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H&R BLOCK INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 19, 2014

Our subsidiaries provide tax preparation and retail banking services. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices or virtually via the internet) or prepared and filed by our clients through H&R Block tax software, either online or using our software or mobile applications. RECENT DEVELOPMENTS In April 2014, our subsidiaries, HRB Bank and Block Financial, entered into a P&A Agreement with BofI. Pursuant to the P&A Agreement, HRB Bank will sell certain assets and assign certain liabilities, including all of HRB Bank's deposit liabilities, to BofI, subject to various closing conditions, including the receipt of certain required approvals, entry into certain additional agreements, and the fulfillment of various other customary conditions. See Item 1, under "Business," and below under "Financial Condition - HRB Bank" for additional information. The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval. We cannot be certain when or if the conditions to and other components of the P&A Transaction will be satisfied, or whether the P&A Transaction will be completed. In addition, there may be changes to the terms and conditions of the P&A Agreement and other contemplated agreements as part of the regulatory approval process. In connection with the additional agreements being entered into upon the closing of the P&A Transaction, BofI will offer H&R Block-branded financial products distributed by the Company to the Company's clients. An operating subsidiary of the Company will provide certain marketing, servicing and operational support for such financial services and products. We expect the net, ongoing annual financial impact of these agreements to be dilutive by approximately $0.07 to $0.09 per share beginning in fiscal year 2015, based on current fully diluted shares outstanding. Results will vary based upon the volume of financial services products sold and the actual closing date.



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OVERVIEW

A summary of our fiscal year 2014 results is as follows: ? Revenues for the fiscal year were just over $3.0 billion, up 4.1% from the

prior year, driven by improved return mix and other pricing changes in

retail locations, digital tax software product enhancements and increases in

paid federal returns, and increased financial product revenues.

? Pretax earnings grew $65.1 million, or 9.3%.

? Diluted earnings per share from continuing operations increased 7.1% from

the prior year to $1.81. ? Adjusted earnings from continuing operations before interest, taxes,



depreciation and amortization (EBITDA) increased $48.4 million, or 5.5%, to

$932.6 million. See "Non-GAAP Financial Information" at the end of this item

for a reconciliation of non-GAAP measures.

Consolidated Results of Operations Data (in 000s, except per share amounts) Year ended April 30, 2014 2013 2012 REVENUES: Tax Services $ 2,999,460$ 2,877,967$ 2,862,378 Corporate and eliminations 24,835 27,976 31,393 $ 3,024,295$ 2,905,943$ 2,893,771 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES: Tax Services $ 866,367 $ 821,143 $ 704,002 Corporate and eliminations (99,251 ) (119,132 ) (127,932 ) 767,116 702,011 576,070 Income taxes 267,019 236,853 230,102 Net income from continuing operations 500,097 465,158 345,968 Net loss from discontinued operations (24,940 ) (31,210 ) (80,036 ) Net income $ 475,157 $ 433,948 $ 265,932 BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ 1.82 $ 1.70 $ 1.16 Discontinued operations (0.09 ) (0.11 ) (0.27 ) Consolidated $ 1.73 $ 1.59 $ 0.89 DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ 1.81 $ 1.69 $ 1.16 Discontinued operations (0.09 ) (0.11 ) (0.27 ) Consolidated $ 1.72 $ 1.58 $ 0.89 EBITDA FROM CONTINUING OPERATIONS (1) $ 940,108 $ 874,375 $ 757,316 EBITDA FROM CONTINUING OPERATIONS - ADJUSTED (1) 932,606 884,245 807,539 (1) See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.



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RESULTS OF OPERATIONS TAX SERVICES This segment primarily consists of our assisted and DIY income tax preparation offerings - in-person, online, software and mobile applications - including tax operations primarily in the U.S. and its territories, Canada, and Australia. This segment also includes the activities of HRB Bank that primarily support our U.S. tax preparation business. Tax Services - Operating Statistics Year ended April 30, 2014 2013 2012 TAX RETURNS PREPARED : (in 000s) United States: Company-owned operations 8,342 8,907 9,207 Franchise operations 5,268 5,598 5,693 Total assisted returns 13,610 14,505 14,900 Desktop (1) 2,026 2,055 2,124 Online (1) 4,389 4,356 3,932 Free File Alliance (1) 767 663 721 Total tax software (1) 7,182 7,074 6,777 Total U.S. returns 20,792 21,579 21,677 International operations: Canada (2) 2,642 2,517 2,545 Australia 746 741 671 Total international operations 3,388 3,258 3,216 Tax returns prepared worldwide 24,180 24,837 24,893 TAX OFFICES (at the peak of the tax season): U.S. offices: Company-owned offices 6,012 5,734 5,787 Company-owned shared locations (3) 74 477 734 Total company-owned offices 6,086 6,211 6,521 Franchise offices 4,266 4,384 4,296 Franchise shared locations (3) 26 123 175 Total franchise offices 4,292 4,507 4,471 Total U.S. offices 10,378 10,718 10,992 International offices: Canada 1,179 1,139 1,223 Australia 409 410 404 Total international offices 1,588 1,549 1,627 Tax offices worldwide 11,966 12,267 12,619



(1) Tax software return counts for fiscal years 2013 and 2012 have been restated

to primarily reflect accepted e-files. No changes were made to previously

reported assisted return counts.

(2) In fiscal year 2014, the end of the Canadian tax season was extended from

April 30 to May 5, 2014. Tax returns prepared in Canada in fiscal year 2014

includes approximately 141 thousand returns in both company-owned and

franchise offices which were accepted by the client after April 30. The

revenues related to these returns will be recognized in fiscal year 2015.

(3) Shared locations included offices located within Walmart and Sears stores in

fiscal years 2013 and 2012.

