Edgar Filing: H&R BLOCK INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2013

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-6089

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H&R Block, Inc.

(Exact name of registrant as specified in its charter)

MISSOURI

44-0607856

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One H&R Block Way

Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 854-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes Ö No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes Ö No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Ö

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on February 28, 2013 was 272,319,178 shares.

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Form 10-Q for the Period Ended January 31, 2013

Table of Contents


		Page

PART I	Financial Information

Item 1.	Consolidated Balance Sheets As of January 31, 2013 and April 30, 2012		1

	Consolidated Statements of Operations and Comprehensive Income (Loss) Three and nine months ended January 31, 2013 and 2012		2

	Condensed Consolidated Statements of Cash Flows Nine months ended January 31, 2013 and 2012		3

	Notes to Consolidated Financial Statements		4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		44

Item 4.	Controls and Procedures		45

PART II	Other Information

Item 1.	Legal Proceedings		45

Item 1A.	Risk Factors		45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 5.	Other Information		47

Item 6.	Exhibits		48

SIGNATURES			49

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CONSOLIDATED BALANCE SHEETS	(amounts in 000s, except share and per share amounts)
As of	January 31, 2013			April 30, 2012
	(Unaudited)
ASSETS
Cash and cash equivalents		$ 418,385			$1,944,334
Cash and cash equivalents – restricted		37,958			48,100
Receivables, less allowance for doubtful accounts of $44,829 and $44,589		949,160			193,858
Prepaid expenses and other current assets		331,046			314,702

Total current assets		1,736,549			2,500,994

Mortgage loans held for investment, less allowance for loan losses of $17,256 and $26,540		357,887			406,201
Investments in available-for-sale securities		396,312			371,315
Property and equipment, at cost, less accumulated depreciation and amortization of $581,246 and $622,313		290,165			252,985
Intangible assets, net		271,523			264,451
Goodwill		435,256			427,566
Other assets		444,804			426,055

Total assets		$3,932,496			$4,649,567

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Commercial paper borrowings		$ 424,967			$ –
Customer banking deposits		1,036,968			827,549
Accounts payable, accrued expenses and other current liabilities		479,660			567,079
Accrued salaries, wages and payroll taxes		103,538			163,992
Accrued income taxes		17,348			336,374
Current portion of long-term debt		713			631,434

Total current liabilities		2,063,194			2,526,428
Long-term debt		906,012			409,115
Other noncurrent liabilities		328,402			388,132

Total liabilities		3,297,608			3,323,675

Commitments and contingencies

Stockholders’ equity:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110 and 397,886,599		3,166			3,979
Additional paid-in capital		747,398			796,784
Accumulated other comprehensive income		9,055			12,145
Retained earnings		723,676			2,523,997
Less treasury shares, at cost		(848,407	)		(2,011,013	)

Total stockholders’ equity		634,888			1,325,892

Total liabilities and stockholders’ equity		$ 3,932,496			$4,649,567

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF OPERATIONS							(Unaudited, amounts in 000s, except per share amounts)
AND COMPREHENSIVE INCOME (LOSS)							(Unaudited, amounts in 000s, except per share amounts)

	Three months ended January 31,						Nine months ended January 31,
	2013			2012			2013			2012
Revenues:
Service revenues	$	362,194		$	524,240		$	558,528		$	717,243
Product and other revenues		71,485			99,564			89,171			116,117
Interest income		38,300			39,476			58,032			59,737

		471,979			663,280			705,731			893,097

Expenses:
Cost of revenues:
Compensation and benefits		160,081			207,480			254,430			316,139
Occupancy and equipment		84,710			93,024			247,059			263,078
Depreciation/amortization of property and equipment		20,067			17,770			54,299			50,894
Provision for bad debt and loan losses		43,028			52,932			51,398			68,423
Interest		19,428			23,543			64,895			69,352
Other		50,304			60,491			110,972			127,551

		377,618			455,240			783,053			895,437
Impairment of goodwill		–			–			–			4,257
Selling, general and administrative expenses		186,997			211,736			352,802			408,144

		564,615			666,976			1,135,855			1,307,838

Operating loss		(92,636	)		(3,696	)		(430,124	)		(414,741	)
Other income (expense), net		(3,632	)		2,670			2,299			9,185

Loss from continuing operations before taxes (benefit)		(96,268	)		(1,026	)		(427,825	)		(405,556	)
Income taxes (benefit)		(79,353	)		2,541			(204,061	)		(159,821	)

Net loss from continuing operations		(16,915	)		(3,567	)		(223,764	)		(245,735	)
Net income (loss) from discontinued operations		(793	)		218			(6,628	)		(74,436	)

Net loss	$	(17,708	)	$	(3,349	)	$	(230,392	)	$	(320,171	)

Basic and diluted loss per share:
Net loss from continuing operations	$	(0.06	)	$	(0.01	)	$	(0.82	)	$	(0.82	)
Net income (loss) from discontinued operations		(0.01	)		–			(0.02	)		(0.25	)

Net loss	$	(0.07	)	$	(0.01	)	$	(0.84	)	$	(1.07	)

Basic and diluted shares		271,542			292,963			273,281			299,450

Dividends paid per share	$	0.20		$	0.20		$	0.60		$	0.50

Comprehensive income (loss):
Net loss	$	(17,708	)	$	(3,349	)	$	(230,392	)	$	(320,171	)
Unrealized gains (losses) on securities, net of taxes:
Unrealized holding gains (losses) arising during the period, net of taxes (benefit) of $(405), $(199), $(122) and $1,113		(605	)		(291	)		(248	)		1,682
Reclassification adjustment for gains included in income, net of taxes of $ –, $ –, $71 and $58		–			–			(104	)		(93	)
Change in foreign currency translation adjustments		975			3,341			(2,738	)		(5,413	)

Other comprehensive income (loss)		370			3,050			(3,090	)		(3,824	)

Comprehensive loss	$	(17,338	)	$	(299	)	$	(233,482	)	$	(323,995	)

See Notes to Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	(unaudited, amounts in 000s)

Nine months ended January 31,	2013			2012
Net cash used in operating activities	$	(1,311,926	)	$	(1,382,771	)

Cash flows from investing activities:
Purchases of available-for-sale securities		(108,351	)		(178,014	)
Sales, maturities and payments received on available-for-sale securities		86,808			40,473
Principal repayments on mortgage loans held for investment, net		31,205			35,460
Purchases of property and equipment, net		(96,063	)		(71,549	)
Payments made for acquisitions of businesses and intangibles, net		(20,662	)		(16,022	)
Proceeds from sales of businesses, net		1,212			533,055
Franchise loans:
Loans funded		(68,874	)		(43,649	)
Payments received		9,594			8,455
Other, net		(15,185	)		15,321

Net cash provided by (used in) investing activities		(180,316	)		323,530

Cash flows from financing activities:
Repayments of commercial paper		(789,271	)		(413,221	)
Proceeds from commercial paper		1,214,238			644,168
Repayments of long-term debt		(636,621	)		–
Proceeds from issuance of long-term debt		497,185			–
Customer banking deposits, net		208,753			735,252
Dividends paid		(162,692	)		(150,058	)
Repurchase of common stock, including shares surrendered		(340,298	)		(180,566	)
Proceeds from exercise of stock options, net		11,529			(324	)
Other, net		(36,113	)		(31,424	)

Net cash provided by (used in) financing activities		(33,290	)		603,827


Effects of exchange rates on cash		(417	)		(3,446	)

Net decrease in cash and cash equivalents		(1,525,949	)		(458,860	)
Cash and cash equivalents at beginning of the period		1,944,334			1,677,844

Cash and cash equivalents at end of the period	$	418,385		$	1,218,984

Supplementary cash flow data:
Income taxes paid, net	$	104,986		$	163,471
Interest paid on borrowings		62,160			55,266
Interest paid on deposits		4,377			5,170
Transfers of foreclosed loans to other assets		7,208			6,521

See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			(unaudited	)

1.	Summary of Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet as of January 31, 2013, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended January 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2013 and 2012 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at January 31, 2013 and for all periods presented have been made. See note 14 for discussion of our presentation of discontinued operations.

“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2012 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2012 or for the year then ended, are derived from our April 30, 2012 Annual Report to Shareholders on Form 10-K.

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the determination of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, fair value of reporting units, valuation allowances based on future taxable income, reserves for uncertain tax positions and related matters. Estimates have been prepared on the basis of the most current and best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.

Seasonality of Business

Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.

2.	Loss Per Share and Stockholders’ Equity

Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 7.7 million shares for the three and nine months ended January 31, 2013, and 9.6 million shares for the three and nine months ended January 31, 2012, as the effect would be antidilutive due to the net loss from continuing operations during those periods.

