Discover 2015 Annual Report Download - page 161

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The fair values of these financial assets and liabilities, which are not carried at fair value on the consolidated
statements of financial condition, were determined by applying the fair value provisions discussed herein. The use of
different assumptions or estimation techniques may have a material effect on these estimated fair value amounts. The
following describes the valuation techniques of these financial instruments measured at other than fair value.
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates fair value due to the low level of risk these assets
present to the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.
Restricted Cash
The carrying value of restricted cash approximates fair value due to the low level of risk these assets present to
the Company as well as the relatively liquid nature of these assets, particularly given their short maturities.
Held-to-Maturity Investment Securities
Held-to-maturity investment securities consist of residential mortgage-backed securities issued by agencies and
municipal bonds. The fair value of residential mortgage-backed securities included in the held-to-maturity portfolio is
estimated similarly to residential mortgage-backed securities carried at fair value on a recurring basis discussed herein.
Municipal bonds are 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. Fair value estimates are derived utilizing discounted cash flow analyses, the calculations of which are performed
on groupings of loan receivables that are similar in terms of loan type and characteristics. Inputs to the cash flow
analysis of each grouping consider recent prepayment and interest accrual trends and leverage forecasted loss
estimates. The expected future cash flows, derived through the cash flow analysis, of each grouping are discounted at
rates at which similar loans within each grouping could be originated under current market conditions. Significant
inputs to the fair value measurement of the loan portfolio are unobservable, and as such are classified as Level 3.
Accrued Interest Receivables
The carrying value of accrued interest receivables, which is included in other assets on the consolidated
statements of financial condition, approximates fair value as it is due in less than one year.
Deposits
The carrying values of money market deposits, savings deposits and demand deposits approximate fair value
due to the potentially 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 as they 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 and, as such, are classified as Level 2. 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. A portion of the difference between the carrying value and the
fair value of the long-term borrowings owed to student loan securitization investors relates to purchase accounting
adjustments recorded in connection with the December 2010 purchase of SLC. Significant inputs to these fair value
measurements are unobservable and, as such, are classified as Level 3.