Ally Financial Inc. Q2 2026 Earnings Call

Good day. Thank you for standing by. Welcome to Ally Financial second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sean Leary, Chief Financial Planning and Investor Relations Officer. Please go ahead. Thank you, Elizabeth.

Good morning. Welcome to Ally Financial second quarter 2026 earnings call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation we 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 page two. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on page three. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for US GAAP measures. Definitions and reconciliations can be found in the appendix. With that, I will turn the call over to Michael.

Thank you, Sean. Good morning, everyone. I appreciate you joining us today. Second quarter results were solid and reflect the progress we have made over the past several years to build a more focused, higher-performing company. The strategic choices we have made are creating a franchise with meaningfully greater earnings power. We are seeing that reflected not only in margin expansion and strong operating performance, but also our ability to invest for growth while simultaneously increasing capital returns to shareholders. Simply put, our results demonstrate our strategy, backed by disciplined execution, is working. The Ally today is fundamentally stronger. We believe this positions us well to further enhance profitability, support customers through economic cycles, and create long-term shareholder value. For the second quarter, adjusted EPS of $1.21 was up 22% year-over-year, while core ROTCE increased to 11.8%.

Adjusted net revenue of $2.3 billion increased 10% year-over-year, reflecting continued asset growth and further margin expansion. To the point, retail auto and corporate finance assets grew nearly $8 billion year-over-year. That is up 8% year-over-year. NIM improved 11 basis points sequentially to 3.63%. Our balance sheet continued to strengthen during the quarter, with CET1 increasing 20 basis points year-over-year. That strength is providing greater capital flexibility. Since announcing our authorization in December, we have returned more than $300 million to shareholders through share repurchases. Taken together, these results reflect improved earnings power, increased capital flexibility, and a company that is better positioned to perform through the economic cycles. Importantly, we are seeing broad-based momentum across the company with each of our core franchises executing well and contributing to our performance.

That momentum is supported by investments we've made to strengthen both the Ally brand and our culture. Our revitalized marketing campaign, Life Today, is resonating with customers and highlighting the unique value proposition of Ally, meeting customers where life and money intersect in today's world. We continue to see encouraging results in brand health, awareness, engagement, and industry-leading retention. Equally important, our culture remains a meaningful competitive advantage. Employee engagement scores improved again this year and rank in the top decile of companies nationally for the seventh consecutive year, with particularly strong improvement across measures such as belief in our strategy. We believe highly engaged employees aligned around a clear strategy create better experiences for our customers and ultimately drive stronger business outcomes. With that, let's turn to page five and discuss performance across our core franchises.

Starting with Dealer Financial Services, our dealer-centric through the cycle approach remains a key differentiator and a meaningful competitive advantage. Within Auto Finance, applications reached a record 4.6 million, increasing 17% from a year ago, validating our strong value proposition and strategic initiatives are resonating with dealers more than ever. This application volume supported originations of $13.3 billion, up 21% year over year, while maintaining approval and pull-through rates. Retail origination yield of 9.1% included 47% S tier, reflecting seasonal dynamics and our measured approach to navigating the current operating environment. Consumers have remained resilient, and we are encouraged by the credit performance across our portfolio. At the same time, we are mindful of the cumulative headwinds from ongoing inflationary pressures and an evolving macro backdrop.

Insurance delivered another solid quarter with written premiums of $382 million, up 9% year over year, as we continue to demonstrate an ability to deepen relationships and highlight our unique full-spectrum value proposition to dealers. In Corporate Finance, we delivered record pre-tax earnings and continue to see strong client demand and attractive opportunities for disciplined growth. The portfolio ended the quarter at $13.7 billion. That's up 25% from the prior year, while generating a 32% return on equity. Our success is built on long-standing client relationships, deep underwriting expertise, speed of execution, and the ability to provide certainty when our clients need it most. We remain focused on profitable growth while maintaining the credit discipline that has consistently differentiated this business. Turning to the Digital Bank. Customer growth and engagement trends remain strong.

Retail deposit balances ended the quarter at $144 billion, with deposits representing 87% of total funding and providing a stable and cost-efficient funding source for the company. We now serve 3.6 million customers, up 7% year over year, and marking our 69th consecutive quarter of customer growth. Importantly, much of that growth is coming from younger consumers who are highly engaged in our digital platform. Nearly 70% of new accounts come from millennials and younger consumers, typically beginning with average balances just under $10,000 and growing over time. As consumer preferences increasingly shift towards digital-first experiences, we believe Ally's trusted brand, national scale, and low-cost operating model positions us exceptionally well for the future. Taken together, these results demonstrate the increasing strength of our core franchises. We're growing in businesses where we have clear competitive advantages, generating attractive returns, and deepening customer relationships across the company.

While there is more work ahead, we remain confident in our path forward. We believe the benefits of our strategic actions will continue to accumulate, positioning Ally to deliver higher profitability and stronger returns over time. Just as importantly, those same actions are creating a more resilient company that we believe is well-positioned to perform through economic cycles. With that, I'll turn to Russ to discuss the quarter in more detail.

