Ally Financial (ALLY) Q2 2024 Earnings Call Transcript

Ally Financial (ALLY -2.67%)
Q2 2024 Earnings Call
Jul 17, 2024, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the second quarter 2024 Ally Financial earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Sean Leary, head of investor relations. Please go ahead.

Sean Leary — Head of Investor Relations

Thank you, Elizabeth. Good morning, and welcome to Ally Financial’s second quarter 2024 earnings call. This morning, our CEO, Michael Rhodes; and our CFO, Russ Hutchinson, will review Ally’s results before taking questions. The presentation will reference can be found on the investor relations section of our website, ally.com.

Forward-looking statements and risk factor language governing today’s call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slide 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures.

Definitions and reconciliations can be found in the appendix. And with that, I’ll turn the call over to Michael.

Michael Rhodes — Chief Executive Officer

Thank you, Sean. Good morning, everyone, and thank you for joining the call. I’ll start by saying I’m so proud to address you all for the first time as CEO of Ally. I feel privileged to have the opportunity to lead this incredible company.

Now I want to start by acknowledging the horrific assassination attempt on former President Trump and the innocent loss of life that occurred over the weekend. Political violence has no place in our democracy. And I hope we can all use this moment to put aside our differences and come together as a country to condemn the senseless act of violence and commit to peacefully upholding our shared American values. Now recognizing there’s no easier way to transition from such a serious topic.

Let’s move to Slide 4. So I believe what this team has built and delivered over the years is remarkable. I would like to express my gratitude to the entire Ally team and the board for placing trust in me to build on that momentum. One of the many things that excites me about Ally was the strength and scale of our business.

We have been in auto finance for more than 100 years and are the largest bank auto finance provider in the U.S., serving 22,000 dealers and decisioning $400 billion in application volume annually. On the consumer bank side, it’s amazing what we’ve done in just 15 years. Ally has built the largest all-digital direct bank, serving more than 3 million customers. In fact, Ally was recently named to the top three on Time Magazine’s list of the best midsized companies of 2024 and No.

1 in banking and financial services. I believe this recognition reaffirms what this team has done here is unique and differentiates our leading franchises in the marketplace. A big part of the success in these franchises is our brand. It’s one of the most relevant and differentiated brands in banking.

This has allowed us to create strong levels of preference among consumers. None of what this team has done is possible without a strong culture, and that permeates throughout the organization. Before joining Ally, I followed the story from a distance. I heard a lot about the culture, and that was a key factor in my decision to join.

I learned quickly that everything I’ve heard with the culture was true. The opportunity to lead Ally and do my part to nurture our culture brings me immense pride. I’m convinced that one of the many things that truly sets Ally apart is our extraordinary purpose-driven culture centered around our lead core values and our do-it-right approach to serve customers, communities, and employees. Our culture isn’t just a buzzword.

It’s the backbone of how we operate. It’s about integrity, innovation, customer obsession, and a relentless focus on execution. At Ally, we fostered an environment where diverse perspectives are valued. I believe that this is a key driver of success and that our people are our greatest assets.

I’ve been fortunate to spend time with many of my teammates and dealer customers in the first two months. My respect for Ally’s legacy has only deepened during that time. It’s clear to me that we are well positioned to continue creating long-term shareholder value. We have great market-leading franchises and consistent execution over the past several years has set up a uniquely compelling financial trajectory.

I cannot be more thrilled to launch the next chapter of Ally’s evolution with my 11,000 teammates. With that, let’s turn to Slide 5. As an outsider, I admired Ally’s auto business. When I got here, I realized it’s even stronger than I appreciated.

Our auto and insurance franchises revolves around the dealer and our approach is simple. We help them sell as many vehicles as possible and be successful in all areas of their business. Our products are comprehensive and focused on serving our dealer partners. We deliver a differentiated value proposition as both high tech and high touch.

We provide vehicle financing to nearly 4 million consumers across the credit spectrum, lending solutions for dealer inventory and other dealer financing needs as well as specialty offerings. These are unique to Ally’s just SmartAuction and pass-through products that enhance our overall dealer value proposition. Our insurance business is well established as a leading consumer F&I provider and market-leading provider for commercial P&C products to help protect dealer businesses. Our insurance products are highly complementary to our auto finance business.

We aim to provide all-in value to our dealer partners. Insurance has steadily produced over $1 billion in annual written premiums including $1.3 billion in 2023. That’s the highest since our IPO. Going forward, our insurance teammates remain focused on leveraging our broad dealer network to grow our leading position in the marketplace.

As I mentioned, I admire what this team has built over the years. The transformation from captive auto finance company primarily supporting OEM new vehicle sales to the largest bank auto finance provider in the country has been deliberate and remarkable. The investment Ally has made over the past decade has resulted in unique scale, expertise in prime auto and mutually beneficial relationships with our dealer customers. We have 4,500 teammates across the auto finance business with significant resources dedicated to fully serving our $90 billion consumer portfolio.

An experienced collection organization gives us the confidence to underwrite across the credit spectrum and through the cycle. On the origination side, we have more than 600 experienced underwriters committed to supporting our dealers. We’re remaining disciplined on where we put capital to work. And we’ve made significant investments to modernize our technology platform, including the core operating system of the auto finance business, and ongoing investments in data and analytics.

The technology and human capital investments required to win in prime auto are significant. What this team has built is unique and has driven a remarkable transformation during our time as a publicly traded company. We have grown dealers and applications, resulting in a robust application funnel from which we source origination volume. We offer quick decision times to dealer, a skilled team to evaluate and rework transactions where appropriate and options for a dealer when a credit doesn’t fit our risk appetite.

