HR Block 2013 Annual Report Download - page 23

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16 H&R Block 2013 Form 10-K
The continued payment of dividends on our common stock and repurchases of our common stock
are dependent on a number of factors, and future payments and repurchases cannot be assured.
We need liquidity sufficient to fund payments of dividends on our common stock and repurchases of our common stock.
In addition, holders of our common stock are only entitled to receive such dividends as our Board of Directors may
declare out of funds legally available for such payments, and our Board of Directors may only authorize the Company
to repurchase shares of our common stock with funds legally available for such repurchases. The payment of future
dividends and future repurchases will depend upon our earnings, economic conditions, liquidity and capital requirements
and other factors, including our debt leverage. Accordingly, we cannot make any assurances that future dividends will
be paid, or future repurchases will be made, at levels comparable to our historical practices, if at all. Due to the seasonal
nature of our business, and the fact that our business is not asset-intensive, there may be periods of time during our
fiscal year in which the payment of dividends or stock repurchases may cause us to have a negative net worth under
GAAP, which, in turn, could create challenges in maintaining our credit ratings and our access to capital markets. See
additional discussion regarding our provision of notice to the Federal Reserve prior to paying dividends or repurchasing
shares in the risk factor related to the proposed Federal Reserve capital requirements.
Our businesses may be adversely affected by difficult economic conditions, in particular, high
unemployment levels.
Difficult economic conditions are frequently characterized by high unemployment levels and declining consumer and
business spending. These poor economic conditions may negatively affect demand and pricing for our services and
products. Higher unemployment levels, especially within client segments we serve, may result in clients no longer
being required to file tax returns, electing not 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%, 19% and 11%, respectively, of total mortgage loans held for investment at April 30, 2013. No
other state held more than 10% of loan balances. If adverse trends in the residential mortgage loan market continue,
particularly in geographic areas with a greater concentration of mortgage loans, we could incur additional loan loss
provisions.
Mortgage loans purchased from our affiliate, Sand Canyon Corporation, previously known as Option One Mortgage
Corporation (including its subsidiaries, collectively, SCC) represent 57% of total loans held for investment at April 30,
2013. These loans have experienced higher delinquency rates than other loans, and may expose us to greater risk of
credit loss.
Mortgage loans held for investment had a carrying value of $338.8 million and a fair value of $210.9 million at
April 30, 2013. 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.