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The computations of basic and diluted loss per share from continuing operations are as follows:


				(in 000s, except per share amounts)
	Three months ended January 31,						Nine months ended January 31,
	2013			2012			2013			2012
Net loss from continuing operations attributable to shareholders	$	(16,915	)	$	(3,567	)	$	(223,764	)	$	(245,735	)
Income (loss) allocated to participating securities (nonvested shares)		62			(24	)		199			152

Net loss from continuing operations attributable to common shareholders	$	(16,977	)	$	(3,543	)	$	(223,963	)	$	(245,887	)

Basic weighted average common shares		271,542			292,963			273,281			299,450
Potential dilutive shares		–			–			–			–

Dilutive weighted average common shares		271,542			292,963			273,281			299,450

Loss per share from continuing operations:
Basic	$	(0.06	)	$	(0.01	)	$	(0.82	)	$	(0.82	)
Diluted		(0.06	)		(0.01	)		(0.82	)		(0.82	)

The weighted average shares outstanding for the three and nine months ended January 31, 2013 decreased to 271.5 million and 273.3 million, respectively, from 293.0 million and 299.5 million for the three and nine months ended January 31, 2012, respectively, primarily due to share repurchases completed during fiscal years 2013 and 2012. During the nine months ended January 31, 2013, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million. During the nine months ended January 31, 2012, we purchased and immediately retired 13.0 million shares of our common stock at a cost of $177.5 million. The cost of shares retired during each period was allocated to the components of stockholders’ equity as follows:


	(in 000s)
Nine months ended January 31,	2013		2012
Common stock	$	213	$	130
Additional paid-in capital		12,542		7,826
Retained earnings		302,245		169,548

	$	315,000	$	177,504

In addition to the shares we repurchased as described above, during the nine months ended January 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $2.8 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the nine months ended January 31, 2012, we acquired 0.2 million shares at an aggregate cost of $3.1 million for similar purposes.

We also retired 60.0 million shares of treasury stock during the nine months ended January 31, 2013. This retirement of treasury stock had no impact on our total consolidated stockholders’ equity. The cost of treasury shares retired during the current period was allocated to the following components of stockholders’ equity:


	(in 000s)
Common stock	$	600
Additional paid-in capital		35,400
Retained earnings		1,104,797

Total cost allocated		1,140,797
Less cost of treasury shares retired		(1,140,797	)

Net impact on consolidated stockholders’ equity	$	–

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During the nine months ended January 31, 2013 and 2012, we issued 1.3 million and 1.0 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.

During the nine months ended January 31, 2013, we granted 1.0 million stock options and 1.5 million nonvested units under our stock-based compensation plans. The weighted average fair value of options granted was $2.79. Stock options or nonvested units granted generally either vest over a three year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $3.7 million and $11.5 million for the three and nine months ended January 31, 2013, respectively, and $2.0 million and $11.0 million for the three and nine months ended January 31, 2012, respectively. At January 31, 2013, unrecognized compensation cost for options totaled $4.6 million, and for nonvested shares and units totaled $25.4 million.

3.	Receivables

Short-term receivables of our continuing operations consist of the following:


	(in 000s)
As of	January 31, 2013			January 31, 2012			April 30, 2012
Emerald Advance lines of credit	$	462,576		$	443,717		$	23,717
Receivables for tax preparation and related fees		250,566			333,636			42,286
Loans to franchisees		110,560			81,415			61,252
Royalties from franchisees		69,627			88,597			5,781
RAC fees receivable		31,680			28,942			–
Receivable from McGladrey & Pullen LLP		–			32,342			–
Other		68,980			91,392			105,411

		993,989			1,100,041			238,447
Allowance for doubtful accounts		(44,829	)		(64,139	)		(44,589	)

	$	949,160		$	1,035,902		$	193,858

The short-term portion of Emerald Advance lines of credit (EAs), loans made to franchisees and credit card balances is included in receivables, while the long-term portion is included in other assets in the consolidated balance sheets. These amounts are as follows:


					(in 000s)
	Emerald Advance Lines of Credit		Loans to Franchisees		Credit Cards
As of January 31, 2013:
Short-term	$	462,576	$	110,560	$	4,220
Long-term		10,465		127,274		16,045

	$	473,041	$	237,834	$	20,265

As of January 31, 2012:
Short-term	$	443,717	$	81,415	$	–
Long-term		15,001		134,136		–

	$	458,718	$	215,551	$	–

As of April 30, 2012:
Short-term	$	23,717	$	61,252	$	–
Long-term		13,007		109,837		–

	$	36,724	$	171,089	$	–

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Emerald Advance Lines of Credit. We review the credit quality of our EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of January 31, 2013, by year of origination, are as follows:


			(in 000s)
2013	$	435,117
2012		6,936
2011		5,992
2010		3,493
2009 and prior		5,073
Revolving loans		16,430

	$	473,041

As of January 31, 2013, January 31, 2012 and April 30, 2012, $30.7 million, $41.4 million and $31.4 million, respectively, of EAs were on non-accrual status and classified as impaired, or more than 60 days past due.

Loans to Franchisees. Loans made to franchisees at January 31, 2013 totaled $237.8 million, and consisted of $144.5 million in term loans and $93.3 million in revolving lines of credit made to existing franchisees primarily for the purpose of funding off-season working capital needs. Loans made to franchisees at January 31, 2012 totaled $215.6 million, and consisted of $150.4 million in term loans and $65.2 million in revolving lines of credit. Loans made to franchisees at April 30, 2012 totaled $171.1 million, and consisted of $127.0 million in term loans and $44.1 million in revolving lines of credit. As of January 31, 2013, we had no loans to franchisees that were past due or on non-accrual status.

Credit Cards. In November 2012, H&R Block Bank, (HRB Bank) began offering unsecured credit cards. These credit cards are offered to selected customers, primarily previous H&R Block clients, based on their credit profile and have a maximum available credit limit of $2,500. Interest income on credit cards is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent.

We believe that delinquency rates are the primary indictor of credit quality; however, we also utilize a four-tier approach with Tier 4 representing the most risk. Each tier is comprised of a combination of FICO, Vantage and industry predictive loss models. We do not consider the borrower’s credit score to be a primary indicator since it tends to be a lagging indicator of credit quality. All criteria are evaluated at the time of origination, and are not subsequently updated. Credit card receivable balances as of January 31, 2013, by credit tier, are as follows:


			(in 000s)
Tier 1	$	3,779
Tier 2		8,818
Tier 3		2,660
Tier 4		5,008

		$20,265

Credit card receivables are evaluated for impairment when they become delinquent. Amounts deemed to be uncollectible are charged off against the related allowance. As of January 31, 2013, none of these credit card balances were on non-accrual status and classified as impaired, or more than 60 days past due. Payments on past due amounts are recorded as a reduction in the receivable balance.

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Allowance for Doubtful Accounts. Activity in the allowance for doubtful accounts for the nine months ended January 31, 2013 and 2012 is as follows:


	(in 000s)
	Balance as of April 30, 2012		Provision		Charge-offs			Balance as of January 31, 2013
Emerald Advance lines of credit	$	6,200	$	25,519	$	–		$	31,719
Loans to franchisees		–		42		–			42
Credit cards		–		4,255		–			4,255
All other receivables		38,389		10,666		(40,242	)		8,813

Total	$	44,589	$	40,482	$	(40,242	)	$	44,829


	Balance as of April 30, 2011		Provision		Charge-offs			Balance as of January 31, 2012
Emerald Advance lines of credit	$	4,400	$	33,570	$	–		$	37,970
Loans to franchisees		–		–		–			–
Credit cards		–		–		–			–
All other receivables		43,543		17,062		(34,436	)		26,169

Total	$	47,943	$	50,632	$	(34,436	)	$	64,139

We recorded an allowance for credit card receivables equal to 21% of amounts outstanding, based on industry information for similar credit cards. We will adjust our allowance in the future as payment and delinquency trends become available.

There were no changes to our methodology related to the calculation of our allowance for doubtful accounts during the nine months ended January 31, 2013.

4.	Mortgage Loans Held for Investment and Related Assets

The composition of our mortgage loan portfolio as of January 31, 2013 and April 30, 2012 is as follows:


	(dollars in 000s)
As of	January 31, 2013					April 30, 2012
	Amount			% of Total		Amount		% of Total
Adjustable-rate loans	$	203,624			55%	$	238,442		56%
Fixed-rate loans		168,515			45%		190,870		44%

		372,139			100%		429,312		100%
Unamortized deferred fees and costs		3,004					3,429
Less: Allowance for loan losses		(17,256	)				(26,540)

		$357,887				$	406,201

Our loan loss allowance as a percent of mortgage loans was 4.6% at January 31, 2013, compared to 6.2% at April 30, 2012.

Activity in the allowance for loan losses for the nine months ended January 31, 2013 and 2012 is as follows:


	(in 000s)
Nine months ended January 31,	2013			2012
Balance, beginning of the period	$	26,540		$	92,087
Provision		10,250			17,275
Recoveries		2,745			160
Charge-offs		(22,279	)		(19,573	)

Balance, end of the period	$	17,256		$	89,949

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Our allowance decreased significantly from the prior year primarily due to a change in the fourth quarter of fiscal year 2012, whereby we now charge-off loans 180 days past due to the value of the collateral less costs to sell. This change did not have a significant impact on our provision recorded during the nine months ended January 31, 2013.

