HR Block 2015 Annual Report Download - page 26

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H&R Block, Inc. | 2015 Form 10-K 19
to file tax returns or clients seeking lower cost preparation and filing alternatives. Sustained levels of high
unemployment may negatively impact our ability to increase or retain tax preparation clients.
Economic conditions that negatively affect housing prices and the job market may result in deterioration in credit
quality of mortgage loans held for investment and other loans, and such deterioration could have a negative impact
on our business and profitability. The fair value of these mortgage loans is less than their carrying value and a
decision by us to no longer hold these loans for investment would result in a significant impairment.
The overall credit quality of mortgage loans held for investment is impacted by the strength of the U.S. economy and
local economic conditions, including residential housing prices. Economic trends that negatively affect housing prices
and the job market could result in deterioration in credit quality of our mortgage loan portfolio and a decline in the
value of associated collateral. Future interest rate resets could also lead to increased delinquencies in our mortgage
loans held for investment.
Mortgage loans held by us are secured by properties concentrated in the states of Florida, New York, and California,
which represented 19%, 23% and 11%, respectively, of total mortgage loans held for investment as of April 30, 2015.
No other state held more than 10% of loan balances. If adverse trends in the residential mortgage loan market were
to occur, particularly in geographic areas with a greater concentration of mortgage loans, we could incur loan loss
provisions.
Mortgage loans purchased from Sand Canyon Corporation, previously known as Option One Mortgage Corporation
(including its subsidiaries, collectively, SCC) represent 58% of total loans held for investment as of April 30, 2015.
Remaining loans held for investment were originated by a third-party bank and purchased by us. Loans we purchased
from SCC have experienced higher delinquency rates than other loans we purchased, and may expose us to greater
risk of credit loss.
Mortgage loans held for investment had a carrying value of $239 million and a fair value of $190 million as of April
30, 2015. Although we have no current intent to do so, if we decide to sell these mortgage loans in the future we
would incur an impairment loss for the difference between carrying value and fair value at the time of sale.
In addition to mortgage loans, we also extend secured and unsecured credit to other clients, including providing
EAs to our tax clients. We may incur significant losses on credit we extend, which in turn could reduce our profitability.
Our business depends on our strong reputation and the value of our brands.
Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing
and future services and products and is an important element in attracting new clients. In addition, our franchisees
may operate their businesses under our brands. Adverse publicity (whether or not justified) relating to events or
activities involving or attributed to us, our franchisees, employees, or agents or our services or products may tarnish
our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce
demand for our services and products and thus have an adverse effect on our future financial results, as well as require
additional resources to rebuild our reputation and restore the value of our brands.
Failure to protect our intellectual property rights may harm our competitive position and litigation to protect our
intellectual property rights or defend against third party allegations of infringement may be costly.
Despite our efforts to protect our intellectual property and proprietary information, we may be unable to do so
effectively in all cases. Competitors may misappropriate our trademarks, copyrights or other intellectual property
rights or duplicate our technology and products which may adversely affect our ability to compete with them. To the
extent that our intellectual property is not protected effectively by trademarks, copyrights, patents, or other means,
other parties with knowledge of our intellectual property, including former employees, may seek to exploit our
intellectual property for their own or others' advantage. In addition, third-parties may allege we are infringing on their
intellectual property rights, and we may face intellectual property challenges from other parties. We may not be
successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property
disputes and, in that event, we could lose significant revenues, incur significant license, royalty, or technology
development expenses, suffer harm to our reputation, or pay significant monetary damages.