Our subsidiaries provide tax preparation and retail banking services. We are the
only major company offering a full range of software, online and in-office tax
preparation solutions to individual tax clients.
OVERVIEW
A summary of our fiscal year 2012 results is as follows:
n Revenues for the fiscal year were $2.9 billion, down 1.7% from prior year
results, primarily due to a promotional offering on RACs, coupled with lower
interest income on EAs.
n Diluted earnings per share from continuing operations decreased 8.7% from the
prior year to $1.16.
n U.S. tax returns prepared by us increased 4.2% from the prior year primarily
due to strong results in our online offering.
n Pretax income for the Tax Services segment decreased $63.5 million, or 8.3%,
due primarily to the decline in RAC revenues, a $35.7 million increase in
marketing expense and increases in litigation and other expenses, partially
offset by a $71.0 million decline in bad debt expense.
n In fiscal year 2012, we sold RSM and also sold RSM EquiCo, Inc.'s subsidiary,
McGladrey Capital Markets LLC (MCM). As of April 30, 2012, the results of
operations of these businesses are presented as discontinued operations in
the consolidated financial statements. All periods presented have been
reclassified to reflect our discontinued operations. See additional
information in Item 8, note 20 to the consolidated financial statements.
n In April 2012, we announced a strategic realignment which eliminated
approximately 350 positions and closed approximately 200 underperforming
company-owned offices. We recorded $31.2 million in severance costs and $5.5
million in lease termination costs and impairment charges.
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Consolidated Results of Operations Data (in 000s, except per share amounts)
Year ended April 30, 2012 2011 2010
REVENUES:
Tax Services $ 2,862,378 $ 2,912,361 $ 2,975,252
Corporate and eliminations 31,393 32,619 39,583
$ 2,893,771 $ 2,944,980 $ 3,014,835
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES:
Tax Services $ 704,002 $ 767,498 $ 867,362
Corporate and eliminations (127,932 ) (139,795 ) (143,948 )
576,070 627,703 723,414
Income taxes 230,102 235,156 268,291
Net income from continuing operations 345,968 392,547 455,123
Net income (loss) from discontinued
operations (80,036 ) 13,563 24,119
Net income $ 265,932 $ 406,110 $ 479,242
BASIC EARNINGS (LOSS) PER SHARE:
Net income from continuing operations $ 1.16 $ 1.27 $ 1.37
Net income (loss) from discontinued
operations (0.27 ) 0.04 0.07
Net income $ 0.89 $ 1.31 $ 1.44
DILUTED EARNINGS (LOSS) PER SHARE:
Net income from continuing operations $ 1.16 $ 1.27 $ 1.36
Net income (loss) from discontinued
operations (0.27 ) 0.04 0.07
Net income $ 0.89 $ 1.31 $ 1.43
18 H&R BLOCK 2012 Form 10K
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RESULTS OF OPERATIONS
TAX SERVICES
This segment primarily consists of our income tax preparation businesses -
assisted, online and software. This segment includes our tax operations in the
U.S. and its territories, Canada, and Australia. Additionally, this segment
includes the activities of HRB Bank that primarily support the tax network.
Tax Services - Operating Statistics
Year ended April 30, 2012 2011 2010
TAX RETURNS PREPARED : (in 000s)
United States:
Company-owned operations 9,207 9,168 9,182
Franchise operations 5,693 5,588 5,064
Total retail operations 14,900 14,756 14,246
Software 2,158 2,201 2,193
Online 4,419 3,722 2,893
Free File Alliance 861 767 810
Total digital tax solutions 7,438 6,690 5,896
Total U.S. operations 22,338 21,446 20,142
International operations:
Canada (1) 2,545 2,411 2,352
Australia 671 644 667
Total international operations 3,216 3,055 3,019
Tax returns prepared worldwide 25,554 24,501 23,161
TAX OFFICES :
U.S. offices:
Company-owned offices 5,787 5,921 6,431
Company-owned shared locations (2) 734 572 760
Total company-owned offices 6,521 6,493 7,191
Franchise offices 4,296 4,178 3,909
Franchise shared locations (2) 175 397 406
Total franchise offices 4,471 4,575 4,315
Total U.S. offices 10,992 11,068 11,506
International offices:
Canada 1,223 1,324 1,269
Australia 404 384 374
Total international offices 1,627 1,708 1,643
Tax offices worldwide 12,619 12,776 13,149
(1) In fiscal year 2011, the end of the Canadian tax season was extended from
April 30 to May 2, 2011. Tax returns prepared in Canada in fiscal year 2011
includes 51,000 returns in both company-owned and franchise offices which
were accepted by the client on May 1 or 2. The revenues related to these
returns were recognized in fiscal year 2012.
(2) Shared locations include offices located within Sears, Wal-Mart and other
third-party businesses.
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Tax Services - Financial Results (dollars in 000s)
Year ended April 30, 2012 2011 2010
Tax preparation fees $ 1,954,498 $ 1,931,024 $ 1,991,989
Royalties 308,561 304,194 275,559
Fees from refund anticipation
checks 132,361 181,661 87,541
Fees from Emerald Card 104,143 90,451 99,822
Fees from Peace of Mind
guarantees 75,603 78,413 79,888
Interest income on Emerald
Advance 59,660 94,300 77,882
Loan participation fees and
related revenue - 17,151 146,160
Other 227,552 215,167 216,411
Total revenues 2,862,378 2,912,361 2,975,252
Compensation and benefits:
Field wages 691,680 692,561 713,792
Other wages 150,908 155,165 138,008
Benefits and other compensation 183,037 174,254 178,728
1,025,625 1,021,980 1,030,528
Occupancy and equipment 381,572 385,130 410,709
Marketing and advertising 278,231 242,538 233,748
Depreciation and amortization 92,816 90,672 93,424
Bad debt 68,082 139,059 104,716
Supplies 44,236 42,300 49,781
Goodwill impairment 7,409 22,700 -
Other 277,006 245,585 234,050
Gains on sale of tax offices (16,601 ) (45,101 ) (49,066 )
Total expenses 2,158,376 2,144,863 2,107,890
Pretax income $ 704,002 $ 767,498 $ 867,362
Pretax margin 24.6% 26.4% 29.2%
FISCAL 2012 COMPARED TO FISCAL 2011- Tax Services' revenues decreased $50.0
million, or 1.7%, compared to the prior year. Tax preparation fees increased
$23.5 million, or 1.2% primarily due to an increase in tax returns prepared in
our international operations and favorable exchange rates. Return volume and
pricing in U.S. company-owned offices were relatively unchanged from the prior
year.
Royalties increased $4.4 million, or 1.4%, primarily due to a 1.9% increase in
returns prepared in franchise offices.
Fees earned on RACs decreased $49.3 million, or 27.1%, due to a promotional
offering, whereby clients were eligible to receive a RAC at no charge through
February 4, if they elected to have their refund direct deposited onto an
Emerald Card.
Emerald Card fees increased $13.7 million, or 15.1%, primarily due to higher
transaction volumes resulting from an increase of approximately 24% in prepaid
debit cards issued.