When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, including those loans more than 60 days past due or modified as troubled debt restructurings (TDRs), are evaluated individually. The balance of these loans and the related allowance is as follows:


	(in 000s)
As of	January 31, 2013				April 30, 2012
	Portfolio Balance		Related Allowance		Portfolio Balance		Related Allowance
Pooled		$ 219,345		$ 6,670		$ 248,772		$ 9,237
Impaired:
Individually (TDRs)		59,295		5,013		71,949		7,752
Individually		93,499		5,573		108,591		9,551

		$ 372,139		$ 17,256		$ 429,312		$ 26,540

Our portfolio includes loans originated by Sand Canyon Corporation, previously known as Option One Mortgage Corporation, and its subsidiaries (SCC) and purchased by HRB Bank, which constitute 57% of the total loan portfolio at January 31, 2013. We have experienced higher rates of delinquency and believe that we have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio is characteristic of a prime loan portfolio, and we believe therefore subject to a lower loss exposure. Detail of our mortgage loans held for investment and the related allowance at January 31, 2013 is as follows:


	(dollars in 000s)
	Outstanding		Loan Loss Allowance					% 30+ Days
	Principal Balance		Amount		% of Principal			Past Due
Purchased from SCC	$	212,250	$	13,596		6.4	%		34.5	%
All other		159,889		3,660		2.3	%		9.2	%

	$	372,139	$	17,256		4.6	%		23.6	%

Credit quality indicators at January 31, 2013 include the following:


	(in 000s)
Credit Quality Indicators	Purchased from SCC		All Other		Total Portfolio
Occupancy status:
Owner occupied	$	154,470	$	102,180	$	256,650
Non-owner occupied		57,780		57,709		115,489

	$	212,250	$	159,889	$	372,139

Documentation level:
Full documentation	$	68,413	$	116,591	$	185,004
Limited documentation		6,889		16,775		23,664
Stated income		118,100		16,385		134,485
No documentation		18,848		10,138		28,986

	$	212,250	$	159,889	$	372,139

Internal risk rating:
High	$	68,645	$	–	$	68,645
Medium		143,605		–		143,605
Low		–		159,889		159,889

	$	212,250	$	159,889	$	372,139

-9-

Loans given our internal risk rating of “high” were originated by SCC, and generally had no documentation or were based on stated income. Loans given our internal risk rating of “medium” were generally full documentation or based on stated income, with loan-to-value ratios at origination of more than 80%, and were made to borrowers with credit scores below 700 at origination. Loans given our internal risk rating of “low” were generally full documentation, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.

Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which 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. Approximately 58% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.

Detail of the aging of the mortgage loans in our portfolio as of January 31, 2013 is as follows:


	(in 000s)
	Less than 60 Days Past Due		60–89 Days Past Due		90+ Days Past Due ⁽¹⁾		Total Past Due		Current		Total
Purchased from SCC		$16,752		$3,084		$69,905	$	89,741	$	122,509	$	212,250
All other		7,168		1,089		12,931		21,188		138,701		159,889

		$23,920		$4,173		$82,836	$	110,929	$	261,210	$	372,139


⁽¹⁾ We do not accrue interest on loans past due 90 days or more.

Information related to our non-accrual loans is as follows:


	(in 000s)
As of	January 31, 2013		April 30, 2012
Loans:
Purchased from SCC	$	76,235	$	88,347
Other		15,761		16,626

		91,996		104,973

TDRs:
Purchased from SCC		3,460		3,166
Other		504		1,270

		3,964		4,436

Total non-accrual loans	$	95,960	$	109,409

Information related to impaired loans is as follows:


							(in 000s)
	Balance With Allowance		Balance With No Allowance		Total Impaired Loans		Related Allowance
As of January 31, 2013:
Purchased from SCC		$38,938		$ 88,671		$127,609		$ 8,470
Other		6,757		18,428		25,185		2,116

		$45,695		$107,099		$152,794		$10,586

As of April 30, 2012:
Purchased from SCC		$56,128		$ 97,591		$153,719		$14,917
Other		7,137		19,684		26,821		2,386

		$63,265		$117,275		$180,540		$17,303

-10-

Information related to the allowance for impaired loans is as follows:


			(in 000s)
As of	January 31, 2013		April 30, 2012
Portion of total allowance for loan losses allocated to impaired loans and TDR loans:
Based on collateral value method		$ 5,573		$ 9,551
Based on discounted cash flow method		5,013		7,752

		$10,586		$17,303

Information related to activities of our non-performing assets is as follows:


			(in 000s)
Nine months ended January 31,	2013		2012
Average impaired loans:
Purchased from SCC	$	137,703	$	224,002
All other		25,879		35,421

	$	163,582	$	259,423

Interest income on impaired loans:
Purchased from SCC	$	2,940	$	4,340
All other		232		348

	$	3,172	$	4,688

Interest income on impaired loans recognized on a cash basis on non-accrual status:
Purchased from SCC	$	2,881	$	4,182
All other		214		324

	$	3,095	$	4,506

Activity related to our real estate owned (REO) is as follows:


				(in 000s)
Nine months ended January 31,	2013			2012
Balance, beginning of the period	$	14,972		$	19,532
Additions		7,208			6,521
Sales		(6,652	)		(7,933	)
Writedowns		(1,676	)		(2,193	)

Balance, end of the period	$	13,852		$	15,927

-11-

5.	Investments in Available-for-Sale Securities

The amortized cost and fair value of securities classified as available-for-sale (AFS) held at January 31, 2013 and April 30, 2012 are summarized below:


																	(in 000s)
As of	January 31, 2013									April 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses ⁽¹⁾			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses ⁽¹⁾			Fair Value
Short-term:
Municipal bonds	$	1,000	$	1	$	–		$	1,001	$	1,008	$	29	$	–		$	1,037
Long-term:
Mortgage-backed securities		386,741		5,825		(780	)		391,786		361,184		5,620		(121	)		366,683
Municipal bonds		4,192		334		–			4,526		4,236		396		–			4,632

		390,933		6,159		(780	)		396,312		365,420		6,016		(121	)		371,315

Total	$	391,933	$	6,160	$	(780	)	$	397,313	$	366,428	$	6,045	$	(121	)	$	372,352


⁽¹⁾ At January 31, 2013, we had no securities that had been in a continuous loss position for more than twelve months. At April 30, 2012, mortgage-backed securities with a cost of $8.1 million and gross unrealized losses of $21 thousand had been in a continuous loss position for more than twelve months.

During the nine months ended January 31, 2013, we received proceeds from the sale of AFS securities of $5.2 million and recorded a gross realized gain of $0.2 million on this sale. We had no sales of AFS securities during the nine months ended January 31, 2012.

Contractual maturities of AFS debt securities at January 31, 2013, occur at varying dates over the next 30 years, and are set forth in the table below.


			(in 000s)
As of January 31, 2013	Cost Basis		Fair Value
Maturing in:
Less than one year	$	1,000	$	1,001
Two to five years		4,192		4,526
More than five years		386,741		391,786

	$	391,933	$	397,313

6.	Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended January 31, 2013 consist of the following:


	(in 000s)
	Tax Services
Balance at April 30, 2012:
Goodwill		$459,863
Accumulated impairment losses		(32,297	)

		427,566


Changes:
Acquisitions		7,650
Disposals and foreign currency changes, net		40


Balance at January 31, 2013:
Goodwill		467,553
Accumulated impairment losses		(32,297	)

		$435,256

-12-

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.

Intangible assets of our Tax Services segment consist of the following:


													(in 000s)
As of	January 31, 2013							April 30, 2012
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Reacquired franchise rights	$	214,330		$(17,174	)	$	197,156	$	214,330		$(14,083	)	$	200,247
Customer relationships		108,596		(52,820	)		55,776		90,433		(46,504	)		43,929
Noncompete agreements		23,054		(21,627	)		1,427		22,337		(21,425	)		912
Franchise agreements		19,201		(5,334	)		13,867		19,201		(4,373	)		14,828
Purchased technology		14,800		(11,911	)		2,889		14,700		(10,665	)		4,035
Trade name		1,300		(892	)		408		1,300		(800	)		500

	$	381,281		$(109,758	)	$	271,523	$	362,301		$(97,850	)	$	264,451

Amortization of intangible assets of our continuing operations for the three and nine months ended January 31, 2013 totaled $4.6 and $14.4 million, respectively. Amortization of intangible assets of our continuing operations for the three and nine months ended January 31, 2012 totaled $4.7 and $15.2 million, respectively. Additionally, we recorded an impairment of customer relationships of $4.0 million during the prior year period related to the discontinuation of the ExpressTax brand. Estimated amortization of intangible assets for fiscal years 2013 through 2017 is $17.6 million, $17.1 million, $13.7 million, $13.1 million and $12.4 million, respectively.

7.	Borrowings

Borrowings consist of the following:


							(in 000s)
As of	January 31, 2013			January 31, 2012			April 30, 2012
Commercial paper outstanding	$	424,967		$	230,947		$	–

Senior Notes, 5.500%, due November 2022	$	497,260		$	–		$	–
Senior Notes, 5.125%, due October 2014		399,588			399,364			399,412
Senior Notes, 7.875%, due January 2013		–			599,871			599,913
Other		9,877			41,002			41,224

Total long-term debt		906,725			1,040,237			1,040,549
Less: Current portion		(713	)		(630,996	)		(631,434	)

	$	906,012		$	409,241		$	409,115

We had commercial paper borrowings of $425.0 million at January 31, 2013, compared to $230.9 million at the same time last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs.

