DFS 3.31.2015 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to 
                    
Commission File Number 001-33378
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter) 
Delaware
 
36-2517428
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2500 Lake Cook Road,
Riverwoods, Illinois 60015
 
(224) 405-0900
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a  smaller reporting company)    
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
As of April 24, 2015, there were 442,505,016 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 


DISCOVER FINANCIAL SERVICES
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015
TABLE OF CONTENTS
 
 
 
 
 
Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.
We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover®, PULSE®, Cashback Bonus®, Discover Cashback CheckingSM, Discover® More® Card, Discover it®, Discover® MotivaSM Card, Discover® Open Road® Card, Discover® Network and Diners Club International®. All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

Table of Contents

Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Financial Condition
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
(dollars in millions,
except share amounts)
Assets
 
 
 
Cash and cash equivalents
$
11,814

 
$
7,284

Restricted cash
109

 
106

Investment securities (includes $2,663 and $3,847 at fair value at March 31, 2015 and December 31, 2014, respectively)
2,778

 
3,949

Loan receivables:
 
 
 
Loan receivables (includes $180 and $122 at fair value at March 31, 2015 and December 31, 2014, respectively)
67,648

 
69,969

Allowance for loan losses
(1,776
)
 
(1,746
)
Net loan receivables
65,872

 
68,223

Premises and equipment, net
678

 
670

Goodwill
257

 
257

Intangible assets, net
175

 
176

Other assets
2,495

 
2,461

Total assets
$
84,178

 
$
83,126

Liabilities and Stockholders’ Equity
 
 
 
Deposits:
 
 
 
Interest-bearing deposit accounts
$
46,124

 
$
45,792

Non-interest bearing deposit accounts
303

 
297

Total deposits
46,427

 
46,089

Short-term borrowings
166

 
113

Long-term borrowings
22,924

 
22,544

Accrued expenses and other liabilities
3,450

 
3,246

Total liabilities
72,967

 
71,992

Commitments, contingencies and guarantees (Notes 8, 11 and 12)

 

Stockholders’ Equity:
 
 
 
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 560,542,486 and 558,194,324 shares issued at March 31, 2015 and December 31, 2014, respectively
5

 
5

Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; 575,000 shares issued and outstanding and aggregate liquidation preference of $575 at March 31, 2015 and December 31, 2014
560

 
560

Additional paid-in capital
3,841

 
3,790

Retained earnings
11,936

 
11,467

Accumulated other comprehensive loss
(161
)
 
(138
)
Treasury stock, at cost; 115,973,061 and 109,006,038 shares at March 31, 2015 and December 31, 2014, respectively
(4,970
)
 
(4,550
)
Total stockholders’ equity
11,211

 
11,134

Total liabilities and stockholders’ equity
$
84,178

 
$
83,126

 
 
 
 
The table below presents the carrying amounts of certain assets and liabilities of Discover Financial Services’ consolidated variable interest entities (VIEs) which are included in the condensed consolidated statements of financial condition above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated VIEs. The liabilities in the table below include third-party liabilities of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts for which creditors have recourse to the general credit of Discover Financial Services.
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
(dollars in millions)
Assets
 
 
 
Restricted cash
$
104

 
$
102

Loan receivables
$
30,226

 
$
32,304

Allowance for loan losses allocated to securitized loan receivables
$
(826
)
 
$
(833
)
Other assets
$
37

 
$
37

Liabilities
 
 
 
Long-term borrowings
$
17,269

 
$
17,395

Accrued expenses and other liabilities
$
11

 
$
11

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
1

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Income
 
For the Three Months Ended March 31,
 
2015
 
2014
 
 (unaudited)
(dollars in millions, except per share amounts)
Interest income:
 
 
 
Credit card loans
$
1,606

 
$
1,537

Other loans
304

 
275

Investment securities
13

 
16

Other interest income
6

 
5

Total interest income
1,929

 
1,833

Interest expense:
 
 
 
Deposits
152

 
153

Short-term borrowings
1

 
1

Long-term borrowings
147

 
116

Total interest expense
300

 
270

Net interest income
1,629

 
1,563

Provision for loan losses
390

 
272

Net interest income after provision for loan losses
1,239

 
1,291

Other income:
 
 
 
Discount and interchange revenue, net
268

 
254

Protection products revenue
71

 
83

Loan fee income
81

 
83

Transaction processing revenue
42

 
44

Gain on investments
8

 
4

Gain on origination and sale of mortgage loans
40

 
16

Other income
32

 
31

Total other income
542

 
515

Other expense:
 
 
 
Employee compensation and benefits
331

 
307

Marketing and business development
182

 
169

Information processing and communications
88

 
84

Professional fees
127

 
99

Premises and equipment
24

 
23

Other expense
121

 
102

Total other expense
873

 
784

Income before income tax expense
908

 
1,022

Income tax expense
322

 
391

Net income
$
586

 
$
631

Net income allocated to common stockholders
$
573

 
$
618

Basic earnings per common share
$
1.28

 
$
1.31

Diluted earnings per common share
$
1.28

 
$
1.31

Dividends declared per common share
$
0.24

 
$
0.20

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
2

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Comprehensive Income
 
For the Three Months Ended March 31,
 
2015
 
2014
 
 (unaudited)
(dollars in millions)
Net income
$
586

 
$
631

Other comprehensive loss, net of taxes
 
 
 
Unrealized gain on available-for-sale investment securities, net of tax
—

 
2

Unrealized loss on cash flow hedges, net of tax
(23
)
 
(4
)
Other comprehensive loss
(23
)
 
