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 AFS 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. Our AFS securities 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. Quarterly, we compare the prices obtained from our third-party pricing services to other available independent pricing information to validate the reasonableness of the valuations provided. In addition, we also perform analytics to assess the reasonableness of the fair value received from the third-party pricing service based on changes in the portfolio and changes in market conditions. We evaluate whether adjustments to third-party pricing is necessary and historically, we have not made adjustments to prices obtained from our third-party pricing services.

There were no transfers of AFS securities between hierarchy levels during the three months ended July 31, 2015 and 2014. 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, 2015 and 2014 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, 2015 and 2014 and the losses on those remeasurements:



(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Losses
As of July 31, 2015:
Impaired mortgage loans held for investment	$	57,951		$	—		$	—		$	57,951		$	(88	)
As a percentage of total assets	1.6		%	—		%	—		%	1.6		%

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		%

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, 2015		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired mortgage loans held for investment – non TDRs	$	68,368	Collateral- based	Cost to list/sell Time to sell (months) Collateral depreciation Loss severity	0% – 171%(10%) 12 (12) (128%) – 100%(32%) 0% – 100%(61%)
Impaired mortgage loans held for investment – TDRs	$	29,925	Discounted cash flow	Aged default performance Loss severity	23% – 36%(29%) 0% – 23%(7%)

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, 2015				July 31, 2014				April 30, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	1,299,382	$	1,299,382	$	1,429,489	$	1,429,489	$	2,007,190	$	2,007,190
Cash and cash equivalents - restricted	61,040		61,040		71,917		71,917		91,972		91,972
Receivables, net - short-term	103,194		103,194		122,315		122,315		167,964		167,964
Mortgage loans held for investment, net	230,130		184,277		259,732		193,920		239,338		190,196
Investments in AFS securities	407,426		407,426		408,063		408,063		441,709		441,709
Receivables, net - long-term	72,427		72,427		101,146		101,146		80,867		80,867
Liabilities:
Customer banking deposits	477,145		473,720		483,477		480,729		744,699		737,261
Long-term debt	505,996		552,431		906,419		965,650		506,088		556,769
Contingent consideration payments	10,650		10,650		9,168		9,168		10,667		10,667

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 estimated using a third-party pricing service. The fair value is determined using the present value of expected future cash flows at the asset level, assuming future prepayments and using discount factors determined by prices obtained for residential loans with similar characteristics in the secondary market, as discounted for illiquid assets. Quarterly, we perform analytics to assess the reasonableness of the fair value received from the third-party pricing service based on changes in the portfolio and changes in market conditions. We evaluate whether adjustments to third-party pricing is necessary and historically, we have not made adjustments to prices obtained from our third-party pricing service (Level 3).


▪	Investments in AFS securities - For mortgage-backed 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). The fair value of our investment in common stock is determined based on quoted market prices (Level 1).

▪

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).