HR Block 2012 Annual Report Download - page 81

NOTE 16: INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and expense of our continuing operations.
(in 000s)
Year ended April 30, 2012 2011 2010
Interest income:
Mortgage loans, net $ 20,322 $ 24,693 $ 31,877
Emerald Advance lines of credit 59,660 94,300 77,891
Investment securities 4,463 1,609 2,318
Other 15,355 13,058 6,274
$ 99,800 $ 133,660 $ 118,360
Interest expense:
Borrowings $ 84,782 $ 84,169 $ 77,659
Deposits 6,735 8,488 10,174
FHLB advances 572 1,526 1,997
$ 92,089 $ 94,183 $ 89,830
NOTE 17: VARIABLE INTERESTS
SCC holds an interest in and is the sponsor (issuer) of 56 Real Estate Mortgage Investment Conduit (REMIC)
Trusts and 14 Net Interest Margin (NIM) Trusts (collectively, “Trusts”) related to previously originated mortgage
loans that were securitized. These Trusts are variable interest entities. The REMIC Trusts hold static pools of
sub-prime residential mortgage loans. The NIM Trusts hold beneficial interests in certain REMIC Trusts. The
Trusts were designed to collect and pass through to the beneficial interest holders the cash flows of the
underlying mortgage loans. The REMIC Trusts were financed with bonds and equity. The NIM Trusts were
financed with notes and equity. All bonds and notes are held by third-party investors.
Our identification of the primary beneficiary of the Trusts was based on a determination that the servicer of the
underlying mortgage loans has the power to direct the most significant activities of the Trusts because the
servicer handles all of the loss mitigation activities for the mortgage loans. We have determined that we are not
the primary beneficiary and, therefore have not consolidated the variable interest entity (VIE).
SCC is not the servicer of the mortgage loans underlying the REMIC Trusts, and therefore, does not have the
power to direct the most significant activities of the REMIC Trusts, which is the servicing of the underlying
mortgage loans.
SCC does have the exclusive right to appoint a servicer when certain conditions have been met for specific
loans related to two of the NIM Trusts. As of April 30, 2012, those conditions have been met for a minority
portion of the loans underlying those Trusts. As this right pertains only to a minority of the loans, we have
concluded that SCC does not have the power to direct the most significant activities of these two NIM Trusts, as
the servicer has the power to direct significant activities over the majority of the mortgage loans. In the
remaining NIM Trusts, SCC has a shared right to appoint a servicer under certain conditions. For these NIM
Trusts, we have concluded that SCC is not the primary beneficiary because the power to direct the most
significant activities, which is the servicing of the underlying mortgage loans, is shared with other unrelated
parties.
At April 30, 2012, we had no significant assets or liabilities included in the consolidated balance sheets
related to SCC’s variable interests in the Trusts. We have a liability, as discussed in note 18, and a deferred tax
asset recorded in the consolidated balance sheets related to claims for representations and warranties SCC
made in connection with the transfer of mortgage loans, including mortgage loans held by the securitization
trusts. We have no remaining exposure to economic loss arising from impairment of SCC’s beneficial interest in
the Trusts. If SCC receives cash flows in the future as a holder of beneficial interests we would record gains as
other income in our income statement.
H&R BLOCK 2012 Form 10K 67