Interest income earned on EAs decreased $34.6 million, or 36.7%, as a result of
lower EA volumes principally resulting from changes in underwriting criteria in
the current year.
Prior to fiscal year 2011, RALs were offered to our clients by a third party. In
the prior year, we recognized the final contractual fees related to RALs
totaling $17.2 million.
Other revenue increased $12.5 million, or 5.8%, primarily due to an increase in
online tax preparation revenues.
Total expenses increased $13.5 million, or 0.6%, compared to the prior year.
Benefits and other compensation increased $8.8 million, or 5.0%, over the prior
year primarily due to incremental severance costs. Marketing and advertising
increased $35.7 million, or 14.7%, as we expanded our marketing efforts,
primarily in television and online. Bad debt expense decreased $71.0 million, or
51.0%, primarily as a result of lower EA volumes in the current year and with
better collection rates in the current year. Other expenses increased $31.4
million, or 12.8%, primarily due to incremental litigation expenses recorded in
the current year. Gains on the sale of tax offices declined $28.5 million, as we
sold 83 offices in the current year compared to 280 in the prior year.
Pretax income for fiscal year 2012 decreased $63.5 million, or 8.3%, from 2011.
The pretax margin for the segment decreased to 24.6% from 26.4% in fiscal year
2011.
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FISCAL 2011 COMPARED TO FISCAL 2010 - Tax Services' revenues decreased $62.9
million, or 2.1%, compared to the prior year. Tax preparation fees decreased
$61.0 million, or 3.1%, due primarily to the sale of company-owned offices to
franchisees and the loss of certain clients as a result of not having a RAL
offering in our tax offices in fiscal year 2011. Although we gained clients
through the free Federal EZ filing we began offering during fiscal year 2011,
that increase did not have a significant impact on our revenues.
Royalties increased $28.6 million, or 10.4%, primarily due to the conversion of
280 company-owned offices into franchises.
Fees earned on RACs increased $94.1 million, or 107.5%, primarily due to an
increase in the number of RACs issued as a portion of our clients chose to
receive their refunds via RAC, as an alternative to a RAL.
RALs were historically offered to our clients by HSBC Holdings plc (HSBC). In
December 2010, HSBC terminated its contract with us based on restrictions placed
on HSBC by its regulator and, therefore, RALs were not offered during the 2011
tax season. Revenues of $17.2 million include the recognition of net deferred
fees from HSBC. This compares with revenues resulting from loans participations
and related fees in fiscal year 2010 of $146.2 million.
Interest income earned on EAs increased $16.4 million, or 21.1%, over fiscal
year 2010 primarily due to an increase in loan volume, which resulted from
offering the product to a wider client base.
Total expenses increased $37.0 million, or 1.8%, compared to fiscal year 2010.
Compensation and benefits decreased $8.5 million, or 0.8%, primarily due to
lower commission-based wages due to conversions to franchise offices, reduced
headcount and related payroll taxes. This decline was partially offset by
severance costs and related payroll taxes of $27.4 million. Occupancy costs
declined $25.6 million, or 6.2%, due to office closures and cost-saving
initiatives. Bad debt expense increased $34.3 million, or 32.8%, primarily due
to increased volumes on EAs, as well as a decline in tax returns prepared for
those clients. During fiscal year 2011, we recorded a $22.7 million impairment
of goodwill in an ancillary reporting unit, as discussed in Item 8, note 7 to
the consolidated financial statements. Other expenses increased $11.5 million,
or 4.9%, primarily due to incremental litigation expenses recorded in fiscal
year 2011.
Pretax income for fiscal year 2011 decreased $99.9 million, or 11.5%, from 2010.
As a result of the declines in revenues and higher expenses, primarily bad debt
expense and goodwill impairment, pretax margin for the segment decreased to
26.4% from 29.2% in fiscal year 2010.
CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include net interest margin and gains or losses
relating to mortgage loans held for investment, real estate owned and residual
interests in securitizations, along with interest expense on borrowings and
other corporate expenses.
Corporate - Operating Results (in 000s)
Year ended April 30, 2012 2011 2010
Interest income on mortgage loans
held for investment $ 20,322 $ 24,693 $ 31,877
Other 11,071 7,926 7,706
Total revenues 31,393 32,619 39,583
Interest expense 83,658 84,288 79,929
Provision for loan losses 24,075 35,567 47,750
Other, net 51,592 52,559 55,852
Total expense 159,325 172,414 183,531
Pretax loss $ (127,932 ) $ (139,795 ) $ (143,948 )
FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011
Interest income earned on mortgage loans held for investment decreased $4.4
million, or 17.7%, from the prior year, primarily as a result of declining rates
and non-performing loans. Our provision for loan losses decreased $11.5 million,
or 32.3%, from the prior year as a result of the continued run-off of our
portfolio.
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations in fiscal year 2012 was 39.9%
compared to 37.5% in the prior year. The higher effective tax rate was primarily
due to increased tax expense related to changes in the value of investments held
within company-owned life insurance (COLI) policies. A portion of the increase
related to COLI resulted from the decision to surrender COLI policies no longer
required to support our deferred
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compensation liabilities. This decision triggered a one-time tax expense related
to prior period gains. In addition to the impact of COLI, changes in tax items
including valuation allowances, income tax reserves and other discrete tax
adjustments caused a small net increase to tax expense.
FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010
Interest income earned on mortgage loans held for investment decreased $7.2
million, or 22.5%, from the prior year, primarily as a result of declining rates
and non-performing loans. Our provision for loan losses decreased $12.2 million,
or 25.5%, from the prior year as a result of the continued run-off of our
portfolio.
Income Taxes on Continuing Operations
Our effective tax rate from continuing operations was 37.5% for the fiscal year
ended April 30, 2011, compared to 37.1% in the prior year. The increase resulted
from a decline in gains from investments in company-owned life insurance assets
which were not subject to tax and an increase in the state effective tax rate
offset by other favorable net discrete adjustments recorded in fiscal year 2011
compared to net unfavorable adjustments recorded in fiscal year 2010.
DISCONTINUED OPERATIONS
Our discontinued operations include the results of RSM and related businesses,
which were previously reported in our Business Services segment, and our
discontinued mortgage operations.
Discontinued Operations - Operating Results (in 000s)
Year ended April 30, 2012 2011 2010
Revenues $ 417,168 $ 828,725 $ 859,869
Pretax income (loss) from operations:
RSM and related businesses $ 14,441 $ 48,021 $ 59,492
Mortgage (59,702 ) (20,644 ) (16,449 )
(45,261 ) 27,377 43,043
Income taxes (benefit) (13,329 ) 13,814 18,924
Net income (loss) from operations (31,932 ) 13,563 24,119
Pretax loss on sales of businesses (109,719 ) - -
Income tax benefit (61,615 ) - -
Net loss on sales of businesses (48,104 ) - -
Net income (loss) from discontinued operations $ (80,036 ) $ 13,563
$ 24,119
FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011
The net loss from our discontinued operations totaled $80.0 million compared to
income of $13.6 million for the prior year. The loss on the sale of RSM and
related businesses includes a $99.7 million goodwill impairment recorded in the
first quarter related to the sales of RSM and MCM. Additionally, the prior year
includes twelve months of RSM operating results while the current year includes
only seven months.
