HR Block 2009 Annual Report Download - page 68

NOTE 16: REGULATORY REQUIREMENTS
BANKING – HRB Bank and the Company are subject to various regulatory requirements, including capital
guidelines for HRB Bank, administered by federal banking agencies. Failure to meet minimum capital
requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and our consolidated financial statements. All
savings associations are subject to the capital adequacy guidelines and the regulatory framework for prompt
corrective action. HRB Bank must meet specific capital guidelines that involve quantitative measures of HRB
Bank’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices.
HRB Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis.
Quantitative measures established by regulation to ensure capital adequacy require HRB Bank to maintain
minimum amounts and ratios of tangible equity, total risk-based capital and Tier 1 capital, as set forth in the table
below. In addition to these minimum ratio requirements, HRB Bank is required to continually maintain a 12.0%
minimum leverage ratio as a condition of its charter-approval order through fiscal year 2009. This condition was
extended through fiscal year 2012 as a result of a Supervisory Directive issued on May 29, 2007. As of April 30, 2009,
HRB Bank’s leverage ratio was 12.4%.
As of March 31, 2009, our most recent TFR filing with the Office of Thrift Supervision (OTS), HRB Bank was a
“well capitalized” institution under the prompt corrective action provisions of the FDIC. The five capital categories
are: (1) “well capitalized” (total risk-based capital ratio of 10%, Tier 1 Risk-based capital ratio of 6% and leverage
ratio of 5%); (2) “adequately capitalized;” (3) “undercapitalized;” (4) “significantly undercapitalized;” and
(5) “critically undercapitalized.” There are no conditions or events since March 31, 2009 that management
believes have changed HRB Bank’s category.
The following table sets forth HRB Bank’s regulatory capital requirements at March 31, 2009, as calculated in the
most recently filed TFR:
Amount Ratio Amount Ratio Amount Ratio
Actual
For Capital Adequacy
Under Purposes
To Be Well Capitalized
Prompt Corrective
Action Provisions
(dollars in 000s)
Total risk-based capital ratio
(1)
$ 182,459 28.4% $ 51,320 8.0% $ 64,150 10.0%
Tier 1 risk-based capital ratio
(2)
$ 175,159 27.3% N/A N/A $ 38,490 6.0%
Tier 1 capital ratio (leverage)
(3)
$ 175,159 13.7% $ 153,752 12.0% $ 64,063 5.0%
Tangible equity ratio
(4)
$ 175,159 13.7% $ 19,219 1.5% N/A N/A
(1)
Total risk-based capital divided by risk-weighted assets.
(2)
Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets.
(3)
Tier 1 (core) capital divided by adjusted total assets.
(4)
Tangible capital divided by tangible assets.
Block Financial LLC (BFC) made additional capital contributions to HRB Bank of $245.0 million during fiscal
year 2009. These contributions were provided for HRB Bank to meet its capital requirements due to seasonal
fluctuations in the size of its balance sheet. Also during fiscal year 2009, we submitted an application to the OTS
requesting that HRB Bank be allowed to pay dividends to BFC in an amount that would not exceed the capital
necessary to continuously maintain HRB Bank’s required 12.0% leverage ratio. The OTS approved our application
on January 12, 2009. HRB Bank paid dividends of $235.0 million to BFC in fiscal year 2009.
NOTE 17: COMMITMENTS AND CONTINGENCIES
We offer guarantees under our POM program to tax clients whereby we will assume the cost of additional tax
assessments, up to a cumulative per client limit of $5,000, attributable to tax return preparation error for which we
are responsible. We defer all revenues and direct costs associated with these guarantees, recognizing these
amounts over the term of the guarantee based on historical and actual payment of claims. The related current asset
is included in prepaid expenses and other current assets. The related liability is included in accounts payable,
accrued expenses and other current liabilities in the consolidated balance sheets. The related noncurrent asset
and liability are included in other assets and other noncurrent liabilities, respectively, in the consolidated balance
64 H&R BLOCK 2009 Form 10K