Ally Financial (ALLY) Q4 2024 Earnings Call Transcript

Ally Financial (ALLY 3.01%)
Q4 2024 Earnings Call
Jan 22, 2025, 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 fourth quarter 2024 Ally Financial earnings conference call. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Leary, head of investor relations.

Please go ahead.

Sean Leary — Head of Investor Relations

Thank you, Daniel. Good morning, and welcome to Ally Financial’s fourth quarter and full year 2024 earnings call. This morning, our CEO, Michael Rhodes; and our CFO, Russ Hutchinson, will review Ally’s results before taking questions. The presentation we’ll 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 Slides 3 and 4. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures.

Please note that the company made a change in our accounting methodology for electric vehicle tax credits, as previewed in recent quarters. Figures for 2023 and 2024 presented under the new deferral method of accounting. For certain metrics, we’ve shown results under both deferral and the prior flow-through methodology. 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. Before we begin, I want to take a moment to acknowledge the devastating wildfires in Los Angeles as our thoughts are with those facing such a tremendous loss. Now, while it’s challenging to shift gears from such a heavy topic, let’s move forward with our results, starting on Page 5.

In 2024, Ally delivered adjusted EPS of $2.35, core pre-tax income of $1 billion and revenues of $8.2 billion. We are pleased with momentum across the businesses entering 2025, after a year in which our financial results were pressured from a combination of volatile interest rates and a consumer burdened by the cumulative effects of inflation. Fourth quarter results were in line with or favorable to the updated guidance we provided in October. The team’s collective efforts enable us to reinforce our market-leading positions and strengthen our foundation for the years ahead.

As I reflect on my first eight months as CEO, I’m filled with a profound sense of gratitude and optimism. I remain particularly encouraged by the strength of our core franchises. We’re poised to deliver growth and shareholder value through consistent execution in Dealer Financial Services, Corporate Finance and Deposits. The strength and durability of our competitive advantage of those businesses are enhanced by our brand and culture.

The Ally brand has a powerful connection with consumers, anchored in a history of always doing the right thing. For the third year in a row, we were recognized by Fast Company as a brand that matters. We’re the only financial services brand to achieve this consecutive distinction, proving again that we have one of the most relevant and differentiated brands in banking. When I started as CEO, one of my first priorities was to keep our people-first culture and do it right approach at the heart of everything we do.

I believe it’s one of the many things that truly sets Ally apart. In 2024, we ranked in the top 10% of companies for employee engagement for the fifth consecutive year, seven points higher than the financial services benchmark. When employees are all in, our culture thrives and our customers benefit. Our commitment extends beyond customers and into the communities where we live and work.

In 2024, we continue to drive economic mobility through financial education, affordable housing and workforce preparedness. Our Community Reinvestment Act has earned three consecutive outstanding ratings, a designation achieved by fewer than 15% of banks. Going forward, we’ll continue to lead into our do-it-right approach, investing in our employee and customer experience and making a positive impact in our communities. As many of you may have heard me say before, I spent the first few months in my role listening and learning.

I developed a greater appreciation for Ally’s legacy during these months. And as we prepare to launch the next chapter of this company’s evolution, I believe we are best positioned to deliver compelling returns and grow shareholder value to the power of focus in our core franchises. Continuing to win in Dealer Financial Services, Corporate Finance and Deposits will be our focus going forward. More on this in a moment.

Let’s turn to Page 6 to talk about the quarter. Since becoming CEO, I’ve been evaluating all aspects of our business to identify opportunities to be even better. Building on Ally’s solid foundation and position the company for long-term success is my top priority. To that end, we have taken a number of significant steps this quarter.

Now, I recognize there are lots of moving pieces. However, these actions simplify and streamline the company, prioritize our resources toward our core franchises and improve financial returns and transparency. This morning, we announced that we reached an agreement to sell our Credit Card business. As I’ve said before, Card’s a great business and we have a great team.

However, I believe our path to deliver mid-teens returns is through the power of focus. Similarly, we are ceasing new mortgage loan originations on January 31 and expect remaining balances to run off over time. The mortgage portfolio today yields just over 3%. As it runs off, we are positioned to invest in higher-yielding asset classes driving NIM expansion.

Beyond these actions, we’ve taken steps to manage controllable expenses in 2025. During the quarter, we announced a workforce reduction, which resulted in recognition of a $22 million restructuring charge. While it’s not something we take lightly, this action is expected to contribute more than $60 million in annualized savings, drive positive operating leverage and align the cost structure with our new streamlined footprint. We see tremendous opportunity in the businesses where we have demonstrated competitive advantage, attractive returns and the scale necessary to succeed.

Shifting gears a bit. We had a few reporting-related updates worth mentioning. As Sean mentioned earlier, we have changed the deferral method of accounting for EV lease tax credits. This change was made retroactively and reduced retained earnings by approximately $300 million and CET1 by 20 basis points.

Importantly, the impact to capital is net neutral in the medium term as the day one impact is earned back over the next few years to net interest income. In alignment with a more simplified Ally, we’ve also made updates to the corporate expense allocations and reporting segments. These changes are intended to provide greater transparency to investors, consistency in various allocations and align with how we manage and evaluate Dealer Financial Services, Corporate Finance and Deposits. Russ will cover these changes in more detail shortly.

Let’s turn to Page 7 to discuss our market-leading franchises. Within auto finance, consumer originations of $39 billion were sourced from a record 14.6 million applications, again, showcasing the strength of our mutually beneficial dealer relationships and the scale of our franchise. Origination yields of 10.4% were driven by strong application flow, allows dynamic and selective underwriting. 44% of our originations were made of the highest credit quality tier, positioning us for strong risk-adjusted returns in the years ahead.