On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. On October 25, 2012, we provided notice to the trustee of our intention to redeem the entire principal amount of the $600.0 million Senior Notes due in January 2013. The redemption settled on November 26, 2012 at a price of $623.0 million, which included full payment of principal, a make-whole premium of $5.8 million and interest accrued up to the redemption date of $17.2 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes. We recognized a loss on the extinguishment of this debt of $5.8 million during the three months ended January 31, 2013, which primarily represents the interest that would have been paid on these notes if they had not been redeemed prior to maturity. This loss is included in other income (expense), net on our consolidated statements of operations.

-13-

In August 2012, we terminated our previous committed line of credit (CLOC) agreement and we entered into a new five-year, $1.5 billion Credit and Guarantee Agreement (2012 CLOC). Funds available under the 2012 CLOC may be used for general corporate purposes or for working capital needs. The 2012 CLOC bears interest at an annual rate of LIBOR plus an applicable rate ranging from 0.750% to 1.45% or PRIME plus an applicable rate ranging from 0.000% to 0.450% (depending on the type of borrowing and our then current credit ratings) and includes an annual facility fee ranging from 0.125% to 0.300% of the committed amounts (also depending on our then current credit ratings). The 2012 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 for the fiscal quarters ending on April 30, July 31, and October 31 of each year and (b) 3.75 for the fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur additional debt, incur liens, merge or consolidate with other companies, sell or dispose of their respective assets (including equity interests), liquidate or dissolve, make investments, loans, advances, guarantees and acquisitions, and engage in certain transactions with affiliates or certain restrictive agreements. The 2012 CLOC includes provisions for an equity cure which could potentially allow us to independently cure a default. We had no balances outstanding under the 2012 CLOC at January 31, 2013. However, we may borrow amounts under the 2012 CLOC from time to time in the future to support working capital requirements or for other general corporate purposes.

8.	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 broken down 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 nine months ended January 31, 2013 and 2012 and the unrealized gains on those remeasurements:


	(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Gain
January 31, 2013:
Mortgage-backed securities	$	391,786		$	–		$	391,786			$ –		$	5,045
Municipal bonds		5,527			–			5,527			–			335

	$	397,313		$	–		$	397,313			$ –		$	5,380

As a percentage of total assets		10.1%			–%			10.1%			–%

January 31, 2012:
Mortgage-backed securities	$	306,475		$	–		$	306,475			$ –		$	2,956
Municipal bonds		7,712			–			7,712			–			451

	$	314,187		$	–		$	314,187			$ –		$	3,407

As a percentage of total assets		6.5	%		–	%		6.5	%		–	%

-14-

These AFS securities are carried at fair value on a recurring basis. These include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities. As a result, we use a third-party pricing service to determine fair value and classify the securities as Level 2. The service’s pricing model is based on market data and utilizes available trade, bid and other market information for similar securities. The fair values provided by third-party pricing service are reviewed and validated by management of HRB Bank. There were no transfers of AFS securities between hierarchy levels during the nine months ended January 31, 2013 and 2012.

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the nine months ended January 31, 2013 and 2012 and the realized losses on those remeasurements:


	(dollars in 000s)
	Total			Level 1			Level 2			Level 3			Loss
January 31, 2013:
REO	$	14,683		$	–		$	–		$	14,683		$	(350	)
Impaired mortgage loans held for investment		87,949			–			–			87,949			(8,509	)

	$	102,632		$	–		$	–		$	102,632		$	(8,859	)

As a percentage of total assets		2.6%			–%			–%			2.6%

January 31, 2012:
REO		16,883			–			–			16,883			(772	)
Impaired mortgage loans held for investment		103,509			–			–			103,509			(6,986	)

	$	120,392		$	–		$	–		$	120,392		$	(7,758	)

As a percentage of total assets		2.5	%		–	%		–	%		2.5	%

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.

-15-

The following table presents the quantitative information about our Level 3 fair value measurements:


					(dollars in 000s)
	Fair Value at January 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
REO		$13,852	Third party	Cost to list/sell	5% - 50% (6%)
			pricing	Loss severity	0% - 100% (52%)
Impaired mortgage loans held for investment – non-TDRs		$87,926	Collateral- based	Cost to list/sell Time to sell (months)	0% - 45% (7%) 24 (24)
				Collateral depreciation	(24%) - 100% (45%)
				Loss severity	0% - 100% (58%)
Impaired mortgage loans held for investment – TDRs		$54,282	Discounted cash flow	Aged default performance Loss severity	30% - 50% (41%) 0% - 21% (4%)

Estimated Fair Value of Financial Instruments

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


									(in 000s)
As of	January 31, 2013						April 30, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Fair Value Hierarchy
Assets:
Cash and cash equivalents	$	418,385	$	418,385	$	1,944,334	$	1,944,334		Level 1
Cash and cash equivalents – restricted		37,958		37,958		48,100		48,100		Level 1
Receivables, net – short-term		949,160		949,160		193,858		193,858		Level 1
Mortgage loans held for investment, net		357,887		217,019		406,201		248,535		Level 3
Investments in available-for-sale securities		397,313		397,313		372,352		372,352		Level 2
Receivables, net – long-term		158,228		158,228		127,468		127,468		Level 1 & 3
Note receivable (including interest)		59,213		67,048		55,444		55,444		Level 3
Liabilities:
Deposits		1,041,942		1,042,282		833,047		831,251		Level 1 & 3
Long-term debt		906,725		946,793		1,040,549		1,077,223		Level 3

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.

•

Receivables – 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.

•

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.

•

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.

•

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. Credit card balances bear interest at a rate similar to available market rates and have been outstanding for less than three months, therefore carrying value approximates fair market value (Level 1).

•

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

•

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

-16-

(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.

9.	Income Taxes

We file a consolidated federal income tax return in the United States with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion of the exam, with tax controversies settled through an appeal process.

In November 2012, we received written approval from the IRS Joint Committee on Taxation of the settlement of a majority of the issues related to the examination of our 1999 through 2007 U.S. federal consolidated tax returns. In the third quarter, we recorded the impact of the settlement which reduced uncertain tax benefits by $59.0 million, with $33.3 million of the total resulting in an income tax benefit in the quarter. Also reducing our tax expense is a further benefit of $10.0 million primarily related to interest adjustments, bringing the total tax benefit from the settlement to $43.3 million.

Except for three issues for which we are pursuing refund claims for tax years 2002 through 2007, which will remain open until resolved, these years are closed. In addition, U.S. federal consolidated tax returns for 2008 through 2010 are currently under examination.

We had gross unrecognized tax benefits of $146.6 million and $206.4 million at January 31, 2013 and April 30, 2012, respectively. The gross unrecognized tax benefits decreased $59.8 million net in the current year, due primarily to the settlement with the IRS during the third quarter. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $18 million before January 31, 2014. This anticipated decrease is due primarily to the expiration of statutes of limitations and anticipated settlements of state audit issues. This amount is included in accrued income taxes in our consolidated balance sheet. The remaining amount is classified as long-term and is included in other noncurrent liabilities in the consolidated balance sheet.

10.

Interest Income and Expense

The following table shows the components of interest income and expense of our continuing operations:


							(in 000s)
	Three months ended January 31,				Nine months ended January 31,
	2013		2012		2013		2012
Interest income:
Emerald Advance lines of credit	$	29,314	$	30,062	$	30,074	$	30,297
Mortgage loans, net		4,120		4,948		12,705		15,760
Loans to franchisees		2,651		2,694		7,397		7,561
AFS securities		1,713		1,283		5,105		3,006
Other		502		489		2,751		3,113

	$	38,300	$	39,476	$	58,032	$	59,737

Interest expense:
Borrowings	$	17,642	$	21,382	$	60,391	$	63,625
Deposits		1,786		2,011		4,504		5,275
FHLB advances		–		150		–		452

	$	19,428	$	23,543	$	64,895	$	69,352

-17-

11.

Commitments and Contingencies

Changes in deferred revenue balances related to our Peace of Mind (POM) program, the current portion of which is included in accounts payable, accrued expenses and other current liabilities and the long-term portion of which is included in other noncurrent liabilities in the consolidated balance sheets, are as follows:


				(in 000s)
Nine months ended January 31,	2013			2012
Balance, beginning of period	$	141,080		$	140,603
Amounts deferred for new guarantees issued		14,202			19,471
Revenue recognized on previous deferrals		(57,505	)		(57,254	)

Balance, end of period	$	97,777		$	102,820

In addition to amounts accrued for our POM guarantee, we had accrued $14.9 million and $16.3 million at January 31, 2013 and April 30, 2012, respectively, related to our standard guarantee, which is included with our in-office tax preparation services. The current portion of this liability is included in accounts payable, accrued expenses and other current liabilities and the long-term portion is included in other noncurrent liabilities in the consolidated balance sheets,

We have accrued estimated contingent payments totaling $10.9 million and $6.8 million as of January 31, 2013 and April 30, 2012, respectively, related to recent acquisitions, with the short-term amount recorded in accounts payable, accrued expenses and deposits and the long-term portion included in other noncurrent liabilities. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ materially from our assumptions, future payments made will differ from the above estimate and any differences will be recorded in our results from continuing operations.

