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Ally Financial (NYSE:ALLY)
Q3 2019 Earnings Call
Oct 16, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to Q3 2019 Ally Financial earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker Mr. Daniel Eller, head of investor relations. Please go ahead, sir.

Daniel Eller -- Head of Investor Relations

Thank you, operator, and we appreciate everyone joining us to review Ally Financial's third-quarter 2019 results. This morning, we have our CEO, Jeff Brown; and our CFO, Jenn LaClair, on the call to review results and to take your questions following prepared remarks. You can find the presentation we will reference during today's call on the Investor Relations section of our website, ally.com. I'll direct your attention to Slide 2 of the presentation, where we have our forward-looking statements and risk factors.

The contents of today's call will be governed by this language. On Slide 3, we've included some of our GAAP and non-GAAP or core measures. These and other core measures are used by management and we believe they are useful to investors in assessing the company's operating performance and capital results. Please keep in mind these are supplemental to and not a substitute for U.S.

GAAP measures. The supplemental slides, at the end, include full definitions and reconciliations. With that, I'll turn the call over to our CEO, Jeff Brown.

Jeff Brown -- Chief Executive Officer

Thank you, Daniel. Good morning, everyone, and thank you for joining our call. On Slide 4, I'll cover highlights from third quarter. Let me begin by saying that in the midst of continued market volatility, Ally's financial results were solid again this quarter, reflecting the ongoing execution of our long-term strategy.

We remain pleased with performance across our auto and deposit franchises where customer growth persisted, flows remained robust, and pricing trends were accretive to results. Progress in our Ally Home and Ally Invest offerings continued, where trends affirm we're meeting the preferences and needs of our customers. Adjusted EPS of $1.01, increased 11% year over year, our highest quarterly result since going public. Core ROTCE of 12.3% remain solid.

Revenues exceeded $1.6 billion, up 7%, compared to the prior year, while our risk profile remains steady. In auto, we originated $9.3 billion of loans and leases in the quarter, a 14% increase versus 3Q '18, and we decisioned 3.2 million applications. Despite some slowdown in new light vehicle sales, used vehicle sales remained robust, shifting dynamic at the consumer level our auto finance platform is well positioned to capture. Evidenced by the higher year-over-year originated volume across all of our major lending categories.

Our originated yield on new retail loans was 7.51%, essentially flat year over year, while average benchmarks declined 135 basis points. The competition continues to ebb and flow in the space, but we remain... we see rational behavior where underwriting standards remain thoughtful and balanced overall. Within our book, trends remained steady and healthy when looking at indicators of a consumer's ability to pay, including term, FICO, LTV, DTI and PTI. We stay diligent in managing our risk profile, and as you would expect, have priced accordingly.

With two fed rate cuts behind us and continued easing actions forecasted, we would expect retail origination yields to trend lower over time, but it betas well below the 100% level we observed as rates rose. Ally scale and broad reach remains unparalleled across the industry, evidenced by our market-leading position. Over 90% of franchise dealers in the U.S. now interact with Ally, providing us with the added benefit of real-time insights into consumer behavior and market trends.

Our dealer count has consistently grown over the past five years, leading to a record 3.2 million decisioned applications in 3Q, supportive of healthy volumes and continued expansion of risk-adjusted returns. Credit performance remained in line with our expectations this quarter, as retail auto net charge-offs of 138 basis points, modestly higher by six basis points compared to the prior year. We continue to see a healthy U.S. consumer, jobs are prevalent, unemployment is at a 50-year low, wage growth continues to outpace inflation, and debt service levels remain well managed.

While consumer confidence recently moderated a bit, overall levels are near the highest they've been over the past two decades. Beyond the consumer, we're monitoring business and manufacturing trends, including trade developments, but remain constructive on the GDP outlook, which continues to expand although at a slower pace. In our insurance segment, written premiums were $357 million in 3Q, our highest level in five years, fueled by sustained growth channel increases and ongoing expansion in our retail and wholesale product offerings. Turning to deposits.

We surpassed a $100 billion in retail deposits this quarter, ending the period with $119 billion in total balances and adding 72,000 net new customers this quarter, surpassing the 1.9 million mark. With another quarter to go this year, we've already exceeded full-year 2018 growth in balances and customers, growing by 12.2 billion and over 290,000 respectively. Over the past decade, Ally has averaged 19% annualized retail deposit growth nearly 7.5 times the retail deposit industry growth rate. We've done this by relentlessly focusing on the customer and being true to our brand, with high-value straightforward innovative digital offerings.

Customer loyalty is evidenced by our strong retention levels and consistent vintage performance, which Jenn will provide more details on in a few minutes. Two-thirds of our customer balances are from mass affluent, high net worth individuals, while 60% of account openings are from the millennial cohort, establishing a banking relationship with us at an early stage in their financial journey. This presents us with the opportunity to continue deepening the relationship over time. The increasing desire for convenient, seamless products and exceptional customer service go hand-in-hand with the core tenets of our philosophy.

We're applying the same framework to the broadening array of consumer products we offer and look to offer in the future. Corporate finance posted another solid quarter, with HFI balances ending at $5 billion, a 16% increase year over year. The team remains focused on responsible growth and cultivating a diversified portfolio, with compelling returns, while prioritizing credit and operational risk. Ally Home DTC originations were $800 million during the quarter, 4.5 times higher than what we originated in the prio-year period.

Our partnership with Better.com has accelerated our ability to deliver a best-in-class digital experience for our customers. During the third quarter, Ally Invest accounts grew 21% year over year ending at 346,000. In early September, we rolled out new product offerings, including the managed portfolio with zero advisory fees along with over 500 commission free ETS. And we recently announced commission free trading and industry trend we had increasingly been anticipating.

