HR Block 2011 Annual Report Download - page 55

reviewed individually and a specific loan loss allowance is recorded based on the fair value of the underlying
collateral.
We classify loans as non-accrual when full and timely collection of interest or principal becomes uncertain, or
when they are 90 days past due. Interest previously accrued, but not collected, is reversed against current interest
income when a loan is placed on non-accrual status. Accretion of deferred fees is discontinued for non-accrual
loans. Payments received on non-accrual loans are recognized as interest income when the loan is considered
collectible and applied to principal when it is doubtful that all contractual payments will be collected. Loans are
not placed back on accrual status until collection of principal and interest is reasonably assured as a result of the
borrower bringing the loan into compliance with the contractual terms of the loan. Prior to restoring a loan to
accrual status, management considers a borrower’s prospects for continuing future contractual payments.
From time to time, as part of our loss mitigation process, we may agree to modify the contractual terms of a
borrower’s loan. We have developed loan modification programs designed to help borrowers refinance adjustable-
rate mortgage loans prior to rate reset or who may otherwise have difficulty making their payments. In cases
where we modify a loan and in so doing grant a concession to a borrower experiencing financial difficulty, the
modification is considered a troubled debt restructuring (TDR). We may consider the borrower’s payment status
and history, the borrower’s ability to pay upon a rate reset on an adjustable-rate mortgage, the size of the payment
increase upon a rate reset, the period of time remaining prior to the rate reset and other relevant factors in
determining whether a borrower is experiencing financial difficulty. A borrower who is current may be deemed to
be experiencing financial difficulty in instances where the evidence suggests an inability to pay based on the
original terms of the loan after the interest rate reset and, in the absence of a modification, may default on the loan.
We evaluate whether the modification represents a concession we would not otherwise consider, such as a lower
interest rate than what a new borrower of similar credit risk would be offered. A loan modified in a troubled debt
restructuring, including a loan that was current at the time of modification, is placed on non-accrual status until we
determine future collection of principal and interest is reasonably assured, which generally requires the borrower
to demonstrate a period of performance according to the restructured terms. At the time of the modification, we
record impairment for TDR loans equal to the difference between the principal balance of the loan and the present
value of expected future cash flows discounted at the loan’s effective interest rate. However, if we later assess that
foreclosure of a modified loan is probable, we record impairment based on the estimated fair value of the
underlying collateral.
REAL ESTATE OWNED –Real estate owned (REO) includes foreclosed properties securing mortgage loans.
Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to REO. Subsequently, REO
is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based on independent
market prices or appraised values of the collateral. Subsequent holding period losses and losses arising from the
sale of REO are expensed as incurred. REO is included in prepaid expenses and other current assets in the
consolidated balance sheets.
INVESTMENTS –Investments include both available-for-sale marketable securities and investments
held-to-maturity. These investments are included in other assets in the consolidated balance sheets.
Available-for-Sale. Marketable securities we hold are classified as available-for-sale (AFS) and are reported at
fair value. Unrealized gains and losses are calculated using the specific identification method and reported, net of
applicable taxes, as a component of accumulated other comprehensive income. Realized gains and losses on the
sale of these securities are determined using the specific identification method.
We monitor our AFS investment portfolio for impairment and consider many factors in determining whether the
impairment is deemed to be other-than-temporary. These factors include, but are not limited to, the length of time
the security has had a market value less than the cost basis, the severity of loss, our intent to sell, including
regulatory or contractual requirements to sell, recent events specific to the issuer or industry, external credit
ratings and recent downgrades in such ratings.
For investments in mortgage-backed securities, amortization of premiums and accretion of discounts are
recognized in interest income using the interest method, adjusted for anticipated prepayments where applicable.
We update our estimates of expected cash flows periodically and recognize changes in calculated effective yields
as appropriate.
Held-to-Maturity. Our investment in the stock of the Federal Home Loan Bank (FHLB) is carried at cost, as it is
a restricted security, which is required to be maintained by HRB Bank for borrowing availability. The cost of the
stock represents its redemption value, as there is no ready market value.
PROPERTYAND EQUIPMENT –Buildings and equipment are initially recorded at cost and are depreciated over
the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the term of the respective lease or the estimated useful life,
H&R BLOCK 2011 Form 10K 43