Thank you, Michael. I'll begin by walking through second quarter performance on slide six. Net financing revenue, excluding OID of $1.7 billion, was up 11% year-over-year. Balance sheet growth in our core portfolios and lower funding costs supported continued NII expansion. Adjusted other revenue of $573 million was up $42 million year-over-year, as we continue to see momentum across our diversified revenue streams, insurance, SmartAuction, and pass-through programs. Provision expense of $430 million was up $46 million year-over-year, as CECL reserve builds associated with strong asset growth more than offset the improvement in the retail auto net charge-offs. Retail origination momentum was strong throughout 2Q, finishing nearly $1 billion higher than our initial expectations. The growth supported earnings beyond 2Q, but drove $30 million of additional CECL build in the quarter, an $0.08 headwind to EPS.

Adjusted non-interest expense of $1.3 billion was up 5% year-over-year, in line with expectations. As noted earlier, adjusted revenue was up 10% year-over-year, driving strong positive operating leverage, as we have successfully executed on focused accretive growth in our core businesses and disciplined expense management. During the quarter, we recognized a $15 million expense related to the early redemption of our Series B preferred stock. This one-time charge reflects a strategic capital management action, and given its non-recurring nature, is excluded from adjusted results. Let's move to slide seven to discuss margin in detail. Net interest margin, excluding OID of 3.63%, was up 11 basis points quarter-over-quarter, largely due to lower deposit costs. Retail auto portfolio yield, excluding the impact from hedges, was relatively flat sequentially and in line with our expectations.

Average earning assets were up 6% year-over-year, with growth concentrated in our highest-returning assets, retail auto, and corporate finance, which on an end-of-period basis, were up approximately 8% year-over-year. On the liability side, cost of funds decreased 12 basis points quarter-over-quarter, driven by disciplined deposit pricing actions through the first and second quarters. Retail deposit balances decreased $2.6 billion during the quarter, driven by seasonal tax outflows, in line with normal seasonality. We maintain access to a wide range of alternative funding sources which complement retail deposits and allow us to fund accretive asset growth in the most efficient manner possible. During the quarter, we reduced liquid deposit pricing 20 basis points and reached a cumulative liquid deposit beta of 69%.

We remain disciplined in how we price deposits, ensuring we continue to optimize customer growth and value and are encouraged by the performance we've seen. Deposit customers grew for a 69th consecutive quarter and are up 7% year-over-year, demonstrating the power of our brand in the market. I'll cover guidance later, but despite the movement in short-term rate expectations year to date, we remain confident in our path to a sustainable upper threes margin over time. Structural momentum is evident in our accretive asset growth and efficient funding sources, each supporting continued NIM expansion. Turning to page eight, CET1 of 10.1% is up approximately 20 basis points versus the prior year. While not final, under the current proposal for RSA, our CET1 would be above 9% when fully phasing in AOCI, and IRBA would provide roughly 30 basis points of additional benefit.

We'll continue to assess each proposal as we await potential refinement following the comment period. During the quarter, we completed our fifth credit risk transfer transaction, generating approximately 20 basis points of CET1 at the time of execution, reflecting continued demand for our retail auto assets in the market and another efficient way to manage capital. Additionally, we issued $1 billion of preferred stock at a 7.1% coupon. The proceeds from the transaction were used to support the redemption of our Series B preferred stock ahead of its reset on May 15. The issuance resulted in a $350 million decline in our preferred stock outstanding and favorable economics relative to the Series B reset rate. In the quarter, we executed $148 million of share repurchases, and earlier this week we announced our quarterly dividend of $0.30 for the third quarter of 2026, consistent with the prior quarter.

We remain pleased with our ability to execute a story of and, not or. We're delivering strong growth in core portfolios at attractive risk-adjusted returns. We've migrated capital ratios higher and repurchased nearly $300 million of shares year to date. At the end of the quarter, adjusted tangible book value per share was $42, up 13% over the past year, and when combined with our solid dividend yield, underscores our continued focus on delivering strong shareholder value. On slide nine, we will review asset quality trends. Consolidated Net Charge-Offs of 111 basis points were down 10 basis points versus prior quarter, and roughly flat year-over-year. During the quarter, the consolidated NCO rate included the resolution of a corporate finance exposure.

The loan was in non-accrual since 2018, and we recorded a P&L benefit on this resolution as the specific reserves we had built exceeded our loss on the exposure. Within retail auto, Net Charge-Offs of 157 basis points were down 40 basis points quarter-over-quarter and down 18 basis points compared to a year ago, marking a sixth consecutive quarter of year-over-year improvement. On the top right of the page, 30-plus all-in delinquencies of 4.8% were down eight basis points from the prior year. While the year-over-year improvement in NCOs widened, given record flow to loss and supportive used values, the year-over-year improvement in delinquencies continues to moderate as expected. Portfolio performance has been solid year to date, but the macro backdrop remains dynamic, and while delinquency rates are down year-over-year, they remain a watch item along with used values and flow to loss rates.

