HR Block 2015 Annual Report Download - page 49

42 2015 Form 10-K | H&R Block, Inc.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
GENERAL – We have a formal investment policy that strives to minimize the market risk exposure of our cash equivalents
and AFS securities, which are primarily affected by credit quality and movements in interest rates. The guidelines in
our investment policy focus on managing liquidity and preserving principal and earnings.
Our AFS securities consist primarily of mortgage-backed securities held to meet the regulatory requirements of
HRB Bank.
Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality, short-term
investments, including money market funds. Because our cash and cash equivalents have a short maturity, our
portfolio's market value is relatively insensitive to interest rate changes.
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 as of April 30, 2015, 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. We had no balance
outstanding under the 2012 CLOC as of April 30, 2015. See Item 8, note 10 to the consolidated financial statements.
Under criteria published by the OCC, HRB Bank's overall interest rate risk exposure at March 31, 2015, our most
recent Call Report filing with the OCC, was characterized as "minimal." We actively manage our interest rate risk
positions. As interest rates change, we adjust our strategy and mix of assets and liabilities to optimize our position.
MORTGAGE LOANS HELD FOR INVESTMENT – As of April 30, 2015, residential mortgage loans held for investment
consisted of a mix of 47% fixed-rate loans and 53% 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 – HRB Bank's liabilities consist primarily of transactional deposit relationships, such as H&R
Block Emerald Prepaid MasterCard® accounts and checking accounts. Other liabilities typically include money market
accounts and certificates of deposit. Money market accounts re-price as interest rates change. Certificates of deposit
re-price over time depending on maturities.
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 2015 and 2014 by $2.9 million and $5.5 million, respectively, and cash balances as of April
30, 2015 and 2014 by $13.0 million and $10.8 million, respectively.
We generally use foreign exchange forward contracts to mitigate foreign currency exchange rate risk for seasonal
loans we advance to our Canadian operations. As of April 30, 2015, 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 $5.9 million for fiscal year 2015, and are included in "other expenses" on our
consolidated statements of income.