The loss related to the mortgage business increased due to a settlement of
approximately $28 million to the SEC accrued during the current year, coupled
with $20.0 million in incremental loss provisions related to an increase in
SCC's estimated contingent losses for representation and warranty claims.
Income Taxes
The sale of RSM resulted in a pretax financial statement loss, but produced a
gain for tax purposes. The tax gain resulted primarily from larger amortization
deductions taken for tax purposes than for financial statement purposes. A
portion of the gain from the sale of intangible assets is capital in nature and
was offset by utilization of capital loss carry-forwards, resulting in an
incremental tax benefit reported for financial statement purposes.
FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010
Net income from our discontinued operations fell to $13.6 million in fiscal year
2011, from $24.1 million for fiscal year 2010, primarily due to lower revenues
and higher litigation expenses in our RSM business and higher expenses from our
discontinued mortgage business.
Income Taxes
Our effective tax rate for discontinued operations was 50.5% for the fiscal year
ended April 30, 2011, compared to 44.0% in the prior year. This increase
resulted from the impact of permanent tax items and increased state tax rates.
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REPRESENTATION AND WARRANTY CLAIMS
SCC has accrued a liability for estimated contingent losses related to
representation and warranty claims as of April 30, 2012 of $130.0 million, which
represents SCC's estimate of the probable loss that may occur. Losses on claims
reviewed and deemed to be valid totaled $16.2 million, $12.2 million and $18.2
million for fiscal years 2012, 2011 and 2010, respectively. These amounts were
recorded as reductions of SCC's accrued representation and warranty liability.
During the second and fourth quarters of fiscal year 2012, SCC observed an
increase in third-party activity. As a result of this third-party activity,
SCC's estimate of probable claims increased from its prior expectations,
resulting in additional loss provisions of approximately $56 million. These loss
provisions were partially offset by changes in assumptions, including a decrease
in the rate at which claims have been found to be valid, corresponding to recent
trends in reviewed claims, and a decrease in expected future claims related to
net interest margin (NIM) bonds that had matured, resulting in a net recorded
loss provision in discontinued operations of $20.0 million.
See additional discussion in Item 1A, "Risk Factors," "Critical Accounting
Estimates" below and in Item 8, note 18 to the consolidated financial
statements.
CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our
financial statements, as they require the use of significant judgment and
estimation in order to measure, at a specific point in time, matters that are
inherently uncertain. Specific risks for these critical accounting estimates are
described in the following paragraphs. We have reviewed and discussed each of
these estimates with the Audit Committee of our Board of Directors. For all of
these estimates, we caution that future events rarely develop precisely as
forecasted and estimates routinely require adjustment and may require material
adjustment.
See Item 8, note 1 to the consolidated financial statements, which discusses
accounting estimates we have selected when there are acceptable alternatives and
new or proposed accounting standards that may affect our financial reporting in
the future.
MORTGAGE LOAN REPRESENTATION AND WARRANTY CLAIMS - In connection with the sale
of loans and/or RMBSs, SCC made certain representations and warranties. These
representations and warranties varied based on the nature of the transaction and
the buyer's or insurer's requirements, but generally pertained to the ownership
of the loan, the validity of the lien securing the loan, borrower fraud, the
loan's compliance with the criteria for inclusion in the transaction, including
compliance with SCC's underwriting standards or loan criteria established by the
buyer, ability to deliver required documentation, and compliance with applicable
laws. Representations and warranties related to borrower fraud in whole loan
sale transactions to institutional investors, which represented approximately
68% of the disposal of loans originated in calendar years 2005, 2006 and 2007,
included a "knowledge qualifier" limiting SCC's liability to those instances
where SCC had knowledge of the fraud at the time the loans were sold.
Representations and warranties made in other sale transactions did not include a
knowledge qualifier as to borrower fraud. In the event that there is a breach of
a representation and warranty and such breach materially and adversely affects
the value of a mortgage loan or a securitization insurer's or certificate
holder's interest in the mortgage loan, SCC may be obligated to repurchase the
loan or may otherwise indemnify certain parties for losses, referred to as
"representation and warranty claims." The amount of claims received varies from
period to period, and these variances have been and are expected to continue to
fluctuate substantially. Although there is no certainty regarding future claims
volume, SCC may continue to experience an increase in representation and
warranty claims as a result of volatility in mortgage delinquency rates, housing
prices and expected expiration of applicable statutes of limitations and
developments in securities litigation and other proceedings to which SCC is not
a party.
SCC accrues a liability for contingent losses relating to representation and
warranty claims by estimating probable losses for those claims, both known and
projected, based on, among other things, historical validity and severity rates.
Projections of future claims are based on an analysis that includes a review of
the terms and provisions of applicable agreements, the historical experience
under representation and warranty claims and third-party activity, which
includes inquiries from various third-parties. SCC's methodology for calculating
this liability also includes an assessment of the probability that individual
counterparties (private label securitization trustees on behalf of certificate
holders, monoline insurers and whole-loan purchasers) will assert future claims.
This accrued liability is included in accounts payable, accrued expenses and
other current liabilities on the consolidated balance sheets, and represents
SCC's estimate of losses from future representation and
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warranty claims where assertion of a claim and a related contingent loss are
both determined to be probable and reasonably estimable. Because, among other
things, the rate at which future claims may be determined to be valid and actual
loss severity rates may differ significantly from historical experience, SCC is
not able to estimate reasonably possible loss outcomes in excess of its current
accrual. A 1% increase in both assumed validity rates and loss severities would
result in losses beyond SCC's accrual of approximately $31 million. This
sensitivity is hypothetical and is intended to provide an indication of the
impact of a change in key assumptions on the representation and warranty claims
liability. In reality, changes in one assumption may result in changes in other
assumptions, which could affect the sensitivity and the amount of losses.
While SCC uses what it believes to be the best information available to it in
estimating its liability, assessing the likelihood that claims will be asserted
in the future and estimating probable losses are inherently subjective and
require considerable management judgment. To the extent that the volume of
asserted claims, the level of valid claims, the counterparties asserting claims,
the nature and severity of claims, remedies claimed, or the value of residential
home prices, among other factors, differ in the future from current estimates,
future losses may differ from the current estimates and those differences may be
significant.
See Item 8, note 18 to the consolidated financial statements.
LITIGATION AND RELATED CONTINGENCIES - It is our policy to routinely assess the
likelihood of any adverse judgments or outcomes related to legal matters, as
well as ranges of probable losses. A determination of the amount of the
liability required to be accrued, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical experience.