Invest brings enhanced value to our customers and increases deposits stickiness. Year to date, around 40% of account openings have been from existing customers and retention levels for these multiproduct customers is higher overall. We closed the HCS transaction earlier this month, and we welcomed 85 Charlotte-based teammates to Ally. We look forward to building upon the momentum the team has established, leveraging the growing desire of consumers to use alternative, digital payment sources in a seamless manner.

And we were pleased during 3Q to receive an investment-grade rating from Fitch, an acknowledgment of the significant progress we've made and the strength of our enterprise. Let's turn to Slide 5 to recap some of our quarterly metrics. Across each of the four measures shown here, we continued our strong progression in 3Q. While not always linear, the long-term trends of improvement have been consistent.

Adjusted EPS on the upper left of $1.01 per share, increased from $0.91 a year ago. In the upper right adjusted total net revenue increased by nearly $100 million year over year, while deposits grew 18% to $119 billion, compared to 3Q 2018. On the bottom right, we continue building tangible book value, increasing the $34.74 per share, up 21% versus prior year. I'm confident we have the right business strategy and the right people to continue building on our momentum, while remaining mindful of potential risk on the horizon.

With that, I'll turn it over to Jenn to walk through the details on the quarter.

Jenn LaClair -- Chief Financial Officer

Thank you, and good morning, everyone. Our strong results in Q3 continue to reflect the consistent progress of our business model, grounded in a relentless customer focus and operating discipline. Let's begin a review of our detailed financial results on Slide 6. Net financing revenue, excluding OID, of $1.195 billion increased $31 million linked quarter and $67 million year over year.

The steady expansion of NII was driven by auto optimization, where portfolio yields continue to move higher and new originations pricing remained above 7.5% and the dual benefit of growing the deposit book where rates moved lower and continuing to replace higher cost wholesale funding. Despite the volatile rate environment, we expect NII to grow on a year-over-year basis over the next several quarters, though seasonality will drive some linked quarter fluctuation, which we expect in Q4. Adjusted other revenue of $424 million grew $31 million quarter over quarter and $32 million year over year driven by solid investment gains and revenue growth from insurance. Provision expense of $263 million increased $86 million quarter over quarter, reflecting normal seasonal trends and $30 million year over year, as asset levels grew and net charge-offs moved modestly higher.

Auto net charge-offs increased by 6 basis points year over year, remaining consistent with our expectations. As we've discussed in the past, we have been originating on pricing to 1.4% to 1.6% net charge-off range. We expect to outperform this range for full-year 2019 due to strong used vehicle prices and macroeconomic factors at or near historically strong levels. We remain confident in the overall performance of the portfolio and our outlook remains the same.

Losses will continue trending toward the stated range of 1.4% to 1.6%, over time, which is fully accounted for in our underwriting, pricing and collection approaches. Noninterest expense declined $43 million linked quarter, reflecting the seasonally lower weather losses and increased $31 million compared to the prior year. We generated positive operating leverage again this quarter, something we've done every quarter this year as year-over-year revenue growth of 7% outpaced expense growth of 4%. Efficiency gains are a direct result of leveraging our scale and the investments we've made over the past few years in opportunities aligned with our long-term strategy.

We expect to continue to prudently investing for the future, which will result in expense growth, with the parallel objective of driving improved efficiency over time. Looking at our key metrics for the quarter. GAAP and adjusted EPS were $0.97 and $1.01 per share. Core ROTCE was 12.3%, including elevated OCI reflecting decline rates since year-end.

Adjusted efficiency ratio of 45.3%, improved 70 basis points year over year. Given our progress year to date, we remain on track to achieve the full-year 2019 guidance we provided in January. This is despite the significant shift in rates and expected Q4 impacts related to the HCF acquisition of $25 million to $30 million not included in our original outlook. Turning to Slide 7.

I'll review balance sheet and margin. We generated revenue expansion again this quarter through continued balance sheet growth and optimization. Like most banks, we prefer a steeper curve, but we are positioned to deliver expanded net financing revenue over the near-term as we are not overly dependent on rates. Average earning assets grew 6% year over year, primarily in capital efficient categories.

We expect earning assets to modestly grow moving forward through measured auto expansion and consumer loans, ongoing diversification and capital efficient mortgage assets, prudent corporate finance growth and continued but slower investment portfolio growth as we've neared our 20% objective. On the funding side, average deposits grew nearly $18 billion year over year, financing earning asset growth of $10 billion, the roll down of $2 billion in unsecured and $9 billion lower secured funding. Net interest margin excluding OID of 2.72% increased 5 basis points linked quarter, and was essentially flat year over year. As we've said for some time now, we expect NIM to stay relatively stable for full-year 2019 compared to 2018, and as we move into 2020, we expect balance sheet dynamics to drive NIM expansion.

The retail auto portfolio yield of 6.66% increased 8 basis points quarter over quarter and 46 basis points year over year, resulting in another quarter of improving portfolio yield. As J.B. touched on earlier, we're monitoring competitive dynamics and benchmark activity, but continue to expect increasing portfolio yields at around 10% of our retail auto book reprices each quarter. Keep in mind we've generated six consecutive quarters of new retail origination yields above 7%.

The lease portfolio yield was 6.24% for the quarter. Our used car index remains essentially flat year to date outperforming our 3% to 5% expected decline for the quarter. While industry off-lease volume of four million plus units is at the highest level in 20 years, the consumer has continue to exhibit strong demand for used vehicles. We see this as a reflection of their healthy overall financial position, improved quality and durability of used vehicles and an increasing difference in average transaction price between new and used cars, which recently exceeded $13,000, a 50% increase versus 2011.