We remain committed to the success of our more than 20,000 dealers, and I’m encouraged by the trends we’re seeing in application flow to further strengthen and grow our position as the leading bank auto finance lender in the country. Insurance written premiums of $1.5 billion were the highest since our IPO as we benefited from new relationships, growth in inventory exposure and synergies with our auto finance team. Corporate Finance delivered record pre-tax income of more than $400 million and an ROE of 37% with zero net charge-offs, demonstrating the quality of our loan book. This was a uniquely strong year in the Corporate Finance business.

While we expect some normalization of credit in the near term, I’m quite confident the team will continue to deliver accretive returns while prudently managing risk. Our deposits franchise had another fantastic year. We’ve continued to invest to deliver best-in-class digital features and products, growing the customer value proposition beyond rate. And we added more than 230,000 new customers and now serve 3.3 million depositors with $143 billion in balances.

Deposit balances were up $1 billion year over year, very consistent with our outlook in January and well aligned with what’s needed to support the asset side of our balance sheet. Customer satisfaction are 90% and retention above 95% continue to lead the industry. In 2024, we grew engaged savers, savings customers that leverage multiple core products and features, by nearly 15%. Since 2019, we’ve increased engaged savers from 300,000 to 1.3 million.

Engaged savers now represent nearly 40% of customer base and are generally less rate sensitive than our other depositors. Our culture of customer obsession has strengthened our deposit franchise, enabled profitable growth in auto, insurance and the Corporate Finance business. We are pivoting to a more focused approach that allocates capital to our core businesses where we have competitive advantage, it prioritizes efficiency and expense discipline and prudently manages risk. I am confident that this should translate to mid-teens ROTCE over time.

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. Before I get into the results, I’ll expand on changes we’ve made to expense allocations and reporting segments.

As Michael mentioned, these changes are intended to align to how we manage and evaluate our businesses. Our Dealer Financial Services and Corporate Finance results now reflect 100% of our centralized functional costs. The business lines will no longer be allocated operating costs associated with the deposit platform. This better aligns with our approach to funds transfer pricing, which is primarily market-based and match fund assets at origination.

And mortgage finance results for the outstanding portfolio are now reflected in corporate and other. Also, as discussed last quarter, our net interest income and income tax expense now reflects the deferral method of accounting for EV lease tax credits. Now, let’s review results. In the fourth quarter, net financing revenue, excluding OID of $1.5 billion, was in line with the prior year and prior quarter.

We benefited from continued expansion in retail auto yields, excluding the impact of hedges, and we benefited from the impact of lower deposit pricing, partially offset by lower yield on floating rate exposures quarter over quarter, reflecting the decrease in short-term benchmark rates. Adjusted other revenue of $564 million was up 13% year over year reflecting broad-based momentum. Full year adjusted other revenue was up 14%, higher than the 5% to 10% expectation set forth at the beginning of the year. Other revenue streams, including insurance, SmartAuction and consumer auto Passthrough programs continue to be a tailwind to fee revenue heading into 2025.

Provision expense of $557 million was down year over year, driven by a few factors: one, zero net charge-off activity in our commercial portfolios; two, lower consolidated net charge-offs following the sale of our point-of-sale lending business early in the year; three, a modest quarter-over-quarter decline in retail auto coverage rate following an increase in the prior quarter. We will discuss retail auto net charge-offs in more detail later. Noninterest expense of $1.4 billion includes two onetime items: a partial write-down of goodwill related to the pending sale of the Credit Card business of $118 million, and a $22 million restructuring charge associated with the reduction in force. The headcount actions position us for $60 million in annualized savings next year.

Onetime expense items totaling $140 million, or $0.37 of EPS, has been excluded from core pre-tax results. This is consistent with our treatment of similar items in the past. Adjusted noninterest expense was up less than 2% year over year, primarily driven by growth in insurance and FDIC fees and controllable expenses were down more than 1%, demonstrating commitment to cost discipline that will continue going forward. Our effective tax rate for the full year was 20%, reflecting the deferral method of accounting for EV tax lease credits.

Our 0% tax rate within the quarter included impacts from prior state and international return, as well as standard year-end true-ups. GAAP and adjusted EPS for the quarter were $0.26 and $0.78, respectively. Moving to Slide 9. Net interest margin, excluding OID of 3.33%, increased 1 basis point from the prior quarter, resulting in full year NIM of 3.3%.

Expansion in retail auto yields, excluding the impact of hedges and decreasing deposit costs, were partially offset by contractual repricing of floating rate exposures and lower lease gains. Cost of funds decreased 17 basis points quarter over quarter driven by a 22 basis point decrease in deposit costs. Deposit pricing has been in line with expectations during the quarter, and we continue to expect a cumulative deposit beta of around 70% over time. We have good momentum on both sides of the Ally balance sheet from the multiyear transformation of both our assets and liabilities.

We continue to run off mortgage and securities balances with yields of approximately 3%, replacing them with Retail Auto and Corporate Finance loans, both currently yielding over 9%. On the other side of the balance sheet, deposits as a percentage of funding have increased to 90% from 70% in 2019 and the spread between cost of funds and Fed funds has improved significantly. As we’ve successfully reached core-funded status and enhanced the value proposition, we’ve been able to price our deposits favorably relative to our major competitors. Due to the improvement in spreads for both assets and liabilities, we’re well positioned for margin expansion and sustainably higher NIM over the medium term.

As Michael mentioned earlier, we have reached an agreement to sell our Credit Card business. Given the 20% plus yield of net book, a sale of the business impacts our medium-term outlook for margin. However, the benefits from lower credit costs and operating expenses provide a substantial offset to lower margins. Taken together, an exit from the Card business does not have a material impact on core pre-tax income.

