Fair Value

Fair Value Measurements

For purposes of this disclosure, fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date under current market conditions. Fair value is based on the assumptions we believe market participants would use when pricing an asset or liability. Additionally, entities are required to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.

GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities at the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.

Level 2

Inputs are 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 in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.


Level 3	Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management's best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.


Transfers	Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfer occurred.

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.

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Available-for-sale securities — All classes of available-for-sale securities are carried at fair value based on observable market prices, when available. If observable market prices are not available, our valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate and consider recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we are required to utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (including prepayment speeds, delinquency levels, and credit losses).

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Interests retained in financial asset sales — Includes certain noncertificated interests retained from the sale of automotive finance receivables. Due to inactivity in the market, valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate; therefore, we classified these assets as Level 3. The valuation considers recent market transactions, experience with similar assets, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we utilize various significant assumptions, including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepayment speeds, delinquency levels, and credit losses).

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Derivative instruments — We enter into a variety of derivative financial instruments as part of our risk management strategies. Certain of these derivatives are exchange traded, such as Eurodollar futures, options of Eurodollar futures, and equity options. To determine the fair value of these instruments, we utilize the quoted market prices for the particular derivative contracts; therefore, we classified these contracts as Level 1.

We also execute OTC and centrally-cleared derivative contracts, such as interest rate swaps, a cross-currency swap, swaptions, foreign-currency denominated forward contracts, prepaid equity forward contracts, caps, floors, and agency to-be-announced securities. For OTC contracts, we utilize third-party-developed valuation models that are widely accepted in the market to value these OTC derivative contracts. The specific terms of the contract and market observable inputs (such as interest rate forward curves, interpolated volatility assumptions, or equity pricing) are used in the model. We classified these OTC derivative contracts as Level 2 because all significant inputs into these models were market observable. For centrally-cleared contracts, we utilize unadjusted prices obtained from the clearing house as the basis for valuation, and they are also classified as Level 2.

We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business. These meet the accounting definition of a derivative and therefore are recorded as derivatives on our Condensed Consolidated Balance Sheet. Because these derivatives are valued using internal pricing models, they are classified as Level 3.

We are required to consider all aspects of nonperformance risk, including our own credit standing, when measuring fair value of a liability. We reduce credit risk on the majority of our derivatives by entering into legally enforceable agreements that enable the posting and receiving of collateral associated with the fair value of our derivative positions on an ongoing basis. In the event that we do not enter into legally enforceable agreements that enable the posting and receiving of collateral, we will consider our credit risk and the credit risk of our counterparties in the valuation of derivative instruments through a credit valuation adjustment (CVA), if warranted. The CVA calculation utilizes the credit default swap spreads of the counterparty.

Recurring Fair Value

The following tables display the assets and liabilities measured at fair value on a recurring basis including financial instruments elected for the fair value option. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items; therefore, they do not directly display the impact of our risk management activities.



	Recurring fair value measurements
June 30, 2017 ($ in millions)	Level 1		Level 2			Level 3		Total
Assets
Investment securities
Available-for-sale securities
Debt securities
U.S. Treasury	$	1,852	$	—		$	—	$	1,852
U.S. States and political subdivisions	—		782			—		782
Foreign government	7		143			—		150
Agency mortgage-backed residential	—		13,676			—		13,676
Mortgage-backed residential	—		2,038			—		2,038
Mortgage-backed commercial	—		475			—		475
Asset-backed	—		1,014			—		1,014
Corporate debt	—		1,272			—		1,272
Total debt securities	1,859		19,400			—		21,259
Equity securities (a)	505		—			—		505
Total available-for-sale securities	2,364		19,400			—		21,764
Mortgage loans held-for-sale	—		—			3		3
Interests retained in financial asset sales	—		—			5		5
Derivative contracts in a receivable position (b)
Interest rate	—		39			1		40
Foreign currency	—		1			—		1
Total derivative contracts in a receivable position	—		40			1		41
Total assets	$	2,364	$	19,440		$	9	$	21,813
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position (b)
Interest rate	$	—	$	(39	)	$	—	$	(39	)
Foreign currency	—		(4		)	—		(4		)
Total derivative contracts in a payable position	—		(43		)	—		(43		)
Total liabilities	$	—	$	(43	)	$	—	$	(43	)


(a)	Our investment in any one industry did not exceed 18%.