(2
)
Comprehensive income
$
563

 
$
629

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
3

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(unaudited)
(dollars in millions, shares in thousands)
Balance at December 31, 2013
575

 
$
560

 
555,350

 
$
5

 
$
3,687

 
$
9,611

 
$
(68
)
 
$
(2,986
)
 
$
10,809

Net income
—

 
—

 
—

 
—

 
—

 
631

 
—

 
—

 
631

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(365
)
 
(365
)
Common stock issued under employee benefit plans
—

 
—

 
14

 
—

 
1

 
—

 
—

 
—

 
1

Common stock issued and stock-based compensation expense
—

 
—

 
2,671

 
—

 
51

 
—

 
—

 
—

 
51

Dividends — common stock
—

 
—

 
—

 
—

 
—

 
(95
)
 
—

 
—

 
(95
)
Dividends — preferred stock
—

 
—

 
—

 
—

 
—

 
(9
)
 
—

 
—

 
(9
)
Balance at March 31, 2014
575

 
$
560

 
558,035

 
$
5

 
$
3,739

 
$
10,138

 
$
(70
)
 
$
(3,351
)
 
$
11,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
575

 
$
560

 
558,194

 
$
5

 
$
3,790

 
$
11,467

 
$
(138
)
 
$
(4,550
)
 
$
11,134

Net income
—

 
—

 
—

 
—

 
—

 
586

 
—

 
—

 
586

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(23
)
 
—

 
(23
)
Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(420
)
 
(420
)
Common stock issued under employee benefit plans
—

 
—

 
18

 
—

 
1

 
—

 
—

 
—

 
1

Common stock issued and stock-based compensation expense
—

 
—

 
2,330

 
—

 
50

 
—

 
—

 
—

 
50

Dividends — common stock
—

 
—

 
—

 
—

 
—

 
(108
)
 
—

 
—

 
(108
)
Dividends — preferred stock
—

 
—

 
—

 
—

 
—

 
(9
)
 
—

 
—

 
(9
)
Balance at March 31, 2015
575

 
$
560

 
560,542

 
$
5

 
$
3,841

 
$
11,936

 
$
(161
)
 
$
(4,970
)
 
$
11,211

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
4

Table of Contents

DISCOVER FINANCIAL SERVICES
Condensed Consolidated Statements of Cash Flows
 
For the Three Months Ended March 31,
 
2015
 
2014
 
(unaudited)
(dollars in millions)
Cash flows from operating activities
 
 
 
Net income
$
586

 
$
631

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
390

 
272

Depreciation and amortization
95

 
90

Amortization of deferred revenues and accretion of accretable yield on acquired loans
(113
)
 
(119
)
Net gain on origination and sale of loans, investments and other assets
(36
)
 
(13
)
Proceeds from sale of mortgage loans originated for sale
1,083

 
512

Net principal disbursed on mortgage loans originated for sale
(1,110
)
 
(478
)
Other, net
(8
)
 
41

Changes in assets and liabilities:
 
 
 
Increase in other assets
(40
)
 
(41
)
Decrease in accrued expenses and other liabilities
216

 
234

Net cash provided by operating activities
1,063

 
1,129

 
 
 
 
Cash flows from investing activities
 
 
 
Maturities and sales of available-for-sale investment securities
1,188

 
1,276

Purchases of available-for-sale investment securities
—

 
(101
)
Maturities of held-to-maturity investment securities
2

 
5

Purchases of held-to-maturity investment securities
(17
)
 
(8
)
Net principal repaid on loans originated for investment
2,129

 
1,692

Purchases of other investments
(5
)
 
(29
)
Increase in restricted cash
(3
)
 
(981
)
Purchases of premises and equipment
(41
)
 
(43
)
Net cash provided by investing activities
3,253

 
1,811

 
 
 
 
Cash flows from financing activities
 
 
 
Net increase (decrease) in short-term borrowings
53

 
(16
)
Proceeds from issuance of securitized debt
950

 
1,650

Maturities and repayment of securitized debt
(1,083
)
 
(2,352
)
Proceeds from issuance of other long-term borrowings
499

 
399

Proceeds from issuance of common stock
1

 
1

Purchases of treasury stock
(420
)
 
(365
)
Net increase in deposits
333

 
26

Dividends paid on common and preferred stock
(119
)
 
(106
)
Net cash provided by (used for) financing activities
214

 
(763
)
Net increase in cash and cash equivalents
4,530

 
2,177

Cash and cash equivalents, at beginning of period
7,284

 
6,554

Cash and cash equivalents, at end of period
$
11,814

 
$
8,731

 
 
 
 

