H&R BLOCK INC - Annual Report: 2012 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 1-6089

H&R Block, Inc.

(Exact name of registrant as specified in its charter)

One H&R Block Way, Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 854-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, without par value

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ            Accelerated filer ¨            Non-accelerated filer ¨            Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  þ

The aggregate market value of the registrant’s Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2011, was $4,466,318,542.

Number of shares of the registrant’s Common Stock, without par value, outstanding on May 31, 2012: 274,408,620.

Documents incorporated by reference

The definitive proxy statement for the registrant’s Annual Meeting of Shareholders, to be held September 13, 2012, is incorporated by reference in Part III to the extent described therein.

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2012 FORM 10-K AND ANNUAL REPORT

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INTRODUCTION AND FORWARD-LOOKING STATEMENTS

Specified portions of our proxy statement are listed as “incorporated by reference” in response to certain items. Our proxy statement will be made available to shareholders in July 2012, and will also be available on our website at www.hrblock.com.

This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variations of words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “would,” “should,” “could” or “may.” Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include estimates of revenues, income, earnings per share, capital expenditures, dividends, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made and management does not undertake to update them to reflect changes or events occurring after that date except as required by federal securities laws. Details about risks affecting various aspects of our business are included throughout this Form 10-K. Investors should carefully consider all of these risks, and should pay particular attention to the section entitled “Risk Factors” beginning on page 10 of this Form 10-K.

PART I

GENERAL DEVELOPMENT OF BUSINESS

H&R Block, Inc. has subsidiaries that provide tax preparation and banking services. Our Tax Services segment provides assisted income tax return preparation, digital tax solutions and other services and products related to income tax return preparation to the general public primarily in the United States (U.S.), and also in Canada and Australia. This segment also offers financial services including the H&R Block Prepaid Emerald MasterCard^® and Emerald Advance lines of credit through H&R Block Bank (HRB Bank), along with other retail banking services. Corporate operations include net interest margin and gains or losses relating to mortgage loans held for investment, real estate owned and residual interests in securitizations, along with interest expense on borrowings and other corporate expenses.

H&R Block, Inc. was organized as a corporation in 1955 under the laws of the State of Missouri. “H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context. A complete list of our subsidiaries can be found in Exhibit 21.

RECENT DEVELOPMENTS – In November 2011, we sold RSM McGladrey, Inc. (RSM) to McGladrey & Pullen LLP (M&P) for net cash proceeds of $523.1 million. We also received at the time of sale a long-term note in the amount of $54.0 million. M&P assumed substantially all liabilities of RSM, including contingent payments and lease obligations. We have indemnified M&P for certain litigation matters as discussed in Item 8, note 20 to the consolidated financial statements. The net after tax loss on the sale of RSM totaled $36.9 million, which includes an $85.4 million impairment of goodwill recorded in our first quarter and tax benefits of $17.9 million associated with capital loss carry-forwards utilized.

In fiscal year 2012, we also sold RSM EquiCo Inc.’s subsidiary, McGladrey Capital Markets LLC (MCM). As of April 30, 2012, the results of operations of these businesses are presented as discontinued operations in the consolidated financial statements. All periods presented in the consolidated balance sheets and statements of income have been reclassified to reflect our discontinued operations.

In April 2012, we announced a strategic realignment which eliminated approximately 350 positions and closed approximately 200 underperforming company-owned offices. We recorded $31.2 million in severance costs and $5.5 million in lease termination costs and impairment charges in the fourth quarter of fiscal year 2012.

On June 7, 2012, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Office of the Comptroller of the Currency (OCC) issued notices of proposed rulemaking that would establish regulatory capital requirements for savings and loan holding companies (SLHCs) and increase capital requirements for federal savings banks.

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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

See discussion below and in Item 8, note 22 to the consolidated financial statements.

DESCRIPTION OF BUSINESS

TAX SERVICES

GENERAL – Our Tax Services segment is primarily engaged in providing tax return preparation and related services and products in the U.S. and its territories, Canada, and Australia. Major revenue sources include fees earned for tax preparation and related services performed at company-owned retail tax offices, royalties from franchisees, sales of tax preparation software, online tax preparation fees, fees from refund anticipation checks (RACs), fees from our H&R Block Prepaid Emerald MasterCard^®, and interest and fees from Emerald Advance lines of credit (EAs). HRB Bank also offers traditional banking services including checking and savings accounts, individual retirement accounts and certificates of deposit.

Assisted income tax return preparation and related services are provided by tax professionals via a system of retail offices operated directly by us or by franchisees.

TAX RETURNS PREPARED – We, together with our franchisees, prepared 25.6 million tax returns worldwide during fiscal year 2012, compared to 24.5 million in 2011 and 23.2 million in 2010. We prepared 22.3 million tax returns in the U.S. during fiscal year 2012, up from 21.4 million in 2011 and 20.1 million in 2010. Our U.S. tax returns prepared during the 2012 tax season, including those prepared by our franchisees and those prepared and filed at no charge, constituted approximately 16% of an Internal Revenue Service (IRS) estimate of total individual income tax returns filed during the fiscal year 2012 tax season. See Item 7 for further discussion of changes in the number of tax returns prepared.

FRANCHISES – We offer franchises as a way to expand our presence in certain markets. Our franchise arrangements provide us with certain rights designed to protect our brand. Most of our franchisees receive the right to use our software, access to product offerings and expertise, signs, specialized forms, advertising and initial training and supervisory services. Our franchisees pay us a percentage, typically approximately 30%, of gross tax return preparation and related service revenues as a franchise royalty in the U.S.

During fiscal years 2012, 2011 and 2010 we sold certain offices to existing franchisees for sales proceeds totaling $17.3 million, $65.6 million and $65.7 million, respectively. The net gain on these transactions totaled $16.6 million, $45.1 million and $49.1 million in fiscal years 2012, 2011 and 2010, respectively. The extent to which we choose to sell company-owned offices depends upon our analysis regarding the optimal mix of offices for our network, including geographic location, as well as our ability to identify qualified franchisees.

From time to time, we have also acquired the assets of existing franchisees and other tax return preparation businesses, and may continue to do so if future conditions warrant and satisfactory terms can be negotiated.

OFFICES – In fiscal year 2012 we operated in 10,992 offices across the U.S., which is slightly less than the prior year. A summary of our company-owned and franchise offices is included in Item 7, under “Tax Services – Operating Statistics.” We sold 83, 280 and 267 company-owned offices to franchisees in fiscal years 2012, 2011 and 2010, respectively. Offices in shared locations at April 30, 2012 consist primarily of offices in Sears and Wal-Mart stores. Offices in shared locations at April 30, 2011 and 2010 consist primarily of offices in Sears stores. The Sears license agreement expires in July 2012, while the Wal-Mart agreement expires in May 2013.

SERVICE AND PRODUCT OFFERINGS – In addition to our retail offices, we offer a number of digital tax preparation alternatives. By offering professional and do-it-yourself tax preparation options through multiple channels, we seek to serve our clients in the manner they choose to be served. We also offer clients a number of options for receiving their income tax refund, including a check directly from the IRS, an electronic deposit directly to their bank account, a prepaid debit card or a RAC offered through HRB Bank.

Online Tax Preparation. We offer a comprehensive range of online tax services, from tax advice to complete professional and do-it-yourself tax return preparation and electronic filing, through our website at www.hrblock.com. The services available at this website allow clients to prepare their federal and state income tax returns using the H&R Block At Home™ Online Tax Program, access tax tips, advice and tax-related news, and use calculators for tax planning.

We participate in the Free File Alliance (FFA). This alliance was created by the tax return preparation industry and the IRS, and allows qualified filers with adjusted gross incomes of less than $57,000 to prepare and file their federal return online at no charge. We believe this program provides a valuable public service and increases our visibility with new clients, while also providing an opportunity to offer our state return preparation and other services to these clients.

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Software Products. We develop and market H&R Block At Home™ income tax preparation software. H&R Block At Home™ offers a simple step-by-step tax preparation interview, data imports from money management software, calculations, completion of the appropriate tax forms, error checking and electronic filing. Our software products may be purchased online, through third-party retail stores or via direct mail.

RACs. RACs are offered to U.S. clients who would like to (1) receive their refund faster and do not have a bank account for the IRS to direct deposit their refund and/or (2) have their tax preparation fees paid directly out of their refund.

Emerald Advance Lines of Credit. EAs are offered to clients in our offices from late November through early January each year, currently in an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be utilized year-round.

H&R Block Prepaid Emerald Mastercard^®. The H&R Block Prepaid Emerald MasterCard^® allows a client to receive a tax refund from the IRS directly on a prepaid debit card, or to direct RAC proceeds to the card to avoid high-cost check-cashing fees. The card can be used for everyday purchases, bill payments and ATM withdrawals anywhere MasterCard^® is accepted. Additional funds can be added to the card account year-round through direct deposit or at participating retail locations.

Peace of Mind Guarantee. In addition to our standard guarantee, we offer our Peace of Mind (POM) guarantee to U.S. clients, whereby we (1) represent our clients if they are audited by the IRS, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to one of our tax professionals’ work. The POM guarantee has a per client cumulative limit of $5,500 in additional taxes assessed with respect to the federal, state and local tax returns we prepared for the taxable year covered by the guarantee.

CashBack Program. We offer a refund discount (CashBack) program to our customers in Canada. In accordance with current Canadian regulations, if a customer’s tax return indicates the customer is entitled to a tax refund, we issue a check to the client in the amount of the refund, less a discount. The client assigns to us the full amount of the tax refund to be issued by the Canada Revenue Agency (CRA) and the refund check is then sent by the CRA directly to us. In accordance with the law, the discount is deemed to include both the tax return preparation fee and the fee for tax refund discounting. This program is financed by short-term borrowings. The number of returns discounted under the CashBack program in fiscal year 2012 was 724,000, compared to 821,000 in 2011 and 797,000 in 2010.

SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of each year, substantially all of our revenues from income tax return preparation and related services and products are earned during this period. As a result, we generally operate at a loss through the first eight months of the fiscal year.

HRB Bank’s operating results are subject to seasonal fluctuations primarily related to the offering of the H&R Block Prepaid Emerald MasterCard^® and EAs, and therefore peak in January and February and taper off through the remainder of the tax season.

COMPETITIVE CONDITIONS – We provide both assisted and do-it-yourself tax preparation products and services and face substantial competition. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services, and we face significant competition from independent tax preparers and CPAs. Certain firms are involved in providing electronic filing services and RACs to the public. Commercial tax return preparers and electronic filers are highly competitive with regard to price and service, and many firms offer services that may include federal and/or state returns at no charge. Additionally, certain tax return preparers were able to offer refund anticipation loans (RALs) this tax season while we did not. In terms of the number of offices and personal tax returns prepared and electronically filed in offices, online and via our software, we are one of the largest providers of tax return preparation and electronic filing services in the U.S. We also believe we operate the largest tax return preparation businesses in Canada and Australia.

Do-it-yourself tax preparation options include use of traditional paper forms and various forms of digital electronic assistance, including online, mobile and desktop software, all of which we offer. Based on tax return volumes, Intuit, Inc. is the largest supplier of tax preparation software and online tax preparation services. Many other companies offer digital and online services. Like all tax return preparation products and services, price and marketing competition for digital tax preparation services is intense among value and premium products and many firms offer services that may include federal and/or state returns at no charge. Federal and certain state taxing authorities also currently offer, or facilitate the offer of, tax return preparation and filing options to taxpayers at no charge.

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HRB Bank provides banking services primarily to our assisted and do-it-yourself tax clients and for many of these clients, HRB Bank is their only provider of banking services. HRB Bank does not seek to compete broadly with regional or national retail banks.

GOVERNMENT REGULATION – TAX PREPARERS – Our tax preparation business is subject to various forms of government regulation, including the following:

Federal Tax Preparer Regulations. Federal legislation requires income tax return preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them and retain all tax returns prepared by them for three years. Federal laws also subject income tax return preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from continuing to act as income tax return preparers if they continuously and repeatedly engage in specified misconduct.

The federal government regulates the electronic filing of income tax returns in part by requiring electronic filers to comply with all publications and notices of the IRS applicable to electronic filing. We are required to provide certain electronic filing information to taxpayers and comply with advertising standards for electronic filers. We are also subject to possible monitoring by the IRS, and if deemed appropriate, they could impose various penalties, including penalties for improper disclosure or use of taxpayer information, other preparer penalties or suspension from the IRS electronic filing program.

IRS regulations require all tax return preparers to: (1) use a Preparer Tax Identification Number (PTIN) as their identifying number on federal tax returns filed after December 31, 2010; and (2) be authorized to practice before the IRS as a prerequisite to obtaining or renewing a PTIN. Additionally, the IRS conducts tax compliance checks on tax return preparers, has defined the individuals who are considered “tax return preparers” for the PTIN requirement, and charges a PTIN user registration fee of $64.25 per year for new registrations and $63.00 per year for renewals. The IRS also conducts background checks on PTIN applicants. In addition, the IRS published final regulations implementing an individual e-file mandate in March 2011.

Financial Privacy Regulations. The Gramm-Leach-Bliley Act and related Consumer Financial Protection Bureau (CFPB) regulations require income tax preparers to: (1) adopt and disclose consumer privacy notices; (2) provide consumers a reasonable opportunity to control (via “opt-out”) whether their personal information is disclosed to unaffiliated third-parties (subject to certain exceptions); and (3) implement reasonable safeguards to protect the security and confidentiality of personal information. In addition, the IRS generally prohibits the use or disclosure of taxpayer information by tax return preparers without the prior written consent of the taxpayer.

State Regulations. Certain states have regulations and requirements relating to offering income tax courses. These requirements include licensing, bonding and certain restrictions on advertising.

Registered Tax Return Preparers. IRS regulations finalized in calendar year 2011 included changes that: (1) established a new class of practitioners, called “registered tax return preparers,” who are authorized to practice before the IRS under Circular 230 (in a limited capacity) and are required to (a) pass a competency examination as a prerequisite to becoming a registered tax return preparer, (b) complete 15 hours of continuing professional education per year, and (c) comply with ethical standards; (2) revised the amount of the enrolled agent application and renewal fee; (3) set the amount of a sponsor fee for qualified continuing professional education sponsors at $419.00; and (4) set the amount of the competency examination user fee at $116.00 per attempt.

Franchise Regulations. Many of the income tax return preparation offices operating in the U.S. under the name “H&R Block” are operated by franchisees. Our franchising activities are subject to the rules and regulations of the Federal Trade Commission (FTC), potential enforcement by the CFPB, and various state laws regulating the offer and sale of franchises. The FTC and various state laws require us to furnish to prospective franchisees a franchise disclosure document containing prescribed information. A number of states in which we are currently franchising regulate the sale of franchises and require registration of the franchise disclosure document with certain state authorities. We are currently operating under exemptions from registration in several of these states based on our net worth and experience. Substantive state laws regulating the franchisor/franchisee relationship presently exist in a large number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. From time to time, we may make appropriate amendments to our franchise disclosure document to comply with our disclosure obligations under federal and state law.

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Foreign Regulations. We also seek to determine applicable government and self-regulatory organization statutes, ordinances, rules and regulations in the other countries in which we operate (collectively, “Foreign Laws”) and to comply with these Foreign Laws. The Canadian government regulates the CashBack program in Canada.

REGULATION AND SUPERVISION – BANK AND HOLDING COMPANIES – Our subsidiary, HRB Bank, is a federal savings bank chartered under the Home Owner’s Loan Act, as amended (HOLA). H&R Block, Inc., H&R Block Group, Inc. and Block Financial LLC (our Holding Companies) are SLHCs because they control HRB Bank. The following is a general description of certain federal banking statutes and regulations that apply to HRB Bank and our Holding Companies.

The Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law on July 21, 2010. This federal statute made extensive changes to the laws regulating federal savings banks, their holding companies and other financial services companies. The Dodd-Frank Act requires various federal agencies to adopt many new implementing rules and regulations. The federal agencies are given significant discretion in drafting the new rules and regulations; consequently, many of the details and much of the impact of the Dodd-Frank Act will not be known for several years.

The Dodd-Frank Act substantially restructured the regulation of federal savings associations and savings and loan holding companies. The Office of Thrift Supervision (OTS), which previously was the primary federal regulator for both HRB Bank and our Holding Companies, was eliminated. On July 21, 2011, the OTS transferred its regulatory authority to the OCC and the Federal Reserve. On that date, the OCC, the primary federal regulator for national banks, became the primary federal regulator for federal savings banks, including HRB Bank, and the Federal Reserve became the primary federal regulator for all SLHCs and their nonbank subsidiaries, including our Holding Companies and their nonbank subsidiaries.

The Federal Reserve has interpreted the Dodd-Frank Act to limit the activities of SLHCs and their nonbank subsidiaries. The OTS had authorized SLHCs and their nonbank subsidiaries to engage in the broadest range of financial activities that could be engaged in by a bank holding company that has elected to be a financial holding company (FHC). The Federal Reserve has issued a regulation that SLHCs, and their nonbank subsidiaries, may only engage in such financial activities if the SLHCs elect to become FHCs. Our Holding Companies have not elected to become FHCs and have no current plans to do so.

The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings banks and gives state attorneys general the ability to enforce federal consumer protection laws. Prior to the enactment of the Dodd-Frank Act, OTS regulations provided that the HOLA, and the OTS regulations that interpret the HOLA, preempted the entire field of state regulation in the critical areas of lending and deposit-taking, resulting in federal preemption of most state consumer protection laws in those areas. The Dodd-Frank Act, effective July 21, 2011, changed the legal standard for federal savings association preemption of state laws to a “conflict” preemption standard that is the same as the standard for national bank preemption of state laws. The Dodd-Frank Act also eliminated federal preemption, effective July 21, 2012, for subsidiaries and affiliates of national banks and federal savings banks. As a result, state statutes and regulations that were previously not applicable to our nonbank subsidiaries will no longer be preempted.

Regulatory Supervision and Enforcement Authority. The OCC has extensive enforcement authority over all federal savings associations, including HRB Bank, and the Federal Reserve has extensive enforcement authority over all SLHCs, including our Holding Companies. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist and removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Public disclosure of final enforcement actions by the OCC or the Federal Reserve is generally required by law.

OCC Regulation of HRB Bank. All of HRB Bank’s activities and operations are subject to regulation and oversight by the OCC. This regulation of HRB Bank is intended for the protection of its depositors and loan customers. HRB Bank also is subject to certain regulations issued by the Federal Deposit Insurance Corporation (FDIC), which insures the deposits of HRB Bank to the maximum extent permitted by law. HRB Bank is subject to periodic examinations by the OCC.

Consumer Protection Laws. In connection with its lending activities, HRB Bank is subject to federal laws designed to protect borrowers and promote lending, including the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (CR Act). In addition, federal banking regulations limit the ability of banks and other financial institutions to disclose nonpublic personal information to unaffiliated third parties. The CR Act

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requires the OCC to assess HRB Bank’s record in meeting the credit needs of the communities served by HRB Bank, including low and moderate income neighborhoods. Under the CR Act, institutions are assigned a rating of outstanding, satisfactory, needs to improve, or substantial non-compliance. HRB Bank received a “satisfactory” rating in its most recent CR Act evaluation.

Bank Secrecy Act /Anti-Money Laundering Laws. HRB Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001. These laws and regulations require HRB Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing, and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions.