We have contractual commitments to fund certain franchisees requesting revolving lines of credit. Our total obligation under these lines of credit was $90.0 million at January 31, 2013, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $13.5 million.

We have contractual commitments to fund our credit card customers on their approved revolving lines of credit. Our total obligation under the credit card agreements was $30.5 million at January 31, 2013, and net of amounts outstanding, our remaining commitment to fund totaled $7.4 million.

We maintain compensating balances related to the 2012 CLOC, which are not legally restricted as to withdrawal. These balances totaled $0.4 million as of January 31, 2013.

We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases are limited only by the applicable statute of limitations. The likelihood of any claims being asserted against us and the ultimate liability related to any such claims, if any, is difficult to predict. While we cannot provide assurance we will ultimately prevail in the event any such claims are asserted, we believe the fair values of guarantees and indemnifications relating to our continuing operations are not material as of January 31, 2013.

Variable Interests

We evaluated our financial interests in variable interest entities (VIEs) as of January 31, 2013 and determined that there have been no significant changes related to those financial interests.

12.

Litigation and Related Contingencies

We are a defendant in a large number of litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the

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lawsuits to which we are subject. In some of the matters, very large and/or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement numerous claims over an extended period of time.

The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.

In addition to litigation matters, we are also subject to other claims and regulatory investigations arising out of our business activities, including as described below.

We accrue liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for a number of the matters noted below. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.

For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that litigation and regulatory matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated at January 31, 2013. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material effect on our consolidated financial position, results of operations and cash flows. As of January 31, 2013, we accrued liabilities of $18.9 million, compared to $79.0 million at April 30, 2012. In addition, there are certain SCC contingencies described below and in note 13, which relate to representation and warranty claims that may be resolved through settlement or litigation and any resulting payment charged as a reduction to the accrual for representation and warranty claims.

For some matters where a liability has not been accrued, we are able to estimate a reasonably possible range of loss. For those matters, and for matters where a liability has been accrued, as of January 31, 2013, we estimate the aggregate range of reasonably possible losses in excess of amounts accrued to be approximately $0 to $119 million, of which approximately 78% relates to our discontinued operations.

For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation and related contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.

Litigation and Other Claims, Including Indemnification Claims, Pertaining to Discontinued Mortgage Operations. Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC and the Company have been, remain, and may in the future be subject to regulatory investigations, claims, including indemnification claims, and lawsuits pertaining to SCC’s mortgage business activities that occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by regulators, third party indemnitees including depositors and underwriters, individual plaintiffs, and cases in which plaintiffs seek to represent a class of

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others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, fraud and other common law torts, rights to indemnification and violations of securities laws, the Truth in Lending Act (TILA), Equal Credit Opportunity Act and the Fair Housing Act. Given the impact of the financial crisis on the non-prime mortgage environment, the aggregate number of these investigations, claims and lawsuits has increased over time and is expected to continue to increase further. The amounts claimed in these investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is difficult to predict and thus in many cases cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts that may be required to be paid in the discharge of liabilities or settlements could be substantial and could have a material impact on our consolidated financial position, results of operations and cash flows. Certain of these matters are described in more detail below.

On February 1, 2008, a class action lawsuit was filed in the United States District Court for the District of Massachusetts against SCC and other related entities styled Cecil Barrett, et al. v. Option One Mortgage Corp., et al. (Civil Action No. 08-10157-RWZ). Plaintiffs allege discriminatory practices relating to the origination of mortgage loans in violation of the Fair Housing Act and Equal Credit Opportunity Act, and seek declaratory and injunctive relief in addition to actual and punitive damages. The court dismissed H&R Block, Inc. from the lawsuit for lack of personal jurisdiction. In March 2011, the court issued an order certifying a class, which defendants sought to appeal. On August 24, 2011, the First Circuit Court of Appeals declined to hear the appeal, noting that the district court could reconsider its certification decision in light of a recent ruling by the United States Supreme Court in an unrelated matter. SCC subsequently filed a motion to decertify the class, which the court granted. Plaintiffs’ petition for appeal was denied. A portion of our loss contingency accrual is related to this lawsuit for the amount of loss that we consider probable and reasonably estimable. We believe SCC has meritorious defenses to the claims in this case and it intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On December 9, 2009, a putative class action lawsuit was filed in the United States District Court for the Central District of California against SCC and H&R Block, Inc. styled Jeanne Drake, et al. v. Option One Mortgage Corp., et al. (Case No. SACV09-1450 CJC). Plaintiffs allege breach of contract, promissory fraud, intentional interference with contractual relations, wrongful withholding of wages and unfair business practices in connection with not paying severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc. (now known as Homeward Residential, Inc. (Homeward)) in connection with the sale of certain assets and operations of SCC. Plaintiffs seek to recover severance benefits of approximately $8 million, interest and attorney’s fees, in addition to penalties and punitive damages on certain claims. On September 2, 2011, the court granted summary judgment in favor of the defendants on all claims. Plaintiffs filed an appeal, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we established a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On October 15, 2010, the Federal Home Loan Bank (FHLB) of Chicago filed a lawsuit in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al. against multiple defendants, including various SCC-related entities, H&R Block, Inc. and other entities, arising out of FHLB’s purchase of RMBSs. The plaintiff seeks rescission and damages under state securities law and for common law negligent misrepresentation in connection with its purchase of two securities originated and securitized by SCC. These two securities had a total initial principal amount of approximately $50 million, of which approximately $40 million remains outstanding. The plaintiff agreed to voluntarily dismiss H&R Block, Inc. from the suit. The remaining defendants, including SCC, filed motions to dismiss, which the court denied. Defendants moved for leave to appeal and the circuit court denied the motion. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

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On February 22, 2012, a lawsuit was filed by SCC against Homeward in the Supreme Court of the State of New York, County of New York, styled Sand Canyon Corporation v. American Home Mortgage Servicing, Inc. (Index No. 650504/2012), alleging breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the Cooperation Agreement entered into with SCC in connection with SCC’s sale of its mortgage loan servicing business to the defendant in 2008. SCC is seeking relief to, among other things, require the defendant to provide loan files only by the method prescribed in applicable agreements. The court denied the defendant’s motion to dismiss. The defendant subsequently filed an appeal, which remains pending.

On May 31, 2012, a lawsuit was filed by Homeward in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 1:12-cv-05067-PGG). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to loans sold to the trust and representation and warranties related to SCC. Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and representations given as to the loans’ compliance with its underwriting standards and the value of underlying real estate. SCC is seeking leave to file a motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On September 28, 2012, a second lawsuit was filed by Homeward in the District Court for the Southern District of New York against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 12-cv-7319). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust. Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. SCC is seeking leave to file a motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

As of January 31, 2013, underwriters and depositors were involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege a variety of claims, including violations of federal and state securities law and common law fraud, based on alleged materially inaccurate or misleading disclosures. Based on information currently available to SCC, it believes that the 14 lawsuits in which notice of a claim for indemnification has been made involve original investments of approximately $14 billion. Because SCC is not party to these lawsuits (with the exception of the Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation case discussed above) and does not have control of this litigation, SCC does not have precise information about the amount of damages or other remedies being asserted or the defenses to the claims in such lawsuits. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification from underwriters or depositors with respect to existing or new lawsuits. We have not concluded that a loss related to any of these indemnification claims is probable, nor have we accrued a liability related to any of these claims. We believe SCC has meritorious defenses to these indemnification claims and intends to defend them vigorously, but there can be no assurance as to their outcome or their impact on our consolidated financial position, results of operations and cash flows.

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On April 3, 2012, the Nevada Attorney General issued a subpoena to SCC indicating it was conducting an investigation concerning “the alleged commission of a practice declared to be unlawful under the Nevada Deceptive Trade Practices Act.” A majority of the documents requested in the subpoena involve SCC’s lending to minority (African American and Latino) borrowers. No complaint has been filed to date. SCC plans to continue to cooperate with the Nevada Attorney General.

Employment-Related Claims and Litigation. We have been named in several wage and hour class action lawsuits throughout the country, including Alice Williams v. H&R Block Enterprises LLC, Case No. RG08366506 (Superior Court of California, County of Alameda, filed January 17, 2008) (alleging improper classification and failure to compensate for all hours worked and to provide meal periods to office managers in California); Delana Ugas, et al. v. H&R Block Enterprises LLC, et al., Case No. BC417700 (United States District Court, Central District of California, filed July 13, 2009) (alleging failure to compensate tax professionals in California for all hours worked and to provide meal periods); and Barbara Petroski, et al. v. H&R Block Eastern Enterprises, Inc., et al., Case No. 10-CV-00075 (United States District Court, Western District of Missouri, filed January 25, 2010) (alleging failure to compensate tax professionals nationwide for off-season training). The plaintiffs in these lawsuits seek actual damages, pre-judgment interest, statutory penalties and attorneys’ fees.

A class was certified in the Williams case in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011). To avoid the cost and inherent risk associated with litigation, we reached an agreement to settle the case in February 2012, subject to approval by the court. The settlement provided for a maximum payment of $7.5 million, with the actual cost of the settlement dependent on the number of valid claims submitted by class members. The court granted final approval of the settlement on November 8, 2012. An appeal was filed, but subsequently withdrawn, rendering the settlement final. We previously recorded a liability for our estimate of the expected loss under the settlement.