In total, we remain confident in the credit quality of the portfolio and our ability to be dynamic in underwriting, servicing, and collections in the current operating environment. Turning to the bottom of the page on reserves, the consolidated coverage rate of 2.49% was down quarter-over-quarter, driven by the specific reserve release in Corporate Finance previously mentioned. Retail auto coverage of 3.75% is flat to the prior quarter. Our coverage levels continue to balance consistent credit trends across our portfolios against broader macroeconomic uncertainty. Moving to slide 10 to review auto segment highlights. Pre-tax income of $410 million was lower year-over-year, primarily due to CECL reserve build associated with strong retail asset growth in the period. On the bottom left, we have highlighted the trajectory of retail auto portfolio yields. Excluding the impact from hedges, yields were down two basis points quarter-over-quarter.

Second quarter originated yield of 9.1% was down approximately 50 basis points quarter-over-quarter, as S tier increased to 47% of origination. The origination mix was influenced by normal seasonal trends, the measured posture we highlighted in April, and a higher quality application mix, including stronger pull-through within those segments. As you recall, we had a richer credit mix in yield than we expected in 1Q, and we saw a pivot in the other direction this quarter with a cleaner mix and lower yield. The yield impact from higher S tier volume was partially offset by increased pricing on the like-for-like segments. Looking ahead, we expect S tier to decline modestly from 2Q levels and settle in the low to mid-40s over time, which we expect will support originated yields absent moves in benchmark rates.

On the bottom right of the page, $13.3 billion of consumer originations were up 21% year-over-year as we continue to benefit from deeper dealer relationships supporting application growth. Application volume remains the key to our success and highlights the strength of our franchise. Approval and pull-through rates remain consistent with prior quarters. A wider top of the funnel provided incremental opportunities for accretive growth. Looking ahead, we remain confident in our ability to continue driving accretive growth, though we would expect the year-over-year growth rates to moderate in the back half of the year. Turning to insurance on slide 11, core pre-tax income was $24 million, up $26 million year-over-year. Total written premiums of $382 million were up $33 million year-over-year, while insurance losses of $208 million were up $5 million year-over-year.

Insurance continues to drive capital-efficient, diversified revenue and remains a key component of our long-term growth strategy. We continue to leverage synergies with Auto Finance to sustain momentum within the business and deepen our all-in dealer value proposition as we help them succeed in all aspects of their business. Turning to Corporate Finance on slide 12, the business delivered another strong quarter with record pre-tax income and a 32% ROE. The team has a proven ability to deliver compelling returns while also driving strong growth as the portfolio is nearly $14 billion today, up 25% over the past year. Our long-standing relationships and deep underwriting expertise are the foundation of our differentiated risk management framework. Credit discipline underpins every decision we make, guiding our growth, and is reflected in the performance of the portfolio. Credit has remained exceptionally strong with non-accrual loans at historic lows.

Results continue to showcase the durability of the franchise, our prioritization of credit risk management will drive accretive growth moving forward. I will provide a brief update on our outlook before moving to Q&A. First-half performance has been solid, we are updating couple aspects of the guide to reflect our latest view. We now expect average earning assets to be up 3%-5% versus 2%-4% previously, as our expansion of the top of the funnel has resulted in strong consumer auto originations alongside continued momentum within Corporate Finance. As we've consistently emphasized, we are growing where we want to be growing while maintaining a disciplined underwriting posture to optimize risk-adjusted returns. This accretive growth will drive higher earnings over time, but it does present elevated reserve built under CECL in 2026.

Additionally, we're tightening our range on consolidated NCOs, which we now expect will land between 1.2% and 1.3%, compared to the 1.2%-1.4% range we shared in January. Reflected within the guide for consolidated NCOs is our outlook for Retail Auto. As I mentioned previously, we're pleased with the credit performance through the first half of the year and view the midpoint of our retail NCO guide as appropriate. With respect to margin, the guide remains 3.6%-3.7%, with the potential to exit the year above the high end of the range. While we continue to closely monitor the impacts of macroeconomic uncertainty and evolving interest rate expectations, which now include rate hikes this year, we are confident in our ability to deliver.

The timing and magnitude of potential rate actions can influence margin for a period of time, we remain confident in our ability to deliver on the full-year guide. In total, our focused strategy and disciplined execution continue to drive improving operational and financial performance. While we have made significant progress, our focus remains on sustaining our momentum and executing on the meaningful opportunities ahead to deliver compelling long-term value for our shareholders. With that, I'll turn it over to Sean for Q&A.

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.

As a reminder, if you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Robert Wildhack with Autonomous Research.

Hi, guys. Maybe to start on Retail Auto and credit there. The net charge-offs were better than we were expecting, and the year-over-year decline there is accelerating, but delinquencies are kind of leveling out. Then add to that, you've got the quarter with the big spike in S tier volume. How does that all come together, both in the context of the 1.8%-2% net charge-off guide this year, and also zooming out the 1.6%-1.8% loss rate you've talked about, bigger picture?