The commercial auto portfolio yield declined 16 basis points linked quarter and increased 19 basis points year over year. Keep in mind, this is a floating rate asset that closely tracks one month LIBOR trends on a lag. On the funding side, deposits grew to 74% of overall funding while unsecured balances declined to 8%. While we expect to periodically issue for parent liquidity purposes, overall balances will continue to decline as another $3 billion is scheduled to mature by the end of 2020 with an average coupon of 5.8%.

On Slide 8, we'll cover some deposit highlights. In the upper right, total deposits ended above $119 billion, driven by retail growth of $2.7 billion, while customer retention levels remained strong at 96%. Q3 marks a 39th consecutive quarter of [Audio gap]

Daniel Eller -- Head of Investor Relations

Operator, are you there?

Questions & Answers:


Operator

Yes, we're here.

Daniel Eller -- Head of Investor Relations

OK. We had a technical difficulty, but we're gonna pick up where we left off.

Jenn LaClair -- Chief Financial Officer

So I'll resume on Slide 8 where we're covering deposits highlights. In the upper right, total deposits ended above $119 billion, driven by retail growth of $2.7 billion, while customer retention levels remained strong at 96%. Q3 marks the 39th consecutive quarter of double-digit percentage growth in our portfolio on a year-over-year basis. Year to date around two-thirds of balanced growth has come from new customers, while the remaining one-third was sourced from existing customers adding to their balances.

We've seen an increasing array of competitive offerings from both traditional and emerging players in the digital space, but our customers and balances continue to demonstrate strong loyalty to Ally, reinforcing our value proposition and the long term stability of the platform. From a flow of funds perspective, the majority of net inflows continue to come from traditional banks, where there is around $4 trillion of balances earning under 50 basis points. In the bottom left, retail deposit rates declined 8 basis points linked quarter, reflecting pricing actions over the past several months. As the Fed continues to ease, we expect the cumulative beta to be higher than what we observed as rates increased, a positive catalyst for the overall NIM trajectory.

But our pricing decisions will remain balanced as we focus on maintaining the trust and loyalty we've earned with our customers over time. On the bottom right, we added 72,000 net new deposit customers during the period, which was our strongest third quarter and resulted in 23% year-over-year growth. The strategic value in customer and balance growth aligns with our strategy and positions us well as we remain mindful of our 75% to 80% deposit-funding target. On Slide 9, we've included a chart demonstrating the stability of our deposits vintages over the past decade.

Our customers consistently keep their money with us and grow their balances. Our industry-leading growth has been achieved even as we've widened the gap to top-rate payer, on our Online Savings product which you can see at the bottom of the chart. And the pricing action we took last week positions us as the lowest among large direct banks, while our rate remains competitive in the broader context of the deposit industry. Let's move to capital on Slide 10.

CET1 of 9.6% increase linked quarter and year over year, reflecting earnings growth and our disciplined approach to managing risk-weighted assets, which grew by 2% year over year, compared to average earning assets growth of 6%. We continued repurchasing shares during the quarter, reducing shares outstanding by 20.7% since mid-2016. And we closed HCS earlier this month and expect an associated capital impact in Q4. As it pertains to CECL, we currently estimate the day one reserves will increase by 105% to 115% driven by consumer auto.

We have been proactive in planning for CECL given the phase-in to the capital position of 25% annually over the next four years. Following CECL implementation, we expect increased volatility in go-forward earnings as we move to life-of-loan reserving and have potential fluctuations in macroeconomic assumptions. Even as this represents a material increase to our existing reserves, the underlying risk profile of our balance sheet has not changed. We plan to absorb day one and navigate the ongoing impact to CECL through prudent balance sheet management, while we continue to prioritize strategic capital deployment, including investment in accretive growth opportunities, share buybacks and dividends.

Let's turn to Slide 11 to review asset quality details. Consolidated net charge-offs were 83 basis points this quarter, an increase of 8 basis points year over year, primarily driven by retail auto. In the top right, consolidated provision expense was $263 million, an increase of $30 million compared to the prior year, due to higher asset balances and moderately higher auto net charge-offs. In the bottom left, the retail net charge-off rate increased 6 basis points year over year to 1.38%, reflecting dynamics I discussed earlier.

Thirty-plus and 50-plus delinquencies in the bottom right increased year over year by 26 and 9 basis points respectively. The rise in delinquencies this quarter reflects the increased mix and seasoning of our used portfolio, the purposeful change in our servicing efforts that have increased delinquencies, but consistently resulted in improved flow-to-loss trends, and dynamics around closing out the quarter on a Monday which impacts consumer payment timing. On Slide 12, auto finance pre-tax income of $429 million declined $30 million linked quarter due to seasonally higher provision and increased $46 million compared to prior year. Net financing revenue growth was driven by retail auto asset growth and increasing portfolio yields.

We experienced the 22nd consecutive quarter of expanding dealer relationships in Q3, leading to our strongest third quarter ever in application volume, decisioning over 3.2 million apps, an 11% year-over-year increase, which resulted in $9.3 billion in originated volume in Q3, a 14% increase versus prior year. In the bottom right, our risk-adjusted return trends reflect improved new origination yields, even as benchmarks have meaningfully declined. Turning to Slide 13. We originated $9.3 billion of consumer loans and leases in the quarter.

Growth originations of 46% declined to the percentage of our total volume in Q3, though dollar originated volume increased compared to the prior-year period. Seasonally higher new and lease volume resulted in used volume near 50% of total originations, while nonprime of 11% remained consistent. While the percentage of use was lower year over year, the dollar amount of originations increased. In the bottom left, consumer assets grew to $81.5 billion, as lease balanced -- balances increased slightly and retail continued to grow.

