HR Block 2007 Annual Report Download - page 75

interest rates. See Item 7, ‘‘Financial Condition’’ for additional HRB Bank’s liabilities consist primarily of transactional deposit
information. relationships, such as prepaid debit card accounts and checking
Our long-term debt at April 30, 2007 consists primarily of fixed-rate accounts. Other liabilities include money market accounts, certificates
Senior Notes; therefore, a change in interest rates would have no impact of deposit, and collateralized borrowings from the FHLB. Money market
on consolidated pretax earnings. See Item 8, note 10 to our consolidated accounts re-price as interest rates change. Certificates of deposit re-
financial statements. price over time, depending on maturities. FHLB advances generally
EQUITY PRICE RISK –We have exposure to the equity markets in have fixed rates ranging from one day through multiple years.
several ways. The largest exposure, though relatively small, is through Under criteria published by the OTS, HRB Bank’s overall interest rate
our deferred compensation plans. Within the deferred compensation risk exposure at April 30, 2007 was characterized as ‘‘minimal.’’ We
plans we have mismatches in asset and liability amounts and investment actively manage our interest rate risk positions. As interest rates
choices (both fixed-income and equity). At April 30, 2007 and 2006, the change, we will adjust our strategy and mix of assets and liabilities to
impact of a 10% market value change in the combined equity assets held optimize our position.
by our deferred compensation plans and other equity investments INTEREST RATE RISK –BROKER-DEALER –HRBFAholds interest
would be approximately $12.5 million and $11.6 million, respectively, bearing receivables from customers, brokers, dealers and clearing
assuming no offset for the liabilities. organizations, which consist primarily of amounts due on margin
transactions and are generally short-term in nature. We fund these
TAX SERVICES
short-term assets with short-term variable rate liabilities from
FOREIGN EXCHANGE RATE RISK –Our operations in international customers, brokers and dealers, including stock loan activity. Although
markets are exposed to movements in currency exchange rates. The there may be differences in the timing of the re-pricing related to these
currencies involved are the Canadian dollar and the Australian dollar. Weassets and liabilities, we believe we are not significantly exposed to
translate revenues and expenses related to these operations at the interest rate risk in this area. As a result, any change in interest rates
average of exchange rates in effect during the period. Assets and would not materially impact our consolidated earnings.
liabilities of foreign subsidiaries are translated into U.S. dollars at Our fixed-income trading portfolio is affected by changes in market
exchange rates prevailing at the end of the year. Translation adjustments rates and prices. The risk is the loss of income arising from adverse
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are recorded as a separate component of other comprehensive income in changes in the value of the trading portfolio. We value the trading
stockholders’ equity. Translation of financial results into U.S. dollars does portfolio at quoted market prices and the market value of our trading
not presently materially affect, and has not historically materially portfolio at April 30, 2007 was approximately $11.0 million, net of
affected, our consolidated financial results, although such changes do $0.2 million in securities sold short. See table below for sensitivities to
affect the year-to-year comparability of the operating results in changes in interest rates. With respect to our fixed-income securities
U.S. dollars ofour international businesses. We estimate a 10% change in portfolio, we manage our market price risk exposure by limiting
foreign exchange rates by itself would impact consolidated pretax concentration risk, maintaining minimum credit quality and limiting
income in fiscal years 2007 and 2006 by approximately $2.5 million and inventory to anticipated retail demand and current market conditions.
$2.1 million, respectively, and cash balances at April 30, 2007 and 2006 by
DISCONTINUED OPERATIONS
$5.9 million and $6.1 million, respectively. INTEREST RATE RISK AND CREDIT SPREADS –NON-PRIME
CONSUMER FINANCIAL SERVICES ORIGINATIONS –Interest rate changes and credit spreads impact the
INTEREST RATE RISK –BANKING–At April 30, 2007, approximately value of the loans underlying our beneficial interest in Trusts, on our
91% of HRB Bank’s total assets were residential mortgage loans, with balance sheet or in our origination pipeline, as well as residual interests
23% of these fixed-rate and 77% adjustable-rate. These loans are in securitizations and MSRs.
sensitive to changes in interest rates, as well as expected prepayment As a result of loan sales to the Trusts, we remove the mortgage loans
levels. As interest rates increase, fixed rate residential mortgages tend from our balance sheet and record the gain or loss on sale, cash
to exhibit lower prepayments. The opposite is true in a falling rate proceeds, MSRs, repurchase reserves and a beneficial interest in Trusts,
environment. When mortgage loans prepay, mortgage origination costs which represents our residual interest in the ultimate expected outcome
are written off. Depending on the timing of the prepayment, the write- from the disposition of the loans by the Trusts. See Item 7, ‘‘Off-Balance
offs of mortgage origination costs may result in lower than anticipated Sheet Financing Arrangements.’’ At April 30, 2007, there were
yields. $1.5 billion of loans held in the Trusts and the value of our beneficial
At April 30, 2007, HRB Bank’s other investments consisted primarily interest in Trusts was $41.1 million. At April 30, 2007, we had
of mortgage-backed securities and FHLB stock. See table below for $222.8 million of mortgage loans held for sale on our balance sheet.
sensitivity analysis of our mortgage-backed securities. Approximately half of these loans were repurchased from whole loan
H&R BLOCK 2007 Form 10K