Great. Thanks for your question, Rob. It's a great question. Maybe I'll just start by saying we're pleased with performance and credit in the first half of this year. I think as we mentioned earlier, we've seen record low levels of flow to loss rates, and we've seen good support from used vehicle prices. As you point out, yet delinquencies have remained stubbornly high. Clearly, we're dealing with a consumer that is dealing with affordability. Gas price is also an issue. Overall, I'd say we still see this macro as dynamic and obviously have taken a measured posture in response to that. All that being said, we're pleased with the credit performance in the first half of the year, and we're holding our guide at 1.8%-2%, as you pointed out. We continue to think the midpoint of that range is an appropriate base case to center around.

As we think about credit evolving in the back half of the year, again the watch items that we're paying close attention to are obviously delinquency, but obviously, looking at flow to loss rates and used vehicle prices just given the support we've seen in the first half of the year from those items. As we think about credit on a longer-term basis, as you pointed out, we've been originating in the 1.6%-1.8% range. The NCO rate that we print in a given quarter is an expression of multiple vintages as well as vintages that are at various stages of their life in terms of loss development. As we've said before, it's our expectation that we'll get there. We haven't given a timeline to that. As we've said before, that's a timeline that's going to evolve over time.

That's not something that we expect to get to in the next couple of quarters. You talked a little bit about S tier mix in your question. As we noted, as you look at second quarter, the originated portfolio in the second quarter, S tier was elevated, had some impact on yield during the quarter as well. I wouldn't read too much into that. Obviously, if you look at first quarter versus second quarter, first quarter, we saw the opposite of that. We saw a richer credit mix and a richer originated yield, and we saw a pivot back in the second quarter. A lot of explanations for that. Number one, just normal seasonality. We expect to see a higher credit quality application pool in the second quarter versus the first quarter. We certainly saw that. As we talked about in April, we've got a measured posture with respect to credit, and so that's certainly something that we would've seen impacting the mix as well through the quarter.

All that being said, broadly, approval rates and pull-through rates were consistent through the quarter. It's certainly our expectation as we evolve over time, we'll see that originated mix migrate to an S tier mix that's probably more in the low to mid-40s again over time. I wouldn't read too much into a single quarter's origination mix. We've seen that move from time to time. As far as we see it, we think the opportunity for that mix to kind of migrate back to normal provides support for originated yield as we move forward.

Russ, I might just add something. I actually agree, don't overread one quarter. If you take a step back and look at the consumer overall, and in fact, even take a step back from our portfolio, what we do see is that there's certain consumers which are certainly working through the higher costs that we're seeing in the system, particularly higher energy costs. Employment rates still are quite constructive. A dynamic you see is that consumers are basically triaging on a real-time basis how they pay every single month and then what they're paying. That can translate into delinquencies that I think we said in the last quarter that we were expecting the tax refunds to have probably more of an impact on delinquency. We didn't quite see that.

I think we're seeing customers in delinquency more, but as Russ said, the flow to loss rates have been quite constructive. We're actually encouraged by what we see in on flow to loss and feel very good about how the consumer's been performing overall. Again, I wouldn't overread one quarter's worth of origination mix. This does move around quarter to quarter.

Very helpful. Thank you both.

Our next question comes from Moshe Orenbuch with TD Cowen.

Great. Thanks. Pretty impressive growth numbers. You did mention that you expected growth to moderate some. Could you talk about perhaps what is driving that? Is it what you're seeing from an application side? Is it the competitive dynamic? Maybe just talk about that a little bit. Thanks. Great. Well, maybe I'll start by giving our auto team a ton of credit here for the traction that they've delivered with our dealer base.

That's a credit to the relationships we've developed. I'd say also, we've retrained our dealers over the last couple of years to really send us all their applications. In the last couple of quarters, we've also aligned our dealer rewards program and our overall strategy in terms of how we think about commercial complex, all aligned around incentivizing our dealers to send us all of their application volume. That strategy has been working out really well for us. We think it still has a runway ahead of it. Our expectation is we'll continue to see strong application flow.

That strong application flow gives us an attractive opportunity set in which we can really target to have, one, strong originations, obviously, in terms of volume, but also where we have the ability to manage yield and credit in order to target originations that deliver for us on a risk-adjusted basis. A lot in there, but a lot of what we see is the strength that's been really driving that growth in application volume and thereby fueling the growth that you see in origination volume.

Great. Thanks. I think the area in which the results were lower than our expectation was purely in that reserve build area that you had noted, driven by that faster growth. As you look at the moderating growth, I think you mentioned that that should have a more moderate build in reserves. Anything that you would highlight in terms of the tenor? Obviously you had high-quality loans originated this quarter, but anything that you would point us to in terms of that reserve rate as we go forward?

