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H&R Block 10-Q 2013
HRB 2013.10.31 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended October 31, 2013
 
 
OR
¨
 
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
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
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 þ 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 þ 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 þ          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  þ
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on November 30, 2013: 274,046,273 shares.
 



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

Table of Contents

 
 
Consolidated Balance Sheets
 
 
As of October 31, 2013, October 31, 2012 and April 30, 2013
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three and six months ended October 31, 2013 and 2012
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Six months ended October 31, 2013 and 2012
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 



PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
 
(in 000s, except share and 
per share amounts)
 
As of
 
October 31, 2013

 
October 31, 2012

 
April 30, 2013

 
 
(unaudited)

 
(unaudited)

 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
790,772

 
$
1,260,901

 
$
1,747,584

Cash and cash equivalents — restricted
 
47,521

 
38,667

 
117,837

Receivables, less allowance for doubtful accounts of $52,969, $42,761 and $50,399
 
131,701

 
124,511

 
206,835

Prepaid expenses and other current assets
 
225,660

 
282,874

 
390,087

Total current assets
 
1,195,654

 
1,706,953

 
2,462,343

Mortgage loans held for investment, less allowance for loan losses of $12,704, $18,125 and $14,314
 
295,907

 
370,850

 
338,789

Investments in available-for-sale securities
 
465,344

 
388,640

 
486,876

Property and equipment, at cost less accumulated depreciation and amortization of $449,738, $492,670 and $420,318
 
311,157

 
272,438

 
267,880

Intangible assets, net
 
296,213

 
275,193

 
284,439

Goodwill
 
442,812

 
434,492

 
434,782

Other assets
 
267,426

 
448,164

 
262,670

Total assets
 
$
3,274,513

 
$
3,896,730

 
$
4,537,779

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Customer banking deposits
 
$
655,129

 
$
790,106

 
$
936,464

Accounts payable, accrued expenses and other current liabilities
 
426,994

 
406,447

 
523,921

Accrued salaries, wages and payroll taxes
 
41,584

 
39,345

 
134,970

Accrued income taxes
 
22,475

 
95,126

 
416,128

Current portion of long-term debt
 
400,503

 
600,678

 
722

Total current liabilities
 
1,546,685

 
1,931,702

 
2,012,205

Long-term debt
 
506,078

 
906,125

 
905,958

Other noncurrent liabilities
 
266,775

 
365,970

 
356,069

Total liabilities
 
2,319,538

 
3,203,797

 
3,274,232

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
 
3,166

 
3,166

 
3,166

Convertible preferred stock, no par, stated value $0.01 per share, 500,000 shares authorized
 

 

 

Additional paid-in capital
 
757,828

 
748,298

 
752,483

Accumulated other comprehensive income
 
1,463

 
8,685

 
10,550

Retained earnings
 
1,003,842

 
795,707

 
1,333,445

Less treasury shares, at cost
 
(811,324
)
 
(862,923
)
 
(836,097
)
Total stockholders’ equity
 
954,975

 
692,933

 
1,263,547

Total liabilities and stockholders’ equity
 
$
3,274,513

 
$
3,896,730

 
$
4,537,779

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block Q2 FY2014 Form 10-Q
1


CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 
(unaudited, in 000s, except 
per share amounts)
 
 
 
Three months ended
 
Six months ended
 
 
October 31,
 
October 31,
 
 
2013

 
2012

 
2013

 
2012

 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
Service revenues
 
$
112,432

 
$
116,438

 
$
220,232

 
$
196,334

Product and other revenues
 
11,282

 
10,966

 
19,480

 
17,686

Interest income
 
10,626

 
9,859

 
21,823

 
19,732

 
 
134,340

 
137,263

 
261,535

 
233,752

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Compensation and benefits
 
60,526

 
54,764

 
106,838

 
94,349

Occupancy and equipment
 
82,358

 
82,398

 
161,094

 
162,349

Provision for bad debt and loan losses
 
2,849

 
3,725

 
14,340

 
8,370

Interest
 
14,314

 
23,390

 
28,760

 
45,467

Depreciation of property and equipment
 
20,144

 
16,196

 
36,948

 
30,730

Other
 
40,673

 
31,538

 
82,937

 
64,170

 
 
220,864

 
212,011

 
430,917

 
405,435

Selling, general and administrative
 
94,092

 
90,327

 
190,789

 
165,805

 
 