See Notes to the Condensed Consolidated Financial Statements.
5

Table of Contents

Notes to the Condensed Consolidated Financial Statements
(unaudited)
1.
Background and Basis of Presentation
Description of Business
Discover Financial Services (“DFS” or the “Company”) is a direct banking and payment services company. The Company is a bank holding company under the Bank Holding Company Act of 1956 as well as a financial holding company under the Gramm-Leach-Bliley Act and therefore is subject to oversight, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company provides direct banking products and services and payment services through its subsidiaries. The Company offers its customers credit card loans, private student loans, personal loans, home loans, home equity loans and deposit products. The Company also operates the Discover Network, the PULSE network (“PULSE”) and Diners Club International (“Diners Club”). The Discover Network processes transactions for Discover-branded credit cards and also provides payment transaction processing and settlement services. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs domestically and internationally, as well as point-of-sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network of licensees, which are generally financial institutions, that issue Diners Club branded charge cards and/or provide card acceptance services.
The Company’s business segments are Direct Banking and Payment Services. The Direct Banking segment includes consumer banking and lending products, specifically Discover-branded credit cards issued to individuals on the Discover Network and other consumer products and services, including private student loans, personal loans, home loans, home equity loans, prepaid cards and other consumer lending and deposit products. The majority of Direct Banking revenues relate to interest income earned on the segment's loan products. Additionally, the Company's credit card products generate substantially all revenues related to discount and interchange, protection products and loan fee income.
The Payment Services segment includes PULSE, Diners Club and the Company’s Network Partners business, which provides payment transaction processing and settlement services on the Discover Network. This segment also includes the business operations of Diners Club Italy, which primarily consist of issuing Diners Club charge cards. The majority of Payment Services revenues relate to transaction processing revenue from PULSE and royalty and licensee revenue (included in other income) from Diners Club.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. The Company believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable. Actual results could differ from these estimates. These interim condensed consolidated financial statements should be read in conjunction with the Company’s 2014 audited consolidated financial statements filed with the Company’s annual report on Form 10-K for the calendar year ended December 31, 2014.
Recently Issued Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The guidance in this update was issued to improve targeted areas of the accounting rules for consolidation. The ASU changes the analysis which a reporting entity would use to determine if certain types of legal entities should be consolidated. In addition, it modifies the determination of whether a limited partnership (“LP”) should be evaluated as a VIE or a voting interest entity and eliminates the presumption that a general partner should consolidate a LP. The amendments will primarily trigger a review of the Company’s tax credit investments, which typically utilize limited liability entities. Management is in the process of reviewing those and all other involvements with potential VIEs to determine if its prior conclusions about consolidation or non-consolidation of those entities continue to be appropriate in light of the amended guidance. The new guidance will become effective for the Company on January 1, 2016.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes existing revenue recognition requirements in Topic 605, Revenue Recognition, including an assortment of transaction-specific and industry-specific rules. The ASU establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. ASU Topic 606 does not apply to rights or obligations associated with financial instruments (for example, interest income from loans or investments, or interest expense on debt), and therefore the Company’s net interest income should not be affected. The Company’s revenue from discount and interchange, protection products, transaction processing and certain fees are within the scope of these rules. Management has not yet completed its evaluation of the impact, if any, of the new guidance on these revenues. As issued, the new revenue recognition rules were to become effective January 1, 2017. In the first quarter of 2015, the FASB proposed a deferral of the effective date to January 1, 2018. This proposal is expected to be approved in the second quarter of 2015. If the proposal is approved, then upon adoption in 2018, the Company will record an adjustment to retained earnings as of the beginning of the year of initial application, which can be either the earliest comparative period presented, with all periods presented under the new rules, or January 1, 2018, without restating prior periods presented. Management has not yet determined which transition reporting option it will apply.
In January 2014, the FASB issued ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. This standard will permit a reporting entity to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under this new method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). This treatment will replace the effective yield method currently permitted for certain investments of this kind. The Company has not historically utilized the effective yield method, and as a result, implementation of this ASU will not impact the Company’s accounting for its investments in qualified affordable housing projects unless a subsequent election is made to apply it. In addition to establishing the conditions under which the proportional amortization method can be used, the ASU calls for additional disclosures that will enable the reader to understand the nature of the investment and the effect of its measurement and related tax credits on the company’s financial position and results of operations. The new guidance is effective for annual reporting periods beginning after December 15, 2014 and interim periods within those periods, with early adoption permitted. The standard requires additional disclosure about the nature of the Company's affordable housing investments, discussed in detail below at Note 2: Investments, but unless the Company subsequently elects to apply the proportional amortization model, the new guidance has no effect on the Company’s financial condition, results of operations or cash flows.
2.
Investments
The Company’s investment securities consist of the following (dollars in millions):
 
March 31,
2015
 
December 31,
2014
U.S. Treasury securities(1)
$
608

 
$
1,330

U.S. government agency securities
628

 
1,033

States and political subdivisions of states
10

 
10

Residential mortgage-backed securities - Agency(2)
1,532

 
1,576

Total investment securities
$
2,778

 
$
3,949

 
 
 
 
(1)
Includes $17 million and $16 million of U.S. Treasury securities pledged as swap collateral in lieu of cash as of March 31, 2015 and December 31, 2014, respectively.
(2)
Consists of residential mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

6
Table of Contents

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in millions):
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
At March 31, 2015
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
600

 
$
7

 
$
—

 
$
607

U.S. government agency securities
620

 
8

 
—

 
628

Residential mortgage-backed securities - Agency
1,406

 
22

 
—

 
1,428

Total available-for-sale investment securities
$
2,626

 
$
37

 
$
—

 
$
2,663

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
1

 
$
—

 
$
—

 
$
1

States and political subdivisions of states
10

 
—

 
—

 
10

Residential mortgage-backed securities - Agency(4)
104

 
2

 
—

 
106

Total held-to-maturity investment securities
$
115

 
$
2

 
$
—

 
$
117

 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
Available-for-Sale Investment Securities(1)
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,317

 
$
12

 
$
—

 
$
1,329

U.S. government agency securities
1,021

 
12

 
—

 
1,033

Residential mortgage-backed securities - Agency
1,473

 
13

 
(1
)
 
1,485

Total available-for-sale investment securities
$
3,811

 
$
37

 
$
(1
)
 
$
3,847

Held-to-Maturity Investment Securities(2)
 
 
 
 
 
 
 
U.S. Treasury securities(3)
$
1

 
$
—

 
$
—

 
$
1

States and political subdivisions of states
10

 
—

 
—

 
10

Residential mortgage-backed securities - Agency(4) 
91

 
2

 
—

 
93

Total held-to-maturity investment securities
$
102

 
$
2

 
$
—

 
$
104

 
 
 
 
 
 
 
 
(1)
Available-for-sale investment securities are reported at fair value.
(2)
Held-to-maturity investment securities are reported at amortized cost.
(3)
Amount represents securities pledged as collateral to a government-related merchant for which transaction settlement occurs beyond the normal 24-hour period.
(4)
Amounts represent residential mortgage-backed securities that were classified as held-to-maturity as they were entered into as a part of the Company's community reinvestment initiatives.
The following table provides information about investment securities with aggregate gross unrealized losses and the length of time that individual investment securities have been in a continuous unrealized loss position (dollars in millions). Gross unrealized losses related to investment securities were not material for the three months ended March 31, 2015.
 
