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the same or similar securities. The fair value estimation techniques for the credit card asset-backed securities issued by other
financial institutions and corporate debt securities are discussed below.
Held-to-maturity investment securities. Held-to-maturity investment securities are generally valued based on quoted
market prices for the same or similar securities.
Net loan receivables. The Company’s loan receivables are comprised of credit card and installment loans, including the
PCI student loans. To estimate the fair value of loan receivables, loans are aggregated into pools of similar loan types,
characteristics and expected repayment terms. The fair values of all loan receivables are estimated by discounting expected
future cash flows using rates at which similar loans could be made under current market conditions.
Derivative financial instruments. The Company’s derivative financial instruments consist of interest rate swaps and
foreign currency forward contracts. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including
interest rate curves and option volatility. The fair values of interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward
curves) derived from observable market interest rate curves. See Note 23: Derivatives and Hedging Activities for more
information.
Deposits. The carrying values of money market deposits, non-interest bearing deposits, interest-bearing demand deposits
and savings deposits approximate fair value due to the liquid nature of these deposits. For time deposits for which readily
available market rates do not exist, fair values are estimated by discounting expected future cash flows using market rates
currently offered for deposits with similar remaining maturities.
Short-term borrowings. The carrying values of short-term borrowings approximate fair value. Federal Funds purchased
and repurchase agreements are short-term in nature and have maturities of less than one year.
Long-term borrowings—owed to securitization investors. Fair values of long-term borrowings owed to credit card
securitization investors are determined utilizing quoted market prices of the same transactions. Fair values of long-term
borrowings owed to student loan securitization investors are calculated by discounting cash flows using estimated assumptions
including, among other things, maturity and market discount rates.
Other long-term borrowings. Fair values of other long-term borrowings are determined utilizing current observable
market prices for those transactions, if available. If there are no observable market transactions, then fair values are determined
by discounting cash flows of future interest accruals at market rates currently offered for borrowings with similar credit risks,
remaining maturities and repricing terms.
Assets and Liabilities Measured at Fair Value on a Recurring Basis. ASC 820 defines fair value, establishes a fair value
hierarchy that distinguishes between valuations that are based on observable inputs from those based on unobservable inputs,
and requires certain disclosures about those measurements. In general, fair values determined by Level 1 inputs are defined as
those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and
liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly
quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the
significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of
those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be
classified as Level 2. Fair values determined by Level 3 inputs are those based on unobservable inputs, and include situations
where there is little, if any, market activity for the asset or liability being valued. In instances in which the inputs used to
measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the
fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of
financial instruments classified within the Level 3 category. The Company’s assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment, and involves consideration of factors specific to the asset or
liability.
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