(b)	For additional information on derivative instruments and hedging activities, refer to Note 19.



	Recurring fair value measurements
December 31, 2016 ($ in millions)	Level 1			Level 2			Level 3		Total
Assets
Investment securities
Available-for-sale securities
Debt securities
U.S. Treasury	$	1,620		$	—		$	—	$	1,620
U.S. States and political subdivisions	—			782			—		782
Foreign government	11			151			—		162
Agency mortgage-backed residential	—			10,290			—		10,290
Mortgage-backed residential	—			2,097			—		2,097
Mortgage-backed commercial	—			537			—		537
Asset-backed	—			1,400			—		1,400
Corporate debt	—			1,443			—		1,443
Total debt securities	1,631			16,700			—		18,331
Equity securities (a)	595			—			—		595
Total available-for-sale securities	2,226			16,700			—		18,926
Other assets
Interests retained in financial asset sales	—			—			29		29
Derivative contracts in a receivable position (b)
Interest rate	—			92			—		92
Foreign currency	—			2			—		2
Other	1			—			—		1
Total derivative contracts in a receivable position	1			94			—		95
Total assets	$	2,227		$	16,794		$	29	$	19,050
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position (b)
Interest rate	$	—		$	(94	)	$	—	$	(94	)
Other	(1		)	—			—		(1		)
Total derivative contracts in a payable position	(1		)	(94		)	—		(95		)
Total liabilities	$	(1	)	$	(94	)	$	—	$	(95	)


(a)	Our investment in any one industry did not exceed 14%.


(b)	For additional information on derivative instruments and hedging activities, refer to Note 19.

The following tables present the reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the following tables do not fully reflect the impact of our risk management activities.



	Level 3 recurring fair value measurements
			Net realized/unrealized gains														Fair value at June 30, 2017		Net unrealized gains included in earnings still held at June 30, 2017
($ in millions)	Fair value at April 1, 2017		included in earnings		included in OCI		Purchases		Sales			Issuances		Settlements
Assets
Mortgage loans held-for-sale	$	1	$	—	$	—	$	20	$	(18	)	$	—	$	—		$	3	$	—
Other assets
Interests retained in financial asset sales	31		1		—		—		4			—		(31		)	5		—
Derivative assets	—		1		—		—		—			—		—			1		1
Total assets	$	32	$	2	$	—	$	20	$	(14	)	$	—	$	(31	)	$	9	$	1



	Level 3 recurring fair value measurements
	Fair value at April 1, 2016		Net realized/unrealized gains					Purchases		Sales		Issuances		Settlements			Fair value at June 30, 2016		Net unrealized gains included in earnings still held at June 30, 2016
($ in millions)	Fair value at April 1, 2016		included in earnings			included in OCI		Purchases		Sales		Issuances		Settlements			Fair value at June 30, 2016
Assets
Other assets
Interests retained in financial asset sales	$	31	$	1	(a)	$	—	$	—	$	2	$	—	$	(3	)	$	31	$	—
Total assets	$	31	$	1		$	—	$	—	$	2	$	—	$	(3	)	$	31	$	—


(a)	Reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income.



	Level 3 recurring fair value measurements
			Net realized/unrealized gains														Fair value at June 30, 2017		Net unrealized gains included in earnings still held at June 30, 2017
($ in millions)	Fair value at Jan. 1, 2017		included in earnings		included in OCI		Purchases		Sales			Issuances		Settlements
Assets
Mortgage loans held-for-sale	$	—	$	—	$	—	$	23	$	(20	)	$	—	$	—		$	3	$	—
Other assets
Interests retained in financial asset sales	29		1		—		—		8			—		(33		)	5		—
Derivative assets	—		1		—		—		—			—		—			1		1
Total assets	$	29	$	2	$	—	$	23	$	(12	)	$	—	$	(33	)	$	9	$	1



	Level 3 recurring fair value measurements
	Fair value at Jan. 1, 2016		Net realized/unrealized gains					Purchases		Sales		Issuances		Settlements			Fair value at June 30, 2016		Net unrealized gains included in earnings still held at June 30, 2016
($ in millions)	Fair value at Jan. 1, 2016		included in earnings			included in OCI		Purchases		Sales		Issuances		Settlements			Fair value at June 30, 2016
Assets
Other assets
Interests retained in financial asset sales	$	40	$	3	(a)	$	—	$	—	$	6	$	—	$	(18	)	$	31	$	—
Total assets	$	40	$	3		$	—	$	—	$	6	$	—	$	(18	)	$	31	$	—


(a)	Reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income.