Number of
Securities
in a Loss
Position
 
Less than 12 months
 
More than 12 months
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
At December 31, 2014
 
 
 
 
 
 
 
 
 
Available-for-Sale Investment Securities
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities - Agency
8

 
$
97

 
$
—

 
$
225

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
There were no gains or losses related to other-than-temporary impairments during the three months ended March 31, 2015 and 2014.

7
Table of Contents

The following table provides information about proceeds from sales, recognized gains and losses and net unrealized gains and losses on available-for-sale securities (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
Proceeds from the sales of available-for-sale investment securities
$
899

 
$
1,220

Gain on sales of available-for-sale investment securities
$
8

 
$
4

Net unrealized gain recorded in other comprehensive income, before-tax
$
—

 
$
3

Net unrealized gain recorded in other comprehensive income, after-tax
$
—

 
$
2

 
 
 
 
Maturities of available-for-sale debt securities and held-to-maturity debt securities are provided in the table below (dollars in millions):
 
One Year
or
Less
 
After One
Year
Through
Five Years
 
After Five
Years
Through
Ten Years
 
After Ten
Years
 
Total
At March 31, 2015
 
 
 
 
 
 
 
 
 
Available-for-Sale—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
100

 
$
500

 
$
—

 
$
—

 
$
600

U.S. government agency securities
125

 
495

 
—

 
—

 
620

Residential mortgage-backed securities - Agency
—

 
—

 
465

 
941

 
1,406

Total available-for-sale investment securities
$
225

 
$
995

 
$
465

 
$
941

 
$
2,626

Held-to-Maturity—Amortized Cost
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$
—

 
$
—

 
$
—

 
$
1

State and political subdivisions of states
—

 
—

 
—

 
10

 
10

Residential mortgage-backed securities - Agency
—

 
—

 
—

 
104

 
104

Total held-to-maturity investment securities
$
1

 
$
—

 
$
—

 
$
114

 
$
115

Available-for-Sale—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
101

 
$
506

 
$
—

 
$
—

 
$
607

U.S. government agency securities
126

 
502

 
—

 
—

 
628

Residential mortgage-backed securities - Agency
—

 
—

 
471

 
957

 
1,428

Total available-for-sale investment securities
$
227

 
$
1,008

 
$
471

 
$
957

 
$
2,663

Held-to-Maturity—Fair Values
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
1

 
$
—

 
$
—

 
$
—

 
$
1

State and political subdivisions of states
—

 
—

 
—

 
10

 
10

Residential mortgage-backed securities - Agency
—

 
—

 
—

 
106

 
106

Total held-to-maturity investment securities
$
1

 
$
—

 
$
—

 
$
116

 
$
117

 
 
 
 
 
 
 
 
 
 
Other Investments
As a part of the Company's community reinvestment initiatives, the Company has made equity investments in certain limited partnerships and limited liability companies that finance the construction and rehabilitation of affordable rental housing, as well as stimulate economic development in low to moderate income communities. These investments are accounted for using the equity method of accounting and are recorded within other assets. The related commitment for future investments is recorded in accrued expenses and other liabilities within the condensed consolidated statements of financial condition. The portion of each investment's operating results allocable to the Company is recorded in other expense within the condensed consolidated statements of income. The Company earns a return primarily through the receipt of tax credits allocated to the affordable housing projects and the community revitalization projects. These investments are not consolidated as the Company does not have a controlling financial interest in the entities. As of March 31, 2015 and December 31, 2014, the Company had outstanding investments in these entities of $312 million and $325 million, respectively, and related contingent liabilities of $46 million and $51 million, respectively. Of the above outstanding equity investments, the Company had $197 million and $201 million, respectively, of investments related to affordable housing projects, which had $32 million and $38 million related contingent liabilities as of March 31, 2015 and December 31, 2014, respectively.

8
Table of Contents

3.
Loan Receivables
The Company has three loan portfolio segments: credit card loans, other loans and purchased credit-impaired ("PCI") loans.
The Company's classes of receivables within the three portfolio segments are depicted in the table below (dollars in millions):
 
March 31,
2015
 
December 31,
2014
Loan receivables
 
 
 
Credit card loans(1)
$
53,499

 
$
56,128

Other loans
 
 
 
Personal loans
5,065

 
5,007

Private student loans
5,177

 
4,850

Mortgage loans held for sale(2)
180

 
122

Other(3)
208

 
202

Total other loans
10,630

 
10,181

Purchased credit-impaired loans(4)
3,519

 
3,660

Total loan receivables
67,648

 
69,969

Allowance for loan losses
(1,776
)
 
(1,746
)
Net loan receivables
$
65,872

 
$
68,223

 
 
 
 
(1)
Amounts include $21.7 billion underlying investors’ interest in trust debt at March 31, 2015 and December 31, 2014 and $6.7 billion and $8.6 billion in seller's interest at March 31, 2015 and December 31, 2014, respectively. See Note 4: Credit Card and Student Loan Securitization Activities for further information.
(2)
Substantially all mortgage loans held for sale are pledged as collateral against the warehouse line of credit used to fund consumer residential loans.
(3)
Other includes home equity loans.
(4)
Amounts include $1.9 billion and $2.0 billion of loans pledged as collateral against the notes issued from the Student Loan Corporation ("SLC") securitization trusts at March 31, 2015 and December 31, 2014, respectively. See Note 4: Credit Card and Student Loan Securitization Activities.
Credit Quality Indicators
The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for loan losses.

