Discover 2011 Annual Report Download - page 160

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The following table summarizes the impact of the derivative instruments on income, and indicates where within the
consolidated statements of income such impact is reported for the years ended November 30, 2011 and 2010 (dollars in
thousands):
Derivatives designated as hedges:
Interest Rate Swaps—Cash Flow Hedges:
Gain (loss) recognized in other comprehensive income after amounts
reclassified into earnings, pre-tax
Total gains (losses) recognized in other comprehensive
income
Amount reclassified from other comprehensive income into income
Interest Rate Swaps—Fair Value Hedges:
Interest expense—ineffectiveness
Interest expense—other
Gain (loss) on interest rate swaps
Interest expense—ineffectiveness
Interest expense—other
Gain (loss) on hedged Item
Total gains (losses) recognized in income
Derivatives not designated as hedges:
Gain (loss) on forward contracts
Gain (loss) on interest rate swaps
Total gains (losses) on derivatives not designated as hedges
recognized in income
Location
Other Comprehensive
Income
Interest Income
Interest Expense
Interest Expense
Other Income
Other Income
For the Year Ended November
30,
2011
$ 7,181
$ 7,181
$ 7,508
36,708
13,048
49,756
(30,317)
(6,423)
(36,740)
$ 20,524
$ 176
(5,099)
$ (4,923)
2010
$ 4,022
$ 4,022
$ 2,297
(8,585)
745
(7,840)
8,648
(831)
7,817
$ 2,274
$ 295
6
$ 301
Collateral Requirements and Credit-Risk Related Contingency Features
For its interest rate swaps, the Company has master netting arrangements and minimum collateral posting thresholds
with its counterparties. Collateral is required by either the Company or the counterparty depending on the net fair value
position of all interest rate swaps held with that counterparty. The Company may also be required to post collateral with a
counterparty depending on the credit rating it or Discover Bank receives from specified major credit rating agencies. Collateral
amounts recorded in the consolidated statement of financial condition are based on the net collateral receivable or payable
position for each counterparty. Collateral receivable or payable amounts are not offset against the fair value of the interest rate
swap, but are recorded separately in other assets or deposits.
As of November 30, 2011, the Company had a right to reclaim $4 million of cash collateral that had been posted (net of
amounts required to be posted by the counterparty) because the credit rating of the Company did not meet specified thresholds.
At November 30, 2011, Discover Bank’s credit rating met specified thresholds set by its counterparties. However, if Discover
Bank’s credit rating is reduced to below investment grade, the Company would be required to post collateral, which would have
been $66 million as of November 30, 2011.
As of November 30, 2011, the Company had interest rate swaps in a net asset position with all of its counterparties,
inclusive of accrued interest. If the Company had breached any provisions of the derivative agreements, there would have been
no obligation to settle termination values since none of the derivative agreements were in net liability positions as of
November 30, 2011.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the
Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated
by the lender, then the Company could also be declared in default on its derivative obligations.
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