These efforts have led to some of our most profitable originations we’ve ever seen and position us well to continue growing our market-leading position in auto in the years to come. Let’s turn to Slide 6 and talk about the bank. Everyone wants to build a digital bank, and this team did better than anyone. Over the past 15 years, we’ve earned our customers’ trust with leading customer service, consumer-friendly product offerings, including no overdraft fees, and a frictionless all-digital user experience.

Our approach has resulted in an engaged customer base. More than 1 million savings customers engage with core products, and we’ve consistently grown multiproduct relationships, providing a comprehensive consumer value proposition that extends beyond rates and being at the forefront of the shift to consumer preferences has proven to be our competitive advantage. Ally Invest and Ally Home are key components to the overall depositor value proposition. Customers are primarily sourced from existing Ally depositors, and we built a solid foundation focused on strengthening the customer experience.

And Ally Credit Card provides an opportunity to add a floating rate product with attractive returns to the balance sheet. Our corporate finance team is highly respected within the industry and has a long history of generating compelling returns. In fact, I had the pleasure of celebrating corporate finance business’ 25th anniversary in June with the entire team. Fittingly, the team just delivered its highest quarterly earnings ever.

Our success in corporate finance is driven by the same customer-focused approach we deliver across dealer financial services and our direct-to-consumer products at the bank. We have been a consistent provider of financing solutions and a relentless allies when it comes to helping our partners succeed. As a result, corporate finance is built and maintain mutually beneficial relationships with our customers, the largest of which span decades. It’s a business we’re proud of and we expect to continue to grow and give us impressive risk-adjusted returns, and the team continues to deliver.

I’m energized by our market-leading position in our two dominant franchises. The opportunity in front of us is inspiring. Our culture of customer obsession and focused execution position us well for continued success in our respective markets. Now let’s turn to Page 7 to cover the second quarter highlights.

Second quarter adjusted EPS of $0.97 and $2 billion of revenue reflects solid financial results from consistent operational execution. We saw strong improvements following the first quarter earnings trough that we’ve messaged for some time. NIM, excluding OID, of 3.3% is up 14 basis points quarter-over-quarter driven by momentum on both sides of the balance sheet, and we expect continued expansion from here. On the capital front, we recently closed our first credit risk transfer transaction, which had strong investor demand, leading to strong pricing and execution.

CRTs are another tool in our toolkit to generate capital and better serve our dealer customers. Last month, we received Fed stress test results. Our preliminary stress capital buffer is 2.6% effective October 1, 2024. As most of you are aware, we operate with a significant buffer to the SCB.

Moving to operational results. In auto, we decisioned a Q2 record 3.7 million consumer auto applications and generated $9.8 billion originations, retail auto originated yields of 10.6% with 44% of the volume in our highest credit tier. This reflects our strong pricing position and strategic underwriting approach, and 181 points of retail auto net charge-offs were in line with recent investor guidance at a conference last month. Insurance written premium of $344 million are up 15% year-over-year, driven by continued momentum in our F&I and P&C products.

Turning to Ally Bank. Deposits were down quarter-over-quarter and flat for the year, in line with our expectations for seasonal tax outflows. In the quarter, we added 54,000 customers and now have 3.2 million depositors. We are fully funded with deposits.

And given our outlook for a largely flat balance sheet, we are well positioned to continue leveraging our high-quality deposit portfolio to generate strong returns across our businesses. We’ve been very measured on our growth in the credit card business, including curtailment actions over the past 18 months. Credit performance in this portfolio is in line with expectations. Corporate finance balances remained steady quarter-over-quarter and the portfolio, which is 100% first lien, continued to generate steady returns.

Second quarter ROE was north of 30% and we continue to provide resources to help our team serve our customers. We’re pleased with the solid financial and operational results this quarter, and we remain confident in our ability to grow earnings from here. And with that, I’ll turn it over to Russ.

Russ Hutchinson — Chief Financial Officer

Thank you, Michael. Good morning, everyone. I’ll begin on Slide 8. In the second quarter, net financing revenue, excluding OID of $1.5 billion, was lower year-over-year, driven by higher interest rates.

Results were up $40 million quarter-over-quarter as pricing actions on retail deposits drove cost of funds lower while earning asset yields continue to expand, driven by the strength in fixed rate asset repricing. We expect asset yields to continue expanding over the medium term as lower-yielding assets run off and are replaced by new originations. Adjusted other revenue of $533 million is up 11% from prior year as we benefit from the momentum within insurance and diversified fee revenue from our SmartAuction and pass-through programs. Provision expense of $457 million increased from the prior year, driven by higher net charge-offs and was down on a linked quarter basis as 2Q is the seasonal low point for retail auto NCOs.

Retail auto NCOs were in line with guidance provided at an investor conference last month, decreasing 46 basis points quarter-over-quarter. Retail auto losses continue to be pressured by the back book, specifically the 2022 vintage. We expect losses from the 2022 vintage peaked in 2Q, and we expect NCOs to moderate in the second half of 2024 on a seasonally adjusted basis. I’ll cover retail auto credit and vintage dynamics in more detail later.

Adjusted noninterest expense of $1.3 billion was up 3% year-over-year, primarily driven by growth in the insurance business and historically elevated weather losses, also in insurance. Controllable noninterest expense was down more than 1% year-over-year and reflects our continued focus on expense discipline. Strong EV lease originations drove more than $90 million in EV tax credits within the period resulting in a negative tax rate for the quarter. We will provide more on our EV originations and tax implications later.

GAAP and adjusted EPS for the quarter were $0.86 and $0.97, respectively. Moving to Slide 9. Net interest margin, excluding OID of 3.3%, increased 14 basis points quarter-over-quarter, in line with the guidance provided last month. Earning asset yields expanded 9 basis points quarter-over-quarter, while funding costs decreased 5 basis points, reflecting strength on both sides of the balance sheet.