Qualified Thrift Lender Test. As a federal savings bank, HRB Bank is required to meet a Qualified Thrift Lender (QTL) test. This test requires HRB Bank to have at least 65% of its portfolio assets in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, HRB Bank may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, HRB Bank is required to maintain a significant portion of its assets in residential housing related loans and investments. Any institution that fails to meet the QTL test must, within one year, either become a national bank or be subject to certain restrictions on its operations, unless it meets the test within the year and thereafter remains a QTL. These restrictions include a prohibition against paying any dividends, except with the prior approval of the OCC. Failure to meet the QTL test is a statutory violation subject to enforcement action. As of April 30, 2012, HRB Bank met the QTL test.

Insurance of Accounts. The FDIC insures HRB Bank’s deposit accounts. The FDIC assesses deposit insurance premiums on each FDIC-insured institution based on its capital, supervisory ratings, and other factors. As required by the Dodd-Frank Act, the FDIC has adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution’s total assets minus its tangible equity instead of its deposits.

Transactions with Affiliates. Transactions between HRB Bank and its affiliates are required to be on terms at least as favorable to HRB Bank as transactions with non-affiliates, and certain covered transactions are restricted to a percentage of HRB Bank’s capital.

Regulatory Capital Requirements. OCC regulations require HRB Bank to maintain specified minimum levels of regulatory capital. To be well capitalized, a federal savings association must have a leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%. To be adequately capitalized, a federal savings association must have a leverage ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a total risk-based capital ratio of at least 8.0%. At March 31, 2012, HRB Bank was well-capitalized, with a leverage ratio of 29.4%, a Tier 1 risk-based capital ratio of 119.0%, and a total risk-based capital ratio of 120.3%.

On June 7, 2012, the OCC issued a notice of proposed rulemaking that would increase the capital requirements for federal savings banks, including HRB Bank. See Item 1A, “Risk Factors,” for further information on the OCC’s proposed capital requirements.

The OCC is authorized to take certain enforcement actions against federal savings banks that fail to meet the minimum ratios for an adequately capitalized institution and to impose other restrictions on federal savings banks that are less than adequately capitalized.

Limitations on Dividends and Other Capital Distributions. OCC regulations impose various restrictions on federal savings banks with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases and other transactions charged to the capital account.

Under OCC regulations, federal savings banks, such as HRB Bank, may generally make capital distributions during any calendar year equal to earnings of the previous two calendar years, net of prior dividends, and current year-to-date earnings. OCC regulations generally require that federal savings banks remain well-capitalized before and after the proposed distribution. A federal savings bank proposing to make any capital distribution greater than these limits must obtain OCC approval prior to making such distributions. Because of the seasonal nature of our business and wide fluctuations in the level of HRB Bank’s assets, our Holding Companies regularly make capital contributions HRB Bank, and HRB Bank regularly seeks regulatory approval to repay such capital contributions as extraordinary dividends.

Federal Home Loan Bank System. HRB Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB), which serves as a reserve or central bank for its members and makes loans or advances to its members. At April 30, 2012, HRB Bank had no outstanding advances from the FHLB.

Federal Reserve Regulation of SLHCs. Each of our Holding Companies is a savings and loan holding company within the meaning of the HOLA. As such, they are registered as unitary savings and loan holding

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companies with the Federal Reserve and are subject to Federal Reserve regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve has supervisory and enforcement authority over our Holding Companies and their non-bank subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to HRB Bank. Our Holding Companies are expected to be a source of strength to HRB Bank, able to commit capital and liquidity to the bank during times of economic stress.

New SHLC Regulatory Capital Requirements. The Dodd-Frank Act is expected to substantially increase the regulatory capital requirements for SLHCs. On June 7, 2012, the Federal Reserve issued a notice of proposed rulemaking that would establish regulatory capital requirements for SLHCs, including our Holding Companies. See Item 1A, “Risk Factors,” for further information on the proposed SLHC capital requirements.

Consumer Financial Protection Bureau. The Dodd-Frank Act created the new CFPB with the power to administer and enforce federal financial consumer protection laws. The CFPB may issue regulations that apply to HRB Bank, and to our non-bank subsidiaries that provide consumer financial products and services. The CFPB may examine, and take enforcement actions against, our non-bank subsidiaries. See Item 1A for further information on the CFPB.

See Item 7, under “Regulatory Environment” and Item 8, note 21 to the consolidated financial statements for additional discussion of regulatory requirements.

SERVICE MARKS, TRADEMARKS AND PATENTS

We have made a practice of selling our services and products under service marks and trademarks and of obtaining protection for these by all available means. Our service marks and trademarks are protected by registration in the U.S. and other countries where our services and products are marketed. We consider these service marks and trademarks, in the aggregate, to be of material importance to our business, particularly our businesses providing services and products under the “H&R Block” brand.

We have no registered patents material to our business.

EMPLOYEES

We had approximately 2,500 regular full-time employees as of April 30, 2012. The highest number of persons we employed during the fiscal year ended April 30, 2012, including seasonal employees, was approximately 93,000.

AVAILABILITY OF REPORTS AND OTHER INFORMATION

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.hrblock.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.

The following corporate governance documents are posted on our website at www.hrblock.com:

If you would like a printed copy of any of these corporate governance documents, please send your request to the Office of the Secretary, H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105.

Information contained on our website does not constitute any part of this report.

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Our business activities expose us to a variety of risks. Identification, monitoring and management of these risks are essential to the success of our operations and the financial soundness of H&R Block. Senior management and the Board of Directors take an active role in our risk management process and have delegated oversight of risk management to the Enterprise Risk Management Committee (ERMC), which is comprised of senior managers of major businesses and control functions. The ERMC is responsible for identifying and monitoring risk exposures and leading the continued development of our risk management policies and practices.

An investment in our common stock involves risk, including the risk that the value of an investment may decline or that returns on that investment may fall below expectations. There are a number of significant factors which could cause actual conditions, events or results to differ materially from those described in forward-looking statements, many of which are beyond management’s control or its ability to accurately estimate or predict, or could adversely affect our financial position, results of operations, cash flows and the value of any investment in our stock.

RISKS RELATING TO CONTINUING OPERATIONS

Increased competition for tax preparation clients in our retail offices and our online and software channels could adversely affect our current market share and profitability. Offers of free tax preparation services could adversely affect our revenues and profitability.

We provide both assisted and do-it-yourself tax preparation products and services and face substantial competition throughout our businesses. The assisted tax services business is highly competitive. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services. Many tax return preparation firms and many firms not otherwise in the tax return preparation business are involved in providing electronic filing and other related services to the public, and certain firms provide RACs. Commercial tax return preparers and electronic filers are highly competitive with regard to price and service, and many firms offer services that may include federal and/or state returns at no charge. Do-it-yourself tax preparation options include use of traditional paper forms and various forms of digital electronic assistance, including online and desktop software, all of which we offer. Our digital tax solutions businesses also compete with in-office tax preparation services and a number of online and software companies, primarily on the basis of price and functionality. Intense price competition could result in a loss of market share, lower revenues or lower margins.

Federal and certain state taxing authorities currently offer, or facilitate the offer of, tax return preparation and electronic filing options to taxpayers at no charge. In addition, many of our direct competitors offer certain free online tax preparation and electronic filing options. In order to compete, we also have free tax service offerings in several categories. We prepared 861,000, 767,000 and 810,000 federal income tax returns in fiscal years 2012, 2011 and 2010, respectively, at no charge as part of the FFA. We also have free online tax preparation offerings and provided free preparation of Federal 1040EZ forms in fiscal years 2012 and 2011, and free RACs to certain clients in fiscal year 2012. There can be no assurance that we will be able to attract clients or effectively monetize all of our free tax service offerings, and clients who have formerly paid for our tax service offerings may elect to use free offerings instead. These competitive factors may diminish our revenue and profitability, and harm our ability to acquire and retain clients.

Government tax authorities and direct competitors may also elect to expand free offerings in the future. Although the FFA has kept the federal government from being a direct competitor to our tax service offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities. We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future.

See tax returns prepared statistics included in Item 7, under “Tax Services – Operating Statistics.”

Failure to comply with laws and regulations that protect our clients’ and employees’ personal and financial information could harm our brand and reputation and could result in significant fines, penalties and damages.

A number of our businesses collect, use and retain large amounts of personal client information and data, including credit card numbers, tax return information, bank account numbers and social security numbers. In addition, we collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal client and employee information is held and some transactions are executed by third

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parties. In addition, some of our products and services are internet-based and we store a large amount of data for our users on our servers, including personal information. We and our vendors use commercially available security technologies to protect transactions and personal information. We use security and business controls to limit access and use of personal information. However, individuals or third parties may be able to circumvent these security and business measures, and errors in the storage, use or transmission of personal information may result in a breach of client or employee privacy or theft of assets, which may require notification under applicable data privacy regulations. We employ contractors and temporary employees who may have access to the personal information of clients and employees or who may execute transactions in the normal course of their duties. While we conduct background checks and limit access to systems and data, it is possible that one or more of these controls could be circumvented, resulting in a security breach.

We are subject to laws, rules and regulations relating to the collection, use, disclosure and security of consumer financial information, which have drawn increased attention from federal and state governments. The IRS imposes various prohibitions on the use or disclosure by tax return preparers of taxpayers’ information without the prior written consent of the taxpayer. In addition, other regulations require financial service providers to adopt and disclose consumer privacy policies and provide consumers with a reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third-parties. New laws in this area have been passed by several jurisdictions, and other jurisdictions are considering imposing additional restrictions. These new laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction and our current data protection policies and practices may not be consistent with those interpretations and applications. In addition, changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change business practices, including how information is disclosed. Establishing systems and processes to achieve compliance with these new requirements may increase costs and/or limit our ability to pursue certain business opportunities.