Therefore, we have accrued liabilities related to certain legal matters for
which we believe it is probable that a loss will be incurred and the range of
such loss can be reasonably estimated. With respect to other matters, we have
concluded that a loss is only reasonably possible or remote, or is not
reasonably estimable and, therefore, no liability is accrued.
Assessing the likely outcome of pending litigation, including the amount of
potential loss, if any, is highly subjective. Our judgments on whether a loss is
probable, reasonably possible or remote and our estimates of probable loss
amounts may differ from actual results due to difficulties in predicting the
outcome of jury trials, arbitration hearings, settlement discussions and related
activity, predicting the outcome of class certification actions and numerous
other uncertainties. Due to the number of claims which are periodically asserted
against us, and the magnitude of damages sought in those claims, actual losses
in the future may significantly differ from our current estimates. We are
subject to threatened litigation claims and indemnification claims, which are
described in Item 8, note 19 to the consolidated financial statements.
ALLOWANCE FOR LOAN LOSSES - The principal amount of mortgage loans held for
investment totaled $429.3 million at April 30, 2012. We are exposed to the risk
that borrowers may not repay amounts owed to us when they become contractually
due. We record an allowance representing our estimate of probable credit losses
in the portfolio of loans held for investment at the balance sheet date.
Determination of our allowance for loan losses is considered a critical
accounting estimate because loss provisions can be material to our operating
results, projections of loan delinquencies and related matters are inherently
subjective, and actual losses are impacted by factors outside of our control
including economic conditions, unemployment rates and residential home prices.
We record a loan loss allowance for loans less than 60 days past due on a pooled
basis. The aggregate principal balance of these loans totaled $248.8 million at
April 30, 2012, and the portion of our allowance for loan losses allocated to
these loans totaled $9.2 million. In estimating our loan loss allowance for
these loans, we stratify the loan portfolio based on our view of risk associated
with various elements of the pool and assign estimated loss rates based on those
risks. Loss rates are based primarily on historical experience and our
assessment of economic and market conditions. Loss rates consider both the rate
at which loans will become delinquent (frequency) and the amount of loss that
will ultimately be realized upon occurrence of a liquidation of collateral
(severity). Frequency rates are based primarily on historical migration analysis
of loans to delinquent status. Severity rates are based primarily on recent
broker quotes or appraisals of collateral. Because of imprecision and
uncertainty inherent in developing estimates of future credit losses, in
particular during periods of rapidly declining collateral values or increasing
delinquency rates, our estimation process includes development of ranges of
possible outcomes. Ranges were developed by stressing initial estimates of both
frequency and severity rates. Stressing of frequency and severity assumptions is
intended to model deterioration in credit quality that is difficult to predict
during declining economic conditions. Future deterioration in credit quality may
exceed our modeled assumptions.
Mortgage loans held for investment include loans originated by our affiliate,
SCC, and purchased by HRB Bank. We have greater exposure to loss with respect to
this segment of our loan portfolio as a result of
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historically higher delinquency rates. Therefore, we assign higher frequency
rate assumptions to SCC-originated loans compared with loans originated by other
third-party banks as we consider estimates of future losses. At April 30, 2012
our weighted-average frequency assumption was 11% for SCC-originated loans
compared to 2% for remaining loans in the portfolio.
We consider loans 60 days past due impaired and review them individually. We
record loss estimates typically based on the value of the underlying collateral.
For loans over 60 days past due but less than 180 days past due or otherwise
impaired, we record a loan loss allowance. Our loan loss allowance for these
impaired loans reflected an average loss severity of 36% at April 30, 2012. The
aggregate principal balance of these impaired loans totaled $108.6 million at
April 30, 2012, and the portion of our allowance for loan losses allocated to
these loans totaled $9.6 million. For loans 180 days or more past due, we
charge-off the loans to the value of the collateral less costs to sell. Loans
more than 180 days past due were partially charged-off at a severity rate of
46%.
Modified loans that meet the definition of a troubled debt restructuring (TDR)
are also considered impaired and are reviewed individually. We record impairment
equal to the difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the loan's effective
interest rate. However, if we assess that foreclosure of a modified loan is
probable, we record impairment based on the estimated fair value of the
underlying collateral. The aggregate principal balance of TDR loans totaled
$71.9 million at April 30, 2012, and the portion of our allowance for loan
losses allocated to these loans totaled $7.8 million.
Charge-offs increased during the current year primarily due to a change whereby
we now charge-off loans 180 days past due, rather than record a specific loan
loss allowance for those loans. This change had no income statement impact, but
reduced the principal amount of loans outstanding and reduced the related
allowance. This was a result of our change in regulators from the OTS to the
OCC.
The residential mortgage industry has experienced significant adverse trends for
an extended period. If adverse trends continue for a sustained period or at
rates worse than modeled by us, we may be required to record additional loan
loss provisions, and those losses may be significant.
Determining the allowance for loan losses for loans held for investment requires
us to make estimates of losses that are highly uncertain and requires a high
degree of judgment. If our underlying assumptions prove to be inaccurate, the
allowance for loan losses could be insufficient to cover actual losses. Our
mortgage loan portfolio is a static pool, as we are no longer originating or
purchasing new mortgage loans, and we believe that factor, over time, will limit
variability in our loss estimates.
VALUATION OF GOODWILL - The evaluation of goodwill for impairment is a critical
accounting estimate due both to the magnitude of our goodwill balances and the
judgment involved in determining the fair value of our reporting units. Goodwill
balances totaled $427.6 million as of April 30, 2012 and $434.2 million as of
April 30, 2011.
We test goodwill for impairment annually or more frequently if events occur or
circumstances change which would, more likely than not, reduce the fair value of
a reporting unit below its carrying value. Our goodwill impairment analysis is
based on a discounted cash flow (DCF) approach and market comparables.
DCF analyses are based on the current revenue and expense forecasts and
estimated long-term growth estimates for each reporting unit. Future cash flows
are discounted based on a market comparable weighted average cost of capital
rate for each reporting unit, adjusted for market and other risks where
appropriate. In addition, we analyze any difference between the sum of the fair
values of the reporting units and our total market capitalization for
reasonableness.
If the estimated fair value of a reporting unit exceeds its carrying value,
goodwill of the reporting unit is considered not impaired. If the estimated fair
value of the reporting unit is less than the carrying value, a second step is
performed in which the implied fair value of the reporting unit's goodwill is
compared to the carrying value of the goodwill. The implied fair value of the
goodwill is determined based on the difference between the estimated fair value
of the reporting unit and the net fair value of the identifiable assets and
liabilities of the reporting unit. If the implied fair value of the goodwill is
less than the carrying value, the difference is recognized as an impairment
charge.
Based on our assessment performed during the fourth quarter of fiscal year 2012,
the fair value of the goodwill within our reporting units substantially exceeded
its carrying value. Changes to our estimates and assumptions associated with the
reporting units could materially affect the determination of fair value and
could result in an impairment charge, which could be material to our financial
position and results of operations.
