Fair Value Measurement

6 Months Ended

Oct. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurement

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 six months ended October 31, 2013 and 2012:

(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Gains (losses)
As of October 31, 2013:
Mortgage-backed securities	$	460,935		$	—		$	460,935		$	—		$	(4,926	)
Municipal bonds	4,409			—			4,409			—			260
	$	465,344		$	—		$	465,344		$	—		$	(4,666	)
As a percentage of total assets	14.2		%	—		%	14.2		%	—		%
As of October 31, 2012:
Mortgage-backed securities	$	384,062		$	—		$	384,062		$	—		$	6,007
Municipal bonds	5,592			—			5,592			—			382
	$	389,654		$	—		$	389,654		$	—		$	6,389
As a percentage of total assets	10.0		%	—		%	10.0		%	—		%

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 six months ended October 31, 2013 and 2012.

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

(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Losses
As of October 31, 2013:
REO	$	7,519		$	—		$	—		$	7,519		$	(300	)
Impaired mortgage loans held for investment	76,148			—			—			76,148			(2,353		)
	$	83,667		$	—		$	—		$	83,667		$	(2,653	)
As a percentage of total assets	2.6		%	—		%	—		%	2.6		%
As of October 31, 2012:
REO	$	14,646		$	—		$	—		$	14,646		$	(203	)
Impaired mortgage loans held for investment	89,032			—			—			89,032			(7,298		)
	$	103,678		$	—		$	—		$	103,678		$	(7,501	)
As a percentage of total assets	2.7		%	—		%	—		%	2.7		%

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

▪ 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.

▪ 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 management 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, which utilize significant unobservable internally-developed inputs:

(in 000s)
	Fair Value at October 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
REO	$	7,093	Third party pricing	Cost to list/sell Loss severity	5% – 26%(5%) 0% – 100%(51%)
Impaired mortgage loans held for investment – non TDRs	$	78,012	Collateral- based	Cost to list/sell Time to sell (months) Collateral depreciation Loss severity	0% – 154%(8%) 24(24) (132%) – 100%(43%) 0% – 100%(59%)
Impaired mortgage loans held for investment – TDRs	$	42,413	Discounted cash flow	Aged default performance Loss severity	29% – 49%(39%) 0% – 22%(6%)

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(in 000s)
As of	October 31, 2013				October 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	$	790,772	$	790,772	$	1,260,901	$	1,260,901	$	1,747,584	$	1,747,584
Cash and cash equivalents – restricted	47,521		47,521		38,667		38,667		117,837		117,837
Receivables, net – short-term	131,701		133,884		124,511		124,511		206,835		206,810
Mortgage loans held for investment, net	295,907		211,690		370,850		226,885		338,789		210,858
Investments in AFS securities	465,344		465,344		389,654		389,654		486,876		486,876
Receivables, net – long-term	129,180		130,023		134,359		134,359		125,048		134,283
Note receivable (including interest)	62,786		69,827		58,049		64,508		60,352		69,472
Liabilities:
Deposits	656,305		656,300		795,519		795,227		938,331		934,019
Long-term borrowings	906,581		947,350		1,506,803		1,540,333		906,680		964,630
Contingent consideration payments	12,454		12,454		10,277		10,277		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).

▪ 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).

▪ Mortgage loans held for investment, net – The fair value of mortgage loans held for investment 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).

▪ 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 borrowings – The fair value of our Senior Notes is based on quotes from multiple banks. (Level 2).

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