9
Table of Contents

Information related to the delinquent and non-accruing loans in the Company’s loan portfolio is shown below by each class of loan receivables except for mortgage loans held for sale and PCI student loans, which is shown under the heading “— Purchased Credit-Impaired Loans” (dollars in millions):
  
30-89 Days
Delinquent
 
90 or
More Days
Delinquent
 
Total Past
Due
 
90 or
More Days
Delinquent
and
Accruing
 
Total
Non-accruing(1)
At March 31, 2015
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
421

 
$
458

 
$
879

 
$
411

 
$
167

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
28

 
11

 
39

 
10

 
6

Private student loans (excluding PCI)(4)
56

 
30

 
86

 
30

 
—

Other
1

 
1

 
2

 
—

 
23

Total other loans (excluding PCI)
85

 
42

 
127

 
40

 
29

Total loan receivables (excluding PCI)
$
506

 
$
500

 
$
1,006

 
$
451

 
$
196

 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
Credit card loans(2)
$
491

 
$
480

 
$
971

 
$
442

 
$
157

Other loans
 
 
 
 


 
 
 
 
Personal loans(3)
29

 
11

 
40

 
10

 
5

Private student loans (excluding PCI)(4)
62

 
25

 
87

 
25

 
—

Other
1

 
1

 
2

 
—

 
21

Total other loans (excluding PCI)
92

 
37

 
129

 
35

 
26

Total loan receivables (excluding PCI)
$
583

 
$
517

 
$
1,100

 
$
477

 
$
183

 
 
 
 
 
 
 
 
 
 
 
(1)
The Company estimates that the gross interest income that would have been recorded in accordance with the original terms of non-accruing credit card loans was $7 million for the three months ended March 31, 2015 and 2014. The Company does not separately track the amount of gross interest income that would have been recorded in accordance with the original terms of loans. This amount was estimated based on customers' current balances and most recent interest rates.
(2)
Credit card loans that are 90 or more days delinquent and accruing interest include $43 million of loans accounted for as troubled debt restructurings at March 31, 2015 and December 31, 2014.
(3)
Personal loans that are 90 or more days delinquent and accruing interest include $3 million of loans accounted for as troubled debt restructurings at March 31, 2015 and December 31, 2014.
(4)
Private student loans that are 90 or more days delinquent and accruing interest include $5 million of loans accounted for as troubled debt restructurings at March 31, 2015 and December 31, 2014.

10
Table of Contents

Net Charge-offs
Information related to the net charge-offs in the Company's loan portfolio is shown below by each class of loan receivables except for mortgage loans held for sale and PCI student loans, which is shown under the heading "— Purchased Credit-Impaired Loans" (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
  
Net
Charge-offs
 
Net 
Charge-off
Rate
 
Net
Charge-offs
 
Net 
Charge-off
Rate
Credit card loans
$
319

 
2.40
%
 
$
294

 
2.32
%
Other loans
 
 
 
 
 
 
 
Personal loans
28

 
2.22
%
 
21

 
2.07
%
Private student loans (excluding PCI)
13

 
1.03
%
 
14

 
1.31
%
Total other loans (excluding PCI)
41

 
1.58
%
 
35

 
1.67
%
Net charge-offs as a percentage of total loans (excluding PCI)
$
360

 
2.26
%
 
$
329

 
2.22
%
Net charge-offs as a percentage of total loans (including PCI)
$
360

 
2.14
%
 
$
329

 
2.08
%
 
 
 
 
 
 
 
 
As part of credit risk management activities, on an ongoing basis, the Company reviews information related to the performance of a customer’s account with the Company as well as information from credit bureaus, such as FICO or other credit scores, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the account and are refreshed monthly or quarterly thereafter to assist in predicting customer behavior. Historically, the Company has noted that a significant proportion of delinquent accounts have FICO scores below 660.
 The following table provides the most recent FICO scores available for the Company’s customers as a percentage of each class of loan receivables:
 
Credit Risk Profile
by FICO Score
 
660 and 
Above
 
Less than 660
or No Score
At March 31, 2015
 
 
 
Credit card loans
83
%
 
17
%
Personal loans
96
%
 
4
%
Private student loans (excluding PCI)(1)
96
%
 
4
%
 
 
 
 
At December 31, 2014
 
 
 
Credit card loans
83
%
 
17
%
Personal loans
96
%
 
4
%
Private student loans (excluding PCI)(1)
96
%
 
4
%
 
 
 
 
(1)
PCI loans are discussed under the heading "— Purchased Credit-Impaired Loans."
For private student loans, additional credit risk management activities include monitoring the amount of loans in forbearance. Forbearance allows borrowers experiencing temporary financial difficulties and willing to make payments, the ability to temporarily suspend payments. Eligible borrowers have a lifetime cap on forbearance of 12 months. At March 31, 2015 and December 31, 2014, there were $54 million and $49 million of private student loans, including PCI, in forbearance, respectively. In addition, at March 31, 2015 and December 31, 2014, there were 0.9% and 0.8% of private student loans in forbearance as a percentage of student loans in repayment and forbearance, respectively.

