NOTE 8: FAIR VALUE

FAIR VALUE MEASUREMENT

Assets measured on a recurring basis are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Our investments in available-for-sale securities 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. There were no transfers of AFS securities between hierarchy levels during the three months ended July 31, 2014 and 2013. See note 6 for details of our AFS securities that were remeasured at fair value on a recurring basis during the three months ended July 31, 2014 and 2013 and the unrealized gains or losses on those remeasurements.

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the three months ended July 31, 2014 and 2013 and the losses on those remeasurements:



(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Losses
As of July 31, 2014:
Impaired mortgage loans held for investment	$	59,635		$	—		$	—		$	59,635		$	(842	)
As a percentage of total assets	1.5		%	—		%	—		%	1.5		%

As of July 31, 2013:
Impaired mortgage loans held for investment	$	76,699		$	—		$	—		$	76,699		$	(1,390	)
As a percentage of total assets	2.0		%	—		%	—		%	2.0		%

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 remeasured at least annually, based on HRB Bank's loan policy. 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 as of July 31, 2014		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired mortgage loans held for investment – non TDRs	$	71,762	Collateral- based	Cost to list/sell Time to sell (months) Collateral depreciation Loss severity	0% – 188%(9%) 24 - 26 (24) (166%) – 100%(38%) 0% – 100%(61%)
Impaired mortgage loans held for investment – TDRs	$	37,579	Discounted cash flow	Aged default performance Loss severity	25% – 40%(33%) 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	July 31, 2014				July 31, 2013				April 30, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	1,429,489	$	1,429,489	$	1,163,876	$	1,163,876	$	2,185,307	$	2,185,307
Cash and cash equivalents - restricted	71,917		71,917		55,477		55,477		115,319		115,319
Receivables, net - short-term	122,315		122,315		121,309		124,218		191,618		191,618
Mortgage loans held for investment, net	259,732		193,920		309,681		194,882		268,428		192,281
Investments in AFS securities	408,063		408,063		487,033		487,033		427,824		427,824
Receivables, net - long-term	101,146		101,146		198,088		210,234		111,795		111,795
Liabilities:
Customer banking deposits	483,477		480,729		759,745		760,449		770,288		765,376
Long-term debt	906,419		965,650		906,632		931,300		906,474		955,050
Contingent consideration payments	9,168		9,168		10,766		10,766		9,206		9,206

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, net - short-term - For short-term balances 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).


▪	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).


▪	Investments in AFS 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, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise territories serving as collateral (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.

▪

Customer banking 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 our Senior Notes is based on quotes from multiple banks (Level 2).


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