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Tax Services - Financial Results (dollars in 000s) Year ended April 30, 2014 2013 2012 Tax preparation fees: U.S. $ 1,794,043$ 1,712,319$ 1,749,032 International 200,152 220,870 205,466 1,994,195 1,933,189 1,954,498 Royalties 316,153 318,386 308,561 Fees from refund anticipation checks 181,394 158,176 132,361 Fees from Emerald Card 103,730 98,896 104,143 Fees from Peace of MindŽ guarantees 89,685 71,355 75,603 Interest and fee income on Emerald Advance 56,877 59,657 59,660 Other 257,426 238,308 227,552 Total revenues 2,999,460 2,877,967 2,862,378 Compensation and benefits: Field wages 702,312 654,794 691,680 Other wages 169,583 150,306 150,908 Benefits and other compensation 158,203 148,492 183,037 1,030,098 953,592 1,025,625 Occupancy and equipment 363,590 354,430 381,572 Marketing and advertising 237,214 270,240 278,231 Depreciation and amortization 115,488 92,004 88,836 Bad debt 71,733 77,402 68,082 Supplies 36,454 40,131 44,236 Impairment of goodwill and intangible assets 277 3,581 11,389 Other, net 278,239 265,444 260,405 2,133,093 2,056,824 2,158,376 Pretax income $ 866,367$ 821,143$ 704,002 Pretax margin 28.9 % 28.5 % 24.6 % FISCAL 2014 COMPARED TO FISCAL 2013 - Tax Services' revenues increased $121.5 million, or 4.2%, compared to the prior year primarily due to an increase in U.S. tax preparation fees of $81.7 million, or 4.8%. Elimination in virtually all markets of a prior year offer to prepare certain 1040EZ tax returns at no charge (resulting in a one-time increase of over $30 million), a shift to more complex returns, and other pricing changes resulted in higher revenues. Other pricing changes primarily related to targeted changes to our pricing strategy for a limited number of clients who were receiving significant discounts and beginning to charge for tax return extensions. This increase was partially offset by a 6.3% decline in returns prepared driven primarily by our decision to discontinue the free 1040EZ offer. International tax preparation fees decreased $20.7 million, or 9.4%, due primarily to unfavorable exchange rates and extension of the Canadian tax season to May 5th. Fees earned on RACs increased $23.2 million, or 14.7%, primarily due to elimination of certain price discounts and higher volumes for our online clients. Revenue from fees for our POM guarantees is initially deferred, and recognized over the term of the guarantee based on actual claims paid in relation to projected claims. Revenue increased in fiscal year 2014 primarily due to improving claim experience and lower estimates of projected claims. Other revenue increased $19.1 million, or 8.0%, primarily due to an increase in online tax preparation revenues. Total expenses increased $76.3 million, or 3.7%, from the prior year primarily due to increases in compensation and benefits, depreciation and amortization, and partially offset by a planned reduction in marketing and advertising spend of $33.0 million.



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Total compensation and benefits increased $76.5 million primarily due to higher variable field wages resulting from increased revenues and increases to in-office customer service support staff. Occupancy and equipment expenses increased $9.2 million, or 2.6%, primarily due to a 4.8% increase in company-owned offices. Marketing and advertising expensed declined $33.0 million due to a planned reduction in national advertising spend. Depreciation and amortization expense increased $23.5 million, or 25.5%, primarily due to office upgrades and competitor acquisitions. Other expenses increased $12.8 million, or 4.8%, primarily due to foreign currency losses in the current year. Pretax income for fiscal year 2014 increased $45.2 million, or 5.5%, over the prior year. The pretax margin for the segment increased to 28.9% in fiscal year 2014 from 28.5% in fiscal year 2013. FISCAL 2013 COMPARED TO FISCAL 2012 - Tax Services' revenues increased $15.6 million, or 0.5%, compared to fiscal year 2012. U.S. tax preparation fees decreased $36.7 million, or 2.1% primarily due to a 3.3% decline in returns prepared, partially offset by a 1.2% increase in our average charge. Total assisted tax returns processed by the IRS in the 2013 tax season fell 1.0%. International tax preparation fees increased $15.4 million, or 7.5%, due primarily to a 10.4% increase in Australian tax returns prepared, partially offset by unfavorable exchange rates. Royalties increased $9.8 million, or 3.2%, primarily due to a 2.7% increase in the average charge, partially offset by a 1.7% decrease in returns prepared in franchise offices. Fees earned on RACs increased $25.8 million, or 19.5%, primarily due to our decision to discontinue a promotion for free RACs offered last year, partially offset by lower RAC volumes. Emerald Card fees decreased $5.2 million, or 5.0%, primarily due to lower transaction volumes resulting from a decrease of approximately 14% in prepaid debit cards issued. Other revenue increased $10.8 million, or 4.7%, primarily due to an increase in online tax preparation revenues. Total expenses decreased $101.6 million, or 4.7%, from fiscal year 2012. Total compensation and benefits decreased $72.0 million primarily due to lower field wages in fiscal year 2013 resulting from workforce reductions and severance costs of $31.1 million recorded in fiscal year 2012. Occupancy and equipment expenses decreased $27.1 million primarily due to a 4.8% reduction in company-owned offices and other cost-saving initiatives. Bad debt expense increased $9.3 million, or 13.7%, primarily due to credit losses associated with the initial offering of credit cards to our clients. Other expenses increased $5.0 million, or 1.9%, primarily due to lower gains on the sale of tax offices, which declined $15.3 million, partially offset by a reduction in litigation expenses in fiscal year 2013. Pretax income for fiscal year 2013 increased $117.1 million, or 16.6%, over fiscal year 2012. The pretax margin for the segment increased to 28.5% from 24.6% in fiscal year 2012. CORPORATE AND ELIMINATIONS Corporate operating results include net interest income and gains or losses relating to mortgage loans held for investment and residual interests in securitizations, interest expense on borrowings, other corporate expenses, and eliminations of intercompany activities. Corporate - Operating Results (in 000s) Year ended April 30, 2014 2013 2012 Total revenues $ 24,835$ 27,976$ 31,393 Interest expense 53,611 73,649 83,658 Compensation and benefits 36,302 29,555 23,487 Other, net 34,173 43,904 52,180 124,086 147,108 159,325 Pretax loss $ (99,251 )$ (119,132 )$ (127,932 )