In the Ugas case, the court initially certified a class on the claim for failure to provide meal periods (consisting of tax professionals who worked in company-owned offices in California from 2006 to 2011), but subsequently decertified the class in a ruling dated July 9, 2012. The Ninth Circuit Court of Appeals declined to hear an appeal. The court also certified a class on the claim for failure to compensate tax professionals for all hours worked (consisting of tax professionals who worked in company-owned offices in one district in California from 2006-2009). That class remains pending. A trial date has been set for October 21, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend them vigorously, but there can be no assurances as to the outcome of the case or its impact on our consolidated financial position, results of operations and cash flows.

In the Petroski case, a conditional class was certified under the Fair Labor Standards Act in March 2011 (consisting of tax professionals nationwide who worked in company-owned offices and who were not compensated for certain training courses occurring on or after April 15, 2007). Two classes were also certified under state laws in California and New York (consisting of tax professionals who worked in company-owned offices in those states). We filed motions to decertify the classes, along with motions for summary judgment, which remain pending. A trial date has been set for June 10, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this matter and intend to defend them vigorously, but there can be no assurances as to the outcome of the matter or its impact on our consolidated financial position, results of operations and cash flows.

RAL and RAC Litigation. We have been named in a putative class action styled Sandra J. Basile, et al. v. H&R Block, Inc., et al., April Term 1992 Civil Action No. 3246 in the Court of Common Pleas, First Judicial District Court of Pennsylvania, Philadelphia County, instituted on April 23, 1993. The plaintiffs allege inadequate disclosures with respect to the refund anticipation loan (RAL) product and assert claims for violation of consumer protection statutes, negligent misrepresentation, breach of fiduciary duty, common law fraud, usury, and violation of the TILA. Plaintiffs seek unspecified actual and punitive damages, injunctive relief, attorneys’ fees and costs. A Pennsylvania class was certified, but later decertified by the trial court in December 2003. The intermediate appellate court subsequently reversed the decertification decision. On September 7, 2012, the Pennsylvania Supreme Court reversed the

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decision of the intermediate appellate court, thereby allowing the trial court’s decertification ruling to stand. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to this case and intend to defend the case vigorously, but there can be no assurances as to the outcome of this case or its impact on our consolidated financial position, results of operations and cash flows.

A series of class action lawsuits were filed against us in various federal courts beginning on November 17, 2011 concerning the RAL and refund anticipation check (RAC) products. The plaintiffs generally allege we engaged in unfair, deceptive and/or fraudulent acts in violation of various state consumer protection laws by facilitating RALs that were accompanied by allegedly inaccurate TILA disclosures, and by offering RACs without any TILA disclosures. Certain plaintiffs also allege violation of disclosure requirements of various state statutes expressly governing RALs and provisions of those statutes prohibiting tax preparers from charging or retaining certain fees. Collectively, the plaintiffs seek to represent clients who purchased RAL or RAC products in up to forty-two states and the District of Columbia during timeframes ranging from 2007 to the present. The plaintiffs seek equitable relief, disgorgement of profits, compensatory and statutory damages, restitution, civil penalties, attorneys’ fees and costs. These cases were consolidated by the Judicial Panel on Multidistrict Litigation into a single proceeding in the United States District Court for the Northern District of Illinois for coordinated pretrial proceedings, styled IN RE: H&R Block Refund Anticipation Loan Litigation (MDL No. 2373). We filed a motion to compel arbitration, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

Compliance Fee Litigation. On April 16, 2012 and April 19, 2012, putative class action lawsuits were filed against us in Missouri state and federal courts, respectively, concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. These cases are styled Manuel H. Lopez III v. H&R Block, Inc., et al., in the Circuit Court of Jackson County, Missouri (Case # 1216CV12290), and Ronald Perras v. H&R Block, Inc., et al., in the United States District Court for the Western District of Missouri (Case No. 4:12-cv-00450-DGK). Taken together, the plaintiffs seek to represent all retail tax clients nationwide who were charged the compliance fee, and assert claims of violation of state consumer laws, money had and received, and unjust enrichment. We are seeking to compel arbitration on certain claims. We have not concluded that a loss related to these lawsuits is probable, nor have we accrued a liability related to either of these lawsuits. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

Express IRA Litigation. On January 2, 2008, the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) filed a lawsuit regarding our former Express IRA product that is styled Jim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc., et al. The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits, damages and restitution, civil penalties and punitive damages. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation, among other things, through an indemnification agreement. A portion of our accrual is related to these indemnity obligations.

Litigation and Claims Pertaining to the Discontinued Operations of RSM McGladrey. On April 17, 2009, a shareholder derivative complaint was filed by Brian Menezes, derivatively and on behalf of nominal defendant International Textile Group, Inc. against McGladrey Capital Markets LLC (MCM) in the Court of Common Pleas, Greenville County, South Carolina (C.A. No. 2009-CP-23-3346) styled Brian P. Menezes, Derivatively on Behalf of Nominal Defendant, International Textile Group, Inc. (f/k/a Safety Components International, Inc.) v. McGladrey Capital Markets, LLC (f/k/a RSM EquiCo Capital

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Markets, LLC), et al. Plaintiffs filed an amended complaint in October 2011 styled In re International Textile Group Merger Litigation, adding a putative class action claim. Plaintiffs allege claims of aiding and abetting, civil conspiracy, gross negligence and breach of fiduciary duty against MCM in connection with a fairness opinion MCM provided to the Special Committee of Safety Components International, Inc. (SCI) in 2006 regarding the merger between International Textile Group, Inc. and SCI. Plaintiffs seek actual and punitive damages, pre-judgment interest, attorneys’ fees and costs. On February 8, 2012, the court dismissed plaintiffs’ civil conspiracy claim against all defendants. A class was certified on the remaining claims on November 20, 2012. We have not concluded that a loss related to this matter is probable, nor have we established a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

In connection with the sale of RSM McGladrey, Inc. (RSM) and MCM, we indemnified the buyers against certain litigation matters. The indemnities are not subject to a stated term or limit. A portion of our accrual is related to these indemnity obligations.

Other. We are from time to time a party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others similarly situated. We believe we have meritorious defenses to each of these investigations, claims and lawsuits, and we are defending or intend to defend them vigorously. The amounts claimed in these matters are substantial in some instances; however, the ultimate liability with respect to such matters is difficult to predict. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material impact on our consolidated financial position, results of operations and cash flows.

We are also a party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including, but not limited to, claims and lawsuits concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, marketing and other competitor disputes, employment matters and contract disputes (Other Claims). While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay in the discharge from liabilities in, or settlements of, these Other Claims will not have a material impact on our consolidated financial position, results of operations and cash flows.

13.

Loss Contingencies Arising From Representations and Warranties of Our Discontinued Mortgage Operations Overview. SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. The sale of servicing assets did not include the sale of any mortgage loans.

Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers or in the form of residential mortgage-backed securities (RMBSs). 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 effectively 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 bondholder’s interest in the mortgage loan and, as discussed below, the mortgage has not been liquidated, SCC may be obligated to repurchase the loan, may be obligated to indemnify certain parties, or may enter into settlement arrangements related to losses, collectively referred to as “representation and warranty claims.”

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Claim History. Representation and warranty claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan’s compliance with the underwriting standards established by SCC at origination and borrower fraud. Claims received since May 1, 2008 are as follows:


											(in millions)
Received in Fiscal Year	2009		2010		2011		2012		2013		Total
Loan Origination Year:
2005	$	62	$	15	$	8	$	4	$	22		$ 111
2006		217		108		194		325		133		977
2007		153		22		16		763		13		967

Total	$	432	$	145	$	218	$	1,092	$	168		$2,055


Note:The table above excludes amounts related to indemnity agreements.

Approximately 95% of claims relate to loans originated in calendar years 2006 and 2007. During calendar years 2006 and 2007, SCC originated approximately $42 billion in loans, of which approximately 1% were sold directly to government sponsored entities. Government sponsored entities also purchased bonds backed by SCC-originated mortgage loans and, with respect to these bonds, have the same rights as other certificate holders in private label securitizations. Due to a variety of substantive defenses and other reasons, SCC may not be subject to representation and warranty losses on loans, including without limitation loans that have been paid in full, liquidated, repurchased, or were sold without recourse.

Based on its experiences to date, SCC believes the longer a loan performs prior to an event of default, the less likely the default will be related to a breach of a representation and warranty, and the less likely that SCC will have a contractual payment obligation with respect to such loan. The majority of claims asserted since May 1, 2008 determined by SCC to represent a valid breach of its representations and warranties relate to loans that became delinquent within the first two years following the origination of the mortgage loan. However, a loan that defaults within the first two years following the origination of the mortgage loan does not necessarily default due to a breach of a representation and warranty. Exclusive of loans that have been paid in full, repurchased or sold without recourse, loans originated in 2006 and 2007 that defaulted in the first two years totaled $6.1 billion and $2.7 billion, respectively.