A major breach of our security measures or those of third parties that execute transactions or hold and manage personal information may have serious negative consequences for our businesses, including reduced client demand for our services, harm to our reputation and brands, possible fines, penalties and damages, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process client credit card orders or tax returns. From time to time, we detect, or receive notices from clients or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm client confidence and require substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited. Although we have commercially available network and application security, internal control measures, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, loss or theft of personal information will not occur, which may harm our business, client reputation and future financial results and may require us to expend significant resources to address these problems, including notification under data privacy regulations.

Security concerns may adversely affect our online financial services that we provide to our clients, and vulnerability of our clients’ computers and mobile devices could lead to losses related to identity theft or other fraud and harm our reputation and financial performance.

We offer a range of services to our clients online, including digital and assisted tax services and banking services provided by HRB Bank. A significant requirement of providing online financial transactions is the secure transmission of confidential information over public networks. The systems we use rely on encryption and authentication technology to provide secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms used to protect client transaction data. If we, or another provider of financial services through the internet, were to suffer damage from a security breach, public acceptance and use of the internet as a medium for financial transactions could suffer. In addition, our clients may access our online tax services from their computers and mobile devices, install and use our H&R Block At Home^TM tax preparation software on their computers, and access online banking services from their computers and mobile devices. Because our business model relies on our clients’ use of their own personal computers, mobile devices and the internet, computer viruses and other attacks on our clients’ personal computer systems and mobile devices could create losses for our clients even without any breach in the security of our systems, and could thereby harm our business and our reputation. Any security breach could deter potential clients or cause

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existing clients to leave, thereby impairing our ability to grow and maintain profitability and, possibly, our ability to continue delivering our products and services through the internet. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent security breaches, these measures may not be successful.

An interruption in or breach of our information systems, those of a third party on which we rely, or the internet may result in lost business.

We rely heavily upon communications and information systems and the internet to conduct our business. Our systems and operations are potentially vulnerable to damage or interruption from network failure, hardware failure, software failure, power or telecommunications failures, computer viruses and worms, negative disruptions to the operation of the internet, penetration of our network by hackers or other unauthorized users and natural disasters. Any failure, interruption or breach in security of our information systems, the third-party information systems on which we rely, or the internet could negatively impact our core business operations and increase our risk of loss. As our businesses are seasonal, our systems must be capable of processing high volumes during peak season. Therefore, service interruptions resulting from system or internet failures could negatively impact our ability to serve our clients, which in turn could damage our brand and reputation, or adversely impact our profitability.

We cannot make assurances that system or internet failures, interruptions or breaches will not occur, or if they do occur that we or the third parties on whom we rely will adequately address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or communication systems interruptions may not be adequate, and we may not have anticipated or addressed all of the potential events that could threaten or undermine our information systems. The occurrence of any systems or internet failure, interruption or breach could significantly impair the reputation of our brand, diminish the attractiveness of our services and harm our business.

Government initiatives that simplify tax return preparation or expedite refunds could reduce the need for our services as a third-party tax return preparer, and cause our revenues or results of operations to decline.

Many taxpayers seek assistance from paid tax return preparers such as us not only because of the level of complexity involved in the tax return preparation and filing process, but also because of paid tax return preparers’ ability to expedite refund proceeds under certain circumstances. From time to time, government officials propose measures seeking to simplify the preparation and filing of tax returns or to provide additional assistance with respect to preparing and filing such tax returns or expediting refunds. During tax season 2011, the U.S. Department of the Treasury (the Treasury) introduced a prepaid debit card pilot program designed to facilitate the refund process. HRB Bank also provides this type of service through its H&R Block Prepaid Emerald MasterCard^®. Additionally, during tax season 2011, the IRS increased its emphasis on a process to allow taxpayers to allocate their refunds to multiple accounts. The adoption or expansion of any measures that significantly simplify tax return preparation, expedite refunds or otherwise reduce the need for a third-party tax return preparer could reduce demand for our services, and cause our revenues or results of operations to decline.

The Dodd-Frank Act is expected to increase capital requirements for savings and loan holding companies. Compliance with these new capital requirements could adversely affect our Holding Companies and could alter our strategic plans.

The Dodd-Frank Act made extensive changes to the laws regulating banks, holding companies and financial services firms, and requires various federal agencies to adopt a broad range of new implementing rules and regulations and prepare numerous studies and reports for Congress. Among other changes, the Dodd-Frank Act imposes consolidated capital requirements on SLHCs. These requirements may have a significant long term effect on our Holding Companies. The Dodd-Frank Act requires the Federal Reserve to promulgate minimum capital requirements for SLHCs, including leverage (Tier 1) and risk based capital requirements that are no less stringent than those applicable to banks.

On June 7, 2012, the Federal Reserve issued a 250 page notice of proposed rulemaking on increased capital requirements, implementing changes required by the Dodd-Frank Act and portions of the Basel III regulatory capital reforms, portions of which would apply to top-tier SLHCs including H&R Block, Inc. We are still analyzing the proposed capital regulations, which would not become fully implemented until January 1, 2015,

and the effect they would have on us and our business.

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The proposed capital requirements for SLHCs may require us to retain or raise additional capital, restrict our ability to pay dividends and repurchase shares of our common stock and/or alter our strategic plans. See Item 1 for further discussion of the Dodd-Frank Act.

HRB Bank is subject to extensive federal banking laws and regulations. If we fail to comply with applicable banking laws and regulations, we could be subject to disciplinary actions, damages, penalties or restrictions that could significantly harm our business.

HRB Bank is subject to regulation, examination, supervision, reporting requirements and enforcement by the OCC. The OCC can, among other things, issue cease-and-desist orders, assess civil money penalties and remove bank directors, officers or employees, for violations of banking laws and regulations or engaging in unsafe and unsound banking practices.

HRB Bank is subject to OCC regulatory capital requirements. Failure to meet minimum capital requirements may trigger actions by regulators that could have a direct material effect on HRB Bank. HRB Bank must meet specific capital guidelines involving quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. OCC regulations require HRB Bank to maintain minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1 capital. On June 7, 2012, the OCC issued a notice of proposed rulemaking increasing capital requirements for federal savings banks, including HRB Bank. We are still reviewing how the OCC’s proposed regulations would affect HRB Bank and its business.

The laws and regulations imposed by federal banking regulators generally involve restrictions and requirements in connection with a variety of technical, specialized and expanding matters and concerns. For example, compliance with anti-money laundering and know-your-customer requirements, and the Bank Secrecy Act, has taken on heightened importance with regulators as a result of efforts to limit terrorism. There has been increased regulation with respect to the protection of customer privacy and the need to secure sensitive customer information. Being subject to banking regulation may put us at a disadvantage compared to our competitors which are not subject to such requirements.

The OCC could deem certain products offered by HRB Bank to be “unsafe and unsound” and require HRB Bank to discontinue offering such products. To the extent such products are instrumental in attracting clients to our offices for tax preparation services, we could experience a significant loss of clients should such products be discontinued. This could cause our revenues or profitability to decline.

The Dodd-Frank Act created the CFPB to administer and enforce all federal consumer protections laws. Regulations promulgated by the CFPB may affect our bank and financial services businesses in ways we cannot predict, which may require changes to our financial products, services and contracts.

The Dodd-Frank Act also created the CFPB with broad powers to administer and enforce all federal consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, federal savings banks, and other financial services companies, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. HRB Bank does not currently have assets in excess of $10 billion.

The CFPB has extensive rulemaking and enforcement powers that may impact our business operations. Specifically, the CFPB may examine, and take enforcement actions against, our non-bank subsidiaries that provide consumer financial products and services. New CFPB regulations may require changes to our financial products, services and contracts. The potential reach of the CFPB’s broad rulemaking powers and enforcement authority on the operations of banks and financial services companies offering consumer financial products or services, including our bank and financial services subsidiaries, is currently unknown.

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The nature of our tax service and product offerings requires timely product launches. Any significant delays in launching our tax service and product offerings, changes in government regulations or processes that affect how we provide such offerings to our clients, or significant problems with such offerings may harm our revenue, results of operations and reputation.

Tax laws and tax forms are subject to change each year, and the nature and timing of any such changes are unpredictable. As a part of our business, we must incorporate any changes to tax laws and tax forms into our tax service and product offerings, including our online tax services and our H&R Block At Home^TM tax preparation software. The unpredictable nature of changes to tax laws and tax forms can result in condensed development cycles for our tax service and product offerings because our clients expect high levels of accuracy and a timely launch of such offerings to prepare and file their taxes by the tax filing deadline. Any changes in governmental regulations and processes that affect how we provide services to our clients may require us to make corresponding changes to our client service systems and procedures.

If we encounter development challenges or discover errors in our services and products late in our development cycle it may cause us to delay the launch dates of our offerings. Any major defects or launch delays may lead to loss of clients and revenue, negative publicity, client and employee dissatisfaction, reduced retailer shelf space and promotions, and increased operating expenses.

Our business, results of operations and financial condition may be adversely affected if we are unable to hire, train and retain sufficient qualified seasonal tax personnel.

Due to the seasonality of our tax business, we employ a substantial amount of seasonal tax professionals on an annual basis. If we were unable to hire, train and retain a sufficient amount of seasonal tax professionals, it could negatively impact our ability to serve clients, which in turn could damage our brand and reputation, or adversely impact our profitability.

We face substantial litigation in connection with our various business activities, and such litigation may damage our reputation or result in material liabilities and losses.