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FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013 - Interest expense declined $20.0 million, or 27.2%, due to lower interest rates on our long-term debt, coupled with lower principal balances outstanding. Other expenses decreased $9.7 million, or 22.2%, primarily due to a gain of $18.3 million recognized on the sale of residual interests in mortgage securitizations. FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012 - Interest expense declined $10.0 million, or 12.0%, due to lower interest rates on our Senior Notes, coupled with lower principal balances outstanding. Other expenses decreased $8.3 million, or 15.9%, primarily due to a $10.8 million decline in our provision for loan losses, partially offset by the $5.8 million loss on extinguishment of debt we incurred on the redemption of our $600.0 million Senior Notes. DISCONTINUED OPERATIONS Discontinued operations include our previously reported Business Services segment and discontinued mortgage operations. FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013 - The net loss from our discontinued operations totaled $24.9 million for the current year, compared to a net loss of $31.2 million in the prior year. Pretax losses of mortgage operations totaled $38.5 million, compared to $52.1 million in the prior year, and resulted primarily from incremental loss provisions related to SCC's estimated contingent losses for representation and warranty claims of $25.0 million and $40.0 million for fiscal years 2014 and 2013, respectively. FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012 - The net loss from our discontinued operations totaled $31.2 million for fiscal year 2013, compared to a net loss of $80.0 million in fiscal year 2012. Fiscal year 2012 losses included a $99.7 million pretax goodwill impairment related to the sales of RSM McGladrey, Inc. (RSM) and McGladrey Capital Markets LLC (MCM), as well as operating income of $14.4 million earned by those businesses prior to the sale. Pretax losses of mortgage operations totaled $52.1 million for fiscal year 2013 and resulted primarily from incremental loss provisions of $40.0 million related to SCC's estimated contingent losses for representation and warranty claims. Pretax losses of mortgage operations totaled $59.7 million in fiscal year 2012 and resulted primarily from loss provisions relating to representation and warranty claims totaling $20.0 million and settlement charges totaling $28.0 million. CONTINGENT LOSSES - SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and warranty claims of $183.8 million. The estimate of accrued loss is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors, mentioned in "Critical Accounting Estimates" below. Changes in any one of these factors could significantly impact the estimate. Losses may also be incurred with respect to various indemnification claims by underwriters and depositors in securitization transactions in which SCC participated. SCC has not concluded that a loss is probable or reasonably estimable related to these indemnification claims, therefore there is no accrued liability for these contingent losses as of April 30, 2014. See additional discussion in Item 1A, "Risk Factors," "Critical Accounting Estimates" below and in Item 8, note 18 to the consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES We consider the estimates discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific methods and assumptions for these critical accounting estimates are described in the following paragraphs. We have reviewed and discussed each of these estimates with the Audit Committee of our Board of Directors. For all of these estimates, we caution that future events rarely develop precisely as forecasted and estimates routinely require adjustment and may require material adjustment. See Item 8, note 1 to the consolidated financial statements, which discusses accounting policies we have selected when there are acceptable alternatives and new or proposed accounting standards that may affect our financial reporting in the future.



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LOSSES ARISING FROM REPRESENTATIONS AND WARRANTIES - Nature of Estimates Required. SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subject to significant management judgment, and estimates may vary significantly period to period. Assumptions and Approach Used. SCC has entered into tolling agreements with the counterparties that initiated the majority of claims received by SCC. Beginning in the fourth quarter of fiscal year 2013 and continuing in fiscal year 2014, SCC has been engaged in discussions with these counterparties regarding the bulk settlement of previously denied and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the representation and warranty and other claims that are the subject of these discussions. In the event that current efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result. SCC will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss estimate. SCC's loss estimate for representation and warranty claims is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors mentioned below. These factors include the terms of prior bulk settlements, the terms expected to result from ongoing bulk settlement discussions, and an assessment of, among other things, historical claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, the potential pro-rata realization of the claims as compared to all claims and other relevant facts and circumstances when developing its estimate of probable loss. SCC believes that the most significant of these factors are the terms of prior bulk settlements and the terms expected to result from ongoing bulk settlement discussions, which have been primarily influenced by the anticipated pro-rata realization of the claims of particular counterparties as compared to the anticipated realization if all claims and litigation were resolved together with payment of SCC's related administration and legal expense. Changes in any one of the factors mentioned above could significantly impact the estimate. Sensitivity of Estimate to Change. It is reasonably possible that future representation and warranty losses may vary from the amounts accrued for these exposures. SCC currently estimates that the range of reasonably possible loss could be up to approximately $16 million in excess of amounts accrued. This estimated range is based on the best information currently available, significant management judgment and a number of factors that are subject to change, including developments in case law and the factors listed above in this Item 7. The actual loss that may be incurred could differ materially from our accrual or the estimate of reasonably possible losses. SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and warranty claims of $183.8 million. SCC accrued incremental loss provisions of $25 million in fiscal year 2014 and $40 million in fiscal year 2013. If future losses are in excess of SCC's accrued liability, those losses could have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows, as SCC's financial condition, operating results and cash flows are included in our consolidated financial statements. The accrued liability does not include potential losses related to litigation matters discussed in Item 1A, "Risk Factors" and in Item 8, note 17 to the consolidated financial statements. Also see Item 8, note 18 to the consolidated financial statements. LITIGATION AND RELATED CONTINGENCIES - Nature of Estimates Required. We have accrued liabilities related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be reasonably estimated. Assessing the likely outcome of pending or threatened litigation, including the amount of potential loss, if any, is highly subjective. Assumptions and Approach Used. We are subject to pending or threatened litigation claims and indemnification claims, which are described in Item 8, note 17 to the consolidated financial statements. It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required to be accrued, if any, for these contingencies is made