Nonrecurring Fair Value

We may be required to measure certain assets and liabilities at fair value from time to time. These periodic fair value measures typically result from the application of lower-of-cost or fair value accounting or certain impairment measures. These items would constitute nonrecurring fair value measures.

The following tables display the assets and liabilities measured at fair value on a nonrecurring basis.



	Nonrecurring fair value measurements								Lower-of-cost or fair value or valuation reserve allowance			Total gain (loss) included in earnings for the three months ended		Total gain (loss) included in earnings for the six months ended
June 30, 2017 ($ in millions)	Level 1		Level 2		Level 3		Total		Lower-of-cost or fair value or valuation reserve allowance
Assets
Loans held-for-sale, net	$	—	$	—	$	13	$	13	$	—		n/m	(a)	n/m	(a)
Commercial finance receivables and loans, net (b)
Commercial and industrial
Automotive	—		—		45		45		$	(6	)	n/m	(a)	n/m	(a)
Other	—		—		34		34		(25		)	n/m	(a)	n/m	(a)
Total commercial finance receivables and loans, net	—		—		79		79		(31		)	n/m	(a)	n/m	(a)
Other assets
Repossessed and foreclosed assets (c)	—		—		13		13		(1		)	n/m	(a)	n/m	(a)
Other	—		—		4		4		—			n/m	(a)	n/m	(a)
Total assets	$	—	$	—	$	109	$	109	$	(32	)	n/m		n/m

n/m = not meaningful


(a)	We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.


(b)	Represents the portion of the portfolio specifically impaired during 2017. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.


(c)	The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.



	Nonrecurring fair value measurements								Lower-of-cost or fair value or valuation reserve allowance			Total gain included in earnings for the three months ended		Total gain included in earnings for the six months ended
June 30, 2016 ($ in millions)	Level 1		Level 2		Level 3		Total		Lower-of-cost or fair value or valuation reserve allowance			Total gain included in earnings for the three months ended		Total gain included in earnings for the six months ended
Assets
Loans held-for-sale, net	$	—	$	—	$	15	$	15	$	—		n/m	(a)	n/m	(a)
Commercial finance receivables and loans, net (b)
Commercial and industrial
Automotive	—		—		43		43		(6		)	n/m	(a)	n/m	(a)
Other	—		—		46		46		(18		)	n/m	(a)	n/m	(a)
Total commercial finance receivables and loans, net	—		—		89		89		(24		)	n/m	(a)	n/m	(a)
Other assets
Repossessed and foreclosed assets (c)	—		—		10		10		(3		)	n/m	(a)	n/m	(a)
Other	—		—		5		5		—			n/m	(a)	n/m	(a)
Total assets	$	—	$	—	$	119	$	119	$	(27	)	n/m		n/m

n/m = not meaningful


(a)	We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.


(b)	Represents the portion of the portfolio specifically impaired during 2016. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.


(c)	The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.

Fair Value Option for Financial Assets

We elected the fair value option for an insignificant amount of conforming mortgage loans held-for-sale. We elected the fair value option to mitigate earnings volatility by better matching the accounting for the assets with the related hedges. Our intent in electing fair value measurement was to mitigate a divergence between accounting losses and economic exposure for certain assets and liabilities.

Fair Value of Financial Instruments

The following table presents the carrying and estimated fair value of financial instruments, except for those recorded at fair value on a recurring basis presented in the previous section of this note titled Recurring Fair Value. When possible, we use quoted market prices to determine fair value. Where quoted market prices are not available, the fair value is internally derived based on appropriate valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates. However, considerable judgment is required in interpreting current market data to develop the market assumptions and inputs necessary to estimate fair value. As such, the actual amount received to sell an asset or the amount paid to settle a liability could differ from our estimates. Fair value information presented herein was based on information available at June 30, 2017, and December 31, 2016.