There are many moving pieces that will impact our path to normalized margin, most notably changes in interest rates and market pricing for deposits, but we remain confident in the trajectory. Turning to Page 10. CET1 of 9.8% represents over $4 billion of excess capital above our SCB minimum. The sale of Ally Credit Card is expected to add 40 basis points of CET1 at closing and $1 of adjusted tangible book value per share.

We intend to redeploy that capital into a combination of growth in our core franchises, potential restructuring of the securities portfolio and eventually share repurchases. As we mentioned earlier, we booked a $118 million goodwill impairment in 4Q related to the card business. We expect to book approximately $10 million to $20 million of additional onetime transaction-related expenses as we progress toward closing. Within the quarter, there were a couple of material moving pieces impacting capital.

We issued our second credit-linked note generating 16 basis points of CET1 at the time of sale. Demand was robust, leading to solid execution and demonstrating market appetite for the loans that we’re originating. And adoption of the deferral method of accounting for EV leases temporarily reduced CET1 by 20 basis points. Looking ahead, we’ll continue to remain opportunistic with respect to growing capital and thoughtful about how we deploy excess capital over time.

In the first quarter of 2025, we expect an approximately 20 basis point impact to CET1 from the final phasing of CECL. We recently announced our quarterly dividend of $0.30 for the first quarter of 2025, which remains consistent with the prior quarter. Excluding the impacts of AOCI, adjusted tangible book value per share is $47, up more than two times from 2014. We remain focused on tangible book value per share growth in the years ahead and driving shareholder value through disciplined capital deployment.

Let’s turn to Slide 11 to review asset quality trends. The consolidated net charge-off rate of 159 basis points was up 9 basis points quarter over quarter. We continue to see solid credit performance in our commercial portfolios in the fourth quarter, resulting in zero net charge-offs in 2024. The year over year net charge-off comparison includes $36 million of Ally Lending activity in 4Q 2023.

Full year consolidated NCOs finished within our range of 1.4% to 1.5% provided a year ago, driven by better-than-expected performance in our commercial portfolios. As we continue to be further removed from the unprecedented effects of the pandemic, including historically high inflation, we’re seeing improving trends in consumer performance. Retail auto net charge-offs of 234 basis points were up 10 basis points quarter over quarter. Typically, we would expect approximately 35 basis points of quarter-over-quarter increase tied to seasonality.

Total loss rates were favorable in the quarter and were well below 2019 levels all year, reflecting a dynamic approach to collection strategy that’s been effective at keeping consumers in their vehicles and reducing losses. We also had a strong fourth quarter for recovery given the strength in used vehicle values relative to our expectations. In the fourth quarter, we outperformed typical seasonality as curtailment actions, auction price stability and easing inflation pressure increasingly benefited portfolio results. In terms of trends we saw throughout the quarter, we saw stabilization of trends early in the quarter and we ended with a strong finish in December.

We closed the year with historically low flow to loss rates and with a stable used volume vehicle value backdrop that led to results better than expectations heading into December. Credit performance throughout 2024 was choppy. We certainly expect to benefit from portfolio turnover in 2025, but we acknowledge the macro environment remains uncertain. In the bottom right, 30-plus day accruing delinquencies increased 15 basis points quarter over quarter and were down 3 basis points year over year.

Late-stage delinquencies remain a key watch item. Given the increase in nonaccrual loans we’ve been discussing throughout the year, we’ve enhanced our disclosure this quarter. We continue to show delinquency for the accruing-only population but have added the corresponding 30-day DQ metric for the total portfolio, which includes both accruing and non-accruing loans. We believe both are helpful to investors and the total portfolio view aligns with how we manage the business from an operational and loss mitigation perspective.

On Slide 12, let’s discuss the retail auto vintage credit trends. Actual and expected portfolio mix, as well as loss contribution by vintage are shown on the top half of the page. As we’ve discussed previously, the 2022 vintage is producing elevated losses relative to expectations at the time of origination across the consumer finance space. Ally’s 2022 vintage comprised roughly 40% of portfolio losses in 2024 as the vintage worked through peak loss seasoning.

As the portfolio continues to turn over, the ’22 vintage will amortize down. That vintage is expected to comprise 10% of our retail auto portfolio by year-end 2025 compared to 20% at year-end 2024. Vintage delinquency trends are on the bottom left. Our 2023 vintage continues to outperform 2022 after equivalent months on book.

We remain encouraged by the early trends in the 2024 vintage, which is outperforming the 2023 vintage after 12 months on book. The table on the bottom right highlights improvement in credit profile, which has resulted from the curtailment actions we’ve taken. We expect these curtailment actions to mitigate losses in future periods and drive strong risk-adjusted returns. Credit trends have improved recently and give us confidence in our path to normalized net charge-offs below 2%.

We continue to carry an elevated population of late-stage delinquent accounts, which makes it difficult to provide precise timing and point estimates. But we remain confident that our curtailment actions and a constructive macro position us for lower losses over time. Moving to Slide 13. Consolidated coverage increased 4 basis points and retail auto coverage decreased 2 basis points.

The increase in consolidated coverage rates were largely driven by lower balances in commercial auto and Corporate Finance. The decrease in the retail auto coverage rate was driven by a partial release of the hurricane reserve recorded in the prior quarter. Moving to Slide 14 to review auto segment highlights. Pretax income of $397 million was lower year over year, primarily driven by lower lease revenue and gains, slightly lower average earning assets and higher servicing-related expenses.

On the bottom left, we highlighted the trajectory of retail auto portfolio yields. Excluding the impact from hedges, yields were up 10 basis points quarter over quarter and 66 basis points year over year. Fourth quarter originated yield of 9.6% was down quarter over quarter, driven by a decrease in benchmark rates and an increase in S-Tier originations from 43% to 49%. While the fourth quarter usually drives an uptick in credit quality, our capture rates in super prime were above our expectations for much of the quarter.