314,956

 
302,338

 
621,706

 
571,240

Operating loss
 
(180,616
)
 
(165,075
)
 
(360,171
)
 
(337,488
)
Other income (expense), net
 
1,254

 
2,787

 
(3,685
)
 
5,931

Loss from continuing operations before income tax benefit
 
(179,362
)
 
(162,288
)
 
(363,856
)
 
(331,557
)
Income tax benefit
 
(76,347
)
 
(61,089
)
 
(147,571
)
 
(124,708
)
Net loss from continuing operations
 
(103,015
)
 
(101,199
)
 
(216,285
)
 
(206,849
)
Net loss from discontinued operations
 
(1,928
)
 
(4,044
)
 
(3,845
)
 
(5,835
)
NET LOSS
 
$
(104,943
)
 
$
(105,243
)
 
$
(220,130
)
 
$
(212,684
)
 
 
 
 
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.38
)
 
$
(0.37
)
 
$
(0.79
)
 
$
(0.76
)
Discontinued operations
 
(0.01
)
 
(0.02
)
 
(0.01
)
 
(0.02
)
Consolidated
 
$
(0.39
)
 
$
(0.39
)
 
$
(0.80
)
 
$
(0.78
)
 
 
 
 
 
 
 
 
 
DIVIDENDS PER SHARE
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
 
Net loss
 
$
(104,943
)
 
$
(105,243
)
 
$
(220,130
)
 
$
(212,684
)
Unrealized gains (losses) on available-for-sale securities, net of taxes:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period, net of taxes (benefit) of $728, $131, ($4,337) and $283
 
1,138

 
187

 
(6,577
)
 
357

Reclassification adjustment for gains included in income, net of taxes of $ -, $71, $ - and $71
 

 
(104
)
 

 
(104
)
Change in foreign currency translation adjustments
 
582

 
1,252

 
(2,510
)
 
(3,713
)
Other comprehensive income (loss)
 
1,720

 
1,335

 
(9,087
)
 
(3,460
)
Comprehensive loss
 
$
(103,223
)
 
$
(103,908
)
 
$
(229,217
)
 
$
(216,144
)
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
H&R Block Q2 FY2014 Form 10-Q


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Six months ended October 31,
 
2013

 
2012

 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
$
(492,373
)
 
$
(567,036
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of available-for-sale securities
 
(45,158
)
 
(67,474
)
Maturities of and payments received on available-for-sale securities
 
55,615

 
53,098

Principal payments on mortgage loans held for investment, net
 
24,340

 
23,608

Purchases of property and equipment
 
(86,926
)
 
(60,720
)
Payments made for business acquisitions, net of cash acquired
 
(20,927
)
 
(10,442
)
Franchise loans:
 
 
 
 
Loans funded
 
(22,114
)
 
(20,670
)
Payments received
 
15,883

 
8,303

Other, net
 
15,255

 
10,218

Net cash used in investing activities
 
(64,032
)
 
(64,079
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of long-term debt
 

 
(30,831
)
Proceeds from issuance of long-term debt
 

 
497,185

Customer banking deposits, net
 
(275,800
)
 
(37,913
)
Dividends paid
 
(109,324
)
 
(108,428
)
Repurchase of common stock, including shares surrendered
 
(5,329
)
 
(339,919
)
Proceeds from exercise of stock options
 
24,536

 
1,288

Other, net
 
(26,619
)
 
(33,004
)
Net cash used in financing activities
 
(392,536
)
 
(51,622
)
 
 
 
 
 
Effects of exchange rates on cash
 
(7,871
)
 
(696
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(956,812
)
 
(683,433
)
Cash and cash equivalents at beginning of the period
 
1,747,584

 
1,944,334

Cash and cash equivalents at end of the period
 
$
790,772

 
$
1,260,901

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
116,099

 
$
48,201

Interest paid on borrowings
 
27,804

 
42,106

Interest paid on deposits
 
1,180

 
2,683

Transfers of foreclosed loans to other assets
 
3,889

 
5,312

Accrued additions to property and equipment
 
6,729

 
10,273

Transfer of mortgage loans held for investment to held for sale
 
7,608

 

 
 
 
 
 
See accompanying notes to consolidated financial statements.