And on the bottom right, average commercial balances of $33.3 billion declined year over year and quarter over quarter as dealer inventories normalized. On slide 14, insurance reported core pre-tax income of $56 million in the quarter, an increase of $70 million linked quarter and $17 million versus prior year. Earned revenue increased $23 million year over year, reflecting the strong written-premium trends over the past several quarters. We wrote $357 million of premiums in Q3, the highest level since becoming a publicly traded company, with increased volume and rates across our product offerings.

And during the quarter, we were pleased to receive an upgrade to A- from AM Best, our first upgrade in 10 years at Ally Insurance. Slide 15 has our corporate finance segment result. Core pre-tax income of $45 million was down $2 million linked quarter and increased $9 million year over year. Portfolio credit performance remained strong and in line with our expectations.

Collateral-based lending increased to nearly 60% of new originations in the period. And compared to prior year, ending HFI assets grew 16%. Our origination activity reflect focus from our experience cycle-tested teams who continue to execute through competitive environments. On Slide 16, mortgage pre-tax income of $11 million was relatively flat versus prior quarter and prior-year periods, reflecting increased premium amortization as rates declined and prepayment activity increased.

We originated nearly $800 million of direct-to-consumer loans, the fourth consecutive quarter of increasing origination volume and our highest level since launching Ally Home. We continue to see strong deposit synergies with 55% of direct-to-consumer originations sourced from existing Ally depositors. Our partnership with Better.com led to a series of best-in-class improvements, including after fund turn times declining to approximately 30 days and industry-leading NPS scores. The all-digital platform and streamlined customer experience will drive a 40% improvement in the cost for funded load over time.

In closing, we had another successful quarter, with solid pre-tax pre-provision income growth and operating leverage kick in that created ongoing progress against our 2019 full-year financial objectives. These results demonstrated a -- demonstrate the strong over core businesses and our focus on delivering for our customers and driving sustainable long-term value for our shareholders. And with that, I'll turn it back to J.B.

Jeff Brown -- Chief Executive Officer

Thank you, Jenn. Wrapping up on Slide 17 are the priorities for our company. The common thread running through each of these objectives is our prioritization of culture at Ally. It's how we ensure we're driving our company in the right direction.

Simply put, we're working to bring increased value through comprehensive and innovative consumer and commercial offerings. And as established leaders in auto, insurance and deposits, we're looking to seize upon untapped opportunities that will further enhance the way we meet our customers' needs. Our 8,500 Ally associates are striving to do it right in every interaction with our customers, within the communities we serve, and on behalf of our shareholders. It's been a great three quarters of the year, and we're focused on finishing strong over the months ahead and well into the coming years.

With that, we can now head into Q&A.

Daniel Eller -- Head of Investor Relations

Thanks, J.B. Go ahead, operator.

Operator

Thank you. [Operator instructions] Our first question comes from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. And congrats on really strong results. I wanted to kind of drill down a little on deposit pricing.

I mean you talked a little bit, Jenn, about being able to lead in the downward direction and just talk a little bit about your strategies there? And how you think about that in particular, given you've had such strong results on the asset yield side?

Jenn LaClair -- Chief Financial Officer

Sure. Good morning, Moshe. And thank you. So no changes overall to our deposit strategy.

I mean, as we look across the business, we're really pleased with the customer growth we're seeing, the deposit flows we're seeing. In fact, through Q3 we've had the highest levels of customer and deposit growth that we've had in any full year in the history of the company. So really pleased there, and we'll continue to have strategic focus on growing customers, as well as deposits. Now relative to pricing, I mentioned we're getting close to our target funding rate of 75% to 80%, and as we do so, we do feel that we're in a really good position to continue to focus on margin and to be thoughtful as we balance competing priorities.

We want to continue to grow our business, we also want to optimize the margin, and we'll just be very thoughtful about that as we go forward. Now you've seen over the last couple of months since June, we have dropped OSA rates around 40 basis points, CDs have come down around 35 basis points. And we think that positions us exceptionally well from a financial trajectory as we go into 2020 and position ourselves for NIM expansion. And overall for the customer, relative to the most bank rates with $4 trillion out there getting paid under 50 basis points, we think we're really optimizing not only for Ally's margin, but optimizing for the customer, as well.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got you. And in a somewhat related, I mean you talked about the debt you have that comes due by the end of next year and the impact that would have at that 5.8% kind of coupon. I guess the question that I have relates to operating leverage, and has that make you kind of think about the ability to kind of to deliver on the operating leverage as you go through 2020?

Jenn LaClair -- Chief Financial Officer

Yes. So, I mean, all of this really positions us to continue to grow net interest income and NIM as we move into 2020, which is going to be a big driver around revenue -- overall revenue growth and operating leverage. Relative to the unsecured debt, rolling down it's a little bit lumpy, but we've got some really high cost of debt coming down in the first quarter at an 8% coupon. And so the roll down of the unsecured, we'll just continue to lower overall deposit cost.

And again, it's an input into NII and NIM trajectory.

Daniel Eller -- Head of Investor Relations

Operator, are you there?

Operator

Yes, I'm here.

Daniel Eller -- Head of Investor Relations

OK. Moshe, are you still on the line?

Moshe Orenbuch -- Credit Suisse -- Analyst

I am.

Jenn LaClair -- Chief Financial Officer

OK.

Daniel Eller -- Head of Investor Relations

OK. We were getting a sign of more technical difficulties.

Moshe Orenbuch -- Credit Suisse -- Analyst

My questions have been answered. Thanks, Daniel.

Jenn LaClair -- Chief Financial Officer

OK. Great. Thank you so much, Moshe.

