HR Block 2012 Annual Report Download - page 48

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Under criteria published by the OCC, HRB Bank’s overall interest rate risk exposure at March 31, 2012, 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.
Mortgage Loans Held for Investment. At April 30, 2012, residential mortgage loans held for investment
consisted of a mix of 44% fixed-rate loans and 56% 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 prepaid debit card 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, 2012.
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 2012 and 2011 by $5.1 million and $3.7 million, respectively,
and cash balances at April 30, 2012 and 2011 by $10.2 million and $7.6 million, respectively.
During fiscal year 2012, borrowing needs in our Canadian operations were funded by our U.S. operations. To
mitigate the foreign currency exchange rate risk, we used forward foreign exchange contracts during the tax
season. 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, 2012 we had no forward exchange contracts outstanding.
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2012 and 2011 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 at
April 30, 2012
Basis Point Change
–300 –200 –100 +100 +200 +300
Mortgage loans held for
investment $ 406,201 $ 28,689 $ 26,403 $ 13,610 $ (11,349) $ (23,845) $ (35,659)
Mortgage-backed securities 366,683 4,996 4,989 2,633 (2,477) (15,008) (29,657)
Carrying Value at
April 30, 2011
Basis Point Change
–300 –200 –100 +100 +200 +300
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)
34
H&R BLOCK 2012 Form 10K