 30,	2012			2011			2010
Balance at beginning of the year	$	92,087		$	93,535		$	84,073
Provision		24,075			35,567			47,750
Recoveries		292			272			88
Charge-offs		(89,914	)		(37,287	)		(38,376	)

Balance at end of the year	$	26,540		$	92,087		$	93,535

Charge-offs increased during the current year primarily due to a change in practice, under which we now charge-off loans 180 days past due as discussed in note 1.

When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, including those loans more than 60 days past due or modified as TDRs, are evaluated individually. The balance of these loans and the related allowance is as follows:


	(in 000s)
	2012				2011
As of April 30,	Portfolio Balance		Related Allowance		Portfolio Balance		Related Allowance
Pooled (less than 60 days past due)	$	248,772	$	9,237	$	304,325	$	11,238
Impaired:
Individually (TDRs)		71,949		7,752		106,328		11,056
Individually (60 days or more past due)		108,591		9,551		162,321		69,793

	$	429,312	$	26,540	$	572,974	$	92,087

Our portfolio includes loans originated by SCC and purchased by HRB Bank, which constitute 59% of the total loan portfolio at April 30, 2012. We have experienced higher rates of delinquency and believe that we have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio totaled $177.5 million and is characteristic of a prime loan portfolio, and we believe therefore subject to a lower loss exposure. Detail of our mortgage loans held for investment and the related allowance at April 30, 2012 is as follows:

(dollars in 000s)

Outstanding

Loan Loss Allowance

% 30+ Days

Principal Balance

Amount

% of Principal

Past Due

Purchased from SCC

251,857

22,109

8.8

36.7

All other

177,455

4,431

2.5

9.3

429,312

26,540

6.2

25.4

We review the credit quality of our portfolio based on the following criteria: (1) originator; (2) the level of documentation obtained for loan at origination; (3) occupancy status of property at origination; (4) geography; and (5) credit score and loan to value at origination. We specifically evaluate each loan and assign an internal risk rating of high, medium or low to each loan. The risk rating is based upon multiple loan characteristics that correlate to delinquency and loss. These characteristics include, but are not limited to, the five criteria listed above. These loan attributes are evaluated quarterly against a variety of additional characteristics to ensure the appropriate data is being utilized to determine the level of risk within the portfolio. All criteria are obtained at the time of origination and are only subsequently updated if the loan is refinanced.

Credit quality indicators at April 30, 2012 include the following:

(in 000s)

Credit Quality Indicators

Purchased from SCC

All Other

Total Portfolio

Occupancy status:

Owner occupied

181,705

113,879

295,584

Non-owner occupied

70,152

63,576

133,728

251,857

177,455

429,312

Documentation level:

Full documentation

80,377

129,565

209,942

Limited documentation

7,333

18,750

26,083

Stated income

142,005

18,039

160,044

No documentation

22,142

11,101

33,243

251,857

177,455

429,312

Internal risk rating:

High

87,010

—

87,010

Medium

164,847

—

164,847

Low

—

177,455

251,857

177,455

429,312

Loans given our internal risk rating of "high" were originated by SCC, generally have no documentation or are stated income, and are non-owner occupied. Loans given our internal risk rating of "medium" were generally full documentation or stated income, with loan-to-value at origination of more than 80%, and have credit scores at origination below 700. Loans given our internal risk rating of "low" were generally full documentation, with loan-to-value at origination of less than 80% and have credit scores greater than 700.

Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 58% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.

Detail of the aging of the mortgage loans in our portfolio as of April 30, 2012 is as follows:

(in 000s)

Less than 60
Days Past Due

60 – 89 Days
Past Due

90 + Days
Past Due ⁽¹⁾

Total
Past Due

Current

Total

Purchased from SCC

18,520

6,627

85,303

110,450

141,407

251,857

All other

7,722

827

14,311

22,860

154,595

177,455

26,242

7,454

99,614

133,310

296,002

429,312

⁽¹⁾	We do not accrue interest on loans past due 90 days or more.

Information related to our non-accrual loans is as follows:


	(in 000s)
As of April 30,	2012		2011
Loans:
Purchased from SCC	$	88,347	$	143,358
Other		16,626		14,106

		104,973		157,464

TDRs:
Purchased from SCC		3,166		2,849
Other		1,270		329

		4,436		3,178

Total non-accrual loans	$	109,409	$	160,642

Information related to impaired loans is as follows:


	(in 000s)
	Balance With Allowance		Balance With No Allowance		Total Impaired Loans		Related Allowance
As of April 30, 2012: ⁽¹⁾
Purchased from SCC	$	56,128	$	97,591	$	153,719	$	14,917
Other		7,137		19,684		26,821		2,386

	$	63,265	$	117,275	$	180,540	$	17,303

As of April 30, 2011: ⁽²⁾
Purchased from SCC	$	180,387	$	51,674	$	232,061	$	71,733
Other		29,027		7,561		36,588		9,116

	$	209,414	$	59,235	$	268,649	$	80,849

⁽¹⁾	Changes as compared to the prior year are primarily a result of the charge-off of loans 180 days past due in the current year, as previously discussed.

⁽²⁾	Classification of amounts as of April 30, 2011 has been restated to conform to the current period presentation.

Information related to the allowance for impaired loans is as follows:


	(in 000s)
As of April 30,	2012		2011
Portion of total allowance for loan losses allocated to impaired loans and TDR loans:
Based on collateral value method	$	9,551	$	69,794
Based on discounted cash flow method		7,752		11,055

	$	17,303	$	80,849

Information related to activities of our non-performing assets is as follows:


	(in 000s)
For the year ended April 30,	2012		2011		2010
Average impaired loans:
Purchased from SCC	$	211,867	$	252,673
All other		33,940		37,082

	$	245,807	$	289,755	$	307,351

Interest income on impaired loans:
Purchased from SCC	$	5,454	$	5,795
All other		445		829

	$	5,899	$	6,624	$	8,548

Interest income on impaired loans recognized on a cash basis on non-accrual status:
Purchased from SCC	$	5,265	$	5,567
All other		417		744

	$	5,682	$	6,311	$	7,452

As of April 30, 2012 and 2011, accrued interest receivable on mortgage loans held for investment totaled $1.6 million and $2.1 million, respectively. At April 30, 2012, HRB Bank had interest-only mortgage loans in its investment portfolio totaling $2.7 million.

Activity related to our REO is as follows:


	(in 000s)
Year ended April 30,	2012			2011			2010
Balance, beginning of the year	$	19,532		$	29,252		$	44,533
Additions		10,308			16,463			19,341
Sales		(11,976	)		(21,889	)		(24,308	)
Impairments		(2,892	)		(4,294	)		(10,314	)

Balance, end of the year	$	14,972		$	19,532		$	29,252