H&R Block Q2 FY2014 Form 10-Q
3


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated balance sheets as of October 31, 2013 and 2012, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended October 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended October 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 October 31, 2013 and 2012 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, 2013 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2013 or for the year then ended, are derived from our April 30, 2013 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 evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, 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.
Recently Issued or Newly Adopted Accounting Standards - In February 2013, the Financial Accounting Standards Board issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. This guidance, which we adopted as of May 1, 2013, did not have a material impact on our financial statements.
NOTE 2: H&R BLOCK BANK
In July 2013, H&R Block Bank (HRB Bank) and Block Financial LLC (Block Financial) entered into a definitive Purchase and Assumption Agreement (P&A Agreement) with Republic Bank & Trust Company (Republic Bank) subject to various closing conditions, including the finalization of various operating agreements and receipt of certain required approvals (P&A Transaction). Prior to entering into the P&A Agreement, Republic Bank, which currently operates under a state bank charter and is regulated primarily by the Federal Deposit Insurance Corporation (FDIC), filed an application with the Office of the Comptroller of the Currency (OCC) for approval to convert to a national banking association. Approval and completion of this conversion were conditions to closing the P&A Transaction.
In October 2013, Republic Bank informed us that it had withdrawn its application for the conversion and its application for approval of the P&A Transaction, which was contingent upon the approval of the conversion. As a result, HRB Bank and Block Financial provided notice to Republic Bank of termination of the P&A Agreement.
We plan to continue offering financial services and products to our clients through HRB Bank during the 2014 tax season. We continue to explore alternatives for delivering financial products and services to our customers while

4
H&R Block Q2 FY2014 Form 10-Q


ceasing to be regulated as a savings and loan holding company (SLHC); however, we cannot predict the timing or the likelihood of ceasing to be regulated as an SLHC.
NOTE 3: 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 6.0 million shares for the three and six months ended October 31, 2013, and 8.9 million shares for the three and six months ended October 31, 2012, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
 
 
Three months ended
 
Six months ended
 
 
October 31,
 
October 31,
 
 
2013

 
2012

 
2013

 
2012

Net loss from continuing operations attributable to shareholders
 
$
(103,015
)
 
$
(101,199
)
 
$
(216,285
)
 
$
(206,849
)
Amounts allocated to participating securities
 
(92
)
 
(64
)
 
(154
)
 
(137
)
Net loss from continuing operations attributable to common shareholders
 
$
(103,107
)
 
$
(101,263
)
 
$
(216,439
)
 
$
(206,986
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
273,907

 
271,145

 
273,494

 
274,150

Potential dilutive shares
 

 

 

 

Dilutive weighted average common shares
 
273,907

 
271,145

 
273,494

 
274,150

 
 
 
 
 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.38
)
 
$
(0.37
)
 
$
(0.79
)
 
$
(0.76
)
Diluted
 
(0.38
)
 
(0.37
)
 
(0.79
)
 
(0.76
)
During the six months ended October 31, 2012, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million.
During the six months ended October 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $5.3 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the six months ended October 31, 2012, we acquired 0.1 million shares at an aggregate cost of $2.4 million for similar purposes.
During the six months ended October 31, 2013 and 2012, we issued 1.6 million and 0.5 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the six months ended October 31, 2013, we granted equity awards equivalent to approximately 0.8 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Nonvested units 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 $6.2 million and $10.8 million for the three and six months ended October 31, 2013, respectively, and $5.4 million and $7.8 million for the three and six months ended October 31, 2012, respectively. As of October 31, 2013, unrecognized compensation cost for stock options totaled $2.0 million, and for nonvested shares and units totaled $33.3 million.

H&R Block Q2 FY2014 Form 10-Q
5


NOTE 4: RECEIVABLES
Short-term receivables consist of the following:
(in 000s)
 
As of
 
October 31, 2013

 
October 31, 2012

 
April 30, 2013

Loans to franchisees
 
$
70,390

 
$
69,110

 
$
65,413

Receivables for tax preparation and related fees
 
35,927

 
34,083

 
49,356

Canadian CashBack receivables
 
2,036

 
3,863

 
47,658

Emerald Advance lines of credit
 
21,692

 
23,630

 
23,218

Royalties from franchisees
 
10,732

 
8,744

 
10,722

Credit cards
 
6,115

 

 
7,733

Other
 
37,778

 
27,842

 
53,134

 
 