We’re pleased with the return profile of what we originated but have taken action on the pricing side that will result in lower S-Tier in the first quarter. We’ve already seen the impact of this with our origination mix exiting the year closer to what we originated for most of 2024. And as we’ve mentioned before, we expect to gradually unwind curtailment actions over time to a more normalized mix. The unwind of curtailment actions will partially offset benchmark rate-driven price decreases over the long term.

The timing of curtailment unwind remains fluid and will be informed by front book portfolio performance, which has begun to show signs of improvement. Lease trends are in the bottom right. Gains of $3 million in the fourth quarter reflect lower lease termination volume quarter over quarter and softer lease gains per vehicle, driven by vehicle termination mix. We expect lease gains to remain low in the first quarter and increase modestly in the spring and summer, due to typical seasonality, as well as vehicle termination mix.

Turning to insurance on Slide 15. Core pre-tax income was up $25 million year over year, driven by higher earned premiums. Total written premiums of $390 million reflect the continued momentum of business trends in P&C and F&I products. Growth in P&C written premiums of $40 million year over year are supported by new OEM relationships and recovering inventory levels.

Insurance losses of $116 million, up $23 million year over year, are in line with expectations and are more than offset by higher revenues. Insurance was a key driver of our fee revenue expansion in 2024 and we remain encouraged by the opportunity to grow this business over time by leveraging synergies with our auto finance business. Corporate Finance results are on Slide 16. Core pre-tax income of $120 million demonstrated another strong quarter for Corporate Finance.

While not shown on the page, Corporate Finance surpassed $400 million of earnings in 2024, a record in the 25-year history of business. End-of-period HFI loans of $9.6 billion are well diversified in virtually all first lien, and we remain well positioned from a credit standpoint. On the bottom of the page, we highlight the accretive return profile of the Corporate Finance business. 2024 performance was in part due to exceptionally strong credit performance, resulting in zero net charge-offs for the year.

We expect NCO performance to normalize and are confident the business will continue to drive solid returns. Corporate Finance remains an attractive business for prudent growth. I will provide an update on our 2025 outlook on Slide 17. We’ve shown 2025 assuming Credit Card operations for a full year largely for comparability purposes with 2024.

We expect the sale of the card business to close in the second quarter and are providing a 2025 pro forma that assumes the sale on April 1. We expect 2025 NIM of approximately 3.4% to 3.5%. Given the 20% yield on credit card receivables, the sale of Allied Credit Card has impacted our near-term NIM outlook by approximately 15 basis points. That would be approximately 20 basis points on an annualized basis.

Importantly, the impact of NIM is offset by lower credit costs and expenses, and our medium-term outlook for mid-teens ROTCE remains unchanged. The range for NIM reflects the uncertain impact of interest rates and deposit competition. Margins should be flat, plus or minus, in the first quarter as we recognized the full quarter impact of 4Q rate cuts on floating rate exposures. We expect to position ourselves competitively during the first quarter to capture incremental money in motion as deposit availability generally increases due to tax refunds, year-end payouts and changes in consumer behavior.

Importantly, we see margin exiting 2025 higher than the full year guide, given our starting point and a stable 1Q margin. We expect continued momentum in Insurance, SmartAuction and auto Passthrough programs to increase other revenue. However, other revenue is expected to be flat year over year as we will see lower fee revenue from the Credit Card business following its sale. In terms of credit, we see retail auto net charge-offs of 2% to 2.25%.

We are exiting the year under favorable conditions, which led to outperformance on both frequency and severity. On the frequency side, while we entered the fourth quarter with elevated levels of delinquency, the collections enhancements implemented within our servicing organization are working. These loss mitigation strategies are keeping people in their vehicles and we exited the year with historically low flow-to-loss rates. Additionally, our newer vintages are performing better than assumed.

With respect to severity, used vehicle prices were approximately 4% better than what we assumed in our October update. Turning to expectations for 2025. Our range reflects that we are still operating through an uncertain macroeconomic environment and that we continue to carry elevated levels of late-stage delinquency. It also takes into consideration the vintage dynamics, which are an important catalyst that gives us confidence that we are structurally headed to losses normalizing lower.

The midpoint of the range assumes a slight increase in flow-to-loss rates coming off historic lows in the fourth quarter. If macroeconomic conditions deteriorate, we could see delinquencies increase, flow to loss rates worsen or used vehicle values soften beyond our current expectations. Any degradation and conditions or if our servicing strategies become less effective, our losses could migrate higher than the midpoint. Conversely, we see a path to lower than midpoint assuming delinquencies stabilize.

4Q flow to loss rates hold or improve further, or used vehicle values continue to outperform expectations. In closing on retail auto credit. It’s important to note that monthly and quarterly variations will continue. Though we remain highly confident in what we see as a trend normalizing lower.

Transitioning to consolidated NCOs. Despite the pressure we saw in retail auto last year, our consolidated loss rate of 1.48% in 2024 was in line with the original guidance we provided last January as we saw uniquely strong performance across the entire commercial loan portfolio. What we feel great about the state of those portfolios, our full year guidance does assume a return to more normalized losses. We see expense growth flat in 2025, including the impact of exiting the Credit Card business.

Increases in areas directly contributing to revenue generation and managing losses are offset by expense savings from the sale of the Credit Card business and headcount actions that we mentioned earlier. As you all know, the first quarter always has seasonal compensation items so we expect linked quarter expenses to be up 6% to 7%, which would put them in line with prior year. Our outlook for revenue expansion and tightly managed expenses positions us for positive operating level in 2025 and over the medium term. Earning assets are expected to be flat on average year over year.