As expected, average earning assets are down linked quarter, largely as a result of proactive capital actions, which include the sale of Ally Lending, recent retail auto loan sales and the continued roll down of mortgage and securities balances. Lease yields were up 43 basis points quarter-over-quarter, driven by an expected increase in lease termination volume. On liabilities, cost of funds decreased 5 basis points within the quarter, driven by our pricing actions on deposit products throughout the first half of the year. The momentum on both sides of our balance sheet is in line with expectations.

Our NIM outlook is unchanged. We expect to exit 2024 near 3.5% and continue the march to 4% NIM as our lower-yielding back book continues to be replaced by higher-yielding originations. And as we’ve said before, our 2024 exit rate is not dependent on Fed rate cuts. We expect a 4% NIM run rate to be reached at the end of 2025 in a range of rate scenarios.

Slide 10 provides a look at the evolution of Ally’s consumer deposits. We are pleased with the strength of the deposit franchise. Retail deposits across all vintages since the inception of Ally Bank have been stable or grown, reflecting a consistent retention rate above 95%. We have steadily grown customers by offering a comprehensive value proposition that includes attractive deposit rates, our award-winning digital platform, high-service levels and our range of no fee products.

And our customer growth continued in the second quarter, we added 54,000 deposit customers in the quarter and are now relentless allies for 3.2 million customers. As expected, deposit balances declined by $3 billion during the quarter to land flat for the first half of the year. The decline in balances in the second quarter was driven by seasonality related to tax payments that was anticipated. The transformation of the bank over the past 15 years has positioned Ally to optimize for sustainable earnings moving forward.

Our balance sheet is fully funded with deposits and the $142 billion deposit portfolio is 92% FDIC insured. We continue to target approximately flat deposit balances for the remainder of the year based on our balance sheet growth trajectory. Turning to Page 11. CET1 of 9.6% increased quarter-over-quarter.

We operate with a significant buffer to required CET1 minimums with $4 billion of excess capital above our preliminary SCB minimum. As you know, our preliminary SCB is up 10 basis points to 2.6% following this year’s Fed run stress test. Given the size of our buffer and the modest increase, this change in SCB does not impact the way we’re managing capital. Within the quarter, we issued $330 million in credit linked notes against a $3 billion reference pool of prime auto loans that generated 11 basis points of CET1 benefit at closing.

We were pleased with the execution, and I will touch on credit risk transfer in more detail in the next slide. We recently announced our quarterly dividend of $0.30 for the third quarter, which remains consistent with the prior quarter. On the bottom of the slide, you can see the trend of tangible book value over time. Excluding the temporary impact of OCI, we closed the quarter with adjusted tangible book value of $47.

With the earnings trajectory in front of us and the natural pull to par on the securities portfolio, we’re confident in our ability to drive solid book value growth over the next several years. On Slide 12, we provide details on our first credit risk transfer transaction. Ally has a long history in the securitization market with an established infrastructure and investor base, which supported our success in pricing and overall execution. In conjunction with the transaction, we issued $330 million of credit linked notes, with a coupon just over 7% that is partially offset by our investment income on a corresponding cash collateral account.

The transaction reduces RWA in the reference portfolio of $3 billion of prime retail auto loans from 100% to 38% and introduces another lever for Dynamic Capital Management. While we meaningfully reduced the risk weighting on the pool, we retain 100% of the economics on the assets and the net cost of the mezzanine notes equates to less than 0.5 basis point of NIM. The transaction increased CET1 by 11 basis points at closing, and given the amortizing nature of the underlying assets, the capital benefit will amortize as the loans pay down. The CRT is another indication of strong market appetite for our loans and our ability to reduce RWA to free up capital.

Consistent with how we use other capital management levers, we’ll remain opportunistic in the CRT space going forward. Let’s turn to Slide 13 to review asset quality trends. The consolidated net charge-off rate of 126 basis points was down quarter-over-quarter, reflecting typical seasonality. Our commercial portfolios continue to demonstrate solid credit performance with no net charge-off activity in corporate finance and a net recovery in commercial auto.

The credit card portfolio is performing in line with expectations and the net charge-off rate of 12.6% is consistent with the prior quarter. Based on what we are seeing in terms of delinquency, we believe credit card NCOs have peaked in line with the guidance we provided in December. Retail auto net charge-offs of 181 basis points were down 46 basis points quarter-over-quarter. In the bottom right, 30-plus day delinquencies increased 45 basis points quarter-over-quarter due to seasonality and were up 73 basis points on a year-over-year basis.

The second quarter closed on a weekend. And as we talked about last quarter, that does have an impact on the spot delinquency rate we report externally. Looking throughout the month of June, the average delinquency rate was up less than 60 basis points on a year-over-year basis. Delinquencies will increase through the second half of 2024 in line with seasonal patterns, but we expect the year-over-year increase to moderate further.

I’ll cover retail auto credit trends in more detail in a couple of slides. Consolidated coverage was flat quarter-over-quarter and total reserves remained steady at $3.6 billion. Retail auto coverage was unchanged at 365 basis points. Our base case continues to assume no change in the retail auto coverage rate.

Corporate finance continues to demonstrate solid credit performance and had no new nonperforming loans in the quarter. We expect consistency in the coverage rates across the portfolio near term, barring any shifts in the macro environment. On Slide 15, we provide further detail around retail auto credit. Retail NCOs of 181 basis points were consistent with the preview provided in early June, but roughly 10 basis points higher than our expectations entering the quarter.

The current pressure on NCOs continues to come from the back book, particularly the 2022 vintage, which accounted for 42% of retail auto NCOs in the first half of the year. That vintage has moved past the typical point of peak loss for vintage and will be a smaller contributor to losses going forward. The majority of our prospective loss content will be driven by vintages originated in 2023 and later. Given the meaningful shift up in credit in the second quarter of 2023, more specifically the increase in our [Inaudible] credit mix for the past year, we expect loss content to be lower on the front book than what we’ve seen on the 2022 vintage, and we continue to see signs of that favorable performance when we compare delinquency rates of those two vintages at various months on book.