Yeah. Our overall reserve levels on the retail auto side at 375, they've held there. That cares for a number of things. Obviously, we've continued to see good performance and improvement in terms of NCO levels and delinquency rates in terms of our own portfolio. At the same time, we're caring for a macro that's dynamic and has some degree of uncertainty into it. As we've said previously, we don't plan around reserve releases as we think about our portfolio or our financials on a go-forward basis. I'd say the reserve rates that we have now, we think, cares for both of the things that we're seeing in terms of performance in our current book, which we characterize as good, as well as that macro uncertainty that we see in the background.

Thank you. Our next question comes from Sanjay Sakhrani with KBW.

Thank you. Good morning. I guess I wanted to go back to the S tier originations. I know you guys said not to read too much into it, but as we think about the NIM expectations, I think it actually improved despite you guys doing this. It sounds like you're going to originate at a slightly higher run rate on S tier, at least for the short run. Am I thinking about that correctly? Maybe you could just talk about what's driving that higher mix. Is it that there's these opportunities in front of you where there's a competitive void or some proprietary flow coming through? Just if you could help us with that too, that'd be great.

Yeah. Thanks, Sanjay. It's a good question. Maybe I'll start with the S tier, then I'll get to your question on the read across to NIM. On the S tier, again, I wouldn't read too much into a quarter. There are a lot of things going on. I think there's that seasonality we pointed to earlier. Certainly, our measured posture with respect to credit played into it as well. Again, I wouldn't read too much into it. When you think about the originated yield, I think it's important to point out that when we look at our originations on a like-for-like basis going from first quarter to second quarter, we increased price. You saw the originated yield come down, but actually embedded in that is increased pricing on a like-for-like basis.

But obviously, overpowered by the movement up in credit in terms of that S tier mix moving from the low 40s to 47% over the course of the quarter. So I think that ability to put price into the market is a good sign that I don't want to be overlooked here. As you think about the forward in terms of how to think about our originated yield and how that translates into the portfolio yield, I'd say one, as you pointed out, we do expect that the mix will continue to move around. We'd expect on balance, it's going to migrate towards a lower S tier mix. We talked earlier about low to mid-40s, albeit over time. That provides some support. Independent of benchmark rates, that provides some support to the originated yield.

As we think about portfolio yield, our expectation is it's going to be stable at current levels as you think about the next few quarters moving forward. The read across to NIM, however, is a little bit different. We still continue to expect our NIM to increase. We showed a nice increase going from first quarter to second quarter. A lot of that is on the back of changes we made in deposit pricing over the course of first and second quarter. Those changes still have runway into third quarter as you think about the last price change on a full quarter basis. We also continue to have a benefit from a NIM perspective from CD maturities as we have higher yielding CDs maturing and for the most part, rolling into liquid deposits or other CDs at lower rates.

On a long-term basis, we have a continued dynamic where we have low yielding mortgage loans and lower yielding mortgage-backed securities that continue to roll off our balance sheet at the same time that we're really growing our higher yielding retail auto loan and corporate finance portfolios. There are a number of dynamics, some that play out stronger over the next quarter or two, some that play out over a longer period of time that continue to contribute to that net interest margin expansion story that we've been talking about for some time.

Russ, it's interesting when you think back. Sorry, Sanjay, I was going to mention, when you think about the kind of quarter origination mix, a lot of this stuff does work so well because of our top of the funnel-like volumes. I know we talk about this a lot, but it's really incredibly powerful and it's a real testament to what our teams are doing every single day because you see top of funnel increasing the high teens. It gives us the ability to constantly optimize, and our optimization this month might be different than next month, might be different than the month after that. All that being the case, you look at our share of volume that we're actually capturing, it keeps on increasing.

We keep on increasing more share with an optimized mix, which is why we say, look, these strategies aren't set it and forget it. We're always optimizing and looking at what the market has and where pricing is and where pricing and risk match, and the top of funnel volumes make all this possible. It's a real testament to, I think, the power of our franchise And hats off to the team that's making this happen every single day.

100%. Thank you. That's very encouraging. Michael, just to make sure I'm not missing something, because I know you touched on it earlier, just this measured approach on growth and obviously credit. It sounds like those are just sort of the broader macro trends. Nothing specifically that you're seeing inside your portfolio on how consumers are behaving, correct? The credit numbers look pretty good. Just making sure. Thanks. Yeah.

The credit numbers are good. Yet we are being measured. I know you've probably heard a cautious tone from us over the past year and a half, I feel it is. Ever since the tariffs came into place, they've been working through those. Now with oil prices, they ebb and flow on a day-to-day basis. Right now, the uncertainty in the environment just feels a lot higher than a normal steady state uncertainty. That kind of volatility, the beta around the environment, I'll just use words like measured. It's reflecting in some of the approaches that we're taking in our underwriting, our volume creation. We're building this business for the long term, and we think we're making the right decision every day, given the fact that there's a lot of uncertainty in the environment.