Importantly, the favorable asset mix shift underpinning relatively flat earning assets will be a tailwind to margin in 2025 and the medium term. Given the accounting change to deferral method, we’re estimating a normalized tax rate of 22% to 23%. I’ve mentioned a few things related to first quarter including relatively stable NIM, seasonal compensation items and, of course, two fewer days in the quarter. We feel good about our earnings trajectory heading into 2026.

Before I turn it over to Michael, I want to reiterate my confidence in our mid-teens ROE outlook. Our path to mid-teens returns is predicated on three primary drivers that remain unchanged. First, margin expansion. As we’ve covered, we’re well positioned in various interest rate scenarios, driven by underlying business trends in auto, corporate finance and deposits.

Second, normalization of retail auto NCOs to below 2%, which implies a consolidated net loss rate of approximately 1.3%, which is about 15 basis points lower than it would be with card. The trends we saw in the fourth quarter, driven by our actions to curtail risk, further increases my confidence in losses improving over time. Finally, our commitment to disciplined resource allocation in terms of expenses and capital, which is firm. The exact timing of when we achieve our return targets will be driven by a number of factors, however, we remain confident in our ability to execute against our plan and drive long-term shareholder value.

And with that, I’ll turn it back to Michael.

Michael Rhodes — Chief Executive Officer

Well, thank you, Russ. Before we wrap up, I believe it’s important to highlight the progress we’ve made as a publicly traded company. Last month, we celebrated the 10-year anniversary of our IPO at the New York Stock Exchange. Our team had the pleasure of ringing the Opening Bell.

It gave me the opportunity to reflect in our legacy and how far we’ve come as an organization. Our do-it-right culture spans all layers of the organization and serves as the foundation of our success. We’ve built a valuable, nationally recognized brand centered on being a relentless ally for our customers. And over the years, we’ve transformed both sides of the balance sheet to make us a structurally more profitable company.

Since we launched Ally Bank 15 years ago, we’ve grown to be the largest all-digital U.S. direct bank, serving more than 3 million customers and over $140 billion of retail deposits. We are at the forefront of the shift in consumer preferences toward the digital banking, and we firmly established a reputation as a leading innovative digital bank that offers compelling rates, best-in-class digital experiences and exceptional service. The Dealer Financial Services business has transformed from a captive auto finance company to a leading full-service independent auto lender, offering a wide range of products and services to more than 20,000 dealers.

We’ve established ourselves as a full-spectrum franchise with superior scale, technology and deeply entrenched relationships with dealers across nearly all OEMs, while continuing to partner with those who are driving the evolution of the auto industry. Corporate Finance has a 25-year proven track record, has navigated multiple business and credit cycles. As we look ahead, I remain incredibly excited about the future of Ally. We are pursuing a more focused approach in our core businesses, where we have demonstrated competitive advantages, Dealer Financial Services, Corporate Finance and Deposits.

We are pivoting to increase focus on a few core businesses that have durable and diversified revenue streams, attractive returns and relevant scale. Dealer Financial Services, Insurance, SmartAuction and our consumer auto Passthrough programs have been increasing fee revenue, which now exceeds $2 billion per year, up more than 50% since 2014. Corporate Finance’s held-for-investment portfolio has grown to $10 billion from roughly $5 billion in 2019. I believe the power of focus in our core business will increase efficiency, reduce complexity and risk, and align our resources to the opportunities that drive, the most value for our stakeholders.

As we launch the next chapter of Ally’s evolution, we will ensure our culture remains aligned with a relentless focus on customers, communities, employees and shareholders. We will strive to be one of the most relevant and creatively disruptive brands in banking. We will invest in technology that powers dealer, and customer centric products and services. And most importantly, we expect this focus will improve financial results to deliver compelling returns.

And with that, I’ll turn it over to Sean for Q&A.

Sean Leary — Head of Investor Relations

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

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Ryan Nash with Goldman Sachs. Your line is open.

Ryan Nash — Analyst

Hi. Good morning, everyone.

Michael Rhodes — Chief Executive Officer

Good morning, Ryan.

Ryan Nash — Analyst

So Russ, maybe to start on credit, you highlighted the better than expected performance in the fourth quarter, due to a handful of items like recoveries-flow to loss. And if I think about the fourth quarter loss rate, it feels like you’re at or slightly below a 2% seasonally adjusted loss rate. When I look at the slides, Slide 12, you show the problem vintages are becoming smaller. The new ones are outperforming.

You’ve continued to move up in S-Tier. So I guess my question is, given the guide of 2% to 2.25% just how do you see, and I know you give a lot of color when you were going through them, but how do you see losses progressing and could we actually exit the year, at a level that is below that 2% seasonally adjusted loss rate?

Russ Hutchinson — Chief Financial Officer

Great. No, thanks Ryan for the question. I appreciate that. And as you know, as you’ve seen our outlook on credit has been choppy throughout the year, and I’d say your observations on fourth quarter are mostly correct.

We saw favorable flow to loss trends. We saw favorability and severity. And as you pointed out, we started the quarter with elevated levels of delinquency, as we’ve been running at elevated levels of delinquency throughout 2024. When you kind of look at the seasonality, you’re right, we saw improvement in what we would call the seasonally adjusted annualized loss rate in the quarter.

I still characterize it as north of 2%. I think you had said it was 2% or below, so it’s probably not quite as good as you implied, but certainly favorable. Certainly favorable to what we were seeing in the third quarter. Where we had highlighted, NCOs that were running 10 basis points above our expectations, and delinquencies that were running 20 basis points above our expectations, based on seasonality and portfolio turnover.