SCC received $168 million in claims during the nine months ended January 31, 2013, most of which were asserted by a private-label securitization trustee or servicer on behalf of certificate holders ($144 million), with the remainder asserted by monoline insurers ($15 million) and Fannie Mae ($9 million). During the fiscal year ended April 30, 2012, SCC received claims totaling $1.1 billion. The amount of claims received varies from period to period, and these variances have been and could continue to fluctuate substantially.

During fiscal year 2013, SCC has either entered into, or is in discussions with several parties for tolling agreements to extend any applicable statute of limitations related to potential representation and warranty claims and other claims against SCC involving substantial amounts. SCC has experienced a recent decline in representation and warranty claims, which it believes may be partially attributable to the existence of these tolling agreements, and this may continue until the tolling agreements are terminated.

Liability for Estimated Contingent Losses. SCC estimates probable losses arising from representations and warranties on loans it originated by assessing, among other things, claim activity, both known and projected. Projections of future claims are based on an analysis that includes a review of the terms and provisions of related agreements, the historical claim and validity rate experience and 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. SCC also considers the potential for bulk settlements when determining its estimated accrual for probable losses related to representations and warranties.

SCC has accrued a liability as of January 31, 2013 for estimated contingent losses arising from representations and warranties on loans it originated of $118.8 million, which represents SCC’s estimate of the probable loss that may occur. 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

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probable losses are inherently subjective and require considerable management judgment. To the extent that the volume of claims, the level of claims (including whether the loan has been liquidated), the level of disputed claims, the level of threatened claims, the counterparties asserting claims, the nature and severity of claims, the outcome of various litigation related to claims, 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. Because of these numerous uncertainties, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. However, such possible loss outcomes may be significant. A 1% increase in loss severities and a 1% decrease in assumed denial rates would result in losses beyond SCC’s accrual of approximately $27 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on this loss contingency. In reality, changes in one assumption may result in changes in other assumptions, which could affect the sensitivity and the amount of losses.

A rollforward of SCC’s accrued liability for these loss contingencies is as follows:


				(in 000s)
Nine months ended January 31,	2013			2012
Balance at beginning of period	$	130,018		$	126,260
Provisions		–			20,000
Payments		(11,253	)		(3,337	)

Balance at end of period	$	118,765		$	142,923

The recent federal court decision styled MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgages (Case No. 11-CV-2542 (JRT/TNL), 2012 WL 4511065 (D. Minn.), the “WMC Decision”), decided on October 1, 2012, recognizes the liquidation of a mortgage loan in a foreclosure sale as a defense to representation and warranty claims and related litigation. Specifically, the court noted that under the law of many states, including New York (which was applicable in the case at hand and governs most of SCC’s purchase agreements for mortgage loans), a foreclosure decree operates to merge the interest of the mortgagor and mortgagee and, consequently, foreclosure on the properties securing the mortgage loan extinguishes it and renders it unavailable for repurchase. Consistent with this approach, SCC is taking the legal position where appropriate, for both contractual representation and warranty claims and similar claims in litigation, that a valid representation and warranty claim cannot be made with respect to a mortgage loan that has been liquidated. However, the WMC Decision is subject to appeal and it is anticipated that the liquidated mortgage loan defense will be the subject of future judicial decisions. Until the liquidated mortgage loan defense is further validated in the courts or other developments occur, SCC’s estimated accrual for representation and warranty claims will continue to be determined using its prior methodology, which does not take this defense into account.

Settlement Actions. SCC has vigorously contested any request for repurchase when it has concluded that a valid basis for repurchase does not exist and will continue to do so in the future.

American International Group, Inc. (AIG) had threatened to assert claims of various types in the approximate amount of $650 million in connection with the sale and securitization of SCC-originated mortgage loans. On December 21, 2012, SCC and AIG entered into an agreement to resolve all of AIG’s claims, except that AIG retained the right to benefit from payments for representation and warranty claims by third parties, without AIG’s assistance or encouragement, that are made to securitization trusts in which AIG has a continuing interest.

SCC may enter into other bulk settlements it believes to be advantageous in lieu of a loan-by-loan review process. In addition, there are certain SCC contingencies described in note 12 that include representation and warranty claims that may be resolved through settlement or litigation. Any resulting payment from such settlements would be charged as a reduction to the accrual for representation and warranty claims.

Indemnification obligations. Losses may also be incurred with respect to various indemnification claims related to loans and securities SCC originated and sold. Losses from indemnification obligations can be significant and are frequently not subject to a stated term or limit. SCC believes it is not probable that it will be required to perform under its indemnification obligations; however, there can be no assurances as to the outcome or impact on our consolidated financial position, results of operations and cash flows related to claims which may arise from those indemnification obligations.

-26-

Reviewed Claims. Since May 2008, SCC has denied approximately 94% of all claims reviewed, excluding loans covered by other settlements. Of the denied claims, 1% related to loans that have been paid in full and 1% of claims were denied because they related to loans which have been liquidated. Paid claim loss severity rates have approximated 64% and SCC has not observed any material trends related to average losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the consolidated balance sheets.

SCC generally has 60 to 120 days to respond to a claimed breach of a representation and warranty and performs a loan-by-loan review of all claims during this time. Counterparties are able to reassert claims that SCC has denied. Claims totaling approximately $42 million remained subject to review as of January 31, 2013, of which, approximately $20 million represent a reassertion of previously denied claims.

14.

Discontinued Operations

Our discontinued operations consist of our former Business Services segment and SCC. We sold RSM and MCM in fiscal year 2012. SCC exited its mortgage business in fiscal year 2008.

The results of operations of our discontinued operations are as follows:


										(in 000s)
	Three months ended January 31,						Nine months ended January 31,
	2013			2012			2013			2012
Revenues	$	–		$	50,508		$	–		$	416,436

Pretax income (loss) from operations:
RSM and related businesses	$	(511	)	$	1,117		$	(204	)	$	18,831
Mortgage		(765	)		(27,385	)		(10,639	)		(54,019	)

		(1,276	)		(26,268	)		(10,843	)		(35,188	)
Income tax benefit		(483	)		(6,462	)		(4,215	)		(10,268	)

Net loss from operations		(793	)		(19,806	)		(6,628	)		(24,920	)

Pretax loss on sales of businesses		–			(236	)		–			(109,485	)
Income tax benefit		–			(20,260	)		–			(59,969	)

Net gain (loss) on sales of businesses		–			20,024			–			(49,516	)

Net income (loss) from discontinued operations	$	(793	)	$	218		$	(6,628	)	$	(74,436	)

15.

Regulatory Requirements – HRB Bank

The following table sets forth HRB Bank’s regulatory capital requirements calculated in its Call Report, as filed with the Federal Financial Institutions Examination Council (FFIEC):


											(dollars in 000s)
	Actual					Minimum Capital Requirement					Minimum to be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2012:
Total risk-based capital ratio ⁽¹⁾	$	469,979		61.9	%	$	60,747		8.0	%	$	75,934		10.0	%
Tier 1 risk-based capital ratio ⁽²⁾		460,341		60.6	%		N/A		N/A			45,561		6.0	%
Tier 1 capital ratio (leverage) ⁽³⁾		460,341		29.7	%		62,041		4.0	%⁽⁵⁾		77,551		5.0	%
Tangible equity ratio ⁽⁴⁾		460,341		29.7	%		23,265		1.5	%		N/A		N/A

As of March 31, 2012:
Total risk-based capital ratio ⁽¹⁾	$	458,860		120.3	%	$	30,513		8.0	%	$	38,141		10.0	%
Tier 1 risk-based capital ratio ⁽²⁾		453,800		119.0	%		N/A		N/A			22,885		6.0	%
Tier 1 capital ratio (leverage) ⁽³⁾		453,800		29.4	%		185,252		12.0	%		77,188		5.0	%
Tangible equity ratio ⁽⁴⁾		453,800		29.4	%		23,157		1.5	%		N/A		N/A
⁽¹⁾ Total risk-based capital divided by risk-weighted assets. ⁽²⁾ Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. ⁽³⁾ Tier 1 (core) capital divided by adjusted total assets. ⁽⁴⁾ Tangible capital divided by tangible assets. ⁽⁵⁾ Effective April 5, 2012, the minimum capital requirement was changed to 4% by the OCC, although HRB Bank plans to maintain a minimum of 12.0% leverage capital at the end of each calendar quarter.

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As of January 31, 2013, HRB Bank’s leverage ratio was 30.4%.

16.

Segment Information

Results of our continuing operations by reportable operating segment are as follows:


										(in 000s)
	Three months ended January 31,						Nine months ended January 31,
	2013			2012			2013			2012
Revenues:
Tax Services	$	464,634		$	655,701		$	684,706		$	868,144
Corporate and eliminations		7,345			7,579			21,025			24,953

	$	471,979		$	663,280		$	705,731		$	893,097

Pretax income (loss):
Tax Services	$	(64,189	)	$	31,716		$	(335,203	)	$	(311,733	)
Corporate and eliminations		(32,079	)		(32,742	)		(92,622	)		(93,823	)

Loss from continuing operations before tax benefit	$	(96,268	)	$	(1,026	)	$	(427,825	)	$	(405,556	)

17.

