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. There were no transfers between any levels for the three months ended March 31, 2018.

The 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.


•	Equity Securities — Includes various marketable equity securities measured at fair value with changes in fair value recognized in net income. Measurements based on observable market prices are classified as Level 1.

•

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).

•

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).

•

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, swaptions, foreign-currency denominated forward contracts, caps, floors, and agency to-be-announced securities. We utilize third-party-developed valuation models that are widely accepted in the market to value these 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 derivative contracts as Level 2 because all significant inputs into these models were market observable.

We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business, certain of which 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 with unobservable inputs, 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
March 31, 2018 ($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Investment securities
Equity securities (a)	$	668	$	—	$	12	$	680
Available-for-sale securities
Debt securities
U.S. Treasury	1,769		—		—		1,769
U.S. States and political subdivisions	—		831		—		831
Foreign government	7		142		—		149
Agency mortgage-backed residential	—		14,883		—		14,883
Mortgage-backed residential	—		2,384		—		2,384
Mortgage-backed commercial	—		580		—		580
Asset-backed	—		900		—		900
Corporate debt	—		1,230		—		1,230
Total available-for-sale securities	1,776		20,950		—		22,726
Mortgage loans held-for-sale (b)	—		—		7		7
Interests retained in financial asset sales	—		—		5		5
Derivative contracts in a receivable position
Interest rate	—		55		1		56
Total derivative contracts in a receivable position	—		55		1		56
Total assets	$	2,444	$	21,005	$	25	$	23,474
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position
Interest rate	$	—	$	55	$	—	$	55
Other	1		—		—		1
Total derivative contracts in a payable position	1		55		—		56
Total liabilities	$	1	$	55	$	—	$	56


(a)	Our investment in any one industry did not exceed 13%.


(b)	Carried at fair value due to fair value option elections.



	Recurring fair value measurements
December 31, 2017 ($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Investment securities
Equity securities (a)	$	518	$	—	$	—	$	518
Available-for-sale securities
Debt securities
U.S. Treasury	1,777		—		—		1,777
U.S. States and political subdivisions	—		854		—		854
Foreign government	8		146		—		154
Agency mortgage-backed residential	—		14,291		—		14,291
Mortgage-backed residential	—		2,494		—		2,494
Mortgage-backed commercial	—		541		—		541
Asset-backed	—		936		—		936
Corporate debt	—		1,256		—		1,256
Total available-for-sale securities	1,785		20,518		—		22,303
Mortgage loans held-for-sale (b)	—		—		13		13
Interests retained in financial asset sales	—		—		5		5
Derivative contracts in a receivable position
Interest rate	—		38		1		39
Total derivative contracts in a receivable position	—		38		1		39
Total assets	$	2,303	$	20,556	$	19	$	22,878
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position
Interest rate	$	—	$	39	$	—	$	39
Foreign currency	—		2		—		2
Total derivative contracts in a payable position	—		41		—		41
Total liabilities	$	—	$	41	$	—	$	41


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


(b)	Carried at fair value due to fair value option elections.

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 (losses) gains																Fair value at March 31, 2018		Net unrealized losses included in earnings still held at March 31, 2018
($ in millions)	Fair value at Jan. 1, 2018		included in earnings				included in OCI		Purchases		Sales			Issuances		Settlements
Assets
Equity securities (a)	$	19	$	(4	)	(b)	$	—	$	—	$	—		$	—	$	(3	)	$	12	$	(5	)
Mortgage loans held-for-sale (c)	13		1			(d)	—		59		(66		)	—		—			7		—
Other assets
Interests retained in financial asset sales	5		—				—		—		—			—		—			5		—
Derivative assets	1		—				—		—		—			—		—			1		—
Total assets	$	38	$	(3	)		$	—	$	59	$	(66	)	$	—	$	(3	)	$	25	$	(5	)


(a)	In connection with our adoption of ASU 2016-01 on January 1, 2018, certain of our equity securities previously measured using the cost method of accounting are now measured at fair value on a recurring basis, and have been categorized as Level 3 within the fair value hierarchy. Accordingly, the fair value of such investments has been included in the opening balance of the reconciliation above.