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after analysis of each known issue and an analysis of historical experience. In cases where we have concluded that a loss is only reasonably possible or remote, or is not reasonably estimable, no liability is accrued. Sensitivity of Estimate to Change. It is reasonably possible that future litigation and related contingent losses may vary from the amounts accrued. For some matters where a liability has not been accrued, we are able to estimate a reasonably possible range of loss. Those matters for which an estimate is not reasonably possible are not included within this estimated range. Therefore, this estimated range of reasonably possible loss represents what we believe to be an estimate of reasonably possible loss only for certain matters meeting these criteria. It does not represent our maximum loss exposure. For those matters, and for matters where a liability has been accrued, as of April 30, 2014, we believe the aggregate range of reasonably possible losses in excess of amounts accrued is not material. However, our judgments on whether a loss is probable, reasonably possible or remote and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement discussions and related activity, predicting the outcome of class certification actions and numerous other uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of damages sought in those claims, actual losses in the future may significantly differ from our current estimates. INCOME TAXES - UNCERTAIN TAX POSITIONS - Nature of Estimates Required. The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments, including assessments of interest or penalties. We have accrued a liability for uncertain tax positions that reflects our judgment as to the ultimate resolution of the applicable issues if subject to judicial review or other settlement. Assumptions and Approach Used. We evaluate each uncertain tax position based on its technical merits. If we determine it is more likely than not a tax position will be sustained based on its technical merits, we record the impact of the position in our consolidated financial statements at the largest amount that is greater than fifty percent likely of being realized upon ultimate settlement. We do not record a tax benefit for tax positions where we have concluded it is not more likely than not to be sustained. Differences between a tax position taken or expected to be taken in our tax returns and the amount of benefit recognized and measured in the financial statements result in unrecognized tax benefits, which are recorded in the balance sheet as either a liability for unrecognized tax benefits or reductions to recorded tax assets, as applicable. Sensitivity of Estimate to Change. Our assessment of the technical merits and measurement of tax benefits associated with uncertain tax positions is subject to a high degree of judgment and estimation. Actual results may differ from our current judgments due to a variety of factors, including changes in law, interpretations of law by taxing authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate on a quarterly basis. As of April 30, 2014, we accrued liabilities for unrecognized tax benefits on uncertain tax positions of approximately $111 million. Of the total gross unrecognized tax benefit as of April 30, 2014, approximately $74 million would impact our effective tax rate if ultimately recognized. INCOME TAXES - VALUATION OF DEFERRED TAX ASSETS - Nature of Estimates Required. We account for income taxes under the asset and liability method, which requires us to record deferred income tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying value of existing assets and liabilities and their respective tax basis. Deferred taxes are determined separately within each tax jurisdiction based on provisions of enacted tax law. We record a valuation allowance to reduce our deferred tax assets to the estimated amount that we believe is more likely than not to be realized. Determination of a valuation allowance for deferred tax assets requires that we



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make judgments about future matters that are not certain, including projections of future taxable income and evaluating potential tax-planning strategies. Assumptions and Approach Used. Our deferred tax assets include tax loss carry-forwards, and have in the past included capital loss carry-forwards, which in some cases have been reduced by a valuation allowance. We have considered taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies in determining the need for a valuation allowance and the estimated amount of these deferred tax assets that will more likely than not be realized. Sensitivity of Estimate to Change. To the extent that actual results differ from our current assumptions, valuation allowances for deferred tax assets will increase or decrease. In the event we determine that we could not realize all or part of our deferred tax assets in the future, an adjustment would be charged to earnings in the period in which we make such determination. Likewise, if we later determine it is more likely than not that we could realize the deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. As of April 30, 2014, valuation allowances for our deferred tax assets totaled $19 million. As a result of changes in deferred tax valuation allowances, our effective tax rate increased 1.5% in fiscal year 2014 and decreased 1.0% in fiscal year 2013. NEW ACCOUNTING PRONOUNCEMENTS See Item 8, note 1 to the consolidated financial statements for a discussion of recently issued accounting pronouncements. FINANCIAL CONDITION These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Item 8. CAPITAL RESOURCES AND LIQUIDITY - OVERVIEW - Our primary sources of capital and liquidity include cash from operations (including changes in working capital) and issuances of debt. We use capital primarily to fund working capital, service and repay debt, pay dividends, repurchase shares of our common stock, and acquire businesses. Our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the period from February through April. Therefore, we require the use of cash to fund operating losses from May through January, and typically rely on available cash balances from the prior tax season and short-term borrowings to meet our off-season liquidity needs. Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under the 2012 CLOC and the issuance of commercial paper, we believe that, in the absence of any unexpected developments, our existing sources of capital as of April 30, 2014 are sufficient to meet our operating needs. DISCUSSION OF CONSOLIDATED STATEMENTS OF CASH FLOWS - The following table summarizes our statements of cash flows for fiscal years 2014, 2013 and 2012. See Item 8 for the complete consolidated statements of cash flows for these periods. (in 000s) Year ended April 30, 2014 2013 2012 Net cash provided by (used in): Operating activities $ 809,581$ 497,108$ 362,049 Investing activities 10,690 (110,937 ) 351,867 Financing activities (364,930 ) (584,541 ) (445,062 ) Effects of exchange rate changes on cash (17,618 ) 1,620 (2,364 ) Net change in cash and cash equivalents $ 437,723$ (196,750 )$ 266,490



