Discover 2010 Annual Report Download - page 133

The following table summarizes the total intrinsic value of options exercised and total fair value of options vested
(dollars in thousands):
For the Years Ended
November 30,
2010 2009 2008
Intrinsic value of options exercised...................................................................................................................................... $ 29 $ 17 $ 733
Grant date fair value of options vested................................................................................................................................ $844 $4,245 $5,273
As of November 30, 2010, there was no unrecognized compensation cost related to non-vested stock options granted
under the Company’s Omnibus Plan.
The Company utilized the Black-Scholes pricing model to estimate the fair value of each option at its date of grant. The
fair value was amortized on a straight-line basis, net of estimated forfeitures, over the requisite service periods of the
awards, which is generally the vesting period. Use of a valuation model requires management to make certain
assumptions with respect to selected model inputs. Since all options were granted prior to the Company’s spin-off from
Morgan Stanley, the expected option life of stock options and the expected dividend yield of stock were determined
based upon Morgan Stanley’s historical experience. The expected stock price volatility was determined based upon
Morgan Stanley’s historical stock price data over a time period similar to the expected option life. The risk-free interest
rate was based on U.S. Treasury Strips with a remaining term equal to the expected life assumed at the date of grant.
13. Employee Benefit Plans
The Company sponsors the Discover Financial Services Pension Plan, which is a non-contributory defined benefit plan
that is qualified under Section 401(a) of the Internal Revenue Code (the “Qualified Plan”), for eligible employees in the
U.S. The Company also sponsors an unfunded supplementary plan (the “Supplemental Plan”) that covers certain
executives and the Discover Financial Services 401(k) Plan (the “Discover 401(k) Plan”) for its eligible U.S. employees.
However, effective December 2008, the Qualified Plan and the Supplemental Plan were amended to discontinue the
accrual of future benefits.
Defined Benefit Pension and Other Postretirement Plans. The Qualified and Supplemental Plans generally provide
pension benefits that are based on each employee’s years of credited service and on compensation levels specified in the
plans. For the Qualified Plan, the Company’s policy is to fund at least the amounts sufficient to meet minimum funding
requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”). For the Supplemental Plan, the
Company’s policy is to fund benefits when amounts are paid to the beneficiaries. The Company also participates in an
unfunded postretirement benefit plan that provides medical and life insurance for eligible U.S. retirees and their
dependents. All information related to the Qualified Plan and the Supplemental plan in this footnote is presented on an
aggregate basis, unless otherwise specified.
Net Periodic Benefit Cost. Net periodic benefit cost expensed by the Company included the following components
(dollars in thousands):
Pension Postretirement
For the Years Ended
November 30,
For the Years Ended
November 30,
2010 2009 2008 2010 2009 2008
Service cost, benefits earned during the period.............................................................. $ 0 $ 1,022 $ 16,825 $1,056 $ 777 $1,075
Interest cost on projected benefit obligation .................................................................. 20,858 20,189 19,991 1,386 1,575 1,444
Expected return on plan assets.................................................................................... (23,295) (24,107) (24,037) 0 0 0
Net amortization ...................................................................................................... 1,625 30 (2,239) (3) (150) (465)
Net settlements and curtailments(1) ............................................................................... 223 64 (38,891) 0 0 0
Net periodic benefit (income) cost ............................................................................ $ (589) $ (2,802) $(28,351) $2,439 $2,202 $2,054
(1) In December 2008, the Qualified Plan and the Supplemental Plan were amended to discontinue the accrual of future benefits. This was considered a curtailment and resulted in the acceleration of a
deferred benefit that resulted from a 2004 change in the Qualified Plan.
-122-