Discover 2011 Annual Report Download - page 150

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The amount of dividends that a bank may pay in any year is subject to certain regulatory restrictions. Under the current
banking regulations, a bank may not pay dividends if such a payment would leave the bank inadequately capitalized. In the
years ended November 30, 2011 and 2010 Discover Bank paid dividends of $1.4 billion and $125 million respectively, to the
Company. There were no dividends paid by Discover Bank in 2009.
20. Commitments, Contingencies and Guarantees
Lease commitments. The Company leases various office space and equipment under capital and non-cancelable
operating leases which expire at various dates through 2022. At November 30, 2011, future minimum payments on leases
with original terms in excess of one year consist of the following (dollars in thousands):
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
Less: Amount representing interest
Present value of net minimum lease payments
Capitalized
Leases
$ 508
508
508
489
179
—
2,192
205
$ 1,987
Operating
Leases
$ 10,025
9,594
8,307
7,312
7,105
15,216
$ 57,559
Occupancy lease agreements, in addition to base rentals, generally provide for rent and operating expense escalations
resulting from increased assessments for real estate taxes and other charges. Total rent expense under operating lease
agreements, which considers contractual escalations, was $16.2 million, $14.2 million and $15.0 million for the years ended
November 30, 2011, 2010 and 2009, respectively.
Unused commitments to extend credit. At November 30, 2011, the Company had unused commitments to extend credit
for consumer loans and commercial loans of approximately $163 billion. Such commitments arise primarily from agreements
with customers for unused lines of credit on certain credit cards and certain other consumer loan products, provided there is no
violation of conditions in the related agreement. These commitments, substantially all of which the Company can terminate at
any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage,
customer creditworthiness and loan qualification.
Commitments to purchase private student loans. Prior to its acquisition by Discover Bank on December 31, 2010, SLC
had an agreement with Citibank providing for the origination and servicing of private student loans. Citibank would originate
and fund such loans and, after final disbursement, SLC would purchase the loans from Citibank. This agreement between SLC
and Citibank was terminated on December 31, 2010, at which time Discover Bank entered into an agreement with Citibank to
purchase (i) eligible private student loans originated by Citibank prior to December 31, 2010 and (ii) any private student loans
originated by Citibank on or after December 31, 2010 under a new loan origination agreement entered into between Citibank
and SLC on December 31, 2010. Discover Bank has agreed to purchase the loans at the funded amount (plus accrued interest
and less any capitalized fees for any loans first funded prior to December 31, 2010) and, for any loans first funded by Citibank
on December 31, 2010 or later, pay a premium equal to 0.125%. Discover Bank completed the first purchase of loan
participations under this agreement on January 3, 2011. The agreement has been amended to extend to December 31, 2012, and
was effective upon the closing of Discover Bank's purchase of private student loans from Citibank on September 30, 2011.
Although the agreement does not set forth a minimum or maximum amount of loans to be purchased, Discover Bank must
purchase all eligible loans originated by Citibank, which the Company estimates to be $1.0 billion to $1.5 billion over the life
of the agreement, as amended. As of November 30, 2011, Discover Bank had an outstanding commitment to purchase $170
million of loans under this agreement.
Secured Borrowing Representations and Warranties. As part of the Company’s financing activities, the Company
provides representations and warranties that certain assets pledged as collateral in secured borrowing arrangements conform to
specified guidelines. Due diligence is performed by the Company which is intended to ensure that asset guideline qualifications
are met. If the assets pledged as collateral do not meet certain conforming guidelines, the Company may be required to replace,
repurchase or sell such assets. In its credit card securitization activities, the Company would replace nonconforming receivables
through the allocation of excess seller’s interest or from additional transfers from the unrestricted pool of receivables. If the
Company could not add enough receivables to satisfy the requirement, an early amortization (or repayment) of investors’
interests would be triggered. In its student loan securitizations, the Company would generally repurchase the loans from the
trust at the outstanding principal amount plus interest.
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