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Cash from Operating Activities. Cash provided by operations, which consists primarily of cash received from customers, increased $312.5 million from fiscal year 2013. The increase from the prior year was primarily due to higher net income and changes in working capital. Cash from Investing Activities. Cash from investing activities increased $121.6 million primarily due to a decline in purchases of available-for-sale (AFS) securities, and proceeds received in fiscal year 2014 totaling $64.9 million from full repayment of principal and accrued interest outstanding on notes receivable in connection with the sale of RSM McGladrey in fiscal year 2012. We had proceeds in fiscal year 2013 totaling $81.1 million from liquidation of certain company-owned life insurance policies. Cash from Financing Activities. Cash used in financing activities decreased $219.6 million primarily due to a reduction in stock repurchase and retirement activities. This was partially offset by cash used to fund declining customer deposit balances. CASH REQUIREMENTS - Dividends and Share Repurchase. Returning capital to shareholders in the form of dividends and the repurchase of outstanding shares has historically been a significant component of our capital allocation plan. We have consistently paid quarterly dividends. Dividends paid totaled $219.0 million, $217.2 million and $208.8 million in fiscal years 2014, 2013 and 2012, respectively. Although we have historically paid dividends and plan to continue to do so, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends. Although we completed no open-market repurchases of outstanding shares of our common stock in fiscal year 2014, we did repurchase 21.3 million shares at a cost of $315 million in fiscal year 2013, and 14.6 million shares at a cost of $200.0 million in fiscal year 2012. We currently have Board of Directors' authorization to purchase up to $2.0 billion of our common stock through June 2015. There was $857.5 million remaining under this authorization as of April 30, 2014. Although we have historically from time to time repurchased common stock, there can be no assurances that circumstances will allow us to continue to repurchase common stock in the future. As long as we remain subject to regulatory supervision of the Federal Reserve, our share repurchase program will be closely supervised and we will likely be restricted from repurchasing outstanding shares. HRB Bank. In April 2014, we entered into the P&A Agreement with BofI. The P&A Agreement is subject to various closing conditions, including the receipt of certain required approvals, entry into certain additional agreements, and the fulfillment of various other customary conditions. If closing conditions (including regulatory approvals) are satisfied, we will complete a closing of the P&A Transaction, including the sale of certain assets and transfer of certain liabilities (principally deposit liabilities) to BofI. Due to the seasonality of our business, the timing of any closing will impact the amount deposit liabilities transferred. If a closing had occurred as of April 30, 2014, we would have made a cash payment to BofI for the difference in the carrying value of assets sold and the carrying value of liabilities transferred of approximately $745 million. The amount of the cash payment made at closing will primarily be equal to the carrying value of the liabilities to be transferred since the carrying value of the assets to be transferred is immaterial. Actual amounts at closing will differ from amounts as of April 30, 2014. We expect to fund any closing date cash payment due to BofI through liquidation of our AFS securities (carrying value of $423 million at April 30, 2014), with any remaining balance expected to be funded through available cash balances. As a result of our intent to liquidate our AFS securities, we recorded an other-than-temporary impairment in our fourth quarter of fiscal year 2014 of $12.4 million. See additional discussion in Item 1, under "Business," and in Item 8, note 2 to the consolidated financial statements. See additional discussion of regulatory and capital requirements of HRB Bank in Item 1, "Regulation and Supervision - Bank and Holding Companies," and Item 1A, "Risk Factors." Capital Investment. Our business is not capital intensive. Capital expenditures totaled $147.0 million and $113.2 million in fiscal years 2014 and 2013, respectively. Our capital expenditures relate primarily to recurring improvements to retail offices, as well as investments in computers, software and related assets. We expended net cash totaling $68.4 million and $20.7 million in fiscal years 2014 and 2013 in connection with acquired businesses. We routinely



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acquire competitor tax businesses and franchisees, and recurring capital allocated to acquisitions consists primarily of this activity. In fiscal year 2014, we also acquired the assets, primarily purchased technology, of a business for $30.3 million. FINANCING RESOURCES - Our 2012 CLOC has capacity up to $1.5 billion, and is scheduled to expire in August 2017. See additional discussion, including a description of related covenants, in Item 8, note 10 to the consolidated financial statements. While we use commercial paper borrowings to fund our seasonal working capital needs, we had no commercial paper borrowings outstanding as of April 30, 2014 or 2013. Our commercial paper borrowings peaked at $195.0 million in February 2014. During fiscal year 2013, we issued $500.0 million in 5.50% Senior Notes, the proceeds of which, together with cash balances on hand, were used to redeem $600.0 million of our 7.875% Senior Notes that were due to mature in January 2013. We also have $400.0 million in 5.125% Senior Notes which are due in October 2014. The following table provides ratings for debt issued by Block Financial as of April 30, 2014 and 2013: As of April 30, 2014 April 30, 2013 Short-term Long-term Outlook Short-term Long-term Outlook Moody's P-2 Baa2 Stable P-2 Baa2 Negative S&P A-2 BBB Negative A-2 BBB Negative CASH AND INVESTMENT SECURITIES - As of April 30, 2014, we held cash and cash equivalents of $2.2 billion, including $609.1 million held by HRB Bank and $119.6 million held by our foreign subsidiaries. Dividends of cash balances held by HRB Bank would be subject to regulatory approval and are therefore not available for general corporate purposes. As of April 30, 2014, we also held investments, primarily mortgage backed securities, with a carrying value of $427.8 million which we classified as available for sale. As discussed above, it is our intent (subject to market conditions) to liquidate the majority of these securities in connection with a closing of the P&A Transaction. Foreign Operations. Seasonal borrowing needs of our Canadian operations are typically funded by our U.S. operations. To mitigate foreign currency exchange rate risk, in fiscal years 2014 and 2012 we entered into foreign exchange forward contracts, although we did not enter into any such contracts in fiscal year 2013. There were no forward contracts outstanding as of April 30, 2014. As of April 30, 2014, our Canadian operations had approximately $52 million of U.S. dollar denominated borrowings owed to various U.S. subsidiaries. These borrowings may be repaid in full or in part at any time. Non-borrowed funds would have to be repatriated to be available to fund domestic operations, and in certain circumstances this would trigger additional income taxes on those amounts. We do not currently intend to repatriate any non-borrowed funds held by our foreign subsidiaries. The impact of changes in foreign exchange rates during the period on our international cash balances resulted in a decrease of $17.6 million during fiscal year 2014 compared to an increase of $1.6 million and a decrease of $2.4 million in fiscal years 2013 and 2012, respectively. This change resulted primarily from a decline in Canadian exchange rates.