We, and/or our subsidiaries, have been named and from time to time will likely continue to be named, as a defendant in various legal actions, including arbitrations, class actions and other litigation arising in connection with our various business activities. Adverse outcomes related to litigation could result in substantial damages and could cause our earnings to decline. Negative public opinion could also result from our subsidiaries’ actual or alleged conduct in such claims, possibly damaging our reputation, which in turn could adversely affect our business prospects and cause the market price of our stock to decline. In addition, certain regulators have alleged that some of our competitors are lending tax preparation fees when they issue products similar to a RAC to their clients. An adverse ruling in this area could have a material impact on our offering of RACs, which could result in the loss of a significant number of clients, causing our revenues or results of operations to decline. See Item 8, note 19 to the consolidated financial statements for additional information.

Our access to liquidity may be negatively impacted as disruptions in credit markets occur, if credit rating downgrades occur or if we fail to meet certain covenants. Funding costs may increase, leading to reduced earnings.

We need liquidity to meet our off-season working capital requirements, to service debt obligations including refinancing of maturing obligations, and for other related activities. Our access to and the cost of liquidity could be negatively impacted in the event of credit rating downgrades or if we fail to meet existing debt covenants. In addition, events could occur which could increase our need for liquidity above current levels.

If rating agencies downgrade our credit rating, the cost of debt would likely increase and capital market access could decrease or become unavailable. Our unsecured committed line of credit (CLOC) is subject to various covenants, and a violation of a covenant could impair our access to liquidity currently available through the CLOC. If current sources of liquidity were to become unavailable, we would need to obtain additional sources of funding, which may not be possible or may be available under less favorable terms.

Our businesses may be adversely affected by difficult economic conditions, particularly if unemployment levels do not improve or continue to increase.

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. 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

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preparation and filing alternatives. Continued high unemployment levels 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 our loan portfolio primarily held by HRB Bank, and such deterioration could have a negative impact on our business and profitability.

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. Trends in the residential mortgage loan market continue to reflect high loan delinquencies and lower collateral values. We recorded loan loss provisions totaling $24.1 million, $35.6 million and $47.8 million during fiscal years 2012, 2011 and 2010, respectively.

HRB Bank’s loan portfolio is concentrated in the states of Florida, New York and California, which represented 19%, 18% and 13%, respectively, of HRB Bank’s total mortgage loans held for investment at April 30, 2012. No other state held more than 10% of HRB Bank’s loan balances. If adverse trends in the residential mortgage loan market continue, particularly in geographic areas in which HRB Bank owns a greater concentration of mortgage loans, HRB Bank could incur additional significant loan loss provisions.

Mortgage loans purchased from Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC) represent 59% of total loans held for investment at April 30, 2012. These loans have experienced higher delinquency rates than other loans in HRB Bank’s portfolio, and may expose HRB Bank to greater risk of credit loss.

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.

RISKS RELATING TO DISCONTINUED OPERATIONS

SCC is subject to potential contingent losses related to representation and warranty claims, which may have an adverse effect on our cash flows, financial condition and results of operations. Additionally, SCC has accrued an estimated liability related to these contingent losses that may not be adequate.

SCC remains exposed to losses relating to mortgage loans it previously originated. Mortgage loans originated by SCC were sold either as whole-loans to single third-party buyers or in the form of residential mortgage-backed securities (RMBSs).

In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. These representations and warranties varied based on the nature of the transaction and the buyer’s or insurer’s requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with SCC’s underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. In the event there is deemed to be a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan, or a securitization insurer’s interest or a certificate holder’s interest in the mortgage loan, SCC may be obligated to repurchase the loan or may otherwise indemnify certain parties for losses, referred to as “representation and warranty claims.” The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred. SCC believes that the limitations period begins to run from the applicable closing date of the sale of the loans or RMBS, although there is limited case law on this issue.

SCC accrues a liability for contingent losses relating to representation and warranty claims by estimating probable losses for those claims, both known and projected. At April 30, 2012, SCC’s accrued liability for representation and warranty claims was $130.0 million. SCC’s accrued liability is subjective and based upon, among other things, SCC’s historical and projected frequency of representation and warranty claims. Losses incurred in connection with actual or projected representation and warranty claims may be in excess of the accrued liability. The accrued liability may need to be increased in the future for additional losses associated with representation and warranty claims. If losses related to future representation and warranty claims are in excess of SCC’s accrued liability, those losses could have a material adverse effect on our cash flows, financial

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condition and results of operations. The accrued liability for representation and warranty claims does not include any losses related to litigation matters discussed in the risk factor below and in Item 8, note 19 to the consolidated financial statements. Also see Item 8, note 18 to the consolidated financial statements.

SCC is subject to potential contingent losses related to securitization transactions in which SCC participated as a depositor or loan originator, which may result in significant financial losses.

Between January 2005 and November 2007, SCC participated in approximately 110 securitization transactions either as a depositor or a loan originator. In most of these securitization transactions, SCC agreed, subject to certain conditions and limitations, to indemnify the underwriters or depositors for certain losses and expenses that the underwriters or depositors may incur as a result of certain claims made against them relating to loans originated by SCC, including certain legal expenses the underwriters or depositors incur in their defense of such claims. Some of those underwriters and depositors are defendants in lawsuits where various other parties allege a variety of claims, including violations of federal and state securities law and common law fraud based on alleged materially inaccurate or misleading disclosures, arising out of the activities of such underwriters or depositors in their sale of RMBSs or mortgage loans. As of April 30, 2012, SCC has received notice of a claim for indemnification from the underwriters or depositors relating to 9 of these lawsuits and involving approximately 25 securitization transactions collateralized in whole or in part by loans originated by SCC. Additional notices of claims for indemnification may be received by SCC in the future from underwriters or depositors who are subject to existing or new litigation.

In addition, other counterparties to the securitization transactions, including certificate holders, securitization trustees and monoline insurance companies, have filed or may file lawsuits, or may assert indemnification claims, directly against depositors and loan originators in securitization transactions alleging a variety of claims, including federal and state securities law violations, common law torts and fraud and breach of contract, among others. Additional or new lawsuits may be filed against SCC in the future.

These matters are in the early stages and SCC is not able to reasonably estimate the associated amount of any possible loss or range of loss. As a result, we have not accrued any liability related to these exposures. However, if SCC were required to pay material amounts with respect to these matters, it could have a material adverse effect on our financial position, results of operations or cash flows, as SCC’s financial condition and operating results are included in our consolidated financial statements. See Item 8, note 19 to the consolidated financial statements for additional information.

H&R Block has guaranteed the payment of certain limited claims against SCC.

SCC is subject to representation and warranty claims by counterparties to SCC whole loan sales and securitization transactions, including certificate holders, securitization trustees and monoline insurance companies. In certain limited circumstances described below, H&R Block has outstanding guarantees of payment if claims are successfully asserted by such counterparties.

These guarantees include representation and warranty claims with respect to three whole loan sales in 2007 by SCC with an aggregate outstanding principal and liquidated amount of approximately $1.4 billion as of April 30, 2012. There have been a total of $29.3 million of representation and warranty claims with respect to these three whole loan sales, of which $4.4 million were deemed valid and paid by SCC, representing significantly less than one percent of the original principal amount of such loans.

These guarantees also cover payment of representation and warranty claims with respect to mortgage loans supporting RMBSs with a remaining outstanding principal amount of approximately $1.2 billion that were issued prior to 2005 (“Pre-2005 RMBSs”). We do not anticipate that any significant amount of representation and warranty claims will be asserted with respect to the Pre-2005 RMBSs in view of (i) the underlying loan vintage and performance, (ii) principal losses to certificate holders represent significantly less than one percent of the original aggregate principal amount of Pre-2005 RMBSs, (iii) no claims have been asserted since 2008, and (iv) based upon our belief regarding the applicable statute of limitations we do not expect that new representation and warranty claims would be viable. This claims history is consistent with our experience that most valid claims relate to loan delinquencies occurring within the first two years following origination, and that the longer a loan performs prior to an event of default, the less likely a default will be related to a breach of a representation and warranty.

These guarantees also cover limited representation and warranty claims on other outstanding securitization transactions, with a potential claims exposure of less than $200 million. In addition, as is customary in divestiture transactions, H&R Block guaranteed the payment of any indemnification claims from the purchaser of SCC’s servicing business, including claims relating to pre-closing services (which closing occurred in 2008).

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If SCC were to become insolvent, we could be subject to claims by the unpaid creditors of SCC.

As discussed above, SCC is subject to representation and warranty claims and other claims and litigation related to its past sales and securitizations of mortgage loans. It is likely that additional claims and proceedings will be made in the future. If the amount that SCC is ultimately required to pay with respect to these claims and litigation exceeds its assets, the creditors of SCC, or a bankruptcy trustee if SCC were to file or be forced into bankruptcy, may attempt to assert claims against us for payment of SCC’s obligations. We believe our legal position is strong on any potential corporate veil-piercing arguments; however, if this position is challenged and not upheld, it could have a material adverse effect on our financial position, results of operations or cash flows. In addition, in certain limited instances, H&R Block guaranteed amounts as outlined in the above risk factor.

None.

Most of our tax offices are operated under leases or similar agreements throughout the U.S. Our Canadian executive offices are located in a leased office in Calgary, Alberta. Our Canadian tax offices are operated under leases throughout Canada. Our Australian executive offices are located in a leased office in Thornleigh, New South Wales. Our Australian tax offices are operated under leases throughout Australia.

HRB Bank is headquartered and its single branch location is located in our corporate headquarters. We own our corporate headquarters, which is located in Kansas City, Missouri. All current leased and owned facilities are in good repair and adequate to meet our needs.

For a description of our material pending legal proceedings, see discussion in Item 8, note 19 to the consolidated financial statements.

Not applicable.

PART II

H&R Block’s common stock is traded on the New York Stock Exchange (NYSE) under the symbol HRB. On May 31, 2012, there were 22,030 shareholders of record and the closing stock price on the NYSE was $15.27 per share.

The quarterly information regarding H&R Block’s common stock prices and dividends appears in Item 8, note 23 to the consolidated financial statements.