			Estimated fair value
($ in millions)	Carrying value		Level 1		Level 2		Level 3		Total
June 30, 2017
Financial assets
Held-to-maturity securities	$	1,189	$	—	$	1,156	$	—	$	1,156
Loans held-for-sale, net	17		—		—		17		17
Finance receivables and loans, net	119,303		—		—		121,029		121,029
Nonmarketable equity investments (a)	925		—		898		25		923
Financial liabilities
Deposit liabilities	$	86,183	$	—	$	—	$	84,287	$	84,287
Short-term borrowings	10,712		—		—		10,714		10,714
Long-term debt	49,145		—		32,371		19,163		51,534
December 31, 2016
Financial assets
Held-to-maturity securities	$	839	$	—	$	789	$	—	$	789
Finance receivables and loans, net	117,800		—		—		118,750		118,750
Nonmarketable equity investments	1,046		—		1,012		55		1,067
Financial liabilities
Deposit liabilities	$	79,022	$	—	$	—	$	78,469	$	78,469
Short-term borrowings	12,673		—		—		12,675		12,675
Long-term debt	54,128		—		22,036		34,084		56,120


(a)	Excludes investments with a carrying value of $13 million and fair value of $34 million at June 30, 2017, for which fair value is measured at net asset value (or its equivalent) as a practical expedient.

The following describes the methodologies and assumptions used to determine fair value for the significant classes of financial instruments. In addition to the valuation methods discussed below, we also followed guidelines for determining whether a market was not active and a transaction was not distressed. We assumed the price that would be received in an orderly transaction (including a market-based return) and not in forced liquidation or distressed sale.

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Cash and cash equivalents — Included in cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. Classified as Level 1 under the fair value hierarchy, cash and cash equivalents generally expose us to limited credit risk and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Accordingly, the carrying value approximates the fair value of these instruments.


•	Held-to-maturity securities — Held-to-maturity securities, which consist of asset-backed retained notes and residential mortgage-backed debt securities issued by government agencies, are carried at amortized cost. For fair value disclosure purposes, held-to-maturity securities are classified as Level 2, with fair value based on observable market prices, when available.

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Finance receivables and loans, net — With the exception of mortgage loans held-for-investment, the fair value of finance receivables and loans was based on discounted future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables and loans (an income approach using Level 3 inputs). The carrying value of commercial receivables in certain markets and certain automotive and other receivables for which interest rates reset on a short-term basis with applicable market indices are assumed to approximate fair value either because of the short-term nature or because of the interest rate adjustment feature. The fair value of commercial receivables in other markets was based on discounted future cash flows using applicable spreads to approximate current rates applicable to similar assets in those markets.

The fair value of mortgage loans held-for-investment was based on a discounted cash flow basis utilizing cash flow projections from models that utilized prepayment, default, and discount rate assumptions. These valuations consider unique attributes of the loans such as geography, delinquency status, product type, and other factors.

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Nonmarketable equity investments — Nonmarketable equity investments primarily include investments in FHLB and FRB stock and other equity investments carried at cost. As a member of the FHLB and FRB, Ally Bank is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the sole discretion of the FHLB and FRB, respectively. The fair value of FHLB and FRB stock is equal to the stock’s par value since the stock is bought, sold, and/or redeemed at par. FHLB and FRB stock is carried at cost, which generally represents the stock’s par value.


•	Deposit liabilities — Deposit liabilities represent certain consumer and brokered bank deposits, mortgage escrow deposits, and dealer deposits. The fair value of deposits at Level 3 was estimated by discounting projected cash flows based on discount factors derived from the forward interest rate swap curve.

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Short-term borrowings and Long-term debt — Level 2 debt was valued using quoted market prices for similar instruments, when available, or other means for substantiation with observable inputs. Debt valued by discounting projected cash flows using internally derived inputs, such as prepayment speeds and discount rates, was classified as Level 3. For our credit facilities, which are floating rate in nature and where pricing occurs on a more frequent basis, the carrying amount or par value is considered to be a reasonable estimate of fair value. As of June 30, 2017, we began using quoted market prices of similar instruments for certain of our long-term debt associated with asset-backed securitizations for which observable market information exists. As a result, the corresponding financial instruments have been transferred from Level 3 to Level 2 within the fair value hierarchy following the change in valuation technique driven by the availability of an independent pricing service.

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Financial instruments for which carrying value approximates fair value — Certain financial instruments that are not carried at fair value on the consolidated balance sheet are carried at amounts that approximate fair value primarily due to their short term nature and limited credit risk. These instruments include restricted cash, cash collateral, accrued interest receivable, accrued interest payable, trade receivables and payables, and other short term receivables and payables.