As I look forward, we’ve given the range of 2% to 2.25% on NCOs and I’d say, I think about that range. It’s important to think about the context in terms of the elevated levels of delinquencies that we’ve been seeing as well, as that favorability we saw in flow to loss in the quarter and on severity. And I’d say toward the midpoint of the range, we’ve assumed that there’s some reversion on flow to loss rates. Obviously we have good visibility into where we’re starting the year in terms of delinquencies, but we’ve assumed some reversion so some unfavorability in flow to loss rates and we’ve assumed kind of more or less stable used car values supporting us on the severity side.

Now, as you think about the range either up or down, maybe I’ll start with some of the things that could affect us unfavorably on the downside. So to the extent that flow to loss rates revert, for example, in the context of a macro that weakens, or to the extent that our collections methods become less effective, or in an environment where used car prices deteriorate, you could see either of those things kind of pushing us toward the high end. On the other hand, if we continue to see flow to loss rates like we saw in December, or potentially even they continue their current path of improvement, and used car prices remain constructive in the context of a favorable macro that could, that could drive us toward the low end of the range that we’ve provided.

Ryan Nash — Analyst

Got it. And then, maybe as my follow-up, a two part question post the sale of the card business, I think you highlighted 40 basis points of capital and even with CECL day one, it should put you above 10%. I know in your remarks, Russ, you talked about a handful of potential uses growth, and then you talked about potential securities restructuring. So my first question can you maybe just give more color, in terms of what the size and parameters of a restructuring could be, and then post the sale of the card Russ.

You talked about being positioned for a sustainably higher NIM. Do you still believe Ally, is a 4% NIM company and what are the drivers to getting there? And if not, what do you think the more normal NIM of the company is? Thank you.

Russ Hutchinson — Chief Financial Officer

Great. Thanks, Ryan. Maybe I’ll start on capital. As we said before, our management target is a 9% CET1.

There’s some uncertainty around the regulatory environment, particularly around AOCI and how that’s going to be treated going forward. Given that uncertainty, and given the volatility that the inclusion of AOCI would introduce to our CET1 levels. We’ve said that where we typically run at a 20 to 30 basis point buffer to that management target of 9%, we think that buffer needs to be fatter. And so, just to give you a little bit of context in terms, of how we’re currently thinking about capital, certainly the card sale is going to increase our flexibility around capital.

And so, as we think about that increased flexibility. Our No. 1 priority is investing in our core businesses. And as we’ve noted throughout the year, we’re being really thoughtful and really disciplined, around how we deploy capital to get to risk adjusted returns that, are accretive to our business.

And so, we’re going to continue with that. Now, aside from investing in the core businesses, we’ve talked about the possibility of some restructuring the securities portfolio. And eventually capital return through share repurchases. As you know, Ally historically has used share repurchases as a way of returning capital, and we look forward to getting back to that.

And I’d say again, the capital flexibility that we’ve been building over the course of the last year, obviously from the card sale, from the lending sale, from the CRT transactions that we’ve been executing over the course of the year. All those things point to greater capital flexibility. And look, as we evaluate the alternatives, we’ll be very much focused on shareholder value, and on what’s going to drive us in terms of risk adjusted return, whether that is, whether that is investing in the core business, and looking at the risk adjusted return we can get there, or it’s looking at restructuring of the securities portfolio and looking at the NIM pickup. And ultimately the payback that we can get from that activity.

But you can expect a continuation of the capital discipline that we’ve been talking about all year long. On your 4% NIM, I guess your follow-up to your follow-up question. Look, I would say look, we’re highly confident in our trajectory, and nothing’s changed in terms of dynamics on our balance sheet, and in our businesses that point to NIM increasing over time. All that being said, as you pointed out, the sale of the cards business will take about 15 basis points off of NIM this year.

20 basis points on an annualized basis. But it’s important to note that with that, we’re also shedding expenses and then our credit costs also come down. And so, the net impact of credit card, is a push from an earnings perspective. And so, when you think about that, we talked about that 4% NIM, 2% loss rate on retail auto, continued discipline around expenses and capital in order to support a mid-teens ROTCE.

I would say the 4% NIM is no longer required to support that mid-teens ROTCE. It’s somewhere in the high threes, and so we’re no longer banking on getting to that 4% NIM. All that being said, I wouldn’t take 4% NIM off the page. It’s certainly as you kind of think about the dynamics on our balance sheet even without card, it’s certainly something that we could deliver, but we’re not banking on it at this point.

I think something in the high threes again with retail auto coming to 2% or lower on NCOs, and continued discipline around capital and expenses, we think those things are adequate to support our mid-teens ROTCE aspirations going forward.

Ryan Nash — Analyst

I’m out of follow ups. Thank you, Russ.

Operator

Thank you. Our next question comes from Sanjay Sakhrani with KBW. Your line is open.

Sanjay Sakhrani — Analyst

Thank you. Good morning. I heard Russ, you talked about some of the movements in the originated yield this quarter and expecting to reprice higher. I’m just curious how much of this is, just sort of the selection of consumers you’re getting versus competition.

I know like Capital One is coming back into the market. Some other banks have talked about it. Maybe you could just talk about the competitive dynamics?

Russ Hutchinson — Chief Financial Officer

Yes, sure. There was about a 90 basis point drop in originated yield, going from 3Q to 4Q. And I’d say a chunk of that was benchmark rates, and then a big chunk of that was actually mix. So you saw our S-Tier go from 43% to 49%.

It’s typical in the fourth quarter that we pick up more of the S-Tier. It’s just a seasonal trend that we see each year. But obviously, we picked up a lot more than we anticipated. And I would characterize that as we just got more volume that, we closed in that S-Tier than we anticipated.

And we mentioned earlier that we’ve made changes around our pricing late in the quarter. And so, we think we’ve got that manage, and we expect our mix to kind of return to more like, what we saw over the full year 2024. But that was, that mix impact was certainly a factor. But importantly, if you look at how we price across the tier.