After 18 months on book, the 2023 vintage has a 30-day delinquency rate, that’s 35 basis points below the 2022 vintage. That gap narrowed slightly from three months ago, but we don’t expect it to be a straight line. Given the day of the week dynamics I touched on earlier, we’ve provided this chart using averages throughout the month, which we think is a more accurate view of delinquency. The traditional spot comparison has also been provided.

Delinquency is a key metric we use to assess expected loss content, but there are other factors that give us confidence new originations will produce lower losses than the 2022 vintage. We expect the front book to outperform from a flow to loss rate perspective, given the increase in credit quality across borrower dimensions like FICO and PTI. And we expect less severity pressure given the front book was underwritten below the peak in collateral values and with lower LTVs. On collateral values, we’ve seen a 3% decline on a year-to-date basis and we’re anticipating another 2% decline for the remainder of the year.

The total change of 5% on a full year basis is unchanged from what we provided in January. Putting all the moving pieces together, we remain confident that our underwriting changes and shift in mix have resulted in a front book that will produce lower losses going forward. Turning to Slide 16. We’ve provided an update on trends we’re seeing in electric vehicles.

EV originations in the second quarter of $1 billion represented 10% of our total 2Q origination volume. Increased volume in the lease channel has been concentrated in battery electric vehicles as we entered into a new OEM agreement in March. Importantly, virtually all of our battery electric vehicle lease contracts come with residual guarantees from the OEM that provides significant protection against declines in value. While the expected economics of an EV lease are identical to an internal combustion engine vehicle, there are some nuances that impact the timing and geography of the earnings stream.

As the owner of leased vehicles, Ally is entitled to the tax credit associated with the transaction. We passed that benefit to the customer in the form of a lower monthly payment, reducing net interest income. Ally gets the full benefit of the tax credit, which flows through the income statement as a reduction in tax expense. So while the economics of EV and traditional internal combustion or ice leases are unchanged, EV leases drive accelerated income through the tax line that is offset by lower net interest income over the full life of the lease.

Given the size of our originations in the quarter, that resulted in current tax benefits of approximately $92 million and reduced the tax rate by approximately 35 percentage points, relative to traditional lease volume that creates a modest NIM headwind going forward. We’ll talk more about the financial outlook shortly, but we expect the momentum we’ve seen in EV leasing to result in a negative tax rate for the year, but the lower revenue associated with EV lease is not material enough to change our 2024 NIM outlook. Stepping back from the accounting dynamics, this increase in volume is another example of how our auto business is well positioned for an evolving auto landscape. We’re pleased with the risk-adjusted returns we’re getting in the channel, particularly with the residual value protection we have in place.

Moving to Slide 17 to review the auto segment highlights. Pretax income of $407 million was down from the prior year, driven by higher funding costs, provision expense and noninterest expense. Provision expense was primarily driven by elevated losses from the 2022 vintage. Noninterest expense was also up year-over-year as servicing-related costs increased in connection with elevated loss content.

On the origination side, we continue to benefit from the strength and scale of our auto finance franchise. Robust application volume enabled us to sustain pricing while originating 44% of our retail auto loan volume in our highest credit tier. Average FICO of 712 is up from prior periods and the highest in over a decade. Retail auto originated yield of 10.59% was down quarter-over-quarter, driven entirely by changes in mix as our pricing remained very consistent across the credit spectrum.

Portfolio yields continue to migrate toward originated yields. Excluding the impact from hedges, yields are up 21 basis points quarter-over-quarter as newer vintages make up a larger portion of the portfolio. Portfolio yields, including hedges are on track for 9.5% by year-end, consistent with prior expectations. Lease trends are on the bottom right, gains of $59 million in the second quarter reflect higher lease termination volume.

Terminations do have seasonality as we see elevated activity in the second quarter each year, and termination volume is also impacted by how many contracts we wrote three years ago given our average lease term. So results this quarter certainly had seasonality, but we also saw the impact of elevated lease volume in the first half of 2021. Lease volume was very strong in the industry and our 2Q 2021 volume was a high watermark. Since that time, volumes have slowed, and as a result, we expect lower termination volumes going forward.

Lower units, combined with continued normalization of used values will reduce lease gains for the remainder of 2024. The lease termination and game dynamics are a key reason we’ve guided to a range of 5 to 15 basis points of quarterly NIM expansion for 2024 rather than a straight line. Turning to insurance on Slide 18. We recorded a pre-tax loss of $14 million as higher weather losses more than offset strong growth in premium and investment revenue.

Total written premiums of $344 million increased 15% year-over-year. We continue to see great momentum across the business. Increased losses on a linked quarter and year-over-year basis were driven by weather activity. We saw the most active weather loss season in over a decade, including the most severe hail activity in the past 20 years.

Our reinsurance program materially reduced our net exposure within the quarter. The team has been actively monitoring the impacts of hurricane Beryl. While claim activity can be filed on a lag, we do not expect any material losses associated with the storm. Another example of the team’s ability to help dealers minimize loss for named storms.

Our focus in insurance remains on leveraging relationships in auto finance and growing earned premiums over time, a key driver of our fee revenue expansion. Corporate financial results are on Slide 19. Core pre-tax income of $98 million is a record for corporate finance and demonstrates another quarter of steady returns with a 2Q ROE of 34%. End-of-period HFI loans decreased quarter-over-quarter as favorable capital markets conditions, including a strong CLO market led to elevated payoffs.