Operator

Thank you. Our next question will come from Sanjay Sakhrani with KBW.

Sanjay Sakhrani -- KBW -- Analyst

Thanks. Good morning. So Jenn, I appreciate the commentary on CECL and sort of the related impacts, but I guess when we're thinking about EPS impacts, you mentioned the variability or volatility it will bring. But is there any rough estimate, assuming macroeconomic conditions are stable, what the EPS impact might be?

Jenn LaClair -- Chief Financial Officer

Yeah. And we'll be providing a bit more guidance as we finalize our 2020 plan, but I mean essentially, when you look at day two, there's a number of drivers around that volatility and let me just outline a couple of those. The first is, if you're growing your portfolios, you're going to see an outsized increase in your reserve levels because again, you're going from a 12-month incurred loss model to life of loan. So it will depend to some degree on the growth in each of your portfolios.

Second is, it's going to the tied to your mix and that's the mix of your assets across your book, but also just the risk content within each of those asset classes. And then last but not least, it'll depend to some extent on your macroeconomic forecast. So we need to settle down our overall forecast, and when we do so, I'll provide our EPS trajectory overall for the company and give you some sensitivities around CECL.

Sanjay Sakhrani -- KBW -- Analyst

OK, great. I guess a follow-up related to credit quality and some of the comments you had on the delinquency rate. Obviously, you guys have had very solid performance on credit quality this year, but when we look at the delinquency rate that was a little bit higher than normal in the third quarter and that was a pretty decent pick up year over year. Was that all related to timing or is it a little bit indicative of next year being a run rate charge off level that's more consistent with what you guys have targeted this year? Thanks.

Jenn LaClair -- Chief Financial Officer

Yeah, sure. So on delinquency, yes, I'd say overall performance is well in line with our expectations and kind of three drivers to the increase year over year. One is just the normal and expected seasoning of the used portfolio. We've talked for some time around the fact that used tends to have slightly higher risk content.

Keep in mind, we get paid three times to four times that in the yield so we're really pleased with the risk-adjusted returns in that segment. But it does drive some higher frequency, and we're just seeing that coming through here in Q3 again, well in line with our expectation. And then there is a couple of just what I would say operational impacts. One is, we launched some new collections and servicing strategies over the last four to eight quarters.

And some of that is just pushing out repo timing and increasing the delinquency levels. It's improving floater loss. So we're pleased with the overall performance of these strategies, but it does result in some slightly higher delinquencies. And then there is just nuances in terms of the day on which the quarter closes that can drive some volatility in your delinquencies, and I'd say almost one-third of that increase was due just to the fact that the quarter closed on a Monday instead of a Friday.

So overall, the in line with expectations to your question on where we're going, we would expect to, at some point migrate up to that 1.4% to 1.6% retail net charge-off ratio simply because that's where we're originating today. And so as the used portfolio continues to season, as used vehicle values start to migrate down, and we're still expecting that to occur, we have some increased severity. And so over time, we'd expect to be more in line that 1.4% to 1.6% range. Keep in mind, we get -- we're pricing that's where we drive risk-adjusted returns in our sweet spot.

So we're we're good with that.

Sanjay Sakhrani -- KBW -- Analyst

All right. Great. Thank you.

Jenn LaClair -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Arren Cyganovich with Citi.

Arren Cyganovich -- Citi -- Analyst

Thanks. I was wondering if you could just comment on the decision to change the commission for, I guess, the industry is moving in that direction? And what the potential impact would be from a revenue perspective for you?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. Good morning, Arren. And maybe just I'll take the second question first. The impact is extremely small for us.

As a percent of overall Ally revenue it's tiny. So from a financial perspective it's pretty much a nonevent. From a customer perspective, we still very much like this business, it's capital light, J.B. mentioned it increases the stickiness in the retention levels of our deposit portfolio, and so we see value there.

And over time as we move to more of an advice-centric model, and we're in the process of building that out, we think that this can be accretive from an ROE perspective. But -- I mean the bottom line here is when the industry moves you have to move with it, otherwise, we lose some valuable customers, and we don't want to put ourselves in that position. J.B., I don't know if you want to comment on that?

Jeff Brown -- Chief Executive Officer

Perfectly covered, Jenn. You got it.

Jenn LaClair -- Chief Financial Officer

Thanks. Thank you for the question, Arren.

Arren Cyganovich -- Citi -- Analyst

Sure. And just as a follow-up, there was... A few weeks ago there was an article on Wall Street Journal talking about middle-class not being to afford a car loan these days and rolling over kind of underwater loans into new purchases and extending the terms. Are you seeing anything from a competitive standpoint, where you're concerned about the trends that you're seeing within -- with auto finance -- obviously, we're not seeing that in your charge off rates or anything of that nature? Just curious what your comment would be about that?

Jenn LaClair -- Chief Financial Officer

Yeah. Look, I mean there's always going to the attention paid to the fringes, and that's really how we view that commentary on the overall business. As we look at our business, nothing has changed in terms of the way in which we originate. And J.B.

mentioned in his comments that we see extremely consistent FICO scores, payment to income scores, loan-to-value, we're not seeing any kind of deterioration in terms of term, etc. And if you look at the consumer, I think, just right in contrast the consumer right now is performing extremely well. We've got[Audio gap]

on unemployment, debt servicing levels are actually at a 39-year low, they're under 10%. And so ability to pay continues to be strong, and I think you see that in our year-to-date credit performance, as well as just an incredibly robust application flow. We had record applications this quarter, continuing to be able to put price in the market, we're just not seeing it.

Arren Cyganovich -- Citi -- Analyst

Thank you.

Jenn LaClair -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question will come from John Hecht with Jefferies.

