Fair Value Measurement

3 Months Ended

Jul. 31, 2013

FAIR VALUE

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 presented 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, 2013 and 2012:



(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Gains (losses)
As of July 31, 2013:
Mortgage–backed securities	$	482,603		$	—		$	482,603		$	—		$	(6,798	)
Municipal bonds	4,430			—			4,430			—			266
Mortgage loans held for sale	7,608			—			—			7,608			(2,916		)
	$	494,641		$	—		$	487,033		$	7,608		$	(9,448	)
As a percentage of total assets	13.1		%	—		%	12.9		%	0.2		%

As of 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		%	—		%

Our investments in mortgage-backed securities and municipal bonds are carried at fair value on a recurring basis with gains and losses reported as a component of other comprehensive income, except for losses assessed to be other than temporary. These include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities, as they are not actively traded and have fewer observable transactions. As a result, we use third-party pricing services to determine fair value and classify the securities as Level 2. The third-party pricing services' models are based on market data and utilize available trade, bid and other market information for similar securities. The fair values provided by the third-party pricing services are regularly reviewed by management. Annually, a sample of prices supplied by the third-party pricing service is validated by comparison to prices obtained from other third party sources. There were no transfers of AFS securities between hierarchy levels during the three months ended July 31, 2013 and 2012.

The fair value of our mortgage loans held for sale is determined using market pricing sources without adjustments and are based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics. These loans are classified as Level 3.

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the three months ended July 31, 2013 and 2012:



(dollars in 000s)
	Total			Level 1		Level 2		Level 3			Losses
As of July 31, 2013:
REO	$	14,752		$	—	$	—	$	14,752		$	(353	)
Impaired mortgage loans held for investment	76,699			—		—		76,699			(1,390		)
	$	91,451		$	—	$	—	$	91,451		$	(1,743	)
As a percentage of total assets	2.4		%	—		—		2.4		%

As of 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		%

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 nine 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 HRB Bank's management team 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, where the significant unobservable inputs were developed by HRB Bank's management team:



(in 000s)
	Fair Value at July 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
REO	$	13,917	Third party pricing	Cost to list/sell Loss severity	5% – 57%(5%) 0% – 100%(48%)
Impaired mortgage loans held for investment – non TDRs	$	81,322	Collateral- based	Cost to list/sell Time to sell (months) Collateral depreciation Loss severity	0% – 134%(8%) 24(24) (120%) – 100%(46%) 0% – 100%(59%)
Impaired mortgage loans held for investment – TDRs	$	45,270	Discounted cash flow	Aged default performance Loss severity	29% – 51%(39%) 0% – 21%(5%)

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of our financial instruments are as follows:



(in 000s)
As of	July 31, 2013				July 31, 2012				April 30, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	1,163,876	$	1,163,876	$	939,871	$	939,871	$	1,747,584	$	1,747,584
Cash and cash equivalents – restricted	55,477		55,477		43,109		43,109		117,837		117,837
Receivables, net – short–term	121,309		124,218		116,357		116,357		206,835		206,810
Mortgage loans held for sale	7,608		7,608		—		—		—		—
Mortgage loans held for investment, net	309,681		194,882		386,759		238,658		338,789		210,858
Investments in AFS securities	487,033		487,033		381,791		381,791		486,876		486,876
Receivables, net – long–term	127,855		132,589		128,930		128,930		125,048		134,283
Note receivable (including interest)	61,561		68,973		56,917		62,748		60,352		69,472
Liabilities:
Deposits	759,745		760,449		653,681		653,382		938,331		934,019
Long–term borrowings	906,632		931,300		1,009,634		1,037,169		906,680		964,630
Contingent consideration payments	10,766		10,766		7,090		7,090		11,277		11,277

Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.


▪	Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).

▪

Receivables - short-term - For short-term balances with the exception of credit card receivables, the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1). The fair value of credit card balances is determined using market pricing sources based on projected future cash flows of the pooled assets and performance characteristics (Level 3).


▪	Mortgage loans held for sale and mortgage loans held for investment, net - The fair value of mortgage loans is determined using market pricing sources based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics (Level 3).


▪	Investments in available-for-sale securities - We use a third-party pricing service to determine fair value. The service's pricing model is based on market data and utilizes available trade, bid and other market information for similar securities (Level 2).

▪

Receivables - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to the variable interest rates (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates. The fair value of credit card balances is determined using market pricing sources based on projected future cash flows of the pooled assets and performance characteristics (Level 3).


▪	Note receivable - The fair value of the long-term note receivable from M&P assumes no prepayment and is determined using market pricing sources for similar instruments based on projected future cash flows (Level 3).

▪

Deposits - The fair value of deposits with no stated maturity such as non-interest-bearing demand deposits, checking, money market and savings accounts is equal to the amount payable on demand (Level 1). The fair value of IRAs and other time deposits is estimated by discounting the future cash flows using the rates currently offered by HRB Bank for products with similar remaining maturities (Level 3).


▪	Long-term debt - The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market yields on our Senior Notes (Level 3).


▪	Contingent consideration payments - Fair value approximates the carrying amount (Level 3).

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

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-Name Statement of Financial Accounting Standard (FAS)

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-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

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Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

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