HR Block 2007 Annual Report Download - page 42

BUSINESS SERVICES banking business, including lending practices, safeguarding deposits,
ALTERNATIVE PRACTICE STRUCTURE WITH ATTEST FIRMS –Ourcapital structure, recordkeeping, transactions with affiliates and
relationship with the Attest Firms requires us to comply with applicable conduct and qualifications of personnel.
regulations regarding the practice of public accounting and auditor HRB Bank is subject to various regulatory capital requirements
independence rules and requirements. In addition, our relationship with administered by the OTS. Failure to meet minimum capital requirements
the Attest Firms closely links our RSM McGladrey brand with the Attest may trigger actions by regulators that, if undertaken, could have a direct
Firms. If the Attest Firms were to encounter regulatory or independence material effect on HRB Bank and our consolidated financial statements.
issues resulting from their relationship with us or if significant litigation HRB Bank must meet specific capital guidelines involving quantitative
arose involving the Attest Firms or their services which implicated RSM, measures of assets, liabilities and certain off-balance sheet items as
our brand reputation and our ability to realize the mutual benefits of our calculated under regulatory accounting practices. A bank’s capital
relationship, such as the ability to attract and retain quality amounts and classification are also subject to qualitative judgments by
professionals, could be impaired. the regulators about the strength of components of its capital, risk
weightings of assets, off-balance sheet transactions and other factors.
CONSUMER FINANCIAL SERVICES Quantitative measures established by regulation to ensure capital
REGULATORY ENVIRONMENT –GENERAL –The securities and adequacy require HRB Bank to maintain minimum amounts and ratios
banking industries are subject to extensive regulation. The SEC, the of tangible equity, total risk-based capital and Tier 1 capital. In addition
NYSE, the NASD and other self-regulatory organizations and state to these minimum ratio requirements, HRB Bank is required to
securities commissions can, among other things, censure, fine, issue continually maintain a 12.0% minimum leverage ratio as a condition of
cease-and-desist orders or suspend or expel a broker-dealer or any of its its charter-approval order through fiscal year 2009. This condition was
officers or employees. The OTS may take similar action with respect to extended through fiscal year 2012 as a result of a Supervisory Directive
our banking activities. Similarly, the attorneys general of each state issued on May 29, 2007. There are no conditions or events since
could bring legal action on behalf of the citizens of the various states to March 31, 2007 that management believes have changed HRB Bank’s
ensure compliance with local laws. category. We will monitor regulatory compliance with this ratio monthly
REGULATORY ENVIRONMENT –BROKER-DEALER –HRBFAmust and discuss with the OTS in the event the minimum is not maintained.
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comply with many laws and rules, including rules relating to possession As of March 31, 2007, our most recent Thrift Financial Report
and control of customer funds and securities, margin lending and (TFR) filing with the OTS, HRB Bank was a ‘‘well capitalized’’ institution
execution and settlement of transactions. under the prompt corrective action provisions of the FDIC. See Item 8,
The SEC, NYSE and NASD and various other regulatory agencies note 17 to the consolidated financial statements for additional
have stringent rules with respect to the maintenance of specific levels of information.
net capital by securities broker-dealers. Net capital is the net worth of a H&R Block, Inc. is subject to a three percent minimum ratio of
broker or dealer (assets minus liabilities), less deductions for certain adjusted tangible capital to adjusted total assets, as defined by the OTS.
types of assets. Failure to maintain the required net capital could result We fell below the three percent minimum ratio at April 30, 2007 and the
in suspension or revocation of registration by the SEC and suspension OTS issued a Supervisory Directive on May 29, 2007. Failure to comply
or expulsion by the NYSE and/or NASD, and could ultimately lead to the with the Supervisory Directive could trigger additional discretionary
firm’s liquidation. actions by the OTS such as a supervisory agreement, cease-and-desist
HRBFAwill be transitioning individual clients in certain fee-in-lieu-of- orders and civil monetary penalties. See Item 7, ‘‘Regulatory
commission accounts to a commission-based or alternative brokerage Environment’’ and Item 8, note 17 to the consolidated financial
account, or to investment adviser accounts as a result of recent court statements for additional information, including discussion of our non-
actions on an SEC rule. As of April 30, 2007, HRBFA had approximately compliance with the three percent minimum capital requirement and
$2.9 billion of assets under management and realized approximately actions taken by the OTS. If we are not in a position to cure
$24.0 million in revenue from these accounts for fiscal year 2007. During deficiencies, a resulting failure could impair our ability to repurchase
the process of converting these accounts, we are exposed to risk in shares of our common stock, acquire businesses and pay dividends.
advisor and client retention, product pricing and related production CONCENTRATION OF CREDIT RISK –The overall credit quality of
revenues. HRB Bank’s mortgage loans held for investment is impacted by the
REGULATORY ENVIRONMENT –BANKING –H&R Block, Inc., as a strength of the U. S. economy and local economies. We continually
savings and loan holding company, and HRB Bank, as a federally monitor changes in the economy, particularly unemployment rates and
chartered savings bank, are subject to extensive regulation, supervision housing prices, as these factors can impact the ability of borrowers to
and examination by the OTS and FDIC. Such regulation covers all repay their loans. Economic trends that negatively affect housing prices
H&R BLOCK 2007 Form 10K