11
Table of Contents

Allowance for Loan Losses
The following tables provide changes in the Company’s allowance for loan losses (dollars in millions): 
 
For the Three Months Ended March 31, 2015
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,474

 
$
120

 
$
135

 
$
17

 
$
1,746

Additions:
 
 
 
 
 
 
 
 
 
Provision for loan losses
337

 
31

 
20

 
2

 
390

Deductions:
 
 
 
 
 
 
 
 
 
Charge-offs
(428
)
 
(31
)
 
(15
)
 
—

 
(474
)
Recoveries
109

 
3

 
2

 
—

 
114

Net charge-offs
(319
)
 
(28
)
 
(13
)
 
—

 
(360
)
Balance at end of period
$
1,492

 
$
123

 
$
142

 
$
19

 
$
1,776

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2014
 
Credit Card
 
Personal Loans
 
Student Loans(1)
 
Other
 
Total
Balance at beginning of period
$
1,406

 
$
112

 
$
113

 
$
17

 
$
1,648

Additions:
 
 
 
 
 
 
 
 
 
Provision for loan losses
230

 
18

 
23

 
1

 
272

Deductions:
 
 
 
 
 
 
 
 
 
Charge-offs
(408
)
 
(24
)
 
(15
)
 
—

 
(447
)
Recoveries
114

 
3

 
1

 
—

 
118

Net charge-offs
(294
)
 
(21
)
 
(14
)
 
—

 
(329
)
Balance at end of period
$
1,342

 
$
109

 
$
122

 
$
18

 
$
1,591

 
 
 
 
 
 
 
 
 
 
(1)
Includes both PCI and non-PCI private student loans.
Net charge-offs of principal are recorded against the allowance for loan losses, as shown in the table above. Information regarding net charge-offs of interest and fee revenues on credit card and other loans is as follows (dollars in millions): 
 
For the Three Months Ended March 31,
 
2015
 
2014
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)
$
75

 
$
72

Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)
$
20

 
$
17

 
 
 
 

12
Table of Contents

The following tables provide additional detail of the Company’s allowance for loan losses and recorded investment in its loan portfolio by impairment methodology (dollars in millions):
 
Credit Card
 
Personal
Loans
 
Student
Loans(3)
 
Other
Loans(4)
 
Total
At March 31, 2015
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
1,334

 
$
118

 
$
101

 
$
1

 
$
1,554

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
158

 
5

 
13

 
18

 
194

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
28

 
—

 
28

Total allowance for loan losses
$
1,492

 
$
123

 
$
142

 
$
19

 
$
1,776

Recorded investment in loans evaluated for impairment as:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
52,475

 
$
5,007

 
$
5,136

 
$
147

 
$
62,765

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
1,024

 
58

 
41

 
61

 
1,184

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
3,519

 
—

 
3,519

Total recorded investment
$
53,499

 
$
5,065

 
$
8,696

 
$
208

 
$
67,468

 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
Allowance for loans evaluated for impairment as:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
1,314

 
$
114

 
$
96

 
$
1

 
$
1,525

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
160

 
6

 
11

 
16

 
193

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
28

 
—

 
28

Total allowance for loan losses
$
1,474

 
$
120

 
$
135

 
$
17

 
$
1,746

Recorded investment in loans evaluated for impairment as:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment in accordance with ASC 450-20
$
55,091

 
$
4,952

 
$
4,812

 
$
142

 
$
64,997

Evaluated for impairment in accordance with
ASC 310-10-35(1)(2)
1,037

 
55

 
38

 
60

 
1,190

Acquired with deteriorated credit quality, evaluated in accordance with ASC 310-30
—

 
—

 
3,660

 
—

 
3,660

Total recorded investment
$
56,128

 
$
5,007

 
$
8,510

 
$
202

 
$
69,847

 
 
 
 
 
 
 
 
 
 
(1)
Loan receivables evaluated for impairment in accordance with Accounting Standards Codification ("ASC") 310-10-35 include credit card loans, personal loans and student loans collectively evaluated for impairment in accordance with ASC Subtopic 310-40, Receivables, which consists of modified loans accounted for as troubled debt restructurings. Other loans are individually evaluated for impairment and generally do not represent troubled debt restructurings.
(2)
The unpaid principal balance of credit card loans was $868 million and $878 million at March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance of personal loans was $58 million and $54 million at March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance of student loans was $40 million and $37 million at March 31, 2015 and December 31, 2014, respectively. All loans accounted for as troubled debt restructurings have a related allowance for loan losses.
(3)
Includes both PCI and non-PCI private student loans.
(4)
Excludes mortgage loans held for sale. Certain other loans, including non-performing Diners Club licensee loans, are individually evaluated for impairment.
Troubled Debt Restructurings
The Company has internal loan modification programs that provide relief to credit card, personal loan and student loan borrowers who are experiencing financial hardship. The internal loan modification programs include both temporary and permanent programs which vary by product. External loan modification programs are also available for credit card and personal loans. Temporary and permanent modifications on credit card and personal loans, as well as temporary modifications on student loans and certain grants of student loan forbearance, are considered to be individually impaired. In addition, loans that defaulted or graduated from modification programs or forbearance are considered to be individually impaired. As a result, the above mentioned loans are accounted for as troubled debt restructurings.
For credit card customers, the temporary hardship program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The permanent workout program involves

