HR Block 2014 Annual Report Download - page 22

14 2014 Form 10-K | H&R Block, Inc.
Federal Reserve capital regulations impose various requirements and restrict our capital allocation strategies and
we are therefore pursuing a strategy pursuant to which our Holding Companies would cease being SLHCs. If our
Holding Companies were to cease being SLHCs, the means we use to deliver financial services and products to our
customers and the revenues and profitability of those offerings could be adversely impacted.
Our subsidiary, HRB Bank, is a federal savings bank. Our Holding Companies are SLHCs because they control HRB Bank.
The Dodd-Frank Act requires the Federal Reserve to promulgate minimum capital requirements for SLHCs, including
leverage and risk-based capital requirements that are no less stringent than those applicable to insured depository
institutions at the time the Dodd-Frank Act was enacted. On July 2, 2013, the Federal Reserve approved the Basel III
Capital Rules, which implement a revised definition of regulatory capital, a new common equity tier 1 minimum capital
requirement and a higher minimum tier 1 capital requirement (Revised Capital Rules). The rule also requires certain
levels of equity for the payment of dividends and bonuses, and amends the methodologies for risk-weighting assets.
The Revised Capital Rules will become effective for us as of 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. Simultaneously with a related closing, 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 required third party consents; 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.