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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - A summary of our obligations to make future payments as of April 30, 2014, is as follows:

(in 000s) Less Than Total 1 Year 1 - 3 Years 4 - 5 Years After 5 Years Long-term debt (including interest) $ 1,154,786$ 437,632$ 55,000$ 55,000$ 607,154 Customer deposits (including interest) 771,088 770,567 175 346 - Contingent acquisition payments 9,206 8,016 1,190 - - Capital lease obligations 8,980 755 1,616 2,007 4,602 Operating leases 423,630 183,701 189,824 44,939 5,166 Total contractual cash obligations $ 2,367,690$ 1,400,671$ 247,805$ 102,292$ 616,922 The table above does not reflect unrecognized tax benefits of approximately $111 million due to the high degree of uncertainty regarding the future cash flows associated with these amounts. See discussion of contractual obligations and commitments in Item 8, within the notes to the consolidated financial statements. REGULATORY ENVIRONMENT - See discussion in Item 1, "Regulation and Supervision - Bank and Holding Companies," and in Item 1A, "Risk Factors," for additional information on regulatory capital requirements for SLHCs, including the new capital requirements for SLHCs published by the Federal Reserve in July 2013. The federal government, various state, local, provincial and foreign governments, and some self-regulatory organizations have enacted statutes and ordinances, or adopted rules and regulations, regulating aspects of our business. These aspects include, but are not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the offering of RACs, loan originations and assistance in loan originations, mortgage lending, privacy, consumer protection, franchising, sales methods and banking. We determine the applicability of such statutes, ordinances, rules and regulations (collectively, Laws) and work to comply with those Laws that are applicable to us or our services or products. From time to time in the ordinary course of business, we receive inquiries from governmental and self-regulatory agencies regarding the applicability of Laws to our services and products. In response to past inquiries, we have demonstrated that we comply with such Laws, convinced the authorities that such Laws were not applicable or that compliance already exists, or modified our activities in the applicable jurisdiction to avoid the application of all or certain parts of such Laws. We believe the past resolution of such inquiries and our ongoing compliance with Laws has not had a material effect on our consolidated financial statements. We cannot predict what effect future Laws, changes in interpretations of existing Laws or the results of future regulatory inquiries with respect to the applicability of Laws may have on our consolidated financial position, results of operations and cash flows. See additional discussion of legal matters in Item 8, note 17 to the consolidated financial statements. NON-GAAP FINANCIAL INFORMATION Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures for other companies. We consider non-GAAP financial measures to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of our core operating performance. The following are descriptions of adjustments we make for our non-GAAP financial measures: ? We exclude losses from settlements and estimated contingent losses from



litigation and favorable reserve adjustments. This does not include legal

defense costs. ? We exclude non-cash charges to adjust the carrying values of goodwill, intangible assets, other long-lived assets and investments to their estimated fair values.



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? We exclude severance and other restructuring charges in connection with the

termination of personnel, closure of offices and related costs. ? We exclude the gains and losses on business dispositions, including investment banking, legal and accounting fees from both business dispositions and acquisitions.



? We exclude the gains and losses on extinguishment of debt.

We may consider whether other significant items that arise in the future should also be excluded from our non-GAAP financial measures. We measure the performance of our business using a variety of metrics, including EBITDA, adjusted EBITDA and adjusted pretax income of continuing operations. Adjusted EBITDA and adjusted pretax income eliminate the impact of items that we do not consider indicative of our core operating performance and, we believe, provide meaningful information to assist in understanding our financial results, analyzing trends in our underlying business, and assessing our prospects for future performance. We also use EBITDA and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees. The following is a reconciliation of our reported results from continuing operations and to our adjusted results from continuing operations: (in 000s) Year ended April 30, 2014 Revenues Expenses EBITDA Pretax income Net income Diluted EPS As reported - from continuing operations $ 3,024,295$ 2,261,084$ 940,108$ 767,116$ 500,097$ 1.81 Adjustments: Loss contingencies - litigation - 1,844 1,844 1,844 1,122 - Impairment of goodwill and intangible assets - 277 277 277 169 - Severance - 5,204 5,204 5,204 3,166 0.01 Professional fees related to HRB Bank transaction - 2,747 2,747 2,747 1,671 0.01 Impairment of AFS securities - - 12,414 12,414 7,553 0.03 Gain on sale of residual interests in securitizations - - (18,250 ) (18,250 ) (11,104 ) (0.04 ) Gain on sales of tax offices/businesses - (1,613 ) (11,738 ) (11,738 ) (7,142 ) (0.03 ) Discrete tax items - - - - (33,347 ) (0.12 ) - 8,459 (7,502 ) (7,502 ) (37,912 ) (0.14 ) As adjusted - from continuing operations $ 3,024,295$ 2,252,625$ 932,606$ 759,614$ 462,185$ 1.67