A summary of our securities authorized for issuance under equity compensation plans as of April 30, 2012 is as follows:

The remaining information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is reported in Item 8, note 14 to the consolidated financial statements.

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A summary of our purchases of H&R Block common stock during the fourth quarter of fiscal year 2012 is as follows:

PERFORMANCE GRAPH – The following graph compares the cumulative five-year total return provided shareholders on H&R Block, Inc.’s common stock relative to the cumulative total returns of the S&P 500 index and the S&P Diversified Commercial & Professional Services index. An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock and in each of the indexes on April 30, 2007, and its relative performance is tracked through April 30, 2012.

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We derived the selected consolidated financial data presented below as of and for each of the five annual periods ending April 30, 2012, from our audited consolidated financial statements. All periods presented have been reclassified to reflect the sale of RSM as discontinued operations. Results of operations of fiscal years 2012, 2011 and 2010 are discussed in Item 7. Results of operations for fiscal year 2008 included significant losses of our discontinued mortgage businesses. The data set forth below should be read in conjunction with Item 7 and the consolidated financial statements in Item 8.

Our subsidiaries provide tax preparation and retail banking services. We are the only major company offering a full range of software, online and in-office tax preparation solutions to individual tax clients.

OVERVIEW

A summary of our fiscal year 2012 results is as follows:

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RESULTS OF OPERATIONS

TAX SERVICES

This segment primarily consists of our income tax preparation businesses – assisted, online and software. This segment includes our tax operations in the U.S. and its territories, Canada, and Australia. Additionally, this segment includes the activities of HRB Bank that primarily support the tax network.

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FISCAL 2012 COMPARED TO FISCAL 2011 – Tax Services’ revenues decreased $50.0 million, or 1.7%, compared to the prior year. Tax preparation fees increased $23.5 million, or 1.2% primarily due to an increase in tax returns prepared in our international operations and favorable exchange rates. Return volume and pricing in U.S. company-owned offices were relatively unchanged from the prior year.

Royalties increased $4.4 million, or 1.4%, primarily due to a 1.9% increase in returns prepared in franchise offices.

Fees earned on RACs decreased $49.3 million, or 27.1%, due to a promotional offering, whereby clients were eligible to receive a RAC at no charge through February 4, if they elected to have their refund direct deposited onto an Emerald Card.

Emerald Card fees increased $13.7 million, or 15.1%, primarily due to higher transaction volumes resulting from an increase of approximately 24% in prepaid debit cards issued.

Interest income earned on EAs decreased $34.6 million, or 36.7%, as a result of lower EA volumes principally resulting from changes in underwriting criteria in the current year.

Prior to fiscal year 2011, RALs were offered to our clients by a third party. In the prior year, we recognized the final contractual fees related to RALs totaling $17.2 million.

Other revenue increased $12.5 million, or 5.8%, primarily due to an increase in online tax preparation revenues.

Total expenses increased $13.5 million, or 0.6%, compared to the prior year. Benefits and other compensation increased $8.8 million, or 5.0%, over the prior year primarily due to incremental severance costs. Marketing and advertising increased $35.7 million, or 14.7%, as we expanded our marketing efforts, primarily in television and online. Bad debt expense decreased $71.0 million, or 51.0%, primarily as a result of lower EA volumes in the current year and with better collection rates in the current year. Other expenses increased $31.4 million, or 12.8%, primarily due to incremental litigation expenses recorded in the current year. Gains on the sale of tax offices declined $28.5 million, as we sold 83 offices in the current year compared to 280 in the prior year.

Pretax income for fiscal year 2012 decreased $63.5 million, or 8.3%, from 2011. The pretax margin for the segment decreased to 24.6% from 26.4% in fiscal year 2011.

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FISCAL 2011 COMPARED TO FISCAL 2010 – Tax Services’ revenues decreased $62.9 million, or 2.1%, compared to the prior year. Tax preparation fees decreased $61.0 million, or 3.1%, due primarily to the sale of company-owned offices to franchisees and the loss of certain clients as a result of not having a RAL offering in our tax offices in fiscal year 2011. Although we gained clients through the free Federal EZ filing we began offering during fiscal year 2011, that increase did not have a significant impact on our revenues.

Royalties increased $28.6 million, or 10.4%, primarily due to the conversion of 280 company-owned offices into franchises.

Fees earned on RACs increased $94.1 million, or 107.5%, primarily due to an increase in the number of RACs issued as a portion of our clients chose to receive their refunds via RAC, as an alternative to a RAL.

RALs were historically offered to our clients by HSBC Holdings plc (HSBC). In December 2010, HSBC terminated its contract with us based on restrictions placed on HSBC by its regulator and, therefore, RALs were not offered during the 2011 tax season. Revenues of $17.2 million include the recognition of net deferred fees from HSBC. This compares with revenues resulting from loans participations and related fees in fiscal year 2010 of $146.2 million.

Interest income earned on EAs increased $16.4 million, or 21.1%, over fiscal year 2010 primarily due to an increase in loan volume, which resulted from offering the product to a wider client base.

Total expenses increased $37.0 million, or 1.8%, compared to fiscal year 2010. Compensation and benefits decreased $8.5 million, or 0.8%, primarily due to lower commission-based wages due to conversions to franchise offices, reduced headcount and related payroll taxes. This decline was partially offset by severance costs and related payroll taxes of $27.4 million. Occupancy costs declined $25.6 million, or 6.2%, due to office closures and cost-saving initiatives. Bad debt expense increased $34.3 million, or 32.8%, primarily due to increased volumes on EAs, as well as a decline in tax returns prepared for those clients. During fiscal year 2011, we recorded a $22.7 million impairment of goodwill in an ancillary reporting unit, as discussed in Item 8, note 7 to the consolidated financial statements. Other expenses increased $11.5 million, or 4.9%, primarily due to incremental litigation expenses recorded in fiscal year 2011.

Pretax income for fiscal year 2011 decreased $99.9 million, or 11.5%, from 2010. As a result of the declines in revenues and higher expenses, primarily bad debt expense and goodwill impairment, pretax margin for the segment decreased to 26.4% from 29.2% in fiscal year 2010.

CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS

Corporate operating losses include net interest margin and gains or losses relating to mortgage loans held for investment, real estate owned and residual interests in securitizations, along with interest expense on borrowings and other corporate expenses.

FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011

Interest income earned on mortgage loans held for investment decreased $4.4 million, or 17.7%, from the prior year, primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased $11.5 million, or 32.3%, from the prior year as a result of the continued run-off of our portfolio.

Income Taxes on Continuing Operations

Our effective tax rate for continuing operations in fiscal year 2012 was 39.9% compared to 37.5% in the prior year. The higher effective tax rate was primarily due to increased tax expense related to changes in the value of investments held within company-owned life insurance (COLI) policies. A portion of the increase related to COLI resulted from the decision to surrender COLI policies no longer required to support our deferred

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compensation liabilities. This decision triggered a one-time tax expense related to prior period gains. In addition to the impact of COLI, changes in tax items including valuation allowances, income tax reserves and other discrete tax adjustments caused a small net increase to tax expense.

FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010

Interest income earned on mortgage loans held for investment decreased $7.2 million, or 22.5%, from the prior year, primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased $12.2 million, or 25.5%, from the prior year as a result of the continued run-off of our portfolio.

Income Taxes on Continuing Operations

Our effective tax rate from continuing operations was 37.5% for the fiscal year ended April 30, 2011, compared to 37.1% in the prior year. The increase resulted from a decline in gains from investments in company-owned life insurance assets which were not subject to tax and an increase in the state effective tax rate offset by other favorable net discrete adjustments recorded in fiscal year 2011 compared to net unfavorable adjustments recorded in fiscal year 2010.

DISCONTINUED OPERATIONS

Our discontinued operations include the results of RSM and related businesses, which were previously reported in our Business Services segment, and our discontinued mortgage operations.

FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011

The net loss from our discontinued operations totaled $80.0 million compared to income of $13.6 million for the prior year. The loss on the sale of RSM and related businesses includes a $99.7 million goodwill impairment recorded in the first quarter related to the sales of RSM and MCM. Additionally, the prior year includes twelve months of RSM operating results while the current year includes only seven months.

The loss related to the mortgage business increased due to a settlement of approximately $28 million to the SEC accrued during the current year, coupled with $20.0 million in incremental loss provisions related to an increase in SCC’s estimated contingent losses for representation and warranty claims.

Income Taxes

The sale of RSM resulted in a pretax financial statement loss, but produced a gain for tax purposes. The tax gain resulted primarily from larger amortization deductions taken for tax purposes than for financial statement purposes. A portion of the gain from the sale of intangible assets is capital in nature and was offset by utilization of capital loss carry-forwards, resulting in an incremental tax benefit reported for financial statement purposes.

FISCAL YEAR 2011 COMPARED TO FISCAL YEAR 2010

Net income from our discontinued operations fell to $13.6 million in fiscal year 2011, from $24.1 million for fiscal year 2010, primarily due to lower revenues and higher litigation expenses in our RSM business and higher expenses from our discontinued mortgage business.

Income Taxes

Our effective tax rate for discontinued operations was 50.5% for the fiscal year ended April 30, 2011, compared to 44.0% in the prior year. This increase resulted from the impact of permanent tax items and increased state tax rates.

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REPRESENTATION AND WARRANTY CLAIMS

SCC has accrued a liability for estimated contingent losses related to representation and warranty claims as of April 30, 2012 of $130.0 million, which represents SCC’s estimate of the probable loss that may occur. Losses on claims reviewed and deemed to be valid totaled $16.2 million, $12.2 million and $18.2 million for fiscal years 2012, 2011 and 2010, respectively. These amounts were recorded as reductions of SCC’s accrued representation and warranty liability.