(b)	Reported as other loss on investments, net, in the Condensed Consolidated Statement of Comprehensive Income.


(c)	Carried at fair value due to fair value option elections.


(d)	Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income.



	Level 3 recurring fair value measurements
	Fair value at Jan. 1, 2017		Net realized/unrealized gains				Purchases		Sales			Issuances		Settlements			Fair value at March 31, 2017		Net unrealized gains included in earnings still held at March 31, 2017
($ in millions)	Fair value at Jan. 1, 2017		included in earnings		included in OCI		Purchases		Sales			Issuances		Settlements			Fair value at March 31, 2017
Assets
Mortgage loans held-for-sale (a)	$	—	$	—	$	—	$	3	$	(2	)	$	—	$	—		$	1	$	—
Other assets
Interests retained in financial asset sales	29		—		—		—		4			—		(2		)	31		—
Total assets	$	29	$	—	$	—	$	3	$	2		$	—	$	(2	)	$	32	$	—


(a)	Carried at fair value due to fair value option elections.

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
March 31, 2018 ($ 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	$	—	$	—	$	119	$	119	$	—		n/m	(a)
Commercial finance receivables and loans, net (b)
Automotive	—		—		51		51		(10		)	n/m	(a)
Other	—		—		22		22		(11		)	n/m	(a)
Total commercial finance receivables and loans, net	—		—		73		73		(21		)	n/m	(a)
Other assets
Repossessed and foreclosed assets (c)	—		—		13		13		(1		)	n/m	(a)
Total assets	$	—	$	—	$	205	$	205	$	(22	)	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 2018. 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 (loss) included in earnings for the three months ended
December 31, 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	$	—	$	—	$	77	$	77	$	—		n/m	(a)
Commercial finance receivables and loans, net (b)
Automotive	—		—		20		20		(3		)	n/m	(a)
Other	—		—		22		22		(12		)	n/m	(a)
Total commercial finance receivables and loans, net	—		—		42		42		(15		)	n/m	(a)
Other assets
Repossessed and foreclosed assets (c)	—		—		14		14		(1		)	n/m	(a)
Other	—		—		3		3		—			n/m	(a)
Total assets	$	—	$	—	$	136	$	136	$	(16	)	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.

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 derivatives. Our intent in electing fair value measurement was to mitigate a divergence between accounting gains or 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 March 31, 2018, and December 31, 2017.



			Estimated fair value
($ in millions)	Carrying value		Level 1		Level 2		Level 3		Total
March 31, 2018
Financial assets
Held-to-maturity securities	$	1,967	$	—	$	1,895	$	—	$	1,895
Loans held-for-sale, net	119		—		—		119		119
Finance receivables and loans, net	124,049		—		—		125,530		125,530
Nonmarketable equity investments	1,210		—		1,210		—		1,210
Financial liabilities
Deposit liabilities (a)	$	49,025	$	—	$	—	$	48,845	$	48,845
Short-term borrowings	9,564		—		—		9,567		9,567
Long-term debt	45,076		—		28,384		18,589		46,973
December 31, 2017
Financial assets
Held-to-maturity securities	$	1,899	$	—	$	1,865	$	—	$	1,865
Loans held-for-sale, net	95		—		—		95		95
Finance receivables and loans, net	121,617		—		—		123,302		123,302
Nonmarketable equity investments	1,233		—		1,190		49		1,239
Financial liabilities
Deposit liabilities (a)	$	45,869	$	—	$	—	$	45,827	$	45,827
Short-term borrowings	11,413		—		—		11,417		11,417
Long-term debt	44,226		—		27,807		18,817		46,624

(a)

In connection with our adoption of ASU 2016-01 on January 1, 2018, deposit liabilities with no defined or contractual maturities are no longer included in the table above. Amounts for December 31, 2017, have been adjusted to conform to the current presentation and exclude $47.4 billion and $45.2 billion of deposit liabilities with no defined or contractual maturities from the carrying value and Level 3 fair value, respectively. Refer to Note 12 for information regarding the composition of our deposits portfolio, and Note 1 for further information regarding recently adopted accounting standards.