Ally Financial Inc (ALLY) Q4 2020 Earnings Call Transcript

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Ally Financial Inc (ALLY 1.78%)
Q4 2020 Earnings Call
Jan 22, 2021, 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 the Ally Financial's Fourth Quarter and Full Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference to your speaker today, Daniel Eller of Investor Relations. Please go ahead, sir.

Daniel Eller -- Investor Relations

Thank you, operator. We appreciate everyone joining us to review Ally Financial's fourth quarter and full year 2020 results this morning. We have JB, Jeff Brown, our CEO; and Jenn LaClair, our CFO on the call, to review results and take questions. Before beginning, I'll note that the presentation we'll reference throughout the call can be found on the Ally Investor Relations website. On Slide 2, you'll find the forward-looking statements and risk factor language that will govern today's call, and on Slides 3 and 4, we've included several GAAP and non-GAAP or core measures pertaining to Ally's operating performance and capital results. These metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix.

With that, I'll turn the call over to JB.

Jeffrey J. Brown -- Chief Executive Officer

Great, thank you, Daniel. Good morning, everyone, and thank you for joining the call today to review our fourth quarter and full year 2020 results. I'm going to start on Slide number 5. I'm incredibly proud of the way our Company and teammates responded during these challenging times. This past year presented one of the most complex operating environments in our Company's history as COVID cases accelerated across all 50 states, and that led to considerable uncertainty about the health and welfare of millions of people and businesses. The fiscal and monetary response from the government, combined with the private sector actions providing relief to those impacted was necessary, and still remains critically important to the recovery. Across our country, we also confronted the harsh realities of social injustices and racial disparity, requiring difficult, but necessary dialogs and an intensified call-to-action for everyone. Sadly, COVID appears to be further accelerating these disparities.

As I shared across our Company and with our Board, the only way we permanently disrupt the flaws in our system is by each individual making the commitment to change now, and after the headlines grow less frequent. And candidly, that's part of the reason not shared again today.

While the year was full of challenges, signs of hope have emerged as we are now taking a meaningful step forward in the fight against the virus with the rollout of vaccines. And I'm proud of how companies and people are responding and recognizing the need for real and lasting social change. I hope America can unite, heal, and strengthen together.

Further, the sacrifices and work of healthcare, service industry, and community-focused leaders and organizations is a reason for optimism moving forward. At Ally, we've built culture based on Doing It Right, rooted in an authentic set of values and inclusivity. I believe we all have the opportunity to emerge from this difficult period with a greater appreciation for each other, for life, and with an involving focus on a quality and inclusion. These elements of our cultural DNA served as a huge source of strength and continuity across our stakeholders.

Actions reinforcing our values included moving and maintaining 99% of our workforce to work from home, while expanding health, family, and financial benefits, and utilizing our employee resource groups during critical moments to listen, share, and connect on a personal level. For our customers, we proudly led the industry with comprehensive COVID relief, with post-deferral performance remaining strong. We continued expanding our digital products, technologies and services, aimed at meeting customer needs in new and innovative ways, something our modern, nimble, direct platform is well-positioned for moving forward. And within our communities, we established the Ally Charitable Foundation, strengthening our ability to make lasting and meaningful change well into the future. And I'm proud of how we demonstrated our humanity more than anything else. And as you'll see, that bettered our results.

Across all of our businesses, we demonstrated our leading capabilities and growing momentum, which is reflected in our financial results and outlook. During the year of constant change, we maintained our long-term focus, something we've done for years as we position the Company for ongoing success.

Turning to Slide number 6. Full year 2020 adjusted EPS of $3.03 and core ROTCE of 9.1% demonstrated our ability to absorb a significant allowance build early in the year, while still driving impressive business results and strong momentum. Revenues of $6.7 billion represented our highest annual result, growing 6% year-over-year, while credit performance exceeded expectations. Jenn will provide more detail on the quarter in a few moments. But pricing, flows, and credit, all ended the year on solid footing, and we feel really good about the exit rate into the new year.

