HR Block 2011 Annual Report Download - page 45

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prepayments. The opposite is true in a falling rate environment. When mortgage loans prepay, mortgage
origination costs are written off. Depending on the timing of the prepayment, the write-offs of mortgage
origination costs may result in lower than anticipated yields.
At April 30, 2011, HRB Bank’s other investments consisted primarily of mortgage-backed securities and FHLB
stock. See table below for sensitivity analysis of our mortgage-backed securities.
HRB Bank’s liabilities consist primarily of transactional deposit relationships, such as prepaid debit card accounts and
checking accounts. Other liabilities include money market accounts, certificates of deposit and collateralized borrowings
from the FHLB. Money market accounts re-price as interest rates change. Certificates of deposit re-price over time
depending on maturities. FHLB advances generally have fixed rates ranging from one day through multiple years.
Under criteria published by the OTS, HRB Bank’s overall interest rate risk exposure at March 31, 2011, the most
recent date an evaluation was completed, was characterized as “minimal.” We actively manage our interest rate risk
positions. As interest rates change, we will adjust our strategy and mix of assets and liabilities to optimize our position.
EQUITY PRICE RISK
We have limited exposure to the equity markets. Our primary exposure is through our deferred compensation
plans. Within the deferred compensation plans, we have mismatches in asset and liability amounts and investment
choices (both fixed-income and equity). At April 30, 2011 and 2010, the impact of a 10% market value change in the
combined equity assets held by our deferred compensation plans and other equity investments would be
$10.9 million and $9.7 million, respectively, assuming no offset for the liabilities.
FOREIGN EXCHANGE RATE RISK
Our operations in international markets are exposed to movements in currency exchange rates. The currencies
involved are the Canadian dollar and the Australian dollar. We translate revenues and expenses related to these
operations at the average of exchange rates in effect during the period. Assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at exchange rates prevailing at the end of the year. Translation adjustments are
recorded as a separate component of other comprehensive income in stockholders’ equity. Translation of financial
results into U.S. dollars does not presently materially affect and has not historically materially affected our
consolidated financial results, although such changes do affect the year-to-year comparability of the operating
results in U.S. dollars of our international businesses. We estimate a 10% change in foreign exchange rates by itself
would impact consolidated net income in fiscal years 2011 and 2010 by $3.7 million and $5.1 million, respectively,
and cash balances at April 30, 2011 and 2010 by $7.6 million and $7.1 million, respectively.
During fiscal year 2011, borrowing needs in our Canadian operations were funded by corporate borrowings in
the U.S. To mitigate the foreign currency exchange rate risk, we used forward foreign exchange contracts. We do
not enter into forward contracts for speculative purposes. In estimating the fair value of derivative positions, we
utilized quoted market prices, if available, or quotes obtained from external sources. When foreign currency
financial instruments are outstanding, exposure to market risk on these instruments results from fluctuations in
currency rates during the periods in which the contracts are outstanding. The counterparties to our currency
exchange contracts consist of major financial institutions, each of which is rated investment grade. We are
exposed to credit risk to the extent of potential non-performance by counterparties on financial instruments. Any
potential credit exposure does not exceed the fair value. We believe the risk of incurring losses due to credit risk is
remote. At April 30, 2011 we had no forward exchange contracts outstanding.
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2011 and 2010 are
presented below. The following table represents hypothetical instantaneous and sustained parallel shifts in
interest rates and should not be relied on as an indicator of future expected results. The impact of a change in
interest rates on other factors, such as delinquency and prepayment rates, is not included in the analysis below.
Carrying Value at
April 30, 2011 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
(in 000s)
Mortgage loans held for investment $ 485,008 $ 53,949 $ 36,810 $ 18,844 $ (16,601) $ (31,228) $ (46,280)
Mortgage-backed securities 158,177 640 611 1,161 (5,325) (11,700) (17,978)
Carrying Value at
April 30, 2010 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
Mortgage loans held for investment $ 595,405 $ 60,251 $ 43,363 $ 20,780 $ (7,906) $ (12,525) $ (14,664)
Mortgage-backed securities 23,016 123 125 134 (272) (411) (510)
H&R BLOCK 2011 Form 10K 33