H&R BLOCK 2012 Form 10K 25
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This analysis, at the reporting unit level, requires significant management
judgment with respect to revenue and expense forecasts, anticipated changes in
working capital and the selection and application of an appropriate discount
rate. Changes in projections or assumptions could materially affect our estimate
of reporting unit fair values. The use of different assumptions would increase
or decrease estimated discounted future operating cash flows and could affect
our conclusions regarding the existence or amount of potential impairment.
Finally, strategic changes in our outlook regarding reporting units or
intangible assets may alter our valuation approach and could result in changes
to our conclusions regarding impairment.
Future estimates of fair value may be adversely impacted by declining economic
conditions. In addition, if future operating results of our reporting units are
below our current modeled expectations, fair value estimates may decline. Any of
these factors could result in future impairments, and those impairments could be
significant.
In fiscal year 2012, we discontinued service under our ExpressTax brand and
closed approximately 200 underperforming company-owned offices as a result of
our strategic realignment announced in April 2012. As a result, we recorded an
impairment of goodwill, which totaled $7.4 million, in our Tax Services segment.
We recorded a goodwill impairment of $22.7 million related to our RedGear
reporting unit within our Tax Services segment in fiscal year 2011.
See Item 8, note 7 to the consolidated financial statements.
INCOME TAXES - Income taxes are accounted for using the asset and liability
approach under U.S. generally accepted accounting principles. We calculate our
current and deferred tax provision for the fiscal year based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the applicable calendar year. Adjustments based on filed
returns are recorded in the appropriate periods when identified. We file a
consolidated federal tax return on a calendar year basis, generally in the
second fiscal quarter of the subsequent year.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We have considered taxable income
in carry-back periods, historical and forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate, and tax
planning strategies in determining the need for a valuation allowance against
our deferred tax assets. Determination of a valuation allowance for deferred tax
assets requires that we make judgments about future matters that are not
certain, including projections of future taxable income and evaluating potential
tax-planning strategies. To the extent that actual results differ from our
current assumptions, the valuation allowance will increase or decrease. In the
event we determine that we could not realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
to earnings in the period in which we make such determination. Likewise, if we
later determine it is more likely than not that we could realize the deferred
tax assets, we would reverse the applicable portion of the previously provided
valuation allowance.
The income tax laws of jurisdictions in which we operate are complex and subject
to different interpretations by the taxpayer and applicable government taxing
authorities. Income tax returns filed by us are based on our interpretation of
these rules. The amount of income taxes we pay is subject to ongoing audits by
federal, state and foreign tax authorities, which may result in proposed
assessments, including assessments of interest and/or penalties. Our estimate
for the potential outcome for any uncertain tax issue is highly subjective and
based on our best judgments. Actual results may differ from our current
judgments due to a variety of factors, including changes in law, interpretations
of law by taxing authorities that differ from our assessments, changes in the
jurisdictions in which we operate and results of routine tax examinations. We
believe we have adequately provided for any reasonably foreseeable outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved, or when statutes of limitation on potential
assessments expire. As a result, our effective tax rate may fluctuate on a
quarterly basis.
REVENUE RECOGNITION - We have many different revenue sources, each governed by
specific revenue recognition policies. Our revenue recognition policies can be
found in Item 8, note 1 to the consolidated financial statements.
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY - Our sources of capital include cash from
operations, cash from customer deposits, issuances of common stock and debt. We
use capital primarily to fund working capital,
26 H&R BLOCK 2012 Form 10K
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pay dividends, repurchase treasury shares and acquire businesses. Our operations
are highly seasonal and therefore generally require the use of cash to fund
operating losses during the period May through mid-January.
Given the likely availability of a number of liquidity options discussed herein,
including borrowing capacity under our CLOC, we believe that in the absence of
any unexpected developments our existing sources of capital at April 30, 2012
are sufficient to meet our operating needs.
These comments should be read in conjunction with the consolidated balance
sheets and consolidated statements of cash flows included in Item 8.
(in 000s)
Year ended April 30, 2012 2011 2010
Net cash provided by (used in):
Operating activities $ 362,049 $ 512,503 $ 587,469
Investing activities 351,867 (110,157 ) 31,353
Financing activities (445,062 ) (534,391 ) (481,118 )
Effect of exchange rates on cash (2,364 ) 5,844 11,678
Net change in cash and cash
equivalents $ 266,490 $ (126,201 ) $ 149,382
CASH FROM OPERATING ACTIVITIES - Cash provided by operations, which consists
primarily of cash received from customers, decreased $150.5 million from fiscal
year 2011. The decline from the prior year was primarily due to lower net income
of our continuing operations and losses in our discontinued operations.
Restricted Cash. We hold certain cash balances that are restricted as to use.
Cash and cash equivalents - restricted totaled $48.1 million at April 30, 2012,
and primarily consisted of cash held by our captive insurance subsidiary that
will be used to pay claims and cash held by HRB Bank required for regulatory
compliance.
CASH FROM INVESTING ACTIVITIES - Changes in cash provided by investing
activities primarily relate to the following:
Available-for-Sale Securities. During fiscal year 2012, HRB Bank purchased
$256.2 million in mortgage-backed securities for regulatory purposes, compared
to $138.8 million in fiscal year 2011. Additionally, we received payments on AFS
securities of $66.4 million in fiscal year 2012 compared to $16.8 million and
$15.8 million in fiscal years 2011 and 2010, respectively. See additional
discussion in Item 8, note 5 to the consolidated financial statements.
Mortgage Loans Held for Investment. We received net proceeds of $49.1 million,
$58.5 million and $72.8 million on our mortgage loans held for investment in
fiscal years 2012, 2011 and 2010, respectively.
Purchases of Property and Equipment. Total cash paid for property and equipment
was $82.5 million, $63.0 million and $90.5 million for fiscal years 2012, 2011
and 2010, respectively.
Business Acquisitions. Total cash paid for acquisitions was $15.3 million, $54.2
million and $10.5 million during fiscal years 2012, 2011 and 2010, respectively.
In fiscal year 2011 our previously reported Business Services segment acquired
Caturano, a Boston-based accounting firm, and cash used in investing activities
includes payments totaling $32.6 million related to this acquisition.
Sales of Businesses. We received proceeds from the sales of businesses of $560.5
million, $71.1 million and $66.6 million for fiscal years 2012, 2011 and 2010,
respectively. Current year amounts include net proceeds of $523.1 million from
the sale of RSM and proceeds of $37.4 million from the sale of ancillary
businesses and offices. During fiscal year 2012, we sold 83 tax offices to
franchisees, compared to 280 tax offices in fiscal year 2011, and 267 in fiscal
year 2010. The majority of these sales were financed through affiliate loans.
Loans Made to Franchisees. Loans made to franchisees totaled $46.2 million,
$92.5 million and $89.7 million for fiscal years 2012, 2011 and 2010,
respectively. We received payments from franchisees totaling $56.6 million,
$57.6 million and $40.7 million, respectively. These amounts include both the
financing of sales of tax offices and franchisee draws under our Franchise
Equity Lines of Credit (FELCs).