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Table of Contents Year ended April 30, 2013 Revenues Expenses EBITDA Pretax income Net income Diluted EPS As reported - from continuing operations $ 2,905,943$ 2,209,257$ 874,375$ 702,011$ 465,158$ 1.69 Adjustments: Loss contingencies - litigation - (4,579 ) (4,579 ) (4,579 ) (2,817 ) (0.01 ) Impairment of goodwill and intangible assets - 3,581 3,581 3,581 2,203 0.01 Severance - 4,785 4,785 4,785 2,944 0.01 Professional fees related to HRB Bank transaction - 1,565 1,565 1,565 963 - Loss on extinguishment of debt - - 5,790 5,790 3,562 0.01 Gain on sales of tax offices/businesses - (1,272 ) (1,272 ) (1,272 ) (782 ) - Discrete tax items - - - - (33,302 ) (0.12 ) - 4,080 9,870 9,870 (27,229 ) (0.10 ) As adjusted - from continuing operations $ 2,905,943$ 2,205,177$ 884,245$ 711,881$ 437,929$ 1.59 Year ended April 30, 2012 Revenues Expenses EBITDA Pretax income Net income Diluted EPS As reported - from continuing operations $ 2,893,771$ 2,327,479$ 757,316$ 576,070$ 345,968$ 1.16 Adjustments: Loss contingencies - litigation - 22,961 22,961 22,961 13,935 0.04 Impairment of goodwill and intangible assets - 11,389 11,389 11,389 6,912 0.02 Severance - 32,474 32,474 32,474 19,708 0.07 Gain on sales of tax offices/businesses - (16,601 ) (16,601 ) (16,601 ) (10,075 ) (0.03 ) Discrete tax items - - - - 3,643 0.01 - 50,223 50,223 50,223 34,123 0.11 As adjusted - from continuing operations $ 2,893,771$ 2,277,256$ 807,539 $



626,293 $ 380,091$ 1.27

The following is a reconciliation of EBITDA:

(in 000s) Year ended April 30, 2014 2013 2012 Net income - reported $ 475,157$ 433,948$ 265,932 Add back: Discontinued operations 24,940 31,210 80,036 Income taxes of continuing operations 267,019 236,853



230,102

Interest expense of continuing operations 57,388 79,957



92,089

Depreciation and amortization of continuing operations 115,604 92,407



89,157

464,951 440,427



491,384

EBITDA from continuing operations $ 940,108$ 874,375

$ 757,316



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STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES This section presents information required by the SEC's Industry Guide 3, "Statistical Disclosure by Bank Holding Companies." The tables in this section include HRB Bank information only. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL - The following table presents average balance data and interest income and expense data for our banking operations, as well as the related interest yields and rates for fiscal years 2014, 2013 and 2012: (dollars in 000s) Year ended April 30, 2014 2013 2012 Interest Average Interest Average Interest Average

Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost Balance Expense Cost Balance Expense Cost Interest-earning assets: Mortgage loans, net $ 295,619$ 13,808 4.67 % $ 372,339$ 16,556 4.45 % $ 448,431$ 20,322 4.53 % Federal funds sold 961 1 0.10 % 1,192 1 0.08 % 2,315 1 0.04 % Credit cards 21,600 4,956 22.94 % 8,119 3,311 40.78 % - - - % Emerald Advance 88,562 30,289 34.20 % 91,338 30,997 33.94 % 87,711 28,982 33.04 % AFS securities 457,642 9,504 2.08 % 380,055 6,791 1.79 % 250,329 4,178 1.67 % FHLB stock 1,842 9 0.49 % 1,879 - - % 3,259 113 3.47 % Cash and due from banks 657,259 1,600 0.24 % 690,396 1,601 0.23 % 732,164 1,806 0.25 % 1,523,485 $ 60,167 3.95 % 1,545,318 $ 59,257 3.83 % 1,524,209 $ 55,402 3.63 % Non-interest-earning assets 24,217 27,974 56,426 Total HRB Bank assets $ 1,547,702$ 1,573,292$ 1,580,635 Interest-bearing liabilities: Customer deposits $ 607,623$ 2,109 0.35 % $ 735,368$ 5,660 0.77 % $ 705,593$ 6,735 0.95 % FHLB borrowing - - - % - - - % 23,770 572 2.41 % 607,623 $ 2,109 0.35 % 735,368 $ 5,660 0.77 % 729,363 $ 7,307 1.00 % Non-interest-bearing liabilities 426,897 364,932 363,990 Total liabilities 1,034,520 1,100,300 1,093,353 Total shareholders' equity 513,182 472,992 487,282 Total liabilities and shareholders' equity $ 1,547,702$ 1,573,292$ 1,580,635 Net yield on interest-earning assets $ 58,058 3.81 % $ 53,597 3.47 % $ 48,095 3.16 %



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The following table presents the rate/volume variance in interest income and expense for the last two fiscal years:

(in 000s) Year ended April 30, 2014 2013 Total Change Change Change Change Total Change Change Change Change in Interest Due to Due to Due to in Interest Due to Due to Due to Income/Expense Rate/Volume Rate