184,670

 
167,272

 
257,234

Allowance for doubtful accounts
 
(52,969
)
 
(42,761
)
 
(50,399
)
 
 
$
131,701

 
$
124,511

 
$
206,835

 
 
 
 
 
 
 
The short-term portions of Emerald Advance lines of credit (EAs), loans made to franchisees, CashBack balances and credit card balances are included in receivables, while the long-term portions are included in other assets in the consolidated balance sheets. These amounts are as follows:
(in 000s)
 
 
 
EAs

 
Loans
to Franchisees

 
CashBack

 
Credit Cards

As of October 31, 2013:
 
 
 
 
 
 
 
 
Short-term
 
$
21,692

 
$
70,390

 
$
2,036

 
$
6,115

Long-term
 
6,161

 
108,874

 

 
13,603

 
 
$
27,853

 
$
179,264

 
$
2,036

 
$
19,718

As of October 31, 2012:
 
 
 
 
 
 
 
 
Short-term
 
$
23,630

 
$
69,110

 
$
3,863

 
$

Long-term
 
10,825

 
119,102

 

 

 
 
$
34,455

 
$
188,212

 
$
3,863

 
$

As of April 30, 2013:
 
 
 
 
 
 
 
 
Short-term
 
$
23,218

 
$
65,413

 
$
47,658

 
$
7,733

Long-term
 
9,819

 
103,047

 

 
15,538

 
 
$
33,037

 
$
168,460

 
$
47,658

 
$
23,271

 
 
 
 
 
 
 
 
 
EAs We review the credit quality of our EA receivables based on pools, which are segmented by the year of origination, with older years being deemed more unlikely to be repaid. Amounts as of October 31, 2013, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2013
 
$
7,817

2012
 
1,069

2011
 
1,987

2010 and prior
 
6,238

Revolving loans
 
10,742

 
 
$
27,853

 
 
 
As of October 31, 2013 and 2012 and April 30, 2013, $26.2 million, $30.3 million and $30.0 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.

6
H&R Block Q2 FY2014 Form 10-Q


Loans to Franchisees Loans made to franchisees as of October 31, 2013 and 2012 and April 30, 2013, consisted of $126.3 million, $136.9 million and $121.2 million, respectively, in term loans made primarily to finance the purchase of franchises and $53.0 million, $51.3 million and $47.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of October 31, 2013 and 2012 and April 30, 2013, loans with a principal amount of $0.1 million, $0.0 million and $0.1 million, respectively, were more than 30 days past due, however we had no loans to franchisees on non-accrual status.
Canadian CashBack Program During the tax season our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency for a fee (the CashBack program). Refunds advanced under the CashBack program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. CashBack amounts are generally received within 60 days of filing the client's return. In September of each fiscal year, any balances more than 90 days old are charged-off against the related allowance. As of October 31, 2013 and 2012 and April 30, 2013, $0.1 million, $0.4 million and $1.8 million of CashBack balances were more than 60 days old, respectively.
Credit Cards We utilize a four-tier underwriting approach at origination. Each of the four tiers, with Tier 4 representing the most risk, is comprised of a combination of FICO scores ranging from 521 to 680, generic and custom credit bureau based risk scores and client attributes. The criteria in the tiers are not subsequently updated. The population also includes certain clients which are “unscorable.” Although we utilize the borrower's credit score for underwriting, we do not consider the credit score to be a primary measure of credit quality, since it tends to be a lagging indicator. Credit card receivable balances as of October 31, 2013, by credit tier, are as follows:
(in 000s)
 
Tier 1
 
$
4,880

Tier 2
 
8,078

Tier 3
 
2,456

Tier 4
 
4,304

 
 
$
19,718

 
 
 
An aging of our credit card receivable balances as of October 31, 2013 is as follows:
(in 000s)
 
Current
 
$
13,069

Less than 30 days past due
 
1,411

30 - 59 days past due
 
932

60 - 89 days past due
 
847

90 days or more past due
 
3,459

 
 
$
19,718

 
 
 
As of October 31, 2013 and April 30, 2013, a total of $0.3 million and $2.1 million in unamortized deferred fees and costs were capitalized related to our credit card balances, respectively.
Long-Term Note Receivable We have a long-term note receivable in the amount of $54.0 million due from McGladrey & Pullen LLP (M&P) related to the sale of RSM McGladrey, Inc. (RSM) in November 2011. This note is unsecured and bears interest at a rate of 8.0%, with all principal and accrued interest due in May 2017. As of October 31, 2013, there is no allowance recorded related to this note. We continue to monitor publicly available information relevant to the financial condition of M&P to assess future collectibility. This note is included in other assets on the consolidated balance sheet, with a total of $62.8 million, $58.0 million and $60.4 million in principal and accrued interest recorded as of October 31, 2013 and 2012 and April 30, 2013, respectively.