13
Table of Contents

changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The permanent modification program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. The Company also makes loan modifications for customers who request financial assistance through external sources, such as a consumer credit counseling agency program (referred to here as external programs). These loans typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees.
To assist student loan borrowers who are experiencing temporary financial difficulties but are willing to resume making payments, the Company may offer hardship forbearance periods of up to 12 months over the life of the loan. Forbearance provides borrowers a deferment in making payments, during which time loan interest continues to accrue at contractual rates. The Company does not anticipate significant shortfalls in the contractual amount due for borrowers using a first hardship forbearance period as the historical performance of these borrowers is not significantly different from the overall portfolio. However, when a borrower is 30 or more days delinquent and granted a second hardship forbearance period, the forbearance is considered a troubled debt restructuring. In addition, the Company offers temporary reduced payment programs, which normally consist of a reduction of the minimum payment for a period of no longer than 12 months. When a student loan borrower is enrolled in a temporary reduced payment program for 12 months or fewer over the life of the loan, the modification is not considered a troubled debt restructuring. No loans have been in a temporary modification program for greater than 12 months.
For personal loan customers, in certain situations the Company offers various payment programs, including temporary and permanent programs. The temporary programs normally consist of a reduction of the minimum payment for a period of no longer than 12 months with the option of a final balloon payment required at the end of the loan term or an extension of the maturity date with the total term not exceeding nine years. Further, in certain circumstances the interest rate on the loan is reduced. The permanent program involves changing the terms of the loan in order to pay off the outstanding balance over a longer term and also in certain circumstances reducing the interest rate on the loan. Similar to the temporary programs, the total term may not exceed nine years. The Company also allows loan modifications for customers who request financial assistance through external sources, similar to the credit card customers discussed above. Payments are modified based on the new terms agreed upon with the credit counseling agency. Personal loans included in temporary and permanent programs are accounted for as troubled debt restructurings.
The Company monitors borrower performance after using payment programs or forbearance and the Company believes the programs help to prevent defaults and are useful in assisting customers experiencing financial difficulties. The Company plans to continue to use payment programs and forbearance and, as a result, expects to have additional loans classified as troubled debt restructurings in the future.

14
Table of Contents

Additional information about modified loans classified as troubled debt restructurings is shown below (dollars in millions):
 
Average recorded investment in loans
 
Interest income recognized during period loans were impaired(1)
 
Gross interest income that would have been recorded with original terms(2)
For the Three Months Ended March 31, 2015
 
 
 
 
 
Credit card loans
 
 
 
 
 
Modified credit card loans(3)
$
255

 
$
11

 
$
1

Internal programs
$
452

 
$
3

 
$
15

External programs
$
323

 
$
6

 
$
3

Personal loans
$
57

 
$
2

 
$
1

Private student loans
$
40

 
$
1

 
N/A

 
 
 
 
 
 
For the Three Months Ended March 31, 2014
 
 
 
 
 
Credit card loans
 
 
 
 
 
Modified credit card loans(3)
$
256

 
$
11

 
$
1

Internal programs
$
454

 
$
3

 
$
15

External programs
$
394

 
$
7

 
$
3

Personal loans
$
44

 
$
1

 
$
—

Private student loans
$
29

 
$
1

 
N/A

 
 
 
 
 
 
(1)
The Company does not separately track interest income on loans in modification programs. Amounts shown are estimated by applying an average interest rate to the average loans in the various modification programs.
(2)
The Company does not separately track the amount of gross interest income that would have been recorded if the loans in modification programs had not been restructured and interest had instead been recorded in accordance with the original terms. Amounts shown are estimated by applying the difference between the average interest rate earned on non-impaired credit card loans and the average interest rate earned on loans in the modification programs to the average loans in the modification programs.
(3)
This balance is considered impaired, but is excluded from the internal and external program amounts reflected in this table. Represents credit card loans that were modified in troubled debt restructurings, but are no longer enrolled in troubled debt restructuring program due to noncompliance with the terms of the modification or successful completion of a program.
In order to evaluate the primary financial effects that resulted from credit card loans entering into a loan modification program during the three months ended March 31, 2015 and 2014, the Company quantified the amount by which interest and fees were reduced during the periods. During the three months ended March 31, 2015 and 2014, the Company forgave approximately $11 million and $10 million, respectively, of interest and fees as a result of accounts entering into a credit card loan modification program.
The following table provides information on loans that entered a loan modification program during the period (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Number of Accounts
 
Balances
 
Number of Accounts
 
Balances
Accounts that entered a loan modification program during the period:
 
 
 
 
 
 
 
Credit card loans
 
 
 
 
 
 
 
Internal programs
13,243

 
$
86

 
12,436

 
$
81

External programs
7,617

 
$
39

 
8,431

 
$
44

Personal loans
986

 
$
12

 
712

 
$
8

Private student loans
469

 
$
7

 
307

 
$
4

 
 
 
 
 
 
 
 

15
Table of Contents

The following table presents the carrying value of loans that experienced a payment default during the period that had been modified in a troubled debt restructuring during the 15 months preceding the end of each period (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Number of Accounts
 
Aggregated Outstanding Balances Upon Default
 
Number of Accounts
 
Aggregated Outstanding Balances Upon Default
Troubled debt restructurings that subsequently defaulted:
 
 
 
 
 
 
 
Credit card loans
 
 
 
 
 
 
 
Internal programs(1)(2)
3,176

 
$
20

 
2,331

 
$
14

External programs(1)(2)
1,643

 
$
7

 
1,881

 
$
8

Personal loans(2)
151

 
$
2

 
106

 
$
1

Private student loans(3)
305

 
$
4

 
311

 
$
5

 
 
 
 
 
 
 
 