CASH FROM FINANCING ACTIVITIES - Changes in cash used in financing activities
primarily relate to the following:
Short-Term Borrowings. While we use commercial paper borrowings to fund our
off-season losses and cover our seasonal working capital needs, we had no
commercial paper borrowings outstanding as of April 30, 2012 or 2011. Our
commercial paper borrowings peaked at $331.5 million in January of the current
year. Our borrowings in the current year were lower than previous years due to
cash received from the sale of RSM.
FHLB Borrowings. HRB Bank obtains borrowings from the FHLB in accordance with
regulatory and capital requirements. During fiscal years 2012, 2011 and 2010, we
had net repayments of $25.0 million, $50.0 million and $25.0 million,
respectively.
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Customer Banking Deposits. Changes in customer banking deposits resulted in a
use of cash of $26.1 million in the current year compared to $11.4 million in
fiscal year 2011. Cash totaling $17.5 million was provided in fiscal year 2010.
These deposits are held by HRB Bank.
Dividends. We have consistently paid quarterly dividends. Dividends paid totaled
$208.8 million, $186.8 million and $200.9 million in fiscal years 2012, 2011 and
2010, respectively. During fiscal year 2012, our
Board of Directors approved an increase of our quarterly cash dividend from
$0.15 per share to $0.20 per share. The increase was effective with the
quarterly dividend payable on January 5, 2012 to shareholders of record as of
December 22, 2011. Although we have historically paid dividends and currently
plan to continue to do so, there can be no assurances that circumstances will
not change in the future that could affect our ability or decisions to pay
dividends.
Repurchase and Retirement of Common Stock. During fiscal year 2012, we purchased
and immediately retired 14.6 million shares of our common stock at a cost of
$200.0 million. As of April 30, 2012, payment of $22.5 million related to
1.5 million shares had not yet settled and was accrued as a liability on the
consolidated balance sheet. During fiscal year 2011, we purchased and
immediately retired 19.0 million shares of our common stock at a cost of $279.9
million. During fiscal year 2010, we purchased and immediately retired
12.8 million shares of our common stock at a cost of $250.0 million. Although we
have historically from time to time repurchased and retired common stock and our
Board of Directors has approved an extension of our current share repurchase
program as discussed below, there can be no assurances that circumstances will
not change in the future that could affect our ability or decisions to
repurchase and retire common stock.
Through June 25 of the first quarter of fiscal year 2013, we repurchased and
immediately retired an additional 21.3 million shares at a cost of $315.0
million. We also retired 60.0 million shares of treasury stock in June 2012. The
June retirement of treasury stock had no impact on our total consolidated
stockholders' equity.
In June 2008, our Board of Directors approved an authorization to purchase up to
$2.0 billion of our common stock through June 2012. In June 2012, our Board of
Directors extended this authorization through June 2015. There was approximately
$1.2 billion remaining under this authorization at April 30, 2012.
Issuances of Common Stock. Proceeds from the issuance of common stock in
accordance with our stock-based compensation plans totaled $12.3 million, $0.4
million and $16.7 million in fiscal years 2012, 2011 and 2010, respectively.
HRB BANK - At April 30, 2012, HRB Bank had cash balances of $513.5 million.
Distribution of that cash balance would be subject to regulatory approval and it
is therefore not available for general corporate purposes.
Block Financial LLC (Block Financial) typically makes capital contributions to
HRB Bank to help meet its capital requirements. Block Financial made capital
contributions to HRB Bank of $400.0 million during fiscal year 2012 and $235.0
million during both fiscal year 2011 and fiscal year 2010.
Historically, capital contributions by Block Financial have been repaid as
dividends or a return of capital by HRB Bank as capital requirements decline. A
return of capital or dividend paid by HRB Bank must be approved by the OCC and
the Federal Reserve. Although such payments have been approved by our regulators
in the past, there is no assurance that they will continue to be in the future,
in particular if our regulators determine that higher capital levels at HRB Bank
are necessary due to non-performing asset levels. In addition, Block Financial
may elect to maintain higher capital levels at HRB Bank. HRB Bank paid dividends
and returned capital of $400.0 million during fiscal year 2012. HRB Bank paid
dividends and returned capital of $262.5 million during fiscal year 2011,
comprised of $37.5 million in real estate owned (REO) properties and loans and
$225.0 million in cash. There were no such dividends or repayments of capital in
fiscal year 2010.
See additional discussion of regulatory and capital requirements of HRB Bank in
"Regulatory Environment" below.
ASSETS HELD BY FOREIGN SUBSIDIARIES - At April 30, 2012, cash and short-term
investment balances of $101.8 million were held by our foreign subsidiaries.
These funds would have to be repatriated to be available to fund domestic
operations, and income taxes would be accrued and paid on those amounts. We do
not currently intend to repatriate any funds held by our foreign subsidiaries.
28 H&R BLOCK 2012 Form 10K
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BORROWINGS
We continually monitor our funding requirements and execute strategies to manage
our overall asset and liability profile. The following chart provides the
ratings for debt issued by Block Financial as of April 30, 2012 and 2011:
As of April 30, 2012 April 30, 2011
Short-term Long-term Outlook Short-term Long-term Outlook
Moody's P-2 Baa2 Stable P-2 Baa2 Negative
S&P A-2 BBB Negative A-2 BBB Negative
DBRS R-2 (high) BBB (high) Stable R-2 (high) BBB (high) Stable
At April 30, 2012, we maintained a CLOC agreement to support commercial paper
issuances, general corporate purposes or for working capital needs. This
facility provides funding up to $1.7 billion and matures July 31, 2013. This
facility bears interest at an annual rate of LIBOR plus 1.30% to 2.80% or PRIME
plus 0.30% to 1.80%, depending on the type of borrowing, and includes an annual
facility fee of 0.20% to 0.70% of the committed amounts, based on our credit
ratings. Covenants in this facility include: (1) maintenance of a minimum equity
of $500.0 million on the last day of any fiscal quarter; and (2) reduction of
the aggregate outstanding principal amount of short-term debt, as defined in the
CLOC agreement, to $200.0 million or less for thirty consecutive days during the
period March 1 to June 30 of each year. At April 30, 2012, we were in compliance
with these covenants and had net worth of $1.3 billion. We had no balance
outstanding under the CLOC at April 30, 2012.
During fiscal years 2012, 2011 and 2010, borrowing needs in our Canadian
operations were funded by our U.S. operations. To mitigate the foreign currency
exchange rate risk, we used foreign exchange forward contracts. We do not enter
into forward contracts for speculative purposes. In estimating the fair value of
derivative positions, we utilize quoted market prices, if available, or quotes
obtained from external sources. There were no forward contracts outstanding as
of April 30, 2012.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of April 30, 2012, is as
follows:
(in 000s)
Less Than
Total 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
Long-term debt (including
interest) $ 1,084,044 $ 653,882 $ 430,162 $ - $ -
Customer deposits
(including interest) 838,272 832,474 5,710 88 -
Acquisition payments 30,831 30,831 - - -
Contingent acquisition
payments 6,838 5,572 1,266 - -
Media advertising purchase
obligation 2,779 2,779 - - -
Capital lease obligations 10,393 690 1,476 1,616 6,611
Operating leases 468,194 181,800 230,044 48,450 7,900
Total contractual cash
obligations $ 2,441,351 $ 1,708,028 $ 668,658 $ 50,154 $ 14,511
The table above does not reflect unrecognized tax benefits of approximately $206
million due to the high degree of uncertainty regarding the future cash outflows
associated with these amounts.