H&R Block Q2 FY2014 Form 10-Q
7


Allowance for Doubtful Accounts Activity in the allowance for doubtful accounts for our short-term and long-term receivables for the six months ended October 31, 2013 and 2012 is as follows:
(in 000s)
 
 
 
EAs

 
Loans
to Franchisees

 
CashBack

 
Credit Cards

 
All Other

 
Total

Balances as of May 1, 2013
 
$
7,390

 
$

 
$
2,769

 
$
7,304

 
$
40,240

 
$
57,703

Provision
 

 

 
188

 
4,957

 
966

 
6,111

Charge-offs
 

 

 
(479
)
 
(6,225
)
 
(1,049
)
 
(7,753
)
Balances as of October 31, 2013
 
$
7,390

 
$

 
$
2,478

 
$
6,036

 
$
40,157

 
$
56,061

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of May 1, 2012
 
$
6,200

 
$

 
$
2,279

 
$

 
$
36,110

 
$
44,589

Provision
 
310

 

 
290

 

 
550

 
1,150

Charge-offs
 

 

 
(1,507
)
 

 
(1,471
)
 
(2,978
)
Balances as of October 31, 2012
 
$
6,510

 
$

 
$
1,062

 
$

 
$
35,189

 
$
42,761

 
 
 
 
 
 
 
 
 
 
 
 
 
There were no changes to our methodology for estimating our allowance for doubtful accounts during fiscal year 2014.
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
October 31, 2013
 
October 31, 2012
 
April 30, 2013
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
165,289

 
54
%
 
$
210,610

 
55
%
 
$
191,093

 
55
%
Fixed-rate loans
 
140,814

 
46
%
 
175,257

 
45
%
 
159,142

 
45
%
 
 
306,103

 
100
%
 
385,867

 
100
%
 
350,235

 
100
%
Unamortized deferred fees and costs
 
2,508

 
 
 
3,108

 
 
 
2,868

 
 
Less: Allowance for loan losses
 
(12,704
)
 
 
 
(18,125
)
 
 
 
(14,314
)
 
 
 
 
$
295,907

 
 
 
$
370,850

 
 
 
$
338,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 4.2% as of October 31, 2013, compared to 4.7% as of October 31, 2012 and 4.1% as of April 30, 2013.
Activity in the allowance for loan losses for the six months ended October 31, 2013 and 2012 is as follows:
(in 000s)
 
Six months ended October 31,
 
2013

 
2012

Balance at beginning of the period
 
$
14,314

 
$
26,540

Provision
 
7,224

 
6,750

Recoveries
 
2,409

 
2,291

Charge-offs
 
(11,243
)
 
(17,456
)
Balance at end of the period
 
$
12,704

 
$
18,125

 
 
 
 
 
During the first quarter of fiscal year 2014, we transferred $7.6 million of mortgage loans into the held-for-sale portfolio from the held-for-investment portfolio. At the time of the transfer, the amount by which cost exceeded fair value totaled $2.9 million. This write-down to fair value was recorded as a provision during the six months ended October 31, 2013 and subsequently charged-off. These loans were sold during the three months ended October 31, 2013.