John Hecht -- Jefferies -- Analyst

Hey, guys. Thanks very much, and congratulations on a good quarter. You touched a little bit on this in the last question, but I'm just wondering kind of thinking about incremental loan volume, where are new -- not new loan, not new car loan, but new loan terms moving in terms of durations and yes, I guess, yield margins and where do you see the competitive market going?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, on retail auto our term has not changed at all. And we've been very consistent year after year just around 70-month term and that has not changed. So I guess that answered the question one.

Just in terms of yield, really robust yield. We had our sixth consecutive quarter of putting new origination yields on the books over 7% and with the portfolio yield at 6.66%. We're very well-positioned to continue to see portfolio yield migrate up to those new origination yields. And I think the performance this quarter really speaks for itself in terms of ability to generate flows, continue to drive upward expansion on the asset side from a yield perspective.

Jeff Brown -- Chief Executive Officer

And then, John, on the competitive front, I'd say very consistent. Obviously, I'm sure you saw one large bank talked about an increase in share that they took on, but we really didn't see it and didn't feel it in the third quarter. I think our flows were exceptionally strong, added to the point that Jenn covered for six consecutive quarters of where we've been bringing in new loans at, we've been very pleased with the margin we're capturing there. So I'd say the competitive environment remains very rational, and we haven't seen any big shifts in structure or appetite lately at all.

John Hecht -- Jefferies -- Analyst

OK. Appreciate that color. And follow-up question is you guys have been working on diversification, you talked a lot about business lines and had some positive commentary with the Better.com partnership. And I think you've also mentioned historically that your -- in order for capital management we might see incremental mix toward mortgage and so forth.

I'm just wondering what do we think about, kind of, business mix as we enter next year and your focus on ongoing diversification.

Jenn LaClair -- Chief Financial Officer

Yeah. I'd say it's high level. We see opportunities to grow all of our portfolios and that's auto, it's mortgage as you're mentioning, as well. And specifically in the mortgage phase the key to that business is managing operating expenses.

And with the partnership that we have with Better.com we see an opportunity to the able to accrete ROE over time because we're able to bring down those operating expenses. We've just closed the transaction with HCS. That's another opportunity we have to drive diversification it's a $130-ish billion dollar market growing at 20% a year, drives ROAs in the 3% to 4%. And so we see a really nice opportunity to continue to diversify through point-of-sale lending with our HCS acquisition, as well.

John Hecht -- Jefferies -- Analyst

Great. Thanks, guys.

Jenn LaClair -- Chief Financial Officer

Thank you, John.

Operator

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley.

Jeff Adelson -- Morgan Stanley -- Analyst

Good morning. This is actually Jeff Adelson on for Betsy.

Daniel Eller -- Head of Investor Relations

Hey, good morning.

Jenn LaClair -- Chief Financial Officer

Good morning.

Jeff Brown -- Chief Executive Officer

Good morning.

Jeff Adelson -- Morgan Stanley -- Analyst

Just wanted to dig into the other revenue lines a bit. I think this is the first quarter you've actually seen the adjusted fees exceed $400 million in several years. And in the not too distant past you kind of talked about that being a range of $375 million to $400 million quarter to quarter. So you're obviously seeing some good results in the insurance business.

You've had some good gains the last couple of quarters and you're layering in that Ally invest business overtime. So I guess my question is, is it too early to think about the $400 million plus as kind of a new normal or how else should we think that going forward?

Jenn LaClair -- Chief Financial Officer

Yeah. I would say we're absolutely focused on growing our fee income and our noninterest income. No, I'm not ready to give you guidance quite yet. I mean we do see a lot of opportunities to continue to grow our fee income.

Insurance you saw had record levels of written premium, and you're seeing that record levels and continued momentum over time show up in the earned premium. And we see opportunities across all of our businesses in that space, the inventory insurance, the VSC insurance we provide, which by the way is becoming more and more critical to dealer margins. We're just seeing a lot of opportunity to continue to expand our insurance business. And that's not only the earned premium it's also gains that we take on the assets in that portfolio.

So insurance is absolutely a growth engine for us. I'd say second, we grew our investment securities portfolio as rates were rising. And so we're in a really strong position relative to kind of harvesting some gains around our investment security portfolio, as well. And then, as you mentioned, Ally invest over time, we're still bullish on this business.

We think that there is opportunities to growth -- grow especially in the advisory space, it is supported by secular trends to digitization, and we think we're very well positioned to capture those growth opportunities, as well.

Operator

Thank you.

Jeff Adelson -- Morgan Stanley -- Analyst

Go ahead.

Operator

Thank you. Our next question comes from Kevin Barker with Piper Jaffray.

Kevin Barker -- Piper Jaffray -- Analyst

Thank you. Your expenses ticked up a little bit in the third quarter compared to the growth that we've seen in the first half. You mentioned that this could occur, but could you just talk about the trajectory for expenses over the next few quarters. And some of the things that are driving the increasing expense growth?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And I do want to couple that with revenue growth that we... Our focus is really around driving positive operating leverage, and we've been driving positive operating leverage every quarter this year, and that is our intention as we move forward. But relative specifically to the growth and expenses, it's really been around the same themes that we been discussing, one is continuing to invest in our core competencies, around marketing and digital technologies and platforms. And continue to see some growth relative to continuing to evolve both marketing and digital and technology capabilities.

Second, there is just some variable cost tied to just the terrific amount of customer growth we've seen across all of our businesses. And so big chunk of that is just related to growing our business. And as I mentioned, there is revenue that comes along at an accelerated pace against that variable growth. And then last but not least, just continuing to look for ways to grow long-term value for the company and for our customers and the HCS transaction is the perfect example of that.

