HR Block 2014 Annual Report Download - page 15

H&R Block, Inc. | 2014 Form 10-K 7
as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The
Basel III Capital Rules substantially revise the risk-based capital requirements applicable to depository institutions,
compared to the current U.S. risk-based capital rules, and for the first time impose capital requirements on SLHCs.
Our Holding Companies are SLHCs because they control HRB Bank. The Basel III Capital Rules will become effective
for our Holding Companies and HRB Bank on January 1, 2015 (subject to phase-in periods as discussed below), provided
that our Holding Companies are still SLHCs on that date.
The Basel III Capital Rules, among other things, introduce a new capital measure called "Common Equity Tier 1,"
which will consist of common stock instruments and related surplus (net of treasury stock), retained earnings, and
subject to certain adjustments, minority common equity interests in subsidiaries (CET1). When fully phased in on
January 1, 2019, the Basel III Capital Rules will require SLHCs to maintain (1) a minimum ratio of CET1 to risk-weighted
assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer
is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full
implementation), (2) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in
a minimum Tier 1 capital ratio of 8.5% upon full implementation), (3) a minimum ratio of total capital (that is, Tier 1
plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0%
total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full
implementation) and (4) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average total
consolidated assets.
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 will be as follows:
4.5% CET1 to risk-weighted assets
6.0% Tier 1 Capital to risk-weighted assets
8.0% Total Capital to risk-weighted assets
4.0% Leverage Ratio
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. Deductions from
CET1 include, among other items, goodwill and other intangibles and deferred tax assets, all net of associated deferred
tax liabilities. Under current capital standards, the effects of accumulated other comprehensive income items included
in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the
effects of certain accumulated other comprehensive items would flow through to regulatory capital; however, certain
banking organizations, including our Holding Companies and HRB Bank, may make a one-time permanent election to
continue to exclude these items. Implementation of the deductions and other adjustments to CET1 will begin on
January 1, 2015 and will be phased-in over a four-year period. The implementation of the capital conservation buffer
will begin on January 1, 2016 and will be phased in over a four-year period.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting
categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-
sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government
and agency securities to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset
categories.
The prompt corrective action rules that apply to HRB Bank will be amended effective January 1, 2015 to incorporate
a CET1 capital requirement and to raise the capital requirements for certain capital categories. In order to be adequately
capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least
an 8% Total Risk-Based Capital Ratio, a 6% Tier 1 Risk-Based Capital Ratio, a 4.5% Common Equity Tier 1 Risk Based
Capital Ratio and a 4% Tier 1 Leverage Ratio. To be well capitalized, a banking organization will be required to have at
least a 10% Total Risk-Based Capital Ratio, an 8% Tier 1 Risk-Based Capital Ratio, a 6.5% Common Equity Tier 1 Risk
Based Capital Ratio and a 5% Tier 1 Leverage Ratio. Federal savings associations will be required to calculate their
prompt corrective action capital ratios in the same manner as national banks. Accordingly, tangible equity ratios will
be based on average total assets rather than period-end total assets.
As discussed in Item 1, under "Business," by consummating the Divestiture Transaction, our Holding Companies
will cease to be SLHCs, in which case we would no longer be subject to regulation by the Federal Reserve as SLHCs.