When the environment hopefully settles down soon, then we'll hopefully stop using the word measured a bit more. Between now and then, that is the world that we're living in. Even just three weeks ago versus today, I think our conversation's a little bit different. Hence that's reflected in some of the language we're using.

Thank you. Our next question comes from Brian Foran with Truist.

Hey, good morning. Two questions on credit. Maybe just start on retail auto. Russ, I think you mentioned the vintage stuff you look at. For a while here, there's been this kind of built-in improvement because the 2022 and 2023 vintages are burning off, and then the 2024 and 2025 vintages are pretty consistent at better levels that you used to show us. I wonder if you could just talk through that dynamic. First, is the 2022, 2023 vintage burn-off still a good guy, or is that kind of played out? As you look at the 2024, 2025, I don't know if it's too early to look at any of the 2026 originations. Are they all steady? Is there anywhere where you're seeing vintages improve or deteriorate from that post 2023 level?

Great. Thanks, Brian. It's a great question. As we mentioned earlier, when you look at our NCO rate during a given quarter, it's an expression of a lot of vintages at various points in their life cycle. While we've mostly been through the 2022 vintage, we still have loans on our books from 2022, they are still contributing to our overall loss rates today. Obviously, we still have loans from the first half of 2023 as well. As you pointed out, as you entered the back part of 2023, certainly as you enter that 2024 vintage, we saw a number of vintages that had the full effect of curtailments that we had put in place. We've said previously, those vintages have exceeded our expectations in terms of performance. They continue to exceed our expectations in terms of how they're performing.

As you would expect, as Michael pointed out earlier, we make decisions around underwriting and pricing on a real-time basis. It's a dynamic process for us. Seeing that outperformance in 2024, we made changes throughout the course of 2025. We don't expect to see that same outperformance on the 2025 vintage versus 2024. Again, still a very strong vintage from our perspective, from an economic perspective. As you look at our NCO rates during a given quarter, there's a lot going on in terms of the different vintages. Again, we continue to see what we've been talking about in terms of some benefit from the ongoing roll-off of that 2022 and first half 2023 vintages. Positive contribution as we see that outperformance of the 2024 vintage. Then you'll see some normalization as we work through the 2025 and 2026 vintages.

Right. Russ, the other item is that 2022 vintage was clearly a tougher vintage, both in terms of what these delinquency curves look like, the vintage curves, but also what the severity was. We pretty much feel that severity hit was probably a one-time thing. When you look at it all in, we are working through 2022, and that's good, but we feel good about where we're positioned.

Thank you. If I could sneak one in on corporate finance, I'm looking specifically at page 15 in the supplement. I don't want to miss the forest for the trees. It's only 4% of your reserve. Even with the loss, it's only 6% of lost dollars year-to-date. It gets outsized interest from investors, given everything going on in the market. I wonder if you could just speak to this new coverage ratio of 1.19% now that that kind of large legacy healthcare loan is gone. Is that kind of a normalized level for this business? Two, are there any other loans similar to that healthcare loan that have been hanging out for a while that may require resolution? Then three, if it's meaningful, is there any difference in that reserve level for the private credit versus the rest of the book?

Right. There's a lot there to unpack. I'll try to get through it. Maybe I'll start with the healthcare loan that we charged off over the course of the quarter. Maybe that's a good start, just given some of the headlines. I think it's important to point out This is a loan that we made in 2015. It's part of a vertical that we're no longer playing within corporate finance. This loan was actually put into non-accrual status back in 2018. I think it's a credit to our team in corporate finance. They're credit first, truly a credit shop perspective in how they manage the business.

They worked through this loan, obviously, over the course of a long period of time, reserved for it conservatively, and got us to a good place where it was a P&L good guy in the quarter in that our charge-off was less than the reserves that we'd built up over time. Overall, led to an overall relief. When we think about the book more broadly, our criticized assets and our non-accrual loans are at historic lows in the portfolio. Speaks to, again, the credit first culture that we've built within our corporate finance business and the fantastic job that they've done over a long period of time in terms of managing credit. We don't run this business as a zero loss business.

This is a business where we expect losses, and we have a team, fortunately, that's able to work through tough credits and often get to what we think are good resolutions of those, like they did in this particular case. We don't run it as a zero loss business. When you look at our reserves at any given point in time, it's a combination of the modeled loss reserve, specific reserves on specific loans, and then obviously some degree of management discretion as well. Given the large charge-off we saw in the second quarter, our specific reserves have obviously come down meaningfully, that's what you're seeing as you look at the change in reserve levels for corporate finance, and quite frankly, even on a consolidated basis for Ally overall.

As we manage the business, you should expect that in corporate finance, just given the lumpiness of that business and the way credit evolves, that you should see some movement in that overall reserve number over time as you look at the dynamics between the different types of reserves that we hold in that business. In particular as you see various items moving on and off the specific reserve.