See discussion of contractual obligations and commitments in Item 8, within the
notes to the consolidated financial statements.
REGULATORY ENVIRONMENT
H&R Block, Inc. is a SLHC and HRB Bank is a federal savings bank. Prior to
July 21, 2011, both entities were subject to supervision and regulation by the
OTS. The Dodd-Frank Act eliminated the OTS effective July 21, 2011. As a result,
the Federal Reserve became H&R Block, Inc.'s primary federal regulator and the
OCC became HRB Bank's primary federal regulator. The OTS did not historically
subject savings and loan holding companies to consolidated regulatory capital
requirements. However, under the Dodd-Frank Act, H&R Block, Inc. will be subject
to capital requirements that will be set by the Federal Reserve. See discussion
in Item 1, ''Regulation and Supervision - Bank and Holding Companies,'' and in
Item 1A, "Risk Factors," for additional information on regulatory capital
requirements for SLHCs, including the new capital requirements for SLHCs
proposed by the Federal Reserve in June 2012.
The Federal Reserve has indicated that its supervision and oversight of SLHCs
and their non-bank subsidiaries will be more rigorous than what was previously
exercised by the OTS. See Item 1, "Regulation and Supervision - Bank and Holding
Companies," for more detailed information on Federal Reserve regulations.
All savings associations are subject to regulatory capital requirements. As of
March 31, 2012, our most recent Call Report filing with the OCC, HRB Bank was a
"well capitalized" institution. See Item 1, "Regulation and
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Supervision - Bank and Holding Companies," and Item 8, note 21 to the
consolidated financial statements, for additional discussion of HRB Bank's
regulatory capital requirements.
H&R Block, Inc. is a legal entity separate and distinct from its indirect
subsidiary, HRB Bank. Various federal and state statutory and regulatory
provisions limit the amount of dividends HRB Bank may pay without regulatory
approval. The ability of HRB Bank to pay dividends in the future is currently,
and could be further, influenced by bank regulatory policies and capital
guidelines. See Item 1, "Regulation and Supervision - Bank and Holding
Companies," for a more detailed discussion of restrictions on payment of
dividends.
The federal government, various state, local, provincial and foreign
governments, and some self-regulatory organizations have enacted statutes and
ordinances, and/or adopted rules and regulations, regulating aspects of our
business. These aspects include, but are not limited to, commercial income tax
return preparers, income tax courses, the electronic filing of income tax
returns, the offering of RACs, the facilitation of RALs, loan originations and
assistance in loan originations, mortgage lending, privacy, consumer protection,
franchising, sales methods and banking. We seek to determine the applicability
of such statutes, ordinances, rules and regulations (collectively, Laws) and
comply with those Laws.
From time to time in the ordinary course of business, we receive inquiries from
governmental and self-regulatory agencies regarding the applicability of Laws to
our services and products. In response to past inquiries, we have agreed to
comply with such Laws, convinced the authorities that such Laws were not
applicable or that compliance already exists, and/or modified our activities in
the applicable jurisdiction to avoid the application of all or certain parts of
such Laws. We believe the past resolution of such inquiries and our ongoing
compliance with Laws has not had a material effect on our consolidated financial
statements. We cannot predict what effect future Laws, changes in
interpretations of existing Laws or the results of future regulator inquiries
with respect to the applicability of Laws may have on our consolidated financial
position, results of operations and cash flows. See additional discussion of
legal matters in Item 8, note 19 to the consolidated financial statements.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
This section presents information required by the SEC's Industry Guide 3,
"Statistical Disclosure by Bank Holding Companies." The tables in this section
include HRB Bank information only.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL - The following table presents average balance data and
interest income and expense data for our banking operations, as well as the
related interest yields and rates for fiscal years 2012, 2011 and 2010:
(dollars in 000s)
Year ended April 30, 2012 2011 2010
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
Interest-earning assets:
Mortgage loans, net $ 448,431 $ 20,322 4.53% $ 545,052 $ 24,693 4.53% $ 677,115 $ 31,877 4.12 %
Federal funds sold 2,315 1 0.04% 2,649 3 0.10% 9,471 9 0.09 %
Emerald Advance (1) 87,711 28,982 33.04% 141,127 94,300 35.21% 106,093 77,891 35.21 %
Available-for-sale investment
securities 250,329 4,178 1.67% 22,243 174 0.78% 25,144 181 0.71 %
FHLB stock 3,259 113 3.47% 5,953 171 2.88% 6,703 119 1.77 %
Cash and due from banks 732,164 1,806 0.25% 930,666 2,338 0.25% 747,504 1,976 0.26 %
1,524,209 $ 55,402 3.63% 1,647,690 $ 121,679 7.38% 1,572,030 $ 112,053 7.00 %
Non-interest-earning assets 56,426 57,899 94,499
Total HRB Bank assets $ 1,580,635 $ 1,705,589 $ 1,666,529
Interest-bearing liabilities:
Customer deposits $ 705,593 $ 6,735 0.95% $ 830,597 $ 8,488 1.02% $ 1,019,664 $ 10,174 1.00 %
FHLB borrowing 23,770 572 2.41% 72,534 1,526 2.10% 98,767 1,997 2.02 %
729,363 $ 7,307 1.00% 903,131 $ 10,014 1.11% 1,118,431 $ 12,171 1.09 %
Non-interest-bearing liabilities 363,990 366,666 267,159
Total liabilities 1,093,353 1,269,797 1,385,590
Total shareholders' equity 487,282 435,792 280,939
Total liabilities and
shareholders' equity $ 1,580,635 $ 1,705,589 $ 1,666,529
Net yield on interest-earning
assets (1) $ 48,095 3.16% $ 111,665 6.78% $ 99,882 6.23 %
(1) Includes all interest income related to Emerald Advance activities. Amounts
recognized as interest income also include certain fees, which are amortized
into interest income over the life of the loan, of $48.5 million and $39.2
million for fiscal years 2011 and 2010, respectively.
