Discover 2014 Annual Report Download - page 108

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Restricted Cash
Restricted cash includes cash for which the Company's ability to withdraw funds at any time is contractually
limited. Restricted cash is generally designated for specific purposes arising out of certain contractual or other
obligations.
Investment Securities
At December 31, 2014, investment securities consisted of U.S. Treasury and U.S. government agency obligations,
mortgage-backed securities issued by government agencies and debt instruments issued by states and political
subdivisions of states. Investment securities that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are reported at amortized cost. All other investment securities are classified as
available-for-sale, as the Company does not hold investment securities for trading purposes. Available-for-sale
investment securities are reported at fair value with unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive income included in stockholders' equity. The Company estimates the fair value of
available-for-sale investment securities as more fully discussed in Note 20: Fair Value Measurements and Disclosures.
The amortized cost for each held-to-maturity and available-for-sale investment security is adjusted for amortization of
premiums or accretion of discounts, as appropriate. Such amortization or accretion is included in interest income. The
Company evaluates its unrealized loss positions for other-than-temporary impairment in accordance with GAAP
applicable for investments in debt and equity securities. Realized gains and losses and the credit loss portion of other-
than-temporary impairments related to investment securities are determined at the individual security level and are
reported in other income.
Loan Receivables
Loan receivables consist of credit card receivables, other loans and purchased credit-impaired ("PCI") loans.
Loan receivables also include unamortized net deferred loan origination fees and costs (also see “— Significant
Revenue Recognition Accounting Policies — Loan Interest and Fee Income”). Credit card loan receivables are reported
at their principal amounts outstanding and include uncollected billed interest and fees and are reduced for unearned
revenue related to balance transfer fees (also see “— Significant Revenue Recognition Accounting Policies — Loan
Interest and Fee Income”). Other loans consist of student loans, personal loans, mortgage loans held for sale and other
loans and are reported at their principal amounts outstanding. With the exception of mortgages, the Company's loan
receivables are deemed to be held for investment at origination or acquisition because management has the intent and
ability to hold them for the foreseeable future.
Cash flows associated with loans that are originated or acquired with the intent to sell are included in cash flows
from operating activities. Cash flows associated with loans originated or acquired for investment are classified as cash
flows from investing activities, regardless of a subsequent change in intent.
Purchased Credit-Impaired Loans
PCI loans are loans acquired at prices which reflected a discount related to deterioration in individual loan credit
quality since origination. The Company's PCI loans are comprised entirely of acquired private student loans.
The PCI student loans were aggregated into pools based on common risk characteristics at the time of their
acquisition. Loans were grouped primarily on the basis of origination date as loans originated in a particular year
generally reflect the application of common origination strategies and/or underwriting criteria. Each pool is accounted
for as a single asset and each has a single composite interest rate, total contractual cash flows and total expected cash
flows.
Interest income on PCI loans is recognized on the basis of expected cash flows rather than contractual cash flows.
The total amount of interest income recognizable on a pool of PCI loans (i.e., its accretable yield) is the difference
between the carrying amount of the loan pool and the future cash flows expected to be collected without regard to
whether the expected cash flows represent principal or interest collections. Interest is recognized on an effective yield
basis over the life of the loan pool.
The initial estimates of the fair value of the PCI student loans included the impact of expected credit losses, and
therefore, no allowance for loan loss was recorded as of the purchase dates. The difference between contractually
required cash flows and cash flows expected to be collected, as measured at the acquisition dates, is not permitted to be
accreted. Charge-offs are absorbed by this non-accretable difference and do not result in a charge to earnings.