And we will have some expense hit in Q4 relative to the closing of that acquisition. So those are the key themes.

Kevin Barker -- Piper Jaffray -- Analyst

OK. So do you expect the year-over-year growth rate to remain consistent with what we saw in the third quarter to persist, or do you think it'll accelerate given HCS transaction and then go forward?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, Q4 we have some seasonality and expenses relative to tax marketing and HCS will close, which is kind of about half of that $25 million to $30 million in pre-tax impact in Q4. And for overall 2019, we're expecting to be well within our guidance of kind of flat to down 1% on efficiency ratio.

Kevin Barker -- Piper Jaffray -- Analyst

OK. Thank you for taking my question.

Jenn LaClair -- Chief Financial Officer

Thank you, Kevin.

Operator

Thank you. Our next question will come from Chris Donat with Sandler O'Neill.

Chris Donat -- Sandler O'Neill + Partners, L.P. -- Analyst

Good morning. Thanks for taking my questions. Jenn, I wanted to ask about the full-year guidance. You made the comment in your prepared remarks that you're on track to meet it.

I just want to flesh out sort of the other piece of that with the -- because it seems like you've got some -- based on the prior three quarters there should be some upside bias to the EPS part of the guidance. But your commentary around the Health Credit Services acquisitions in the $25 million to $30 million, is that onetime a nature related to the closing of the transaction or are there losses with that acquisition that will persist into 2020?

Jenn LaClair -- Chief Financial Officer

Yeah.So good morning, Chris . A couple of things. So first of all on Q4, there is some seasonality in the quarter. And I just mentioned some of the expense impacts there.

We do have some impacts from an NII perspective, lease gains can be a little bit lumpy, and we're still expecting used vehicle prices to come down a bit. So little bit of pressure in terms of the sequential quarterly impact to NII. I mean, year over year, we will be up on NII, but it's not always a linear path. And then on provision, we tend to have seasonality there, no different than we've had in any fourth quarter and kind of the history of the company.

So just keep in mind there's a seasonal element, which is putting us back on track with our overall EPS guidance. And then relative to HCS, we closed the transaction in first quarter. We've got some operating expenses obviously that are part of that transaction. They're not onetime in nature.

We would expect that expense to roll forward into 2020. And then second, as we acquire portfolios, we've got about $250 million in balances that will build in Q4. And then as we continue to grow that portfolio there is some provision expense around it. Those are really the two big drivers.

But taking a long-term view, really pleased again with the opportunity to drive earnings and accretive ROA and ROE asset over time. But I do want to keep... I do want to emphasize one more point here, and that's the fact that we are sticking with our original guidance for this year that's in spite of an incredibly volatile interest rate environment, and in spite of that we've grown NII in line with expectations. We're hitting that flat NIM number that we've been guiding toward, and now taking a longer term view, we're incredibly well-positioned to have continued NII growth and NIM expansion as we head into 2020.

Chris Donat -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then I had one question, too, about the insurance business and the written premiums that -- if I'm looking at the trend correctly they tend to be -- you have higher written premium in the third quarter of each year. If you just explain what's going on there? I understand the earned premium component of it, but just wanted to understand why written is stronger, what's seasonally going on there?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean there isn't really any key driver of growth there. I will say, as you look at those written and earned premiums, Chris, there is some lumpiness just related to reinsurance cost. And so we mirror the reinsurance expenses with when we have weather losses.

And so you typically do see some higher reinsurance cost in the high-weather quarters. But other than that, it's been a pretty linear growth trajectory from a written and on the premium perspective.

Chris Donat -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Thanks very much.

Jenn LaClair -- Chief Financial Officer

Thank you, Chris.

Operator

Thank you. Our next question comes from Eric Wasserstrom with UBS.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Jen, I'm just trying to think through the capital lock on CET1 into next year. But maybe thus the preface to my main question is, I think I saw you guys do a little bit of securitization in the period. Is that correct? And what was the CET1 benefit of that?

Jenn LaClair -- Chief Financial Officer

So the short answer is yes. We did have some securitization activity, just business as usual, there is not any big CET1 impacts related to that. And just on your CET1 question, I mean, we are being very thoughtful just in terms of continuing to grow CET1, and we're up about 50 basis points since fourth quarter and that's really to position us well to absorb the day one impact from CECL. So we got 25% of the capital impact hitting in 2020.

We're very well-positioned to absorb that. In addition to that, we have HCS transaction that's closed here in Q1, so that will be a Q4 event. And then above and beyond that, we are positioning ourselves very well to continue to look for strategic opportunities to deploy capital. We've done all of that in spite of distributing over $900 million in capital year to date in the form of repurchases and dividends.

And so we'll just continue to organically accrete capital, be very thoughtful in terms of RWA growth and balance sheet management, and position ourselves not only to absorb CECL, but also to make sure that we can stay focused on our strategic priorities.

Eric Wasserstrom -- UBS -- Analyst

Great. And so If I can just maybe -- just follow-up on that. My quick arithmetic on the day one CECL impact is about 90 bps with the phase in well... And then I guess a quarter of that phased in pro rata, is that ballpark correct?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, think about it kind of in that 80% range overall, and then you take 15% to 20% of that kind of in any given year. Take a quarter of that in any given year. The kind of tax effect the reserve impact, say 25% of that over the next four years.

Eric Wasserstrom -- UBS -- Analyst

Got it. And so then it sounds like the other dynamics are just the accretion, which is typically about 30 to 40 basis points and then a little bit of impact from HCS. Is that basically right?

Jenn LaClair -- Chief Financial Officer

Yeah. Well done.

Eric Wasserstrom -- UBS -- Analyst

All right. Thanks very much. I appreciate it.

