Fair Value Measurement

3 Months Ended

Jul. 31, 2012

Fair Value Measurement [Abstract]

Fair Value Measurement

7. Fair Value Measurement

We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:

• Level 1 – inputs to the valuation are quoted prices in an active market for identical assets.

• Level 2 – inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.

• Level 3 – valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.

Financial instruments are broken down in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following table presents the assets that were remeasured at fair value on a recurring basis during the three months ended July 31, 2012 and 2011 and the unrealized gains on those remeasurements:

													(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Gain (loss)
July 31, 2012:
Mortgage-backed securities	$	376,138		$	—		$	376,138		$	—		$	5,820
Municipal bonds		5,653			—			5,653			—			426
	$	381,791		$	—		$	381,791		$	—		$	6,246
As a percentage of total assets		10.6	%		—	%		10.6	%		—	%
July 31, 2011:
Mortgage-backed securities	$	192,491		$	—		$	192,491		$	—		$	1,936
Municipal bonds		7,758			—			7,758			—			449
	$	200,249		$	—		$	200,249		$	—		$	2,385
As a percentage of total assets		4.6	%		—	%		4.6	%		—	%

Our AFS securities are carried at fair value on a recurring basis. These include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities. As a result, we use a third-party pricing service to determine fair value and classify the securities as Level 2. The service's pricing model is based on market data and utilizes available trade, bid and other market information for similar securities. The fair values provided by third-party pricing service are reviewed and validated by management of HRB Bank. There were no transfers of AFS securities between hierarchy levels during the three months ended July 31, 2012 and 2011.

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the three months ended July 31, 2012 and 2011 and the losses on those remeasurements:

													(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Gain (loss)
July 31, 2012:
REO	$	16,384		$	—		$	—		$	16,384		$	(261	)
Impaired mortgage loans held for investment		93,666			—			—			93,666			(4,337	)
	$	110,050		$	—		$	—		$	110,050		$	(4,598	)
As a percentage of total assets		3.1	%		—	%		—	%		3.1	%
July 31, 2011:
REO		3,446			—			—			3,446			(482	)
Impaired mortgage loans held for investment		61,997			—			—			61,997			(1,473	)
	$	65,443		$	—		$	—		$	65,443		$	(1,955	)
As a percentage of total assets		1.5	%		—	%		—	%		1.5	%

The following methods were used to estimate the fair value of each class of financial instrument above:

• Real estate owned – REO includes foreclosed properties securing mortgage loans. Foreclosed assets are recorded at estimated fair value, generally based on independent market prices or appraised values of the collateral, less costs to sell upon foreclosure. The assets are remeasured quarterly based on independent appraisals or broker price opinions. Subsequent holding period gains and losses arising from the sale of REO are reported when realized. Because our REO is valued based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset, these assets are classified as Level 3.

• Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. Impaired and TDR loans are required to be evaluated at least annually, based on HRB Bank's Loan Policy. Impaired loans are typically remeasured every six months, while TDRs are evaluated quarterly. These loans are classified as Level 3.

We have established various controls and procedures to ensure that the unobservable inputs used in the fair value measurement of these instruments are appropriate. Appraisals are obtained from certified appraisers and reviewed internally by HRB Bank's asset management group. The inputs and assumptions used in our discounted cash flow model for TDRs are reviewed and approved by the management team of HRB Bank each time the balances are remeasured. Significant changes in fair value from the previous measurement are presented to HRB Bank management for approval. There were no changes to the unobservable inputs used in determining the fair values of our level 3 financial assets.

The following table presents the quantitative information about our Level 3 fair value measurements:

						(dollars in 000s)
	Fair Value at July 31, 2012		Valuation Technique		Unobservable Input	Range (Weighted Average)
REO	$	15,457		Third party pricing	Cost to list/sell Loss severity		5% - 36% (6%) 0% - 95% (45%)
Impaired mortgage loans held for investment – non TDRs	$	91,531		Collateral- based	Cost to list/sell Time to sell (months) Collateral depreciation Loss severity		0% -30% (7%) 24 (24) (38%) - 100% (48%) 0% -100% (57%)
Impaired mortgage loans held for investment – TDRs	$	60,656		Discounted cash flow	Aged default performance Loss severity		31% - 55% (43%) 0% - 21% (4%)