Discover 2010 Annual Report Download - page 155

The following table summarizes the impact of the derivative instruments on income, as well as the location they are
reported in the consolidated statements of income for the years ended November 30, 2010 and 2009 (dollars in
thousands):
For the Years Ended
November 30,
Location 2010 2009
Derivatives designated as hedges:
Interest Rate Swaps – Cash Flow Hedges:
Gain (loss) recognized in other comprehensive income after amounts reclassified into earnings,
pre-tax ........................................................................................................................... Other Comprehensive Income $ 4,022 $ 0
Total gains (losses) recognized in other comprehensive income............................................. $ 4,022 $ 0
Amount reclassified from other comprehensive income into Income.............................................. Interest Income $ 2,297 $ 0
Net Hedge ineffectiveness ..................................................................................................... Other Income 0 0
Gain (loss) excluded from assessment of hedge effectiveness ...................................................... Interest Income 0 0
Interest Rate Swaps – Fair Value Hedges:
Interest Expense – Ineffectiveness............................................................................................ (8,585) 1,127
Interest Expense – Other ....................................................................................................... 745 6,675
Gain (loss) on interest rate swaps........................................................................................ Interest Expense (7,840) 7,802
Interest Expense – Ineffectiveness............................................................................................ 8,648 (2,334)
Interest Expense – Other ....................................................................................................... (831) 11,139
Gain (loss) on hedged Item ................................................................................................ Interest Expense 7,817 8,805
Total gains (losses) recognized in income.......................................................................... $ 2,274 $16,607
Derivatives not designated as hedges:
Gain (loss) on forward contracts ............................................................................................ Other Income $ 295 $ 0
Gain (loss) on interest rate swaps ........................................................................................... Other Income 6 1,819
Total gains (losses) on derivatives not designated as hedges recognized in income .................. $ 301 $ 1,819
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, 2010, the Company had a right to reclaim $7.9 million of cash collateral that had been posted as
a result of the fair value position of the interest rate swaps. The Company also had a right to reclaim $4.0 million of cash
collateral that had been posted because the credit rating of the Company did not meet specified thresholds. At
November 30, 2010, 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 additional collateral,
which, as of November 30, 2010, would have been $31.3 million. As of November 30, 2010, the Company had an
obligation to return $3.7 million cash collateral deposited with the Company.
As of November 30, 2010, the Company had swaps in a net liability position with one of its counterparties, the fair
value of which was $6.6 million, inclusive of accrued interest. If the Company had breached any provisions of the
derivative agreements, it could have been required to settle its obligations under the agreements at their termination
value, which was $6.6 million at November 30, 2010.
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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