Turning to our business and product offerings across our growing base of nearly 9 million Ally customers, we focus on our relentless pursuit to provide differentiated, innovative products, services and experience. Within auto finance, consumer volume of $35.1 billion was sourced from 12.1 million applications, results that were only modestly impacted by the COVID environment. As we move into 2021, we're well-positioned for an outlook that indicates rising new and used auto sales as demand persists, OEM production that should gradually replenish depleted inventories on dealer locks, and some normalization of used values from the record-setting levels we saw in the third quarter.

Our retail origination yields remained solid, exceeding 7% for the full year, which reflects our dynamic underwriting approach. I can't emphasize how strong this performance is and exceeds margin expansion well into the future. From a credit perspective, net charge-offs of 96 basis points reinforced a resilient and disciplined consumer despite elevated unemployment in a challenging backdrop. Simply put, the combined impact of fiscal stimulus, digital collection tools, and proactive actions implemented this year have kept loss as well.

In our insurance business, we generated $1.2 billion in written premium in 2020, while our $6.3 billion investment portfolio produced over $200 million of investment income. The countercyclical aspects of this business are a powerful reminder of our ability to drive strong results in a variety of environments. Ally Bank was an early disruptor, and we've built the largest direct bank in the U.S. by truly focusing on growth and retention of the customer. Our growing scalable platform has generated over 10 years of customer and balance expansion, and experienced record-setting growth in 2020. We ended the year with over $124 billion in retail balances and 2.25 million active customers; a six-fold increase over the past decade.

Deposit growth continues to lower our cost of funds and serves as a gateway to Ally Bank in the expanded suite of all digital consumer finance products we offer. Trends accelerated this year across each of these products, as depositors with a Home or Invest product grew to 8%, our fourth consecutive year of growth. Ally Home originations of $4.7 billion, increased 74% year-over-year, as we continue to expand and enhance our customer experience and take advantage of a strong refinance market. Ally Invest self-directed accounts of 406,000, expanded 17% year-over-year, while customer assets of $13.4 billion increased 70%. Ally Lending volume of $503 million grew 75%, while entering home improvement and retail verticals, complementing our established healthcare offering. We now have over 1,800 provider relationships, a 60% increase from 2019. The opportunities across each of these digitally driven products to grow and deepen customer relationships provide us with long-term organic growth runway.

Our Corporate Finance segment generated strong results, driven by experienced teams, focused execution, and prudent underwriting. Our $6 billion held-for-investment portfolio grew 6% year-over-year, while credit performance remained stable against a shifting backdrop. Over the past several years, we've generated steady growth, while maintaining a disciplined underwriting approach. The outlook for each of these businesses continues to accelerate, reflecting years of steady, disciplined, and consistent execution. I'm fully confident in our ability to keep driving meaningful value for our customers, communities, and stakeholders in the years ahead.

Turning to Slide number 7, we highlighted some of the competitive advantages last quarter, and it bears repeating again, on the strength and position of the Company's core businesses. Within Auto, we're a full service partner to 18,700 dealers. That's the highest level in the history of our Company, reflecting growth from both established and emerging players. Scale of this magnitude provides us with broad market insights; it allows us to generate impressive volumes with attractive returns. Our industry-leading field teams, strong service levels, and expanding use of modernized tools and technology will continue to set us apart from the competition. Throughout the year, we streamlined user experiences and enhanced digital capabilities across our servicing, underwriting, and SmartAuction platforms. We continue to employ the use of advanced data analytics in 2020, leading to our fifth consecutive year of improved auto decision levels and reduced response times.

Within Insurance, our comprehensive protection products continued to enhance value for over 4,200 dealers and 2.6 million customers in the U.S. Within our Consumer Banking products, we differentiated through friction-less experiences built on data intelligence, innovative technologies, and mobile investments. New savings tools rolled out this year have been hugely popular, and we crossed over 1 million consumer savings goals. We made significant progress against our long-term strategic objectives in 2020, as ongoing consumer demand for digitally based experiences accelerated.