(1)
The outstanding balance upon default is the loan balance at the end of the month prior to default. Terms revert back to the pre-modification terms for customers who default from a temporary program and charging privileges remain revoked in most cases.
(2)
A customer defaults from a modification program after two consecutive missed payments.
(3)
Student loan defaults have been defined as loans that are 60 or more days delinquent.
Of the account balances that defaulted as shown above for the three months ended March 31, 2015 and 2014, approximately 43% and 34%, respectively, of the total balances were charged off at the end of the month in which they defaulted. For accounts that have defaulted from a loan modification program and have not been subsequently charged off, the balances are included in the allowance for loan loss analysis discussed above under "— Allowance for Loan Losses."
Purchased Credit-Impaired Loans
Purchased loans with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are considered impaired at acquisition and are reported as PCI loans. The private student loans acquired in the SLC transaction, as well as the additional acquired private student loan portfolio comprise the Company’s only PCI loans at March 31, 2015 and December 31, 2014. Total PCI student loans had an outstanding balance of $3.8 billion and $3.9 billion, including accrued interest, and a related carrying amount of $3.5 billion and $3.7 billion as of March 31, 2015 and December 31, 2014, respectively.
The following table provides changes in accretable yield for the acquired loans during each period (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
Balance at beginning of period
$
1,341

 
$
1,580

Accretion into interest income
(59
)
 
(68
)
Other changes in expected cash flows
(101
)
 
—

Balance at end of period
$
1,181

 
$
1,512

 
 
 
 
Periodically the Company updates the estimate of cash flows expected to be collected based on management's latest expectations of future credit losses, borrower prepayments and certain other assumptions that affect cash flows. No provision expense was recorded during the three months ended March 31, 2015 and 2014. The allowance for PCI loan losses at March 31, 2015 and December 31, 2014 was $28 million. For the three months ended March 31, 2015, changes in other cash flow assumptions resulted in a decrease in accretable yield primarily related to changes in borrower prepayments. For the three months ended March 31, 2014, there were no changes in other cash flow assumptions. Changes to accretable yield are recognized prospectively as an adjustment to yield over the remaining life of the pools.
At March 31, 2015, the 30 or more days delinquency and 90 or more days delinquency rates on PCI student loans (which includes loans not yet in repayment) were 2.15% and 0.70%, respectively. At December 31, 2014, the 30 or more days delinquency and 90 or more days delinquency rates on PCI student loans (which includes loans not yet in repayment) were 2.35% and 0.75%, respectively. These rates include private student loans that are greater than 120 days delinquent that are covered by an indemnification agreement or insurance arrangements through which the Company expects to recover a

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substantial portion of the loan. The net charge-off rate on PCI student loans was 0.50% and 0.75% for the three months ended March 31, 2015 and 2014, respectively.
Mortgage Loans Held For Sale
The following table provides a summary of the initial unpaid principal balance of mortgage loans sold during each period, by type of loan  (dollars in millions):
 
For the Three Months Ended March 31,
 
2015
 
2014
 
Amount
 
%
 
Amount
 
%
Conforming(1)
$
993

 
94.21
%
 
$
447

 
89.94
%
FHA(2)
54

 
5.12

 
48

 
9.66

Jumbo(3)
6

 
0.57

 
2

 
0.40

VA(4)
1

 
0.10

 
—

 
—

Total
$
1,054

 
100.00
%
 
$
497

 
100.00
%
 
 
 
 
 
 
 
 
(1)
Conforming loans are loans that conform to Government Sponsored Enterprises guidelines.
(2)
FHA loans are loans that are insured by the Federal Housing Administration and are typically made to borrowers with low down payments. The initial loan amount must be within certain limits.
(3)
Jumbo loans are loans with an initial amount larger than the limits set by a Government Sponsored Enterprise.
(4)
VA loans are loans that are insured by and conform to the Department of Veteran Affairs guidelines.
4.
Credit Card and Student Loan Securitization Activities
Credit Card Securitization Activities
The Company accesses the term asset securitization market through the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”), which are trusts into which credit card loan receivables are transferred (or, in the case of DCENT, into which beneficial interests in DCMT are transferred) and from which DCENT issues notes to investors.
The DCENT debt structure consists of four classes of securities (DiscoverSeries Class A, B, C and D notes), with the most senior class generally receiving a triple-A rating. In this structure, in order to issue senior, higher rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated or more highly subordinated classes of notes, the majority of which are held by wholly-owned subsidiaries of Discover Bank. The credit-related risk of loss associated with trust assets as of the balance sheet date to which the Company is exposed through the retention of these subordinated interests is fully captured in the allowance for loan losses recorded by the Company.
The Company’s credit card securitizations are accounted for as secured borrowings and the trusts are treated as consolidated subsidiaries of the Company. The Company’s retained interests in the assets of the trusts, consisting of investments in DCENT notes and previously outstanding DCMT certificates held by subsidiaries of Discover Bank, constitute intercompany positions which are eliminated in the preparation of the Company’s condensed consolidated statements of financial condition.
Upon transfer of credit card loan receivables to the trust, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the trusts’ creditors. Further, the transferred credit card loan receivables are owned by the trust and are not available to third-party creditors of the Company. The trusts have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cash. Investment of trust cash balances is limited to investments that are permitted under the governing documents of the trusts and which have maturities no later than the related date on which funds must be made available for distribution to trust investors. With the exception of the seller’s interest in trust receivables, the Company’s interests in trust assets are generally subordinate to the interests of third-party investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt.

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The carrying values of these restricted assets, which are presented on the Company’s condensed consolidated statements of financial condition as relating to securitization activities, are shown in the table below (dollars in millions):
 
March 31,
2015
 
December 31,
2014
Restricted cash
$
16

 
$
16

Investors’ interests held by third-party investors
15,900

 
15,950

Investors’ interests held by wholly-owned subsidiaries of Discover Bank
5,782

 
5,789

Seller’s interest