New Accounting Standards

In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” Under the amendments in this guidance, an entity may consider qualitative factors before applying Step 1 of the goodwill impairment assessment, but may no longer be permitted to carry forward estimates of a reporting unit’s fair value from a prior year when specific criteria are met. These amendments were effective for us as the beginning of our current fiscal year. We adopted this guidance as of May 1, 2012, and this new guidance did not have a material effect on our consolidated financial statements.

18.

Condensed Consolidating Financial Statements

Block Financial LLC (Block Financial) is an indirect, wholly-owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes issued on October 25, 2012 and October 26, 2004, our 2012 CLOC, and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company’s investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances and transactions.

-28-


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)													(in 000s)
Three months ended January 31, 2013	H&R Block, Inc. (Guarantor)			Block Financial (Issuer)			Other Subsidiaries			Eliminations			Consolidated H&R Block
Total revenues	$	–		$	58,616		$	414,858		$	(1,495	)	$	471,979

Cost of revenues		–			68,333			310,776			(1,491	)		377,618
Selling, general and administrative		–			11,327			175,674			(4	)		186,997

Total expenses		–			79,660			486,450			(1,495	)		564,615

Operating loss		–			(21,044	)		(71,592	)		–			(92,636	)
Other income (expense), net		(96,268	)		(4,938	)		1,306			96,268			(3,632	)

Loss from continuing operations before tax benefit		(96,268	)		(25,982	)		(70,286	)		96,268			(96,268	)
Income tax benefit		(79,353	)		(31,416	)		(47,937	)		79,353			(79,353	)

Net income (loss) from continuing operations		(16,915	)		5,434			(22,349	)		16,915			(16,915	)
Net loss from discontinued operations		(793	)		(483	)		(310	)		793			(793	)

Net income (loss)		(17,708	)		4,951			(22,659	)		17,708			(17,708	)
Other comprehensive income (loss)		370			(569	)		939			(370	)		370

Comprehensive income (loss)	$	(17,338	)	$	4,382		$	(21,720	)	$	17,338		$	(17,338	)


Three months ended January 31, 2012	H&R Block, Inc. (Guarantor)			Block Financial (Issuer)			Other Subsidiaries			Eliminations			Consolidated H&R Block
Total revenues	$	–		$	65,604		$	597,837		$	(161	)	$	663,280

Cost of revenues		–			77,965			377,436			(161	)		455,240
Selling, general and administrative		–			9,705			202,031			–			211,736

Total expenses		–			87,670			579,467			(161	)		666,976

Operating income (loss)		–			(22,066	)		18,370			–			(3,696	)
Other income (expense), net		(1,026	)		1,301			1,369			1,026			2,670

Income (loss) from continuing operations before tax (benefit)		(1,026	)		(20,765	)		19,739			1,026			(1,026	)
Income tax (benefit)		2,541			12,036			(9,495	)		(2,541	)		2,541

Net income (loss) from continuing operations		(3,567	)		(32,801	)		29,234			3,567			(3,567	)
Net income (loss) from discontinued operations		218			(15,695	)		15,913			(218	)		218

Net income (loss)		(3,349	)		(48,496	)		45,147			3,349			(3,349	)
Other comprehensive income (loss)		3,050			(335	)		3,385			(3,050	)		3,050

Comprehensive income (loss)	$	(299	)	$	(48,831	)	$	48,532		$	299		$	(299	)

-29-


Nine months ended January 31, 2013	H&R Block, Inc. (Guarantor)			Block Financial (Issuer)			Other Subsidiaries			Eliminations			Consolidated H&R Block
Total revenues	$	–		$	98,531		$	608,773		$	(1,573	)	$	705,731

Cost of revenues		–			137,146			647,476			(1,569	)		783,053
Selling, general and administrative		–			26,288			326,518			(4	)		352,802

Total expenses		–			163,434			973,994			(1,573	)		1,135,855

Operating loss		–			(64,903	)		(365,221	)		–			(430,124	)
Other income (expense), net		(427,825	)		(2,428	)		4,727			427,825			2,299

Loss from continuing operations before tax benefit		(427,825	)		(67,331	)		(360,494	)		427,825			(427,825	)
Income tax benefit		(204,061	)		(46,374	)		(157,687	)		204,061			(204,061	)

Net loss from continuing operations		(223,764	)		(20,957	)		(202,807	)		223,764			(223,764	)
Net loss from discontinued operations		(6,628	)		(6,503	)		(125	)		6,628			(6,628	)

Net loss		(230,392	)		(27,460	)		(202,932	)		230,392			(230,392	)
Other comprehensive loss		(3,090	)		(315	)		(2,775	)		3,090			(3,090	)

Comprehensive loss	$	(233,482	)	$	(27,775	)	$	(205,707	)	$	233,482		$	(233,482	)


Nine months ended January 31, 2012	H&R Block, Inc. (Guarantor)			Block Financial (Issuer)			Other Subsidiaries			Eliminations			Consolidated H&R Block
Total revenues	$	–		$	104,937		$	788,321		$	(161	)	$	893,097

Cost of revenues		–			152,605			742,993			(161	)		895,437
Selling, general and administrative		–			24,044			388,357			–			412,401

Total expenses		–			176,649			1,131,350			(161	)		1,307,838

Operating loss		–			(71,712	)		(343,029	)		–			(414,741	)
Other income (expense), net		(405,556	)		7,647			1,538			405,556			9,185

Loss from continuing operations before tax benefit		(405,556	)		(64,065	)		(341,491	)		405,556			(405,556	)
Income tax benefit		(159,821	)		(4,877	)		(154,944	)		159,821			(159,821	)

Net loss from continuing operations		(245,735	)		(59,188	)		(186,547	)		245,735			(245,735	)
Net loss from discontinued operations		(74,436	)		(36,398	)		(38,038	)		74,436			(74,436	)

Net loss		(320,171	)		(95,586	)		(224,585	)		320,171			(320,171	)
Other comprehensive income (loss)		(3,824	)		1,430			(5,254	)		3,824			(3,824	)

Comprehensive loss	$	(323,995	)	$	(94,156	)	$	(229,839	)	$	323,995		$	(323,995	)

-30-


Condensed Consolidating Balance Sheets											(in 000s)
As of January 31, 2013	H&R Block, Inc. (Guarantor)		Block Financial (Issuer)			Other Subsidiaries		Eliminations			Consolidated H&R Block
Cash & cash equivalents	$	–	$	294,816		$	124,102	$	(533	)	$	418,385
Cash & cash equivalents – restricted		–		1,613			36,345		–			37,958
Receivables, net		963		555,418			392,779		–			949,160
Mortgage loans held for investment		–		357,887			–		–			357,887
Intangible assets and goodwill, net		–		–			706,779		–			706,779
Investments in subsidiaries		2,834,612		556			–		(2,834,612	)		556
Amounts due from affiliates		62		496,760			2,208,626		(2,705,448	)		–
Other assets		8,244		630,999			822,528		–			1,461,771

Total assets	$	2,843,881	$	2,338,049		$	4,291,159	$	(5,540,593	)	$	3,932,496

Customer deposits	$	–	$	1,037,501		$	–	$	(533	)	$	1,036,968
Commercial paper borrowings		–		424,967			–		–			424,967
Long-term debt		–		896,848			9,877		–			906,725
Other liabilities		367		251,833			676,748		–			928,948
Amounts due to affiliates		2,208,626		-			496,822		(2,705,448	)		–
Stockholders’ equity		634,888		(273,100	)		3,107,712		(2,834,612	)		634,888

Total liabilities and stockholders’ equity	$	2,843,881	$	2,338,049		$	4,291,159	$	(5,540,593	)	$	3,932,496


As of January 31, 2013	H&R Block, Inc. (Guarantor)		Block Financial (Issuer)			Other Subsidiaries			Eliminations			Consolidated H&R Block
Cash & cash equivalents	$	–	$	515,147		$	1,430,030		$	(843	)	$	1,944,334
Cash & cash equivalents – restricted		–		8,814			39,286			–			48,100
Receivables, net		–		90,755			103,103			–			193,858
Mortgage loans held for investment, net		–		406,201			–			–			406,201
Intangible assets and goodwill, net		–		–			692,017			–			692,017
Investments in subsidiaries		2,525,473		–			715			(2,525,473	)		715
Amounts due from affiliates ⁽¹⁾		188		492,851			1,430,782			(1,923,821	)		–
Other assets		8,887		623,032			732,423			–			1,364,342

Total assets ⁽¹⁾	$	2,534,548	$	2,136,800		$	4,428,356		$	(4,450,137	)	$	4,649,567

Customer deposits	$	–	$	828,392		$	–		$	(843	)	$	827,549
Long-term debt		–		999,325			41,224			–			1,040,549
Other liabilities ⁽¹⁾		22,690		277,160			1,155,727			–			1,455,577
Amounts due to affiliates ⁽¹⁾		1,185,966		244,816			493,039			(1,923,821	)		–
Stockholders’ equity		1,325,892		(212,893	)		2,738,366			(2,525,473	)		1,325,892

Total liabilities and stockholders’ equity ⁽¹⁾	$	2,534,548	$	2,136,800		$	4,428,356		$	(4,450,137	)	$	4,649,567

								&n