On Slide number 8, trends across each of the quadrants demonstrates the near-term result of the long-term planning and execution. EPS in the upper left improved throughout the year, reaching a record level in Q4, driven by a combination of core revenue growth and diversified sources of income. Tangible book value in the bottom right grew year-over-year and quarter-over-quarter to $36.05, as our earnings more than offset the CECL's day one impact of $2.70 and significant reserve build in the first quarter. Values, culture, and disciplined execution will continue to underpin our approach as we build upon this accelerating momentum in the years ahead.

And with that, I'm going to pass it to Jenn to go through all the detailed financial results.

Jennifer LaClair -- Chief Financial Officer

Thank you, JB, and good morning, everyone. I'd like to begin by thanking our Ally teammates for their consistent operating and financial performance throughout the many challenges of 2020. Their commitment to our values, hard work, and perseverance is reflected in our strong and accelerating financial trajectory.

Let's turn now to Slide 9. Net revenue of $6.7 billion for full year 2020 expanded for the sixth consecutive year, representing a 5% CAGR over this timeframe. The sustained top line trajectory reflects margin improvement across both sides of the balance sheet, driven by over a decade of customer growth and relationship deepening. Our balance sheet positioning and revenue momentum this year demonstrate our ability to navigate challenging environments and drive improved financial results in the years ahead.

Turning to Slide 10, we've included details on our balance sheet, reflecting three primary dynamics. First, asset expansion and diversification. We ended 2020 at $176 billion in assets, a $33 billion increase since 2014. Retail auto loan growth has outpaced the decline in lease exposure, reflecting our strategy to broaden our capabilities in distribution. Corporate finance has tripled in size to $6 billion through prudent entry into additional verticals, and we've grown capital efficient mortgage and investment securities portfolios and added Ally Lending. We expect continued organic loan growth and return optimization moving forward.

The second driver has been the transformation of our funding profile shown in the bottom left, where deposit growth and retention has increased stability and reduced cost of funds. Since 2014, our deposit portfolio has nearly doubled to $137 billion, now representing 85% of overall funding. As a result of higher cost legacy, unsecured debt has declined by 60%, and we've reduced reliance on other wholesale fundings, including securitizations, facilities, and other borrowings.

And third, optimization of retail auto portfolio yields, where we've consistently generated improved risk-adjusted returns through expanding dealer relationships and increased application flow. Full year new origination yields exceeded 7% for the third consecutive year, even as benchmark rates have declined 150 basis points to 200 basis points over the past two years. Our consistent pricing reflects the strength of the retail auto asset class and our leading competitive position. Across both sides of our balance sheet, we have reduced NIM volatility by managing to a relatively neutral interest rate risk management position, which is evidenced in stable full year net interest margin. From here, we expect sustained revenue and margin expansion, a key differentiator for Ally.

Let's turn to Slide 11 to review detailed results. I'll begin with significant items on the bottom of the page. Other revenue, including impacts related to an early pay down of FHLB debt, where again this quarter, we utilized surplus liquidity to accelerate cost of fund benefits. And gains related to corporate investments and our legacy mortgage portfolio sales executed in Q4. Noninterest expense included our contribution to the Ally Charitable Foundation and an auto legal settlement, that subject to court approval, will fully resolve an outstanding class action case described in our 10-K and 10-Q filings.

Moving to the top of the page, Q4 net financing revenue excluding OID was $1.312 billion, our highest quarterly results to date, increasing 9% linked quarter and 13% year-over-year, powered by steady loan and lease growth, stable earning asset yields, declining cost of funds, and proactive liability management as we reduced excess cash. Adjusted other revenue of $567 million reflected strong realized investment gains, robust mortgage fee income, and the significant items mentioned earlier. While we remain opportunistic generating investment gains, ongoing other revenue expansion will be sourced from steady growth across insurance, mortgage, invest in our SmartAuction platform. Provision expense of $102 million declined linked quarter and year-over-year, as consumer and commercial performance remained solid and reserves declined due to macroeconomic favorability.

