HR Block 2014 Annual Report Download - page 26

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18 2014 Form 10-K | H&R Block, Inc.
provision of notice to the Federal Reserve prior to paying dividends or repurchasing shares in the risk factor related
to the 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 20%, 21% and 10%, respectively, of total mortgage loans held for investment as of April 30, 2014.
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 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, 2014.
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 $268.4 million and a fair value of $192.3 million as of
April 30, 2014. 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 attributed to us, our franchisees, employees or agents 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 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 through trademarks, patents or other means, other parties,
including former employees, with knowledge of our intellectual property may seek to exploit our intellectual property