Russ, just a couple other things on that. We don't have any additional loans like that in our portfolio. I'd mentioned private credit. Private credit portfolio is strong. Just maybe just underscore here something, it may be obvious. We have our narrative in terms of how we're going to generate mid-teens returns, and we talk the three drivers that lead to that, but each business plays a role. I hope you see in the results that we've been generating and the way corporate finance is performing and growing, they're a very important component of our overarching story in terms of how this business is going to perform. There's this one loan, I think the team handled it beautifully. I think the way they handled it shows our effectiveness in working out loans and our conservatism in terms of how we take our marks.

If anything, I think this should give a lot of confidence that this is going to be a really important part of our business.

Thank you so much. Our next question comes from Jeff Adelson with Morgan Stanley.

Hey, good morning, guys. Thanks for taking my questions. Just wanted to maybe focus on the expenses a bit here. You were pretty clear that the year-over-year growth rate would accelerate this quarter, I think due to some noise or some differences in the comps. As we think about your unchanged guide for the year, it does as you noted before, seem to imply a 3% growth rate from here. Is that the right way to be thinking about the level of expense growth required in the business? As you sort of have seen your revenue growth step up here, maybe just help us understand how you're thinking about the operating leverage story from here, maybe the opportunity to reinvest back in the business.

Great question, Jeff. Thank you very much. As you pointed out, expenses in the quarter were very much as expected. I think it's also important to point out the positive operating leverage we saw in the quarter with expenses up roughly 5%, but revenues up 10%. As you asked, it is our expectation that we'll continue to show positive operating leverage on a go-forward basis. I think your commentary around the forward outlook on expenses, I think is appropriate. Obviously, we don't provide guidance for 2027 or forward. We'll do that at some point in January, but I think your kind of overall observations make sense. Obviously we expect to, and we seek to grow revenues faster than that and continue to benefit from operating leverage on a go-forward basis. I would characterize that as a benefit of our focused strategy, right?

We're focusing on businesses where we have competitive advantage, businesses where we have relevant scale. Our growth story is very much doing what we have been doing very well, and doing more of it. That puts us in a position really to drive that positive operating leverage on a go-forward basis.

Great. Just as my follow-up, the share repurchase trend, you've kept that now at about $150 million a quarter the last few quarters. Is this sort of the right cadence to be thinking about from here? Are you maybe waiting for more final confirmation around the new capital rules before you sort of reevaluate that trend? Maybe just remind us, is the right Target post capital rules to be thinking about here still the 9% level that you've thought about historically, or just kind of help us understand what you're thinking about on the capital return path from here.

Right. Well, I'd say maybe start off, we're pleased with the capital build that we've executed on over the last couple of years. Obviously, the proposals are still proposals. They're being commented on. We don't have the timeline for implementation, and obviously they haven't been finalized yet. As we look at RSA on a fully stated basis, we're north of 9%, which is the management target that we've talked about for a number of years. That positions us really well. From our perspective, a heavy lifting on the capital build is largely behind us, and we're positioned now to execute on our story of and, not or. Our expectation is you'll continue to see a lot of what you've seen the first half of this year.

Strong emphasis on providing capital to grow our businesses in an accretive way, and also a focus on capital return to our shareholders, both through our dividend as well as repurchases. A capital ratio that, again, we expect to drift higher over time, but obviously, with the heavy lifting in terms of capital build largely behind us. We think we're really well positioned to execute on the story of and here to support the growth of our businesses, and also return capital to shareholders. We're not going to make any particular promises or guidance in terms of the volume of share repurchases as we progress through the quarters, except to say that we're not growing for growth's sake. We're growing where we believe it's accretive and additive to the business. From our perspective, share repurchases are in effect a plug.

They're what we do after we've cared for accretive growth in the businesses, and our dividends.

Okay, great. Thank you, Russ.

Our next question comes from Ben Gerlinger with Citi.

Hi, good morning. I just wanted to quickly follow up on the deposit funding side. Russ, you kind of alluded to not a lot more juice to go lower. When I look at your OSA rates, it seems like you cut them twice in the quarter, and then CD rates roll on and roll off are roughly the same. Are you anticipating 3Q as kind of the floor, mainly just from the averages on that end of the OSA rate specifically?

Yeah. Well, I'd say, look, on the cuts during the quarter, we will have the benefit in third quarter from having those cuts in place for the full duration of the quarter, there's still some juice left in overall deposit costs from that in the third quarter. On the CD roll on, roll off, a lot of our CDs actually when they roll off, the customers roll them into OSA, we still expect to see some benefit from CDs rolling off into OSA as you progress through third and fourth quarter. We continue to have those benefits that roll in. In terms of the broader economics of deposits, part of that depends on kind of what we see in terms of Fed funds. Our current expectation, we use the forward curve as of June 30th, I think it was.

We had one hike in place I think in September of this year, then another hike early next year. Obviously, hikes affect the path for us. They affect the net interest margin that we print in any given quarter. They don't affect our destination in that our deposit pricing and our asset side of our balance sheet tend to react over time. Our destination in terms of the high threes NIM that we've been talking about for quite some time remains unchanged. Obviously, in any given quarter, you could see some movement in terms of the path we take there.