Our portfolio remains well diversified and is virtually all first lein, and we remain well positioned from a credit standpoint with criticized assets and nonaccrual loans near historic lows and limited commercial real estate exposure. On the bottom of the page, we highlight the return since our IPO. Corporate finance remains a steady and meaningful contributor to Ally’s earnings profile with an average return on equity of 22% since 2014. Our success is driven by a relentless focus on our customers through the cycle lending approach and mutually beneficial sponsor relationships.

While balances can be choppy quarter-to-quarter, we’re committed to serving our customers and being disciplined about deploying capital. And over time, this is a business we’ll continue to prudently grow. Turning to mortgage on Slide 20. Mortgage generated pre-tax income of $27 million and $261 million of DTC originations.

Held-for-investment assets continue to decrease as we continue to allocate resources to our highest returning businesses. We remain committed to providing a best-in-class digital experience in driving operational efficiency within the business. I will provide an update on our 2024 outlook before heading into Q&A. In terms of net interest margin, second quarter represented an inflection point.

A natural portfolio rollover will drive expansion from here with or without rate cuts. We see third quarter expansion at the low end of our 5 to 15 basis point quarterly range given lease dynamics I talked about and expect to exit the year between 3.45% and 3.50% resulting in a full year NIM of about 330 basis points. So relative to our last earnings call, we’re increasing to the high end of our NIM guide. Similarly, we expect adjusted other revenues to be at the top of the range provided last quarter, increasing 12% year-over-year.

Momentum within insurance, P&C earned premiums through recent OEM relationships and continued momentum in our other revenue streams more broadly gives us confidence in the revised outlook. We have narrowed the range of our expected consolidated loss rate to 1.45% to 1.5% and we now see retail auto NCOs of approximately 2.1%. As I noted earlier, we continue to see pressure from the 2022 vintage, but remain pleased with what we’re seeing in the front book, which will be the largest driver of losses beyond 2024. Adjusted noninterest expense guidance is unchanged with controllable expenses expected to be down more than 1% year-over-year and total up less than 2%.

We now expect average earning assets to be down 1% this year, reflecting the cumulative impact of all of the actions we’ve taken to manage RWA and capital levels in anticipation of regulatory changes. Over the last several quarters, we’ve deconsolidated $2.8 billion of lower-yielding retail auto loans, sold our point-of-sale lending business and its $2 billion portfolio and executed a credit risk transfer to create access capital. These actions not only create incremental capital, but also improve overall returns. On tax rate, we’ve adjusted our full year guidance to a range of zero to negative 5% based on our outlook for EV lease volume in the back half of the year.

To wrap, this was a solid quarter in terms of operational execution and financial results, and we remain confident in achieving a 4% NIM, $6 of EPS, and mid-teens return run rate by the end of 2025. And with that, I’ll turn it over to Sean for Q&A.

Sean Leary — Head of Investor Relations

Thank you, Russ. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Elizabeth, please begin the Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Ryan Nash with Goldman Sachs.

Ryan Nash — Analyst

Hey, good morning, everyone. So, Michael, you highlighted you’ve been in the role for about two months. Maybe just give us your initial impressions of the company and the strategy and — as you think about the strategy that the company has pursued, any initial thoughts on potential changes to the strategy or the direction of the company?

Michael Rhodes — Chief Executive Officer

So, Ryan, thanks for the question, and nice chat. So as you mentioned in the prepared remarks, I said a couple of things, really reflects the fact how grateful I am to inherit this well-respected and well-positioned company and really a tremendous respect for what the team has built. And one of the things that really drew me to Ally was the evolution we’ve had over the past many years. And I should underscore how well positioned we are for where banking is heading in the future.

And as you know, you talk about strategy as CEO, an important part of my job is to constantly think about and evolve the strategy. But right now, my primary focus is to execute on the plans we have in place. I am incredibly fortunate to walk in to a situation with a strong several years ahead of us, and I believe we are uniquely positioned in our industry with a very attractive earnings ramp. And so it’s very important to me that we execute.

And so I just want to underscore that, that very much focus on execution. Now don’t read this that we’re on autopilot. Rather, we’ll continue to optimize our use of capital. And we will take a hard look at everything, just don’t expect any significant near-term shifts as it gets widely deal with.

Ryan Nash — Analyst

Got it. Maybe a question for Russ regarding credit. Russ, you gave a lot of color on credit regarding performance. You talked about lower front book performance.

I guess, given the tighter underwriting, the burn-off of ’22, which you showed on Slide 15 and then the stronger ’26, I think you highlighted loss in moderating on a seasonal basis, but — when do you think we start to see credit outperform seasonal expectations given all the changes then move up market? And can we make significant progress toward the 1.8 targeted charge-off level in ’25? Thank you.

Russ Hutchinson — Chief Financial Officer

Yes. No, thanks for the question, Ryan. Great to be on with you again. Look, OK, I think as you think about kind of seasonal trends, as we highlighted, second quarter is a seasonal trough.

And so our expectation is to see kind of typical increase in NCOs over the remainder of this year as we go into third and fourth quarter. That being said, that kind of typical seasonal increase we expect to be mitigated. As you pointed out, as that 2022 vintage has past peak loss period, and really starts to burn off. And so we do expect some mitigation in the normal seasonal increase that we’d see going into third and fourth quarter.

And obviously, our expectation is that continues into 2025. We’re not providing guidance on 2025 NCOs yet. As usual, we’ll kind of work through the remainder of the year and look to provide that kind of guidance early next year. That being said, we do, as you pointed out, expect to make progress toward NCOs that we think over the kind of the medium term auto settle out somewhere in the, call it, 1.6% to 1.8% range based on kind of how we’re underwriting today.

Ryan Nash — Analyst

Thanks for the color, Russ.

Operator

Our next question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani — Analyst

Thanks. Good morning. And, Michael, congratulations on your first call. Maybe just to follow up on Ryan’s questions.