8
H&R Block Q2 FY2014 Form 10-Q


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 a troubled debt restructuring (TDR), are evaluated individually. The balance of these loans and the related allowance is as follows:
(in 000s)
 
As of
 
October 31, 2013
 
October 31, 2012
 
April 30, 2013
 
 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

Pooled (less than 60 days past due)
 
$
178,497

 
$
5,523

 
$
229,761

 
$
6,892

 
$
207,319

 
$
5,628

Impaired:
 
 
 
 
 
 
 
 
 
 
 
 
Individually (TDRs)
 
47,011

 
4,598

 
63,602

 
5,972

 
55,061

 
4,924

Individually (60 days or more past due)
 
80,595

 
2,583

 
92,504

 
5,261

 
87,855

 
3,762

 
 
$
306,103

 
$
12,704

 
$
385,867

 
$
18,125

 
$
350,235

 
$
14,314

 
 
 
 
 
 
 
 
 
 
 
 
 
Detail of our mortgage loans held for investment and the related allowance as of October 31, 2013 is as follows:
(dollars in 000s)
 
 
 
Outstanding Principal Balance

 
Loan Loss Allowance
 
% 30+ Days
Past Due

 
 
 
Amount

 
% of Principal

 
Purchased from SCC
 
$
175,566

 
$
10,236

 
5.8
%
 
31.0
%
All other
 
130,537

 
2,468

 
1.9
%
 
8.0
%
 
 
$
306,103

 
$
12,704

 
4.2
%
 
21.2
%
 
 
 
 
 
 
 
 
 
Credit quality indicators as of October 31, 2013 include the following:
(in 000s)
 
Credit Quality Indicators
 
Purchased from SCC

 
All Other

 
Total Portfolio

Occupancy status:
 
 
 
 
 
 
Owner occupied
 
$
128,932

 
$
84,025

 
$
212,957

Non-owner occupied
 
46,634

 
46,512

 
93,146

 
 
$
175,566

 
$
130,537

 
$
306,103

Documentation level:
 
 
 
 
 
 
Full documentation
 
$
57,821

 
$
95,174

 
$
152,995

Limited documentation
 
5,744

 
13,412

 
19,156

Stated income
 
97,591

 
13,656

 
111,247

No documentation
 
14,410

 
8,295

 
22,705

 
 
$
175,566

 
$
130,537

 
$
306,103

Internal risk rating:
 
 
 
 
 
 
High
 
$
53,679

 
$

 
$
53,679

Medium
 
121,887

 

 
121,887

Low
 

 
130,537

 
130,537

 
 
$
175,566

 
$
130,537

 
$
306,103

 
 
 
 
 
 
 
Loans given our internal risk rating of “high” were originated by Sand Canyon Corporation, formerly known as Option One Mortgage Corporation, and its subsidiaries (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 obtained from parties other than SCC, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.

H&R Block Q2 FY2014 Form 10-Q
9


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 59% 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 October 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
 
$
14,794

 
$
627

 
$
56,107

 
$
71,528

 
$
104,038

 
$
175,566

All other
 
5,964

 
677

 
9,115

 
15,756

 
114,781

 
130,537

 
 
$
20,758

 
$
1,304

 
$
65,222

 
$
87,284

 
$
218,819

 
$
306,103

 
 
 
 
 
 
 
 
 
 
 
 
 
(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
 
October 31, 2013

 
October 31, 2012

 
April 30, 2013

Loans:
 
 
 
 
 
 
Purchased from SCC
 
$
67,641

 
$
75,414

 
$
70,327

Other
 
12,723

 
16,427

 
14,906

 
 
80,364

 
91,841

 
85,233

TDRs:
 
 
 
 
 
 
Purchased from SCC
 
3,832

 
3,776

 
3,719

Other
 
881

 
506

 
502

 
 
4,713

 
4,282

 
4,221

Total non-accrual loans
 
$
85,077

 
$
96,123

 
$
89,454

 
 
 
 
 
 
 
Information related to impaired loans is as follows:
(in 000s)
 
 
 
Balance
With Allowance

 
Balance
With No Allowance

 
Total
Impaired Loans

 
Related Allowance

As of October 31, 2013:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
30,100

 
$
77,052

 
$
107,152

 
$
5,762

Other
 
5,196

 
15,258

 
20,454

 
1,419

 
 
$
35,296

 
$
92,310

 
$
127,606

 
$
7,181

As of October 31, 2012:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
40,142

 
$
90,516

 
$
130,658

 
$
7,992

Other
 
7,951

 
17,497

 
25,448

 
3,241

 
 
$
48,093

 
$
108,013

 
$
156,106

 
$
11,233

As of April 30, 2013:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
33,791

 
$
84,592

 
$
118,383

 
$
6,573

Other
 
7,601

 
16,932

 
24,533

 
2,113

 
 
$
41,392

 
$
101,524

 
$
142,916

 
$
8,686

 
 
 
 
 
 
 
 
 

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