Volume Income/Expense Rate/Volume Rate Volume Interest income: Loans, net (1) $ (1,811 )$ (2,603 )$ (584 )$ 1,376 $ 1,560 $ 3,052$ (60 )$ (1,432 ) AFS securities 2,713 222 1,102 1,389 2,613 147 300 2,166 Federal funds sold - - - - - (1 ) 1 - FHLB stock 12 - 12 - (113 ) 50 (118 ) (45 ) Cash & due from banks (4 ) 3 69 (76 ) (205 ) 49 (146 ) (108 ) $ 910 $ (2,378 )$ 599$ 2,689 $ 3,855 $ 3,297$ (23 )$ 581 Interest expense: Customer deposits $ (3,551 ) $ 511 $ (3,085 )$ (977 )$ (1,075 ) $ (52 ) $ (1,286 )$ 263 FHLB borrowings - - - - (572 ) 574 (573 ) (573 ) $ (3,551 ) $ 511 $ (3,085 )$ (977 )$ (1,647 ) $ 522 $ (1,859 )$ (310 ) (1) Includes mortgage loans held for investment, EAs and credit cards. Non-accruing loans have been excluded. INVESTMENT PORTFOLIO - The following table presents the cost basis and fair value of HRB Bank's investment portfolio as of April 30, 2014, 2013 and 2012: (in 000s) As of April 30, 2014 2013 2012 Cost Basis Fair Value Cost Basis Fair Value Cost Basis Fair Value Mortgage-backed securities $ 420,697$ 423,495$ 476,450$ 482,378$ 361,184$ 366,683 Federal funds sold 1,156 1,156 1,169 1,169 1,586 1,586 FHLB stock 1,633 1,633 1,861 1,861 1,879 1,879 $ 423,486$ 426,284$ 479,480$ 485,408$ 364,649$ 370,148



The following table shows the cost basis, scheduled maturities and average yields for HRB Bank's investment portfolio as of April 30, 2014:

(dollars in 000s) Less Than One Year After Ten Years Total Weighted Weighted Weighted Cost Balance Average Balance Average Balance Average Basis Due Yield Due Yield Due Yield



Mortgage-backed

securities $ 420,697 $ - - $ 420,697 2.08 % $ 420,697 2.08 % Federal funds sold 1,156 1,156 0.10 % - - 1,156 0.10 % FHLB stock 1,633 1,633 0.49 % - - 1,633 0.49 % $ 423,486$ 2,789$ 420,697

$ 423,486



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LOAN PORTFOLIO AND SUMMARY OF LOAN LOSS EXPERIENCE - The following table shows the composition of HRB Bank's mortgage loan portfolio and information on delinquent loans: (in 000s) As of April 30, 2014 2013 2012 2011 2010 Residential real estate mortgages $ 277,253$ 349,841$ 428,568$ 569,610$ 683,452 Home equity lines of credit 170 170 174 183 232 $ 277,423$ 350,011$ 428,742$ 569,793$ 683,684 Loans and TDRs on non-accrual $ 79,894$ 89,230$ 108,839$ 155,645$ 185,209 Loans past due 90 days or more 57,882 74,992 99,044 149,501 153,703 Total TDRs 43,865 55,061 71,949 106,328 144,977 Interest income recorded on non-accrual loans 3,575 4,025 5,682 6,311 7,452 Concentrations of loans to borrowers located in a single state 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. The table below presents outstanding loans by state, for states with a concentration of 5% or greater, for our portfolio of mortgage loans held for investment as of April 30, 2014: (dollars in 000s) Loans Loans Purchased Purchased from Other Percent Delinquency from SCC Parties Total of Total Rate (30+ Days) Florida $ 14,040$ 39,945$ 53,985 20 % 10 % New York 51,264 7,173 58,437 21 % 16 % California 23,397 5,560 28,957 10 % 41 % Wisconsin 1,358 19,273 20,631 7 % 9 % All others 69,507 45,906 115,413 42 % 21 % Total $ 159,566$ 117,857$ 277,423 100 % A rollforward of HRB Bank's allowance for loss on mortgage loans is as follows: (dollars in 000s) Year ended April 30, 2014 2013 2012 2011 2010 Balance as of the beginning of the year $ 14,314$ 26,444$ 90,487$ 93,535$ 84,073 Provision 8,271 13,250 23,875 35,200 47,750 Recoveries 4,040 3,253 252 272 88 Charge-offs and transfers (15,353 ) (28,633 ) (88,170 ) (38,520 ) (38,376 ) Balance as of the end of the year $ 11,272$ 14,314$ 26,444$ 90,487$ 93,535 Ratio of net charge-offs to average loans outstanding during the year 3.74 % 6.37 % 19.61 % 5.96 % 4.95 %



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DEPOSITS - The following table shows HRB Bank's average deposit balances and the average rate paid on those deposits for fiscal years 2014, 2013 and 2012:

(dollars in 000s) Year ended April 30, 2014 2013 2012 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Money market and savings $ 274,633 0.47 % $ 331,819 0.59 % $ 306,053 0.71 % Interest-bearing checking accounts 8,881 0.08 % 12,027 0.17 % 14,871 0.27 % IRAs 310,103 0.20 % 322,078 0.91 % 334,022 1.00 % Certificates of deposit 14,006 1.31 % 69,444 1.08 % 50,647 2.33 % 607,623 0.35 % 735,368 0.77 % 705,593 0.95 %

Non-interest-bearing deposits 362,806 330,727 320,566 $ 970,429$ 1,066,095$ 1,026,159 RATIOS - The following table shows certain of HRB Bank's key ratios for fiscal years 2014, 2013 and 2012: Year ended April 30, 2014 2013 2012 Return on average assets 3.2 % 3.0 % 3.1 % Net return on equity 9.7 % 10.2 % 10.0 % Equity to assets ratio 41.3 % 33.9 % 34.8 % SHORT-TERM BORROWINGS - We had no short-term borrowings outstanding from the FHLB as of April 30, 2014, 2013 or 2012, and did not borrow from the FHLB during fiscal year 2014 or 2013. During fiscal year 2012, the maximum amount of FHLB advances outstanding during fiscal year 2012 was $25.0 million, with average borrowings of $23.8 million at an average interest rate of 2.41%.


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