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42 H&R Block 2013 Form 10-K
As our short-term borrowings are generally seasonal, interest rate risk typically increases through our third fiscal
quarter and declines to zero by fiscal year-end. While the market value of short-term borrowings is relatively insensitive
to interest rate changes, interest expense on short-term borrowings will increase and decrease with changes in the
underlying short-term interest rates.
Our long-term debt at April 30, 2013, consists primarily of fixed-rate Senior Notes; therefore, a change in interest
rates would have no impact on consolidated pretax earnings until these notes mature or are refinanced. The fixed-rate
interest payable on our Senior Notes is subject to adjustment based upon our credit ratings. See Item 8, note 9 to the
consolidated financial statements.
Under criteria published by the OCC, HRB Bank’s overall interest rate risk exposure at March 31, 2013, 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, 2013, residential mortgage loans held for investment
consisted of a mix of 45% fixed-rate loans and 55% 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,
2013.
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 2013 and 2012 by $4.7 million and $5.1 million, respectively, and cash balances at April 30, 2013 and 2012
by $27.5 million and $10.2 million, respectively.
During previous fiscal years, we used foreign exchange forward contracts to mitigate foreign currency exchange
rate risk as we funded our Canadian operations. We did not utilize exchange forward contracts in fiscal year 2013 and
do not currently expect to enter into any similar contracts in the future. At April 30, 2013, our Canadian operations had
$257.1 million of U.S. dollar denominated liabilities to various U.S. subsidiaries, which are exposed to exchange rate
risk. Foreign currency gains on these balances totaled $0.2 million for fiscal year 2013 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, 2013 and 2012 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.