Ally Bank 2012 Annual Report Download - page 177

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recognized compensation expense related to IRSU awards of $30 million, $14 million and $10 million for the years ended December 31,
2012, 2011 and 2010, respectively, for the outstanding awards. These costs were recorded as compensation and benefits expense in our
Consolidated Statement of Income.
25. 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. Fair value is based on the assumptions 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 during the year ended December 31, 2012.
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.
• Trading assets (excluding derivatives) — Trading assets were recorded at fair value. Our portfolio included MBS (including senior
and subordinated interests) that were either investment-grade, noninvestment grade, or unrated securities. Valuations were primarily
based on internally developed discounted cash flow models (an income approach) that used assumptions consistent with current
market conditions. The valuation considered recent market transactions, experience with similar securities, current business
conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we utilized 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).
• Available-for-sale securities — 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).
• Mortgage loans held-for-sale, net — Our mortgage loans held-for-sale are accounted for at either fair value because of fair value
option elections or they were accounted for at the lower-of-cost or fair value. Mortgage loans held-for-sale are typically pooled
together and sold into certain exit markets depending on underlying attributes of the loan, such as GSE eligibility, product type,
interest rate, and credit quality. Two valuation methodologies are used to determine the fair value of mortgage loans held-for-sale.
The methodology used depends on the exit market as described below.
Level 2 mortgage loans — This includes all GSE-eligible mortgage loans carried at fair value due to fair value option
election, which are valued predominantly using published forward agency prices. It also includes any domestic loans and
foreign loans where recently negotiated market prices for the loan pool exist with a counterparty (which approximates fair
value) or quoted market prices for similar loans are available.
Level 3 mortgage loans — This included all conditional repurchase option loans carried at fair value due to the fair value
option election and all GSE-ineligible residential mortgage loans that were accounted for at the lower-of-cost or fair value. The
fair value of these residential mortgage loans were determined using internally developed valuation models because observable
market prices were not available. The loans were priced on a discounted cash flow basis utilizing cash flow projections from
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K