HR Block 2014 Annual Report Download - page 49

H&R Block, Inc. | 2014 Form 10-K 41
MORTGAGE LOANS HELD FOR INVESTMENT – As of April 30, 2014, residential mortgage loans held for investment
consisted of a mix of 46% fixed-rate loans and 54% adjustable-rate loans. These loans are sensitive to changes in
interest rates as well as expected prepayment levels. As interest rates increase, fixed-rate residential mortgages tend
to exhibit lower 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.
CUSTOMER DEPOSITS AND FHLB ADVANCES – HRB Bank's liabilities consist primarily of transactional deposit
relationships, such as H&R Block Prepaid Emerald MasterCard® accounts and checking accounts. Other liabilities
typically 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. We had no FHLB advances
outstanding as of April 30, 2014.
FOREIGN EXCHANGE RATE RISK
Our operations in international markets are exposed to movements in currency exchange rates. The currencies
primarily 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 2014 and 2013 by $5.5 million and $4.7 million, respectively, and cash balances as of April
30, 2014 and 2013 by $10.8 million and $27.5 million, respectively.
We primarily use foreign exchange forward contracts to mitigate foreign currency exchange rate risk for seasonal
loans we advance to our Canadian operations, although we did not utilize exchange forward contracts in fiscal year
2013. As of April 30, 2014, our Canadian operations had approximately $52 million of U.S. dollar denominated liabilities
to various U.S. subsidiaries, which are exposed to exchange rate risk. Foreign currency losses totaled $18.2 million for
fiscal year 2014, and are included in "other income, net" on our consolidated statements of income.
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2014 and 2013 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.
(in 000s)
Carrying
Value
Basis Point Change
–200 –100 +100 +200 +300
As of April 30, 2014:
Mortgage loans held for investment $ 268,428 $ 4,032 $ 3,798 $ (4,737) $ (9,830) $ (15,264)
Mortgage-backed securities 427,824 22,816 17,264 (27,037) (48,636) (69,191)
As of April 30, 2013:
Mortgage loans held for investment $ 338,789 $ 5,399 $ 4,934 $ (4,769) $ (10,654) $ (18,828)
Mortgage-backed securities 482,378 3,472 4,067 (17,027) (39,469) (59,975)