HR Block 2006 Annual Report Download - page 103

of additional capital to HRBFA. During fiscal year 2005, we contributed Securities borrowed and securities loaned transactions are generally
additional capital of $27.0 million. HRBFA was in excess of the reported as collateralized financings. These transactions require us to
minimum net capital requirement during fiscal years 2006 and 2005, but deposit cash and/or collateral with the counterparty. Securities loaned
we may continue to contribute additional capital in the future. consist of customers’ securities purchased on margin. We receive cash
In fiscal year 2006, Investment Services provided $24.9 million from collateral approximately equal to the value of the securities loaned. The
its operating activities primarily due to improved performance. amount of cash collateral is adjusted, as required, for market
To manage short-term liquidity, BFC provides HRBFA a $300 million fluctuations in the value of the securities loaned. Interest rates paid on
unsecured credit facility. At the end of fiscal year 2006 there was no the cash collateral fluctuate as short-term interest rates change.
outstanding balance on this facility. To satisfy the margin deposit requirement of client option
HRBFA has a secured letter of credit with an unaffiliated financial transactions with the Options Clearing Corporation (OCC), HRBFA
institution with a credit limit of $50.0 million. There were no borrowings pledges customers’ margined securities. Pledged securities at the end of
on this letter of credit during fiscal years 2006 or 2005 and no fiscal year 2006 totaled $53.0 million, an excess of $9.9 million over the
outstanding balance at April 30, 2006 or 2005. margin requirement. Pledged securities at the end of fiscal year 2005
Liquidity needs relating to client trading and margin-borrowing totaled $44.6 million, an excess of $7.9 million over the margin
activities are met primarily through cash balances in client brokerage requirement.
accounts and working capital. We believe these sources of funds will We believe the funding sources for Investment Services are stable.
continue to be the primary sources of liquidity for Investment Services. Liquidity risk within this segment is primarily limited to maintaining
Stock loans have historically been used as a secondary source of sufficient capital levels to obtain securities lending liquidity to support
funding and could be used in the future, if warranted. margin borrowing by customers.
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
We are party to various transactions with an off-balance sheet facilities bear interest at one-month LIBOR plus 50 to 400 basis points
component, including loan commitments and QSPEs, or Trusts. and expire on various dates during the year. In addition, some of the
We have commitments to fund mortgage loans of $4.0 billion and facilities provide for the payment of minimum usage fees. Additional
$4.2 billion at April 30, 2006 and 2005, respectively, which are subject to uncommitted facilities of $1.5 billion bring total capacity to $16.0 billion.
conditions and loan contract verification. There is no commitment on When we sell loans to the Trusts, we remove the mortgage loans from
the part of the borrower to close on the mortgage loan at this stage of our balance sheet and record the gain on the sale, cash, MSRs, recourse
the lending process and external market forces impact the probability reserves and a beneficial interest in Trusts, which represents our
of these loan commitments being closed. Therefore, total commitments residual interest in the ultimate expected outcome from the disposition
outstanding do not necessarily represent future cash requirements. If of the loans by the Trusts. Our beneficial interest in Trusts totaled
the loan commitments are exercised, they will be funded as described $188.0 million and $215.4 million at April 30, 2006 and 2005,
below. respectively.
Our relationships with the Trusts serve to reduce our capital Subsequently, the Trusts, in response to the exercise of a put option
investment in our non-prime mortgage operations. These arrangements by the third-party beneficial interest holders, either sell the loans
are primarily used to sell mortgage loans, but a portion may also be directly to third-party investors or back to us to pool the loans for
used to sell servicing advances and finance residual interests. securitization. The decision to complete a loan sale or a securitization is
Additionally, these arrangements have freed up cash and short-term dependent on market conditions.
borrowing capacity, improved liquidity and flexibility, and reduced For fiscal year 2006, the final disposition of loans sold by the Trusts
balance sheet risk, while providing stability and access to liquidity in was 77% loan sales and 23% securitizations. For fiscal year 2005, the
the secondary market for mortgage loans. final disposition of loans sold by the Trusts was 92% loan sales and 8%
Substantially all non-prime mortgage loans we originate are sold daily securitizations. The higher percentage of loan sale transactions versus
to the Trusts. The Trusts purchase the loans from us using nine securitizations is due to more favorable pricing in the loan sale market
committed warehouse facilities, arranged by us, totaling $14.5 billion. and also results in cash being received earlier. Additionally, loan sales
These facilities are subject to various Option One performance triggers, do not add residual interests to our balance sheet, and therefore, we do
limits and financial covenants, including tangible net worth and not retain balance sheet risk.
leverage ratios and may be subject to margin calls. In addition, these If the Trusts sell the mortgage loans in a loan sale, we receive cash for
facilities contain cross-default features in which a default in one facility our beneficial interest in Trusts. In a securitization transaction, the
would trigger a default under the other facilities as well. These various Trusts transfer the loans and the corresponding right to receive all
H&R BLOCK 2006 Form 10K
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