HR Block 2015 Annual Report Download - page 22

H&R Block, Inc. | 2015 Form 10-K 15
The Revised Capital Rules became effective for us on January 1, 2015. See Item 1, "Regulation and Supervision - Bank
and Holding Companies," for details of the new requirements.
The Federal Reserve, the Holding Companies' primary banking regulator, has issued guidance set forth in
Supervisory Letter SR 09-4 (March 27, 2009) regarding the payment of dividends, stock redemptions and stock
repurchases by bank holding companies. Pursuant to Supervisory Letter SR 11-11 (July 21, 2011), the Federal Reserve
has directed examiners to apply the principles of SR 09-4 to SLHCs. Pursuant to SR 09-4, we have committed to provide
notice to the Federal Reserve prior to paying dividends or repurchasing shares.
The Revised Capital Rules will require our Holding Companies to retain significant additional capital, even though
HRB Bank has regulatory capital substantially above the "well capitalized" level. We do not foresee any regulatory
flexibility in this regard in light of the Federal Reserve's views of the statutory requirements imposed under the Dodd-
Frank Act. Accordingly, while our current belief is that the Federal Reserve would permit dividends to continue at
current levels as long as H&R Block, Inc. remains adequately capitalized (with a sufficient capital buffer) and HRB Bank
remains well capitalized, the Federal Reserve will closely supervise and likely restrict our other capital allocation
decisions, including stock repurchases, acquisitions, and other forms of strategic investment.
On April 10, 2014, we entered into the P&A Agreement with BofI. In connection with the closing of the P&A
Transaction, HRB Bank will convert into a national banking association, merge with and into Block Financial, surrender
its bank charter, and cease to operate as a separate legal entity. At that time, our Holding Companies would no longer
be SLHCs subject to regulatory oversight of the Federal Reserve or related regulatory capital requirements. See
additional discussion in Item 1, under "Business," and Item 8, note 2 to the consolidated financial statements.
Although we are selling certain assets and liabilities and surrendering the charter of HRB Bank, we plan to continue
to enhance our business by delivering financial services and products to our clients. In connection with the execution
of the P&A Agreement, we plan to enter into certain other agreements with BofI concurrent with the closing of the
Divestiture Transaction, including, without limitation a Program Management Agreement, including related product
schedules (PMA), and a related Emerald Advance Receivables Participation Agreement (RPA). An operating subsidiary
of the Company will provide certain marketing, servicing, and operational support to BofI with respect to such financial
services and products.
The obligations of the parties to complete the P&A Transaction and the other transactions discussed herein are
subject to the fulfillment of numerous conditions, including, but not limited to: (1) receipt of all regulatory approvals
necessary to consummate the entire Divestiture Transaction; (2) receipt of a required third party consent; and (3) the
execution and delivery of the PMA and the RPA. We cannot be certain when or if the conditions to and other
components of the P&A Transaction will be satisfied, or whether the P&A Transaction will be completed. In addition,
there may be changes to the terms and conditions of the P&A Agreement, PMA, RPA, and other contemplated
agreements as part of the regulatory approval process.
HRB Bank is subject to extensive U.S. federal banking laws and regulations. If we fail to comply with applicable
banking laws and regulations, we could be subject to enforcement actions, damages, penalties, or restrictions that
could significantly harm our business.
As previously announced, we are pursuing the Divestiture Transaction, pursuant to which we will no longer be subject
to regulation as an SLHC and HRB Bank would surrender its bank charter and cease to exist as a separate legal entity.
However, there can be no assurance regarding the timing of consummation of the Divestiture Transaction, or whether
the Divestiture Transaction will be consummated at all. Until such time as the Divestiture Transaction is consummated,
HRB Bank remains subject to regulation, examination, supervision, reporting requirements, and enforcement by the
OCC. The OCC can, among other things, issue cease-and-desist orders, assess civil money penalties, and remove bank
directors, officers or employees, for violations of banking laws and regulations or engaging in activities it determines
to be unsafe and unsound banking practices.
HRB Bank is subject to OCC regulatory capital requirements. Failure to meet minimum capital requirements may
trigger actions by regulators that could have a direct, material effect on HRB Bank. HRB Bank must meet specific capital
requirements involving quantitative measures of assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. OCC regulations currently require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and Tier 1 capital.