HR Block 2009 Annual Report Download - page 41

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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, 2009 we had no forward exchange contracts outstanding.
CONSUMER FINANCIAL SERVICES
INTEREST RATE RISK –At April 30, 2009, approximately 67% of HRB Bank’s total assets were residential mortgage
loans with 35% of these fixed-rate loans and 65% 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.
At April 30, 2009, 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, 2009, 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.
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2009 and 2008 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, 2009 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
(in 000s)
Mortgage loans held for investment $ 744,899 $ 115,319 $ 76,202 $ 33,253 $ (28,847) $ (58,293) $ (85,922)
Mortgage-backed securities 26,793 803 727 398 (1,188) (1,675) (1,906)
Carrying Value at
April 30, 2008 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
Mortgage loans held for investment $ 966,301 $ 33,382 $ 22,618 $ 14,291 $ (22,135) $ (44,639) $ (65,274)
Mortgage-backed securities 29,401 941 681 624 (165) (198) (227)
H&R BLOCK 2009 Form 10K 37