As for us, I mean, as you said, it ebbs and flows, but the direction of travel is still north.

Yeah. Yeah. Got you. Yeah, no, that makes sense.

I was just trying to get kind of cute here with the timing and modeling over the next six months. When you guys think also just average earning asset mix, like your securities are obviously much lower yielding than your loans. Is this mix appropriate, or could you think loans could be a little bit bigger in terms of average earning assets? I get it's more of a cash flow, but I'm just trying to think like longer term where that direction of travel is. It could be a better mix from here.

Yeah. I think in terms of mix, maybe I'd start with the mortgage loans. That portfolio is in runoff, that runoff will benefit us. The yield on the mortgage loans is about the same as the securities portfolio. That kind of rolls off. We've been growing our retail auto loans and corporate finance at a pace quicker than our earning assets overall. You'd expect basically mortgage loans to run off, retail auto loans and corporate finance loans growing and contributing to NIM expansion. The securities portfolio is a little bit more complicated because we've got within that portfolio a legacy of lower yielding securities that we continue to run off.

At the same time, we are reinvesting in that portfolio because we do need to maintain liquidity for a whole bunch of different reasons. Within that portfolio, you do have a runoff of older, lower-yielding mortgage-backed securities and then a roll-on of investments. Albeit in a shorter duration targeted portfolio, a roll-on of securities that are at a higher yield given the current interest rate environment. That one's a little bit different. In terms of the overall size of the investment portfolio, I wouldn't anticipate any major changes in the sizing of that going forward. We do have to care for kind of overall liquidity needs across the business.

Got it. The pricing moves every time.

Yeah. That's right. Yeah. Okay, that's helpful.

Thank you. Our next question comes from Rich Shane with JPMorgan.

Hey, guys. Thanks for taking my question. Look, one of the things we've observed historically, and I'm not convinced it's as pronounced these days, is that when gas prices spike, consumers substitute types of vehicles, and it creates distortions in terms of used car prices. I think over the last decade, U.S. consumers have become pretty sanguine about driving big SUVs, and that's been one of the things that's contributed to price stability of used car prices. I'm curious if there is anything that you guys are seeing right now in terms of auction prices by vehicle type that we should be thinking about or anything interesting in terms of consumer behavior in terms of vehicle substitution.

Yeah, no, it's a good question. Obviously there's always a lot going on. There's vehicle type. There's the gains that various manufacturers have been making in terms of fuel economy, even for some of their larger vehicles. There are some of the issues that individual OEMs have been dealing with from time to time in terms of recalls and other issues. There's a lot that we could kind of go into there. Maybe just to get directly at your question. I think one area to look at is EVs. We have seen more interest in EVs and hybrid electric vehicles as we've seen elevated gas prices. Again, there's always a lot going on, and in some cases, that's overwhelmed by issues that are going on with particular OEMs.

I'd say on the margin, there's probably incrementally more interest in those vehicles and also in kind of more fuel-efficient vehicles generally.

Is that dampening some of the sort of accelerated depreciation and quicker obsolescence of those newer types of vehicles that we've experienced over the last few years?

No, I wouldn't say that. Again, there's always a lot going on, and broadly speaking, used vehicle prices have been strong. That has been helpful to us as we see cars coming back from lease, as well as we've seen kind of resolution on repossessions. Overall, broadly speaking, used vehicle pricing has been strong. Again, there are always individual issues with particular models. Some of that we've talked about with respect to our lease portfolio historically and has led to changes in how we think about depreciation rates. I'd characterize those as more targeted to specific OEMs and models that have encountered issues that are specific and particular to them.

Got it. Okay. Always interesting. Appreciate it very much, guys. Thank you. Okay. Rich, thank you.

Do we have any more questions? That's it? I might just take a moment, I know we still have maybe two minutes. First of all, thank everyone for joining the call. Second, just provide some reflections here. The reflections really upon the quarter and kind of where we are in our path. I think this quarter really provides some wonderful evidence that our strategy is working. For a while now, we've outlined our path to higher returns as dependent upon three drivers, lower auto losses, higher NIM, and disciplined expense and capital management. I think you can see we're making progress, very good progress on all three. It's showing up in the business. The combination of earnings up 20-plus% year-over-year for this quarter, up 60% plus last year on a year-over-year basis.

We're doing that and growing our core businesses very well. We have auto originations up 20%, corporate finance 25% in loans, and our consumer bank have a 7% increase in customers, which is a great number for a retail bank. These are very strong growth numbers on top of very strong earnings numbers. Look, appreciate there'll be ebbs and flows from quarter-to-quarter how things are going. We feel very confident about the destination and the direction and the path. This is a fundamentally different Ally. We are driving stronger performance, greater resilience, and definitely see a path to continued improvement. Thank you for joining the call, and appreciate the support.

Thank you, Michael. That's a great way to wrap. If anyone has any additional questions, as always, please reach out to Investor Relations. Thank you for joining us this morning. That concludes today's call. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.