So comparing pricing on a more of a like-for-like basis, I’d say we’re pretty pleased with our asset betas, over the course of the quarter and in fact-they’re probably running favorable quite frankly to our original expectations.

Sanjay Sakhrani — Analyst

And anything. Sorry Michael, go ahead.

Michael Rhodes — Chief Executive Officer

Sorry, sorry Sanjay. I was just going to offer. I agree with everything obviously Russ said. And then, just from a competitive perspective, it was an interesting dynamic between the third and the fourth quarters, because in the third quarter we actually saw that our origination volume probably a little softer than we would have expected.

In the fourth quarter we actually did quite well. I’d actually say that we were pretty consistent in terms of our market approach, during those two quarters, and the market just I think rewarded us nicely in the fourth quarter. One other dynamic you have to kind of think about is, the most recent data on new car sales has been pretty strong, and see if that dynamic worked in our favor as well.

Sanjay Sakhrani — Analyst

Got it. And then, just a follow-up question to the previous line of questioning in terms of all these different moves that you made. I know Russ, you kind of reiterated the mid-teens ROTCE target. But as far as like timing, does that change anything? Because like, obviously some of these NIM, the NIM impacts from the EV credits are immediate and they come back over time.

I’m just curious, as we think about timing of achieving them, does that push it out in any way? Thanks.

Russ Hutchinson — Chief Financial Officer

No, nothing’s changed from our perspective on timing. I think with a lot of these moves we have increased confidence, and we certainly see the benefits of focus in terms of our ability to drive to the outcomes that we desire in terms of credit, in terms of expense levels, in terms of how we think about capital. So all of those things are positive. I’d say it doesn’t change our view on timing.

All that being said, we haven’t given the Street a, any precise timing. A lot of things outside of our control, including what happens with rates going forward, what happens in the macro that could affect the timing positively or negatively? The destination for us is clear in terms of where we’re going, and all the changes that we’ve done. I think gives us better ability to manage different changes in the macro. And ultimately give you hopefully, more confidence in our ability to get to that mid-teens ROTCE target in the medium term.

But again, we haven’t given a specific timing on that.

Sanjay Sakhrani — Analyst

Thank you.

Operator

Thank you. Our next question comes from Robert Wildhack with Autonomous Research. Your line is open.

Robert Wildhack — Analyst

Good morning, guys. I wanted to unpack some of your comments around unwinding curtailment actions. All else equal, how much of a benefit do you think that is to the originated yield, and then what’s the primary driver behind that decision? Given some of the volatility around credit in the past, it sounds like you’re still being reasonably conservative, with respect to the macro going forward too. I wonder why not keep the pedal down on the S-Tier volume? Thanks.

Michael Rhodes — Chief Executive Officer

Great. Thanks, Robert. Great question. And maybe just as we think about curtailment and also drawing back to Sanjay’s question around originated yield, it is our expectation that, as we see the impact of benchmark rates, the unwind curtailment will be an offset to that.

And so, as we think about originated yield on the forward, we’re confident we can keep originating, at yields that are in the high nines, touching 10%. But certainly our expectations for the near term. As we think about curtailment, and the timing of that. As you can imagine, our process around credit is not a kind of, one and done process.

It is something that we’re looking at continuously. And so, we’re constantly looking at our book and evaluating credit performance, relative to our expectations. And we do that at a pretty granular level. Curtailment isn’t something that I think you’re, we’re going to kind of point to a specific point in time.

It’s going to come as we continue to see improved performance in our front books. And it’s going to be, it’s not going to come in kind of one flash. It’s going to come in stages as we make tweaks to our underwriting at the micro segment level. You’ll see it as you see the distribution of S-Tier versus other tiers change over time.

But I just want to point out it’s not a one and done process in terms of how we look at credit. It’s continuous and it’s a constant tweaking of our approach to underwriting, to our approach just around how we process applications. Whether we auto approve or revert to manual underwriting. There are a lot of factors that kind of go into that.

But again, you’ll see that over time as you see that S-Tier mix normalize, from current levels.

Robert Wildhack — Analyst

OK. Thanks. And then, we know that the EV lease accounting change benefits the NIM. I was wondering if there was any way you could give some more context to that.

Could you comment on what the 2025 NIM guide would have been had you not made the accounting change?

Russ Hutchinson — Chief Financial Officer

Yes, it’s, it’s a challenging question, because if I sat here, when I sat here a year ago, obviously we didn’t have a tremendous amount of visibility into how much of the EV volume, EV lease volume we would do, right. We entered into this agreement with an OEM in March, and that’s been a significant driver of the amount of volume that, we’ve done over the course of the year. And I would say, I think that the benefit of the deferral method of lease accounting, is it very much makes the accounting look more like the economics. And look at how we look at it from a business perspective, which is that is to say, to make us indifferent between an EV lease versus an internal combustion engine lease in terms of the economics and how it presents on our balance sheet.

And so, it’s hard to answer that question, because it’s not how we look at the business. The way we look at the business is more consistent with this deferral method of accounting, and more consistent with kind of the expression of it. And quite frankly, from your perspective, it shouldn’t matter. Those are just timing differences.

I think investors should appreciate the transparency and the clarity. That the deferral method provides, versus some of that lumpiness that we saw with the flow through method.

Michael Rhodes — Chief Executive Officer

Understanding our true economics when these mix impacts can overwhelm, our EPS on the tax line. Just don’t think that was really kind of helping much of anyone.

Robert Wildhack — Analyst

Yes. OK. Appreciate the color there. Thank you.

Operator

Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. Your line is open.