Jenn LaClair -- Chief Financial Officer

Thank you, Eric.

Operator

Thank you. Our next question comes from Dominick Gabriele with Oppenheimer.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Hi. Thanks so much for taking my questions. When we look at deposit mix and your targets and where we are today. And we saw some nice funding relief this quarter, quarter over quarter, when you think about the interest rate path going forward, that the implieds have.

Can you talk about the quarter-over-quarter change in deposit costs and total funding costs could accelerate on a downward trajectory from here?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, it's not a perfect formula. We -- as I mentioned earlier, we want to balance strategic focus on customer growth, balance growth, but we do feel we're well-positioned. We're approaching our target funding level of 75% to 80%.

I mentioned in my comments this morning that as the Fed continues to ease we could continue to see opportunities to take down rates, OSA is down already 40 basis points. And that beta on the downs will be higher than the beta on the ups, and I think that's probably the best way to think about it.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

OK, great. Thanks. And then when we think about -- you did mention about the betas on the yield side. Can we talk a little bit more about where you think that may be and the ramp there over time on the auto yields in particular? And you actually saw some really nice uplift in the lease yield this quarter, what's going on there if you don't mind talking about that? Thanks so much.

Jenn LaClair -- Chief Financial Officer

Yeah, sure. Maybe I'll start with retail auto, and then we can go to lease. Yeah, but if you go back to the tightening cycle we've passed on over a 100% of the increase in the underlying benchmark rate, the two- to three-year swap. And as we passed on that increase in the benchmark rate that's when we really started to originate above that 7% mark.

Now if you look year to date, the underlying two- to three-year benchmark is down on average a 130 basis points and the beta on that has been zero, I mean, because we just continue to put it in pricing in the market above that 7% mark. Now there's a number of dynamics there, one is healthy consumer has sustained car purchases, high demand, as well as the fact that well, the rate is up compared to a couple of years ago, we're well below the average from a historic time period. And so the overall interest rate on the car relative to payment income and debt-to-income level continues to be absorbed. So we're not seeing a lot of overall price sensitivity from the consumer at this point.

Now as we go forward and funds is top of mind and we see funds potentially coming down. We could see some pressure on rates, but we're not seeing that at this point. And then relative to lease, we can have some lumpiness there, especially related to lease gains. We had a really strong lease gain quarter this quarter.

That's been sustained by very strong used vehicle prices, we're, as I've mentioned, several times expecting used-vehicle values to come down at some point. But overall, this quarter, we had a really nice pick up because of lease gains sustained by used-car performance, which continues to be very strong.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

And then if I may just one more, on the mortgage business we saw a year-over-year loan growth kind of slow a bit. Is that from one of the sales there of why the growth floaters or maybe a different strategy taking place or is this a one-off? And what do you see in the mortgage market today, given the increased mortgage applications spike more recently? Thanks so much. I really appreciate it.

Jenn LaClair -- Chief Financial Officer

Yeah, no, sure. We have -- maybe I'll separate DTC versus bulk. On the DTC side, we absolutely see a lot of growth, and I mentioned we hit $800 million in originations, which is the record quarter for us and puts us well on the path to originate up to that $3 billion mark that we've set for ourselves. So on a DTC side, really bullish on the product offering we have, the opportunity to continue to grow, originations especially as refi volume has peaked here.

And so we'll continue to grow DTC and with the Better.com partnership we think we can get really great returns on that business, as well. On the bulk side, you're absolutely right, we have brought down the balances, and a little bit of a shift in strategy there, just as we have seen pre -- early pre-payments and amortization expense increase, we've just been very thoughtful about the way in which we grow that book. And we did have a loan sale, part of that was just positioning around the LIBOR transition, but part of that was just exiting some of the lower yield and portfolios that were in the money because of the rate drop. So we'll continue to be incredibly thoughtful as we allocate capital to bulk, just making sure we get the right yields and -- that are accretive to the book.

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Thanks so much for taking my questions.

Jenn LaClair -- Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, I am showing we do have time for one last question. And our last question will come from Rick Shane with JP Morgan.

Rick Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my question this morning. Jenn, I actually had a lease question, and I thought you were going to touch on it, but I'm a little bit -- I'd like a little bit of clarification. The lease yields were up nicely year over year.

But if you look at the gains from vehicle sales they were actually flat. So I'm curious if this is a mix shift, in terms of the new vintages, is there more pricing power in the lease business or was there actually a change to the depreciation curves that you guys were using?

Jenn LaClair -- Chief Financial Officer

Yeah. So, I mean, the short answer to all of that is no. We did see a strong origination flow this quarter, and we're up about couple of hundred million in terms of the flow, but we've been guiding toward kind of X gains of low 5% yield and I think we've been trending kind of right in line with that and then anything above that 5% is related to the gains and the trajectory around the gains. But no real trends, Rick, just in terms of our overall lease portfolio.

Rick Shane -- J.P. Morgan -- Analyst

OK, great. Thank you so much.

Jenn LaClair -- Chief Financial Officer

Thank you, Rick.

Operator

Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to hand the call back to Mr. Daniel Eller for any closing remarks.

Daniel Eller -- Head of Investor Relations

Thanks, operator. All I'll say is that if you have additional questions please feel free to reach out to investor relations, and we thank you for joining our call this morning.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Daniel Eller -- Head of Investor Relations

Jeff Brown -- Chief Executive Officer

Jenn LaClair -- Chief Financial Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Arren Cyganovich -- Citi -- Analyst

John Hecht -- Jefferies -- Analyst

Jeff Adelson -- Morgan Stanley -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

Chris Donat -- Sandler O'Neill + Partners, L.P. -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Dominick Gabriele -- Oppenheimer and Company -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

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