During the second and fourth quarters of fiscal year 2012, SCC observed an increase in third-party activity. As a result of this third-party activity, SCC’s estimate of probable claims increased from its prior expectations, resulting in additional loss provisions of approximately $56 million. These loss provisions were partially offset by changes in assumptions, including a decrease in the rate at which claims have been found to be valid, corresponding to recent trends in reviewed claims, and a decrease in expected future claims related to net interest margin (NIM) bonds that had matured, resulting in a net recorded loss provision in discontinued operations of $20.0 million.

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 risks 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 estimates we have selected when there are acceptable alternatives and new or proposed accounting standards that may affect our financial reporting in the future.

MORTGAGE LOAN REPRESENTATION AND WARRANTY CLAIMS – In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. These representations and warranties varied based on the nature of the transaction and the buyer’s or insurer’s requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with SCC’s underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which represented approximately 68% of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a “knowledge qualifier” limiting SCC’s liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions did not include a knowledge qualifier as to borrower fraud. In the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan or a securitization insurer’s or certificate holder’s interest in the mortgage loan, SCC may be obligated to repurchase the loan or may otherwise indemnify certain parties for losses, referred to as “representation and warranty claims.” The amount of claims received varies from period to period, and these variances have been and are expected to continue to fluctuate substantially. Although there is no certainty regarding future claims volume, SCC may continue to experience an increase in representation and warranty claims as a result of volatility in mortgage delinquency rates, housing prices and expected expiration of applicable statutes of limitations and developments in securities litigation and other proceedings to which SCC is not a party.

SCC accrues a liability for contingent losses relating to representation and warranty claims by estimating probable losses for those claims, both known and projected, based on, among other things, historical validity and severity rates. Projections of future claims are based on an analysis that includes a review of the terms and provisions of applicable agreements, the historical experience under representation and warranty claims and third-party activity, which includes inquiries from various third-parties. SCC’s methodology for calculating this liability also includes an assessment of the probability that individual counterparties (private label securitization trustees on behalf of certificate holders, monoline insurers and whole-loan purchasers) will assert future claims.

This accrued liability is included in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets, and represents SCC’s estimate of losses from future representation and

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warranty claims where assertion of a claim and a related contingent loss are both determined to be probable and reasonably estimable. Because, among other things, the rate at which future claims may be determined to be valid and actual loss severity rates may differ significantly from historical experience, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. A 1% increase in both assumed validity rates and loss severities would result in losses beyond SCC’s accrual of approximately $31 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on the representation and warranty claims liability. In reality, changes in one assumption may result in changes in other assumptions, which could affect the sensitivity and the amount of losses.

While SCC uses what it believes to be the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating probable losses are inherently subjective and require considerable management judgment. To the extent that the volume of asserted claims, the level of valid claims, the counterparties asserting claims, the nature and severity of claims, remedies claimed, or the value of residential home prices, among other factors, differ in the future from current estimates, future losses may differ from the current estimates and those differences may be significant.

See Item 8, note 18 to the consolidated financial statements.

LITIGATION AND RELATED CONTINGENCIES – 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 after analysis of each known issue and an analysis of historical experience. Therefore, 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. With respect to other matters, we have concluded that a loss is only reasonably possible or remote, or is not reasonably estimable and, therefore, no liability is accrued.

Assessing the likely outcome of pending litigation, including the amount of potential loss, if any, is highly subjective. 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. We are subject to threatened litigation claims and indemnification claims, which are described in Item 8, note 19 to the consolidated financial statements.

ALLOWANCE FOR LOAN LOSSES – The principal amount of mortgage loans held for investment totaled $429.3 million at April 30, 2012. We are exposed to the risk that borrowers may not repay amounts owed to us when they become contractually due. We record an allowance representing our estimate of probable credit losses in the portfolio of loans held for investment at the balance sheet date. Determination of our allowance for loan losses is considered a critical accounting estimate because loss provisions can be material to our operating results, projections of loan delinquencies and related matters are inherently subjective, and actual losses are impacted by factors outside of our control including economic conditions, unemployment rates and residential home prices.

We record a loan loss allowance for loans less than 60 days past due on a pooled basis. The aggregate principal balance of these loans totaled $248.8 million at April 30, 2012, and the portion of our allowance for loan losses allocated to these loans totaled $9.2 million. In estimating our loan loss allowance for these loans, we stratify the loan portfolio based on our view of risk associated with various elements of the pool and assign estimated loss rates based on those risks. Loss rates are based primarily on historical experience and our assessment of economic and market conditions. Loss rates consider both the rate at which loans will become delinquent (frequency) and the amount of loss that will ultimately be realized upon occurrence of a liquidation of collateral (severity). Frequency rates are based primarily on historical migration analysis of loans to delinquent status. Severity rates are based primarily on recent broker quotes or appraisals of collateral. Because of imprecision and uncertainty inherent in developing estimates of future credit losses, in particular during periods of rapidly declining collateral values or increasing delinquency rates, our estimation process includes development of ranges of possible outcomes. Ranges were developed by stressing initial estimates of both frequency and severity rates. Stressing of frequency and severity assumptions is intended to model deterioration in credit quality that is difficult to predict during declining economic conditions. Future deterioration in credit quality may exceed our modeled assumptions.

Mortgage loans held for investment include loans originated by our affiliate, SCC, and purchased by HRB Bank. We have greater exposure to loss with respect to this segment of our loan portfolio as a result of

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historically higher delinquency rates. Therefore, we assign higher frequency rate assumptions to SCC-originated loans compared with loans originated by other third-party banks as we consider estimates of future losses. At April 30, 2012 our weighted-average frequency assumption was 11% for SCC-originated loans compared to 2% for remaining loans in the portfolio.

We consider loans 60 days past due impaired and review them individually. We record loss estimates typically based on the value of the underlying collateral. For loans over 60 days past due but less than 180 days past due or otherwise impaired, we record a loan loss allowance. Our loan loss allowance for these impaired loans reflected an average loss severity of 36% at April 30, 2012. The aggregate principal balance of these impaired loans totaled $108.6 million at April 30, 2012, and the portion of our allowance for loan losses allocated to these loans totaled $9.6 million. For loans 180 days or more past due, we charge-off the loans to the value of the collateral less costs to sell. Loans more than 180 days past due were partially charged-off at a severity rate of 46%.

Modified loans that meet the definition of a troubled debt restructuring (TDR) are also considered impaired and are reviewed individually. We record impairment 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 assess that foreclosure of a modified loan is probable, we record impairment based on the estimated fair value of the underlying collateral. The aggregate principal balance of TDR loans totaled $71.9 million at April 30, 2012, and the portion of our allowance for loan losses allocated to these loans totaled $7.8 million.

Charge-offs increased during the current year primarily due to a change whereby we now charge-off loans 180 days past due, rather than record a specific loan loss allowance for those loans. This change had no income statement impact, but reduced the principal amount of loans outstanding and reduced the related allowance. This was a result of our change in regulators from the OTS to the OCC.

The residential mortgage industry has experienced significant adverse trends for an extended period. If adverse trends continue for a sustained period or at rates worse than modeled by us, we may be required to record additional loan loss provisions, and those losses may be significant.

Determining the allowance for loan losses for loans held for investment requires us to make estimates of losses that are highly uncertain and requires a high degree of judgment. If our underlying assumptions prove to be inaccurate, the allowance for loan losses could be insufficient to cover actual losses. Our mortgage loan portfolio is a static pool, as we are no longer originating or purchasing new mortgage loans, and we believe that factor, over time, will limit variability in our loss estimates.

VALUATION OF GOODWILL – The evaluation of goodwill for impairment is a critical accounting estimate due both to the magnitude of our goodwill balances and the judgment involved in determining the fair value of our reporting units. Goodwill balances totaled $427.6 million as of April 30, 2012 and $434.2 million as of April 30, 2011.

We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value. Our goodwill impairment analysis is based on a discounted cash flow (DCF) approach and market comparables.

DCF analyses are based on the current revenue and expense forecasts and estimated long-term growth estimates for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness.

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of the reporting unit’s goodwill is compared to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the estimated fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.

Based on our assessment performed during the fourth quarter of fiscal year 2012, the fair value of the goodwill within our reporting units substantially exceeded its carrying value. Changes to our estimates and assumptions associated with the reporting units could materially affect the determination of fair value and could result in an impairment charge, which could be material to our financial position and results of operations.

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This analysis, at the reporting unit level, requires significant management judgment with respect to revenue and expense forecasts, anticipated changes in working capital and the selection and application of an appropriate discount rate. Changes in projections or assumptions could materially affect our estimate of reporting unit fair values. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could affect our conclusions regarding the existence or amount of potential impairment. Finally, strategic changes in our outlook regarding reporting units or intangible assets may alter our valuation approach and could result in changes to our conclusions regarding impairment.

Future estimates of fair value may be adversely impacted by declining economic conditions. In addition, if future operating results of our reporting units are below our current modeled expectations, fair value estimates may decline. Any of these factors could result in future impairments, and those impairments could be significant.

In fiscal year 2012, we discontinued service under our ExpressTax brand and closed approximately 200 underperforming company-owned offices as a result of our strategic realignment announced in April 2012. As a result, we recorded an impairment of goodwill, which totaled $7.4 million, in our Tax Services segment. We recorded a goodwill impairment of $22.7 million related to our RedGear reporting unit within our Tax Services segment in fiscal year 2011.

See Item 8, note 7 to the consolidated financial statements.

INCOME TAXES – Income taxes are accounted for using the asset and liability approach under U.S. generally accepted accounting principles. We calculate our current and deferred tax provision for the fiscal year based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the applicable calendar year. Adjustments based on filed returns are recorded in the appropriate periods when identified. We file a consolidated federal tax return on a calendar year basis, generally in the second fiscal quarter of the subsequent year.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. 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 against our deferred tax assets. Determination of a valuation allowance for deferred tax assets requires that we make judgments about future matters that are not certain, including projections of future taxable income and evaluating potential tax-planning strategies. To the extent that actual results differ from our current assumptions, the valuation allowance 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 to the deferred tax assets 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.