Moshe Orenbuch — Analyst

Great. Thanks. And wanted to dig in a little bit on some of the mitigation actions that you were talking about Russ. Could you-just give us a little more detail as to what, what you did that kind of allowed for those low flow through rates in the quarter, and what that might mean as you go forward? Do those borrowers have a period of time where they’ve got to perform? Like, how should we think about that? Thank you.

Russ Hutchinson — Chief Financial Officer

Yes, no it’s a great question, Moshe. Thanks for the question. We’ve been working on our loss mitigation strategies all year, and I think I can break it up into roughly three buckets. No.

1 would be repossession timing. We’ve been running a lot of analytics around when, and our timing of repossession based on credit tier, based on borrower characteristics, based on a number of factors. And for the most part, we’ve been moving back the timing of repossession. And we’ve been finding that giving the collectors that extra time, to work with a borrower tends to lead to better outcomes.

We can keep people in their cars longer, we can collect more, and we’re getting to better outcomes. The second is around our communication strategies, where we’ve been doing a lot of work. Around how and when we reach out, to our borrowers who are delinquent. Probably the biggest change is, just more use of-whatever resonates with them in terms of the medium of communication, whether it’s a text message, an email or a phone call.

And so, we found we’re just getting better at contacting and reaching them. And then, third is modifications and extensions, increasing the availability and removing some of the friction around those. Now, our extension and modification rates haven’t changed 2024 versus 2023, but we’ve just gotten better at kind of how we use those, and how we target those. It’s important to note that we’re obviously carefully looking at rates of recidivism, and stick rates on the population of loans that have been extended or modified.

And we continue to be impressed, by the borrower behavior. And based on kind of what we’re seeing, we don’t think we’re kicking the can down the road. We think we’re getting better outcomes in terms of helping our borrowers, keeping them in their cars, and also improving the effectiveness of our collections.

Moshe Orenbuch — Analyst

Got it. Thanks. Very helpful. As a follow-up, you talked about capital allocation toward growth in the business.

The guidance that you gave for 2025 includes, kind of flat earning assets. Just talk a little bit about your thoughts about No. 1, what is the NIM impact in ’25 of the mix upgrade? And secondly, when would you be more comfortable allowing earning assets, to grow within that capital plan?

Russ Hutchinson — Chief Financial Officer

Yes. Behind the flat earning assets, there are a couple of moving pieces as we’ve talked about before. We continue to see runoff of the lower yielding mortgage loan and mortgage securities portfolios. And so, what we’re effectively doing is we’re running off those assets at the same time that we’re growing our retail auto loans, and our Corporate Finance loans.

And you can see also there’s, we’re exercising a lot of discipline around our commercial auto portfolio as well. And so, behind the flat earning assets, there’s a mix shift that reflects, kind of how we focus the business from here. And then, obviously, the sale of card and lending, we also have it as a both of those things also have an impact on earning assets. And so, there’s a lot going on behind that.

But you can be assured that we’re very much focused on growing in the places that, are most accretive to returns, and that’s in the retail auto lending, Corporate Finance. And I’d also point out in the insurance business, that doesn’t impact earning assets necessarily, but it’s an important area where we’re growing the business. It’s less capital intensive, and it’s additive to our returns over time.

Operator

Thank you. And our final question comes from Mark DeVries with Deutsche Bank. Your line is open.

Mark Devries — Analyst

Yeah. Thank you. Russ, I was hoping you could provide some of the same context around the NIM guidance, in terms of what gets you to the high and low end of the range that, you provided around the charge off guidance?

Russ Hutchinson — Chief Financial Officer

Yes, thanks, Mark. Look, I’d say for the NIM guide, obviously the path of rates is impactful in terms of our overall expectations around NIM, as well as the competitive environment for our deposits business. And we’ve talked a lot about beta and it’s certainly-it’s still our expectation that we’ll get to a 70% beta. But as we’ve pointed out before, the timing of getting there is, it takes time to get there.

And so, there’s some variation based on market competition, and that overall timing of deposit repricing. As we think about the rate environment, our range anticipates a range of different rate trajectories. From a case where rates are flat relative to where they are today, and stay for a prolonged period of time at today’s levels. We look at the forward curve and market expectations, around where rates go from here.

And we also look at cases, where rates come down faster than the market currently anticipates. And I’d say our range kind of covers that range of scenarios. Look, in the event that we saw rates go up from here, that’s certainly a scenario we look at. It’s something that we can manage to in the medium term, but it would throw our guidance for the year off.

But I’d say we look at all those things and we also consider the timing of, kind of when these rates come and how those could affect us through the year, both in terms of that beta evolution, as well as those near term impacts that we’ve talked about in prior quarters.

Michael Rhodes — Chief Executive Officer

Russ, maybe one last thing I just might add, recognize this is our last question is, recognize that we gave you a lot of information, and a lot of moving pieces within the quarter. If you kind of step back from a lot of the great detailed questions, and just kind of think about where we are, I’d leave it a thought that you should be encouraged by our momentum. And the momentum is occurring. It’s on the expense line, it’s on the credit line and certainly on the margin line.

When it comes to capital, I think you’ve seen we’ve been pretty disciplined and prudent with respect to how we’re creating capital. Expect our use of the capital will respect that same approach. And then, we have this notion that we’ve introduced this quarter, which you can hear more about from us around the power of focus. And we think that when we focus our energies, and efforts around the places where we have some demonstrated advantage, attractive returns and the necessary scale, you’d expect to see good things for us going forward.

Mark Devries — Analyst

Thank you, Michael.

Sean Leary — Head of Investor Relations

I’m so a little past the hour here. So that’s all the time that we have for today. If anyone has any additional questions, as always, feel free to reach out to investor relations. Thank you 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

Robert Wildhack — Analyst

Moshe Orenbuch — Analyst

Mark Devries — Analyst

Mark DeVries — Analyst

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