Maybe, Michael, you could just talk about your opinion on the strategy of the company and sort of being a monoline in auto. There’s always been ideas to diversify into card. You obviously have a background there. Could you just talk about philosophically, like how you think about the composition of the asset base and sort of the strategy going forward?

Russ Hutchinson — Chief Financial Officer

Yes. Thanks for the question, and great question. So coming in the role, I’ve obviously followed Ally from the outside and now being in the role, one of the questions you always have to ask yourself from a high-level strategy is where are we going to compete and how are we going to win? And in terms of where we’re going to compete, we do find that the auto business is a very attractive ecosystem for us. And I say ecosystem because it’s more than just the consumer loans.

We have commercial lending to the dealers. We have insurance product. We have some value-added services such as a pass-through program, SmartAuction. And so we really have a compelling reason why we can win in the auto space.

And so you can imagine that you want to double down on where you have a real reason to win. And so you look at that, and I’m just very pleased with where we are. And then clearly, on the banking side of the business, what we’ve done with deposits is really quite remarkable. Again, I said in my prepared comments, everyone wants to build a digital bank and then one better than anyone, and that’s great.

And we’ve had some places where our diversification is really taking hold and you see the commercial finance business and what that’s done. And then we have some emerging opportunities here. And you can see that we’re being a little more slow in terms of what we’re trying to do in those emerging opportunities because the best use of capital right now is really the things that we do very well, have defensible reasons to win. And and that’s where you’re going to see us allocating our expenses and our capital in the near term.

Sanjay Sakhrani — Analyst

OK. Great. And then apologies if I missed this, but maybe Russ, you could just talk about the originated yield. I know it declined because of the mix and you guys went up more upmarket.

But was there anything else from a competitive standpoint that was affecting that originated yield? Or is it simply just a mix?

Russ Hutchinson — Chief Financial Officer

No, it’s simply just mix. And look, mix will vary on a quarter-to-quarter basis. I don’t think we’re looking at this as any kind of a long-term trend. Our pricing was consistent across credit tiers, and we got hit to a higher quality credit mix this time.

You see it most clearly obviously in the high percentage of the [Inaudible], but you also see it more broadly with the FICO moving up to 712 for this quarter’s origination. So it’s really just kind of normal fluctuations. And again, we’re not reading anything into it at this point.

Sanjay Sakhrani — Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Don Fandetti with Wells Fargo.

Donald Fandetti — Analyst

Hi. Good morning. Just wanted to clarify, Russ, I think you talked about the year-over-year delinquency 30-plus day moderating going forward. Is that versus the 60 or the 73 bps? I just want to clarify that.

Russ Hutchinson — Chief Financial Officer

Right. No, I appreciate the clarification. The 73 basis points is kind of based on the end of quarter delinquencies. And so as we pointed out earlier, and we pointed this out last quarter as well, the day of the week has an impact on overall delinquency levels.

That is to say, over the course of a typical week, we see kind of different outcomes for delinquencies. So we typically get our kind of lower delinquencies on Fridays and higher delinquencies on Sundays. This quarter ended on a Sunday, the comparative quarter ended on a Friday. And so that was, in a sense, a bad guy in terms of that overall measure of delinquency.

When we look at it on a daily average basis, that 73 basis point — delta based on the last day of the quarter, is more like 60 basis points on a daily average basis. And so you can kind of get a more kind of a steady-state reflection of the delinquency trends as you compare the two months, this month and — sorry, this quarter and the quarter a year ago. And so that’s a little bit more kind of context on the 60 and the 73. I think kind of given we’ve now had two quarters where we had to talk about this day of the week phenomenon, I think you will see us going forward, talk a little bit more about daily averages where it’s applicable.

That being said, of course, we know the industry and a lot of the reporting we do is on a daily, end-of-the-quarter basis, and so that’s going to continue. But we’ll try to provide a little bit more insight on the daily average basis, basically just to mute that day of the week impact that we’ve been seeing.

Donald Fandetti — Analyst

So I guess we should think about — you had said that it could moderate further, would that be from like that 73 or the 60 base? Just trying to think because the 60 was better than last quarter on a year-over-year?

Russ Hutchinson — Chief Financial Officer

Yes, that’s right. And so I think our expectation is moderating, not necessarily in a straight line, but moderating overall. And so yes, we do expect to see continued moderation both in terms of the last day of the quarter as well as the daily average. The only thing I’d point out is there is that kind of embedded volatility in the last day of the quarter depending on which specific day of the week it falls on, relative to the base quarter you’re comparing it to.

Donald Fandetti — Analyst

Great. Thanks for the clarification.

Operator

Our next question comes from the line of Moshe Orenbuch with TD Cowen.

Moshe Orenbuch — Analyst

Great. Thanks. Hoping that you guys — that maybe, Russ, you could talk a little bit about the outperformance of the ’23 vintage versus 2022. How much do you think of that has being driven by kind of industry performance? How much of it is Ally? And can you relate to that, the — what you talked about in terms of seeing kind of tighter underwriting for a lot of the period in 2023 and early 2024, and maybe some of those other factors that you talked about as to how do we think about that even as we go forward into the ’24 vintage?

Russ Hutchinson — Chief Financial Officer

Sure. So maybe I’ll start with kind of the first question here. For the first part of your question, us versus the industry. And I think the kind of — I think the clearest and most definitive way to look at it is I’ll start maybe with the industry.

When you look at the trajectory of car prices, both kind of where dealers were selling and where MSRPs were going as well as used car prices they really peaked in 2022. And so from an industry perspective, we all kind of get a tailwind from the fact that ’23 going forward were written — loans and leases were basically underwritten at less than peak prices for both new and used vehicles. And so I think that’s helpful for us, it’s helpful for the industry. Flipping gears and just talking about Ally specifically, we’ve been making — we’ve been tightening our underwriting consistently over the course of over the past — more than the past year.

But in particular, you see it as you go from first quarter of 2023, the second quarter of 2023. And that’s where you really saw that step up in the proportion of our originations that are in our top credit tier, the S tier, and so I’d say from Q2 ’23 onwards, you really see a change in terms of our overall underwriting. And that’s for us, obviously, and that’s very much Ally specific, but that’s what I would point to as kind of the Ally specific part in terms of the change in the way we’ve underwritten. You see it most clearly in that percentage of [Inaudible], but you also see it kind of overall and just the overall way that we’ve underwritten.

We’ve effectively taken a microscope to our originations, looking at our performance on a very discrete level, looking at vintages and then looking at cuts within those vintages to understand how kind of various subsegments are performing and then calling underperforming segments and adjusting pricing as we move forward. And so that, again, a lot of that kicked in, in the second quarter of 2023, and that’s really where we attribute a large chunk of the improvement in what we’re seeing in the ’23 and forward vintages versus 2022.

Moshe Orenbuch — Analyst

Got it. Thanks. And maybe as kind of the follow-up question and, Michael, I wanted to add my welcome and congratulations. Just to talk a little bit about capital maybe and thoughts about capital levels.

I saw the CRT, but maybe given that the financial markets have been better, could you talk about the appetite for actual loan sales or securitization and sales of loans and how you would think about that in terms of managing both capital levels and origination levels into the back half of the year and into ’25?

Russ Hutchinson — Chief Financial Officer

Yes. Maybe I’ll start and Michael can kind of add to it. We have been very pleased with the market’s receptivity to our loans. It’s given us additional levers that we can use in terms of managing overall capital levels.

And so you’ve seen, obviously, the CRT — the reception on the CRT was fantastic. I think we were very pleased with the outcome, both in terms of pricing, in terms of size, in terms of overall market demand for it. You also saw earlier in the first half and late last year, in the ABS markets actually selling deeper into the residuals of our ABS in order to get deconsolidation of loans. So we sold about $2.8 billion of loans through the ABS markets as well.

So another example of capital markets receptivity to our loans. And so we’ve been very pleased with that. We think that these capital levers give us additional flexibility that will allow us to both support our dealers and then ultimately, return capital to our shareholders. As we’ve said before and as you know very well, we continue to be very focused on capital build for now in anticipation of the new B3 capital rules that we expect at some point.

Moshe Orenbuch — Analyst

Great. Thank you.

Michael Rhodes — Chief Executive Officer

Moshe, this is Michael. Great to chat with you again. It’s been a while. But being the new guy in here and just kind of seeing what we have.

We have several very attractive tools that Russ has covered. And we are in a bit of wait-and-see mode as it relates to [Inaudible] and kind of what’s going to happen there. But I’d say it would be very opportunistic, and we’ve got the appropriate tools, and we’re being very thoughtful about how we allocate our capital. It’s certainly now and then as we go forward.

Moshe Orenbuch — Analyst

Thanks so much.

Operator

Our next question comes from the line of Jeff Adelson with Morgan Stanley.

Jeff Adelson — Morgan Stanley — Analyst

Yes. Hi. Thanks for taking my question. Just wanted to circle back on the credit a little bit.

I know there’s a bit of a timing issue on the spot rate. But if we look at the 60-plus days, the second derivative there does continue to shrink. So just wondering, is that something that does give you more confidence in the outlook for your charge-off trajectory from here? And then as we think about the spot rate dynamic here, the weekend timing, next quarter, sitting here looking at my calendar does end on a Monday. So is that something that could potentially help you guys next quarter reverse some of that spot dynamic you’ve been seeing?

Russ Hutchinson — Chief Financial Officer

No, great questions, Jeff, and thanks and great to speak with you again. I’d say first, I think your observation on the 30 plus versus the 60 plus is very astute. And I’d say just more broadly, we continue to see very favorable trends in flow to loss. And that’s — and part of that, we believe, is some of the changes that we’ve made, both on the underwriting that we talked about earlier, but also on the servicing side, in terms of just making improvements to our overall servicing model, to give our collectors a little bit more time to work the credits and to give our customers a little bit more time to correct.

And so I agree with you that as we just look at the overall book, as we look at flow-to-loss trends, all those things are things that again give us confidence in terms of the credit outlook going forward.

Jeff Adelson — Morgan Stanley — Analyst

OK. Great. And then as my follow-up, just tax rate, I mean, is there any reason why we shouldn’t start thinking about this negative or really low tax rate as kind of the new norm here. I mean it’s starting to feel like this could be more of a recurring ongoing benefit even beyond ’24.

Is there any reason why that might not be the case?

Russ Hutchinson — Chief Financial Officer

Jeff, another great question. I’m glad you asked it. You look at the quarter and as we pointed out, a lot of the EV lease volume was driven by an OEM relationship that we entered into in March. And so really, this was the first quarter where we had a full quarter of origination under this program.

We did — obviously, as you saw just over $600 million of lease EV originations during the quarter. We’re obviously — we’re pleased with that level of origination. But again, a large chunk of that was driven by a new agreement. There will naturally be kind of ebbs and flows in that.

I wouldn’t necessarily count on that specific level of volume each quarter. But certainly, our expectation is that we’re going to continue to originate these EV leases in size. And it is certainly our expectation that that’s going to continue, obviously, through the remainder of 2024 driving down to the revised tax rate guidance we provided, and that will also continue somewhat over the course of 2025. I would just like to reiterate, while we’re talking about the EV leases, the accounting for these leases, as we pointed out, using this the flow-through method has the impact of kind of impacting NIM to the negative, we’ve considered that.

And obviously, every quarter that we continue to do these EV leases, there’s more kind of downward pressure on NIM. We’ve anticipated that downward pressure. And again, we remain confident in the NIM guidance that we’ve provided in terms of the exit rate for 2024 and then ultimately getting to a 4% NIM run rate at the end of 2025. And again, that’s with the headwind of these EV leases.

Jeff Adelson — Morgan Stanley — Analyst

OK. Great. Thank you for taking my questions.

Operator

Our next question comes from the line of Rick Shane with J.P. Morgan.

Rick Shane — JPMorgan Chase and Company — Analyst

Thanks guys for taking the questions. Hey, Michael, welcome and congratulations and I share your hope in terms of what you set up front. Look, I’d like to talk a little bit more about the EV originations and the residual guarantees. I’m curious if there is a differential between your residual assumption and the guarantee level and if that could impact NIM over time?

Russ Hutchinson — Chief Financial Officer

Yes, that’s a good question. I’d say maybe just to start, look, the residual value guarantee provides real protection against the decline in values. You probably noticed in our Q for the first quarter, we actually did provide a little bit more discussion around this as this agreement was entered into in March. And so there’s a bit more description around that residual value protection.

That being said, as you think about lease gains on this particular portfolio going forward, we do expect them to be muted. But again, it’s early days in terms of this agreement. And as we mentioned earlier, overall, we do have an expectation of second quarter, the lease gains we saw were obviously driven by just a seasonality as well as the — just the level of origination — lease originations we did three years ago, back in the second quarter of 2021. And our expectation that lease terminations decline throughout the remainder of this year as well as 2025.

And so obviously, that has an impact on lease gains going forward. And again, that is something that we’ve anticipated and we’ve baked into our guidance around net interest margin going forward for ’24 and ’25.

Rick Shane — JPMorgan Chase and Company — Analyst

Got it. Look, the reason the residual guarantees on battery — EV battery cars is so important is because of the rapid evolution of the technology, and the rapid obsolescence of prior cars. I’m curious if the OEM partnership also is driving an increase in your mix of loan volume for battery-powered EVs? And if that’s something that we need to think about in terms of residual values on a long-term basis as well in terms of recoveries?

Russ Hutchinson — Chief Financial Officer

I think the agreement is more focused around lease. And so I’d say it’s certainly driving our origination of battery electric vehicle leases. I don’t believe it’s having any meaningful impact on our retail lending overall. I would point out, when we think about electric vehicles, obviously, we have a balance of hybrid electric as well as battery electric and the residual value performance on the hybrid electrics is obviously quite a bit different versus the pure battery electric vehicles.

And a lot of our volume is driven by the battery electric side, particularly when you look at the leased product and outside of this OEM relationship.

Rick Shane — JPMorgan Chase and Company — Analyst

Got it. OK. Thank you guys very much.

Operator

Our last question today will come from Rob Wildhack with Autonomous Research.

Rob Wildhack — Autonomous Research — Analyst

Good morning, guys. We noticed that you took CD pricing up in at least a couple of the products during the quarter. Wondering if there’s anything to read into there on your ability to continue to push deposit costs lower. And then what kind of deposit repricing are you baking into the expectation to exit the year with that 3.45% to 3.5% NIM? And then same question, too, for the 4% in ’25 as well?

Russ Hutchinson — Chief Financial Officer

Sure. Yes, we have made selective changes to CD pricing. It’s just basically a reaction to kind of specific market conditions as well as just looking at kind of specific CD maturities in terms of just kind of managing our overall CD maturity profile. All that being said, we don’t anticipate any kind of broad changes to deposit pricing from where we are in advance of any moves by the Federal Reserve.

As we’ve said before, as we think about just overall our NIM trajectory for 2024, obviously, the deposit pricing will depend to some extent on Fed rate moves, but our NIM trajectory does not. And that is to say that we believe that we’ve put hedging in place and we’ve managed our risk in such a way that our 2024 exit rate does not depend or rely upon Fed rate cuts. Similarly, as we look at 2025, and we look at our guidance to get to 4% NIM at the end of 2025, again, we’ve looked at that under a variety of rate scenarios. And as you can imagine, our deposit pricing depends on, to some extent, kind of broader moves in rates by the Fed.

And again, looking at a broad range of scenarios, we feel comfortable based on our hedging, based on our overall asset mix between floating and fixed that we can hit the 4% NIM guidance in a range of scenarios.

Rob Wildhack — Autonomous Research — Analyst

OK. Thanks. And then just one more. I appreciate the color on the credit risk transfer.

Curious how big a tool you think this could be for Ally going forward? Is it something you’d expect to do frequently to the extent that the market appetite is there? Or should we think of these as more one-off type transactions?

Russ Hutchinson — Chief Financial Officer

There’s certainly an opportunistic nature to them. That being said, we were very pleased with market appetite and demand. And so it’s definitely a tool that we want to use. And so I think our expectation is that we’ll continue to use it.

You’ll see us print these from time to time. I certainly wouldn’t expect them every quarter, but it’s certainly a tool that we expect to reuse.

Rob Wildhack — Autonomous Research — Analyst

Thank you.

Sean Leary — Head of Investor Relations

Thanks, Rob. Thanks, Russ. I’m showing a little past the top of the hour here. That’s all the time that we have for today.

If you do have additional questions, as always, please feel free to reach out to investor relations. Thank you all for joining us this morning. That concludes today’s call.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sean Leary — Head of Investor Relations

Michael Rhodes — Chief Executive Officer

Russ Hutchinson — Chief Financial Officer

Ryan Nash — Analyst

Sanjay Sakhrani — Analyst

Donald Fandetti — Analyst

Don Fandetti — Analyst

Moshe Orenbuch — Analyst

Jeff Adelson — Morgan Stanley — Analyst

Rick Shane — JPMorgan Chase and Company — Analyst

Rob Wildhack — Autonomous Research — Analyst

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