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The following table presents the rate/volume variance in interest income and
expense for the last two fiscal years:
(in 000s)Year ended April 30, 2012 2011
Total Change Change Change Change Total Change Change Change Change
in Interest Due to Due to Due to in Interest Due to Due to Due to
Income/ Expense Rate/Volume Rate Volume Income/Expense Rate/Volume Rate Volume
Interest income:
Loans, net(1) $ (69,700 ) $ (46,549 ) $ (5 ) $ (23,146 ) $ 9,225 $ 4,485 $ (1,211 ) $ 5,951
Available-for-sale
investment securities 4,004 2,027 198 1,779 (7 ) (2 ) 16 (21 )
Federal funds sold (2 ) - (2 ) - (6 ) (1 ) 1 (6 )
FHLB stock (58 ) (15 ) 35 (78 ) 52 (8 ) 73 (13 )
Cash & due from banks (521 ) (25 ) - (496 ) 362 40 (128 ) 450
$ (66,277 ) $ (44,562 ) $ 226 $ (21,941 ) $ 9,626 $ 4,514 $ (1,249 ) $ 6,361
Interest expense:
Customer deposits $ (1,753 ) $ (102 ) $ (141 ) $ (1,510 ) $ (1,686 ) $ (264 ) $ 56 $ (1,478 )
FHLB borrowings (954 ) (155 ) 225 (1,024 ) (471 ) (22 ) 81 (530 )
$ (2,707 ) $ (257 ) $ 84 $ (2,534 ) $ (2,157 ) $ (286 ) $ 137 $ (2,008 )
(1) Includes mortgage loans held for investment and EAs. Non-accruing loans have
been excluded.
INVESTMENT PORTFOLIO - The following table presents the cost basis and fair
value of HRB Bank's investment portfolio at April 30, 2012, 2011 and 2010:
(in 000s)
As of April 30, 2012 2011 2010
Cost Basis Fair Value Cost Basis Fair Value Cost Basis Fair Value
Mortgage-backed securities $ 361,184 $ 366,683 $ 157,970 $ 158,177 $ 23,026 $ 23,016
Federal funds sold 1,586 1,586 8,727 8,727 2,338 2,338
FHLB stock 1,879 1,879 3,315 3,315 6,033 6,033
Trust preferred security - - - - 1,854 31
$ 364,649 $ 370,148 $ 170,012 $ 170,219 $ 33,251 $ 31,418
The following table shows the cost basis, scheduled maturities and average
yields for HRB Bank's investment portfolio at April 30, 2012:
(dollars in 000s)
Less Than One Year After Ten Years Total
Weighted Weighted Weighted
Cost Balance Average Balance Average Balance Average
Basis Due Yield Due Yield Due Yield
Mortgage-backed securities $ 361,184 $ - - % $ 361,184 1.67 % $ 361,184 1.67 %
Federal funds sold 1,586 1,586 0.04 % - - % 1,586 0.04 %
FHLB stock 1,879 1,879 3.47 % - - % 1,879 3.47 %
$ 364,649 $ 3,465 $ 361,184 $ 364,649
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LOAN PORTFOLIO AND SUMMARY OF LOAN LOSS EXPERIENCE - The following table shows
the composition of HRB Bank's mortgage loan portfolio as of April 30, 2012,
2011, 2010, 2009 and 2008, and information on delinquent loans:
(in 000s)
As of April 30, 2012 2011 2010 2009 2008
Residential real estate
mortgages $ 428,568 $ 569,610 $ 683,452 $ 821,583 $ 1,004,283
Home equity lines of
credit 174 183 232 254 357
$ 428,742 $ 569,793 $ 683,684 $ 821,837 $ 1,004,640
Loans and TDRs on
non-accrual $ 108,839 $ 155,645 $ 185,209 $ 222,382 $ 110,759
Loans past due 90 days
or more 99,044 149,501 153,703 121,685 73,600
Total TDRs 71,949 106,328 144,977 160,741 37,159
Interest income recorded
on non-accrual loans 5,682 6,311 7,452 4,927 585
Concentrations of loans to borrowers located in a single state may result in
increased exposure to loss as a result of changes in real estate values and
underlying economic or market conditions related to a particular geographical
location. The table below presents outstanding loans by state, for states with a
concentration of 5% or greater, for our portfolio of mortgage loans held for
investment as of April 30, 2012:
(dollars in 000s)
Loans
Loans Purchased
Purchased from Other Percent Delinquency
from SCC Parties Total of Total Rate (30+ Days)
Florida $ 23,534 $ 56,058 $ 79,592 19% 18%
New York 68,680 8,530 77,210 18% 48%
California 45,976 9,764 55,740 13% 30%
Wisconsin 1,566 34,627 36,193 8% 6%
All others 111,667 68,340 180,007 42% 21%
Total $ 251,423 $ 177,319 $ 428,742 100%
A rollforward of HRB Bank's allowance for loss on mortgage loans is as follows:
(dollars in 000s)
Year ended April 30, 2012 2011 2010 2009 2008
Balance at beginning of
the year $ 90,487 $ 93,535 $ 84,073 $ 45,401 $ 3,448
Provision 23,875 35,200 47,750 63,897 42,004
Recoveries 252 272 88 54 999
Charge-offs and transfers (88,170 ) (38,520 ) (38,376 ) (25,279 ) (1,050 )
Balance at end of the year $ 26,444 $ 90,487 $ 93,535 $ 84,073 $ 45,401
Ratio of net charge-offs
to average loans
outstanding during the
year 19.61% 5.96% 4.95% 2.80% 0.09%
The increase in charge-offs during fiscal year 2012 was a result of the
charge-off of $64.1 million in mortgage loans more than 180 days past due in
accordance with OCC regulations, as discussed in Item 8, note 1 to the
consolidated financial statements.
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DEPOSITS - The following table shows HRB Bank's average deposit balances and the
average rate paid on those deposits for fiscal years 2012, 2011 and 2010:
(dollars in 000s)
Year ended April 30, 2012 2011 2010
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Money market and savings $ 306,053 0.71 % $ 279,162 0.81 % $ 400,920 0.50%
Interest-bearing checking accounts 14,871 0.27 % 10,782 0.87 % 13,677 0.61%
IRAs 334,022 1.00 % 353,902 1.01 % 377,973 1.02%
Certificates of deposit 50,647 2.33 % 186,742 1.36 % 227,094 1.86%
705,593 0.95 % 830,588 1.02 % 1,019,664 1.00%
Non-interest-bearing deposits 320,566 310,781 233,717
$ 1,026,159 $ 1,141,369 $ 1,253,381
RATIOS - The following table shows certain of HRB Bank's key ratios for fiscal
years 2012, 2011 and 2010:
Year ended April 30, 2012 2011 2010
Return on average assets 3.1% 1.4% 1.6%
Net return on equity 10.0% 5.4% 21.0%
Equity to assets ratio 34.8% 30.8% 28.8%
SHORT-TERM BORROWINGS- The following table shows HRB Bank's short-term
borrowings for fiscal years 2012, 2011 and 2010:
(dollars in 000s)
Year ended April 30, 2012 2011 2010
Balance Rate Balance Rate Balance Rate
Ending balance of FHLB advances $ - -% $ 25,000 2.36% $ 50,000 1.92%
Average balance of FHLB advances 23,770 2.41% 72,534
2.10% 98,767 2.07%
The maximum amount of FHLB advances outstanding during fiscal years 2012, 2011
and 2010 was $25.0 million, $75.0 million and $100.0 million, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to the consolidated financial statements for a discussion of
recently issued accounting pronouncements.