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 and/or penalties. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on our best judgments. 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.

REVENUE RECOGNITION – We have many different revenue sources, each governed by specific revenue recognition policies. Our revenue recognition policies can be found in Item 8, note 1 to the consolidated financial statements.

FINANCIAL CONDITION

CAPITAL RESOURCES AND LIQUIDITY – Our sources of capital include cash from operations, cash from customer deposits, issuances of common stock and debt. We use capital primarily to fund working capital,

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pay dividends, repurchase treasury shares and acquire businesses. Our operations are highly seasonal and therefore generally require the use of cash to fund operating losses during the period May through mid-January.

Given the likely availability of a number of liquidity options discussed herein, including borrowing capacity under our CLOC, we believe that in the absence of any unexpected developments our existing sources of capital at April 30, 2012 are sufficient to meet our operating needs.

These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Item 8.

CASH FROM OPERATING ACTIVITIES – Cash provided by operations, which consists primarily of cash received from customers, decreased $150.5 million from fiscal year 2011. The decline from the prior year was primarily due to lower net income of our continuing operations and losses in our discontinued operations.

Restricted Cash.  We hold certain cash balances that are restricted as to use. Cash and cash equivalents – restricted totaled $48.1 million at April 30, 2012, and primarily consisted of cash held by our captive insurance subsidiary that will be used to pay claims and cash held by HRB Bank required for regulatory compliance.

CASH FROM INVESTING ACTIVITIES – Changes in cash provided by investing activities primarily relate to the following:

Available-for-Sale Securities.  During fiscal year 2012, HRB Bank purchased $256.2 million in mortgage-backed securities for regulatory purposes, compared to $138.8 million in fiscal year 2011. Additionally, we received payments on AFS securities of $66.4 million in fiscal year 2012 compared to $16.8 million and $15.8 million in fiscal years 2011 and 2010, respectively. See additional discussion in Item 8, note 5 to the consolidated financial statements.

Mortgage Loans Held for Investment.  We received net proceeds of $49.1 million, $58.5 million and $72.8 million on our mortgage loans held for investment in fiscal years 2012, 2011 and 2010, respectively.

Purchases of Property and Equipment.  Total cash paid for property and equipment was $82.5 million, $63.0 million and $90.5 million for fiscal years 2012, 2011 and 2010, respectively.

Business Acquisitions.  Total cash paid for acquisitions was $15.3 million, $54.2 million and $10.5 million during fiscal years 2012, 2011 and 2010, respectively. In fiscal year 2011 our previously reported Business Services segment acquired Caturano, a Boston-based accounting firm, and cash used in investing activities includes payments totaling $32.6 million related to this acquisition.

Sales of Businesses.  We received proceeds from the sales of businesses of $560.5 million, $71.1 million and $66.6 million for fiscal years 2012, 2011 and 2010, respectively. Current year amounts include net proceeds of $523.1 million from the sale of RSM and proceeds of $37.4 million from the sale of ancillary businesses and offices. During fiscal year 2012, we sold 83 tax offices to franchisees, compared to 280 tax offices in fiscal year 2011, and 267 in fiscal year 2010. The majority of these sales were financed through affiliate loans.

Loans Made to Franchisees.  Loans made to franchisees totaled $46.2 million, $92.5 million and $89.7 million for fiscal years 2012, 2011 and 2010, respectively. We received payments from franchisees totaling $56.6 million, $57.6 million and $40.7 million, respectively. These amounts include both the financing of sales of tax offices and franchisee draws under our Franchise Equity Lines of Credit (FELCs).

CASH FROM FINANCING ACTIVITIES – Changes in cash used in financing activities primarily relate to the following:

Short-Term Borrowings.  While we use commercial paper borrowings to fund our off-season losses and cover our seasonal working capital needs, we had no commercial paper borrowings outstanding as of April 30, 2012 or 2011. Our commercial paper borrowings peaked at $331.5 million in January of the current year. Our borrowings in the current year were lower than previous years due to cash received from the sale of RSM.

FHLB Borrowings.  HRB Bank obtains borrowings from the FHLB in accordance with regulatory and capital requirements. During fiscal years 2012, 2011 and 2010, we had net repayments of $25.0 million, $50.0 million and $25.0 million, respectively.

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Customer Banking Deposits.  Changes in customer banking deposits resulted in a use of cash of $26.1 million in the current year compared to $11.4 million in fiscal year 2011. Cash totaling $17.5 million was provided in fiscal year 2010. These deposits are held by HRB Bank.

Dividends.  We have consistently paid quarterly dividends. Dividends paid totaled $208.8 million, $186.8 million and $200.9 million in fiscal years 2012, 2011 and 2010, respectively. During fiscal year 2012, our

Board of Directors approved an increase of our quarterly cash dividend from $0.15 per share to $0.20 per share. The increase was effective with the quarterly dividend payable on January 5, 2012 to shareholders of record as of December 22, 2011. Although we have historically paid dividends and currently 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.

Repurchase and Retirement of Common Stock.  During fiscal year 2012, we purchased and immediately retired 14.6 million shares of our common stock at a cost of $200.0 million. As of April 30, 2012, payment of $22.5 million related to 1.5 million shares had not yet settled and was accrued as a liability on the consolidated balance sheet. During fiscal year 2011, we purchased and immediately retired 19.0 million shares of our common stock at a cost of $279.9 million. During fiscal year 2010, we purchased and immediately retired 12.8 million shares of our common stock at a cost of $250.0 million. Although we have historically from time to time repurchased and retired common stock and our Board of Directors has approved an extension of our current share repurchase program as discussed below, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to repurchase and retire common stock.

Through June 25 of the first quarter of fiscal year 2013, we repurchased and immediately retired an additional 21.3 million shares at a cost of $315.0 million. We also retired 60.0 million shares of treasury stock in June 2012. The June retirement of treasury stock had no impact on our total consolidated stockholders’ equity.

In June 2008, our Board of Directors approved an authorization to purchase up to $2.0 billion of our common stock through June 2012. In June 2012, our Board of Directors extended this authorization through June 2015. There was approximately $1.2 billion remaining under this authorization at April 30, 2012.

Issuances of Common Stock.  Proceeds from the issuance of common stock in accordance with our stock-based compensation plans totaled $12.3 million, $0.4 million and $16.7 million in fiscal years 2012, 2011 and 2010, respectively.

HRB BANK – At April 30, 2012, HRB Bank had cash balances of $513.5 million. Distribution of that cash balance would be subject to regulatory approval and it is therefore not available for general corporate purposes.

Block Financial LLC (Block Financial) typically makes capital contributions to HRB Bank to help meet its capital requirements. Block Financial made capital contributions to HRB Bank of $400.0 million during fiscal year 2012 and $235.0 million during both fiscal year 2011 and fiscal year 2010.

Historically, capital contributions by Block Financial have been repaid as dividends or a return of capital by HRB Bank as capital requirements decline. A return of capital or dividend paid by HRB Bank must be approved by the OCC and the Federal Reserve. Although such payments have been approved by our regulators in the past, there is no assurance that they will continue to be in the future, in particular if our regulators determine that higher capital levels at HRB Bank are necessary due to non-performing asset levels. In addition, Block Financial may elect to maintain higher capital levels at HRB Bank. HRB Bank paid dividends and returned capital of $400.0 million during fiscal year 2012. HRB Bank paid dividends and returned capital of $262.5 million during fiscal year 2011, comprised of $37.5 million in real estate owned (REO) properties and loans and $225.0 million in cash. There were no such dividends or repayments of capital in fiscal year 2010.

See additional discussion of regulatory and capital requirements of HRB Bank in “Regulatory Environment” below.

ASSETS HELD BY FOREIGN SUBSIDIARIES – At April 30, 2012, cash and short-term investment balances of $101.8 million were held by our foreign subsidiaries. These funds would have to be repatriated to be available to fund domestic operations, and income taxes would be accrued and paid on those amounts. We do not currently intend to repatriate any funds held by our foreign subsidiaries.

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BORROWINGS

We continually monitor our funding requirements and execute strategies to manage our overall asset and liability profile. The following chart provides the ratings for debt issued by Block Financial as of April 30, 2012 and 2011:

At April 30, 2012, we maintained a CLOC agreement to support commercial paper issuances, general corporate purposes or for working capital needs. This facility provides funding up to $1.7 billion and matures July 31, 2013. This facility bears interest at an annual rate of LIBOR plus 1.30% to 2.80% or PRIME plus 0.30% to 1.80%, depending on the type of borrowing, and includes an annual facility fee of 0.20% to 0.70% of the committed amounts, based on our credit ratings. Covenants in this facility include: (1) maintenance of a minimum equity of $500.0 million on the last day of any fiscal quarter; and (2) reduction of the aggregate outstanding principal amount of short-term debt, as defined in the CLOC agreement, to $200.0 million or less for thirty consecutive days during the period March 1 to June 30 of each year. At April 30, 2012, we were in compliance with these covenants and had net worth of $1.3 billion. We had no balance outstanding under the CLOC at April 30, 2012.

During fiscal years 2012, 2011 and 2010, borrowing needs in our Canadian operations were funded by our U.S. operations. To mitigate the foreign currency exchange rate risk, we used foreign exchange forward contracts. We do not enter into forward contracts for speculative purposes. In estimating the fair value of derivative positions, we utilize quoted market prices, if available, or quotes obtained from external sources. There were no forward contracts outstanding as of April 30, 2012.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

A summary of our obligations to make future payments as of April 30, 2012, is as follows: