HR Block 2007 Annual Report Download - page 67

We believe the funding sources for Consumer Financial Services are bears interest at one-month LIBOR plus 140 to 200 basis points. As of
stable. Liquidity risk within this segment is primarily limited to April 30, 2007 and 2006, the balance outstanding under this facility was
maintaining sufficient capital levels to obtain securities lending liquidity $0.4 million and $1.6 million, respectively, and is included in current
to support margin borrowing by customers and maintaining sufficient liabilities held for sale on the consolidated balance sheets.
capital levels at HRB Bank. See discussion of our non-prime warehouse facilities and waivers of
DISCONTINUED OPERATIONS –Our discontinued operations certain covenants below in ‘‘Off-Balance Sheet Financing
primarily generate cash as a result of the sale and securitization of Arrangements.’’
mortgage loans and residual interests and as residual interests mature. We believe the sources of liquidity available to our mortgage
Our discontinued operations used $735.3 million in cash from operating operations are sufficient for its needs. Risks to the stability of these
activities primarily due to operating losses. Our discontinued operations sources include, but are not limited to, adverse changes in the
provided $15.4 million in cash from investing activities primarily related perception of the non-prime industry, adverse changes in the regulation
to cash received from the maturity and sales of AFS residual interests. of non-prime lending, changes in the rating criteria of non-prime lending
Cash provided by financing activities of $52.4 million reflects an on- by third-party rating agencies and, to a lesser degree, reduction in the
balance sheet securitization during fiscal year 2007. availability of third parties who provide credit enhancement. Past
We regularly sell loans as a source of liquidity. Loan sales in fiscal performance of the securitizations will also impact the segment’s future
year 2007 were $27.5 billion compared with $40.3 billion in fiscal year participation in these markets. The off-balance sheet warehouse
2006. Additionally, BFC provides a line of credit of at least $150 million facilities used by the Trusts are subject to annual renewal, each at a
for working capital needs. At the end of fiscal year 2007 there was different time during the year, and any of the above events could lead to
$811.9 million outstanding on this facility. difficulty in renewing the lines.
To finance our prime mortgage loan originations, HRBMC uses a
warehouse facility with capacity up to $25.0 million. This annual facility
OFF-BALANCE SHEET FINANCING ARRANGEMENTS
We are party to various transactions with an off-balance sheet tangible net worth, income and leverage ratios and may be subject to
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component, including loan commitments and QSPEs, or Trusts. margin calls. We hold an interest in the Trusts equal to the difference
We had commitments to fund mortgage loans of $2.4 billion and between the fair value of the assets and cash proceeds, adjusted for
$4.0 billion at April 30, 2007 and 2006, respectively, which are subject to contractual advance rates, received from the Trusts. In addition to a
conditions and loan contract verification. There is no commitment on margin call feature, loans sold to the Trust are subject to repurchase if
the part of the borrower to close on the mortgage loan at this stage of certain criteria are not met, including loan default provisions.
the lending process and external market forces impact the probability Unfavorable fluctuations in loan value are guaranteed up to 10% of the
of these loan commitments being closed. Therefore, total commitments original fair value.
outstanding do not necessarily represent future cash requirements. If These facilities also contain cross-default features in which a default
the loan commitments are exercised, they will be funded as described in one facility would trigger a default under the other facilities as well.
below. These various facilities bear interest at one-month LIBOR plus 50 to 400
The Trusts reduce our capital investment in our non-prime mortgage basis points and expire on various dates during the year. In addition,
operations. These arrangements are primarily used to sell mortgage some of the facilities provide for the payment of minimum usage fees.
loans, but a portion may also be used to sell servicing advances and Additional uncommitted facilities of $2.0 billion bring total capacity to
finance residual interests. Additionally, these arrangements free up cash $11.3 billion at April 30, 2007.
and short-term borrowing capacity, improve liquidity and flexibility, and As of April 30, 2007, OOMC did not meet the ‘‘minimum net income’’
reduce balance sheet risk, while providing stability and access to financial covenant contained in certain of its committed warehouse
liquidity in the secondary market for mortgage loans. facilities. This covenant requires OOMC to maintain a cumulative
Substantially all non-prime mortgage loans we originate are sold daily minimum net income of at least $1 for the four consecutive fiscal
to the Trusts. Loans totaling $1.5 billion and $7.8 billion were held by the quarters ended April 30, 2007. On April 27, 2007, OOMC obtained
Trusts as of April 30, 2007 and 2006, respectively, and were not recorded waivers of the minimum net income financial covenants from all of the
on our consolidated balance sheets. The Trusts purchase the loans from warehouse facility providers. These waivers extend through various
us using committed warehouse facilities, arranged by us, totaling dates as discussed below. Two waivers are subject to OOMC having a
$9.3 billion in the aggregate. These facilities are subject to various specified amount of total warehouse capacity. If we do not obtain
OOMC performance triggers, limits and financial covenants, including extensions of facilities and waivers that expire before July 31, 2007 or
H&R BLOCK 2007 Form 10K