Noninterest expense trends, excluding the one-time mentioned earlier, reflects ongoing business investments to drive long-term customer and revenue expansion. Q4 GAAP and adjusted EPS of $1.82 and $1.60 respectively reflects a strong finish to a challenging year, and are a direct reflection of our talented workforce, loyal customer relationships, and several years of diligent focus and execution, transforming our balance sheet.

Before moving on, I'll address full year 2020 noninterest expenses of $3.8 billion. The year-over-year increase reflects nearly $80 million of insurance business expansion, its variable commission and weather-related increases reflect growing written premium volume from prior years, a $150 million of investment supporting business growth, customer capabilities, technology enhancements in our growing brand, and a $173 million of significant one-time items covered earlier, and a goodwill impairment in Q2. Importantly, we will deliver positive operating leverage and efficiency improvement in 2021.

Let's turn to Slide 12. Net interest margin, excluding OID, of 2.92% improved 25 basis points linked quarter and 26 basis points year-over-year. Earning asset yields of 4.34% remains stable quarter-over-quarter, a trend we expect to persist as we patiently redeploy excess liquidity into our organic growth and balance sheet management. Our outlook for 2021 embeds assumptions for retail auto origination yields in the mid-6% range and a decline in used car values of 3% on a full year basis. Average earning assets of $178.5 billion expanded quarter-over-quarter among all loan and lease portfolios, except mortgage, where prepayment activity reflected persistently low rates. Notably, average commercial auto balances rose $1.2 billion quarter-over-quarter and a 11% increase from the trough in July, as auto inventory levels continue to build.

Cost of funds improved 27 basis points, the sixth consecutive quarter-over-quarter decline, reflecting improved deposit costs and ongoing wholesale funding optimization. $2.2 billion of unsecured debt matured in 2020 with a weighted average coupon of 6.6%, as we opportunistically issued $2.8 billion in new bonds at a blended rate of 3.1%, less than half the cost of the matured debt. Given strong deposit flows, we did not access ABS markets and reduced brokered deposits and FHLB borrowing levels. Stable asset yields, declining cost of funds, and liability management will contribute to ongoing NIM expansion in 2021 and beyond.

Detailed deposit trends are on Slide 13. Total deposits grew to a $137 billion, powered by $20.6 billion of retail growth, our highest annual growth ever. Existing customers drove over 50% of balanced growth, while retention of 96% remained industry-leading. Our 2.25 million customers grew 14% year-over-year, while deposit customers with an Ally Home or Ally Invest accounts expanded for the 15th consecutive quarter. The momentum generated by our customer-centric approach is reinforced in the accelerating trends across all our digital offerings. Over half our brokerage account openings and mortgage volumes are sourced from existing customers, reflecting the organic growth opportunities within Ally Bank.

Throughout the year, we rolled out new innovative digital tools aimed at helping customers' debt and achieve their financial goals. And we continue to receive several industry awards throughout the year, and we're pleased in Q4 to be named best online bank by Money Magazine for the eighth time in the past 10 years.

Turning to capital on Slide 14. Q4 CET1 of 10.6% reflected strong earnings and lower risk-weighted assets, stemming from lower commercial floorplan balances. Last week, we announced the Q1 common dividend of $0.19 per share and a share repurchase program of up to $1.6 billion for 2021. We're pleased to be able to resume buybacks. And while we await guidance from the Federal Reserve regarding activities beyond Q1, we remain confident in the positioning of our balance sheet, our proven approach to risk management, and our robust capital position. At these levels, we remain well above our 9% internal target, and have $3.7 billion in excess, above the 8% FED requirement. Capital deployment priorities remain centered around investing in the growth of our businesses, delivering innovative and differentiated products, and driving long-term shareholder value.

Turning to Slide 15, asset quality remained strong. While we observed an expected linked quarter seasonal uptick across our loss metrics, trends improved considerably versus prior year. Results were driven by broad-based consumer and commercial resilience, as consolidated NCOs of 0.67% declined 24 basis points year-over-year.

In the upper right, charge-offs of $198 million declined $92 million compared to prior year, driven by retail auto. In the bottom left, the Q4 retail auto net charge-off rate of 1.01% declined 48 basis points year-over-year, reflecting the combined impact of lower frequency and improved severity, as customer payment behavior remained solid and used car values remained elevated. In the bottom right, early and late-stage delinquencies remained strong, ending meaningfully below prior year levels. Taken together, credit trends reflect the high utility of auto, disciplined underwriting, effective servicing strategies, and a resilient consumer, benefiting from lower discretionary spend and government stimulus.

Let's turn to Slide 16 to review coverage and reserve details. Given favorable credit trends and improved macroeconomic indicators, consolidated coverage of 2.78% and retail auto reserves at 3.95% was modestly lower to end the year. Retail auto reserves of $2.9 billion remained well-positioned for elevated pandemic-related NCOs. Retail auto coverage remains 2.5 times higher than 2019 ending reserves and nearly 20% higher than CECL day one levels. Our baseline forecast assumes unemployment remains elevated throughout 2021, ending above 6%, and consistent with prior quarters, we continue to exclude any stimulus-related impacts. While we are encouraged by the underlying trends of our portfolios and confident in our ample reserves, we recognize the continued uncertainty driven by COVID-19.

On Slide 17, I'll review Auto segment highlights. Net financing revenue expanded year-over-year, reflecting growth in the retail margin and strong lease gains. Used car prices shown in the bottom right moderated throughout the quarter, but continued generating higher year-over-year gains per vehicle. Execution within our Auto reflects our diversified full-spectrum capabilities, expanded market reach, experienced underwriting, and growing use of technology across our products. The proven ability to meet and adapt to the needs of our dealers is reflected in our strong application flows, pricing trends, and overall improved risk-adjusted returns.

Detailed origination and asset trends are on Slide 18. Auto originations of $9.1 billion in the quarter increased $1 billion year-over-year and represented our highest Q4 in three years. We maintained a dynamic, disciplined approach to underwriting this year, evidenced by stable FICO and non-prime trends. In the bottom left, ending consumer assets grew year-over-year and sequentially, ending at $83.1 billion, driven by retail and lease expansion. On the bottom right, average commercial assets ended at $22.4 billion, up quarter-over-quarter, as inventory levels have gradually improved over the past five months.

Turning to insurance results on Slide 19, core pre-tax income of $72 million, increased $7 million linked quarter and declined $13 million year-over-year. Written premiums of $312 million declined seasonally linked quarter, while the year-over-year decline reflected stable F&I, but lower commercial activity resulting from lower floorplan. Notably, commercial volumes declined by less than half the rate of vehicle inventory, reflecting ongoing new business expansion across our growing dealer base. Overall, we were pleased with the resilience and countercyclical value of the insurance business throughout 2020, delivering core pre-tax income growth, fueled by record on premiums and strong realized investment gains.

Turning to Slide 20, Corporate Finance core income of $63 million grew $4 million quarter-over-quarter and $14 million year-over-year, reflecting expanding assets and steady credit performance. HFI-ending balances of $6 billion, increased linked quarter and year-over-year, as the base lending now comprises 50% of the portfolio compared to 43% a year ago and 25% in 2014. Unfunded commitments of $4.1 billion reflects our ability to expand amid a challenging backdrop. Portfolio metrics reinforced our continued prudent underwriting approach and operating execution.

Moving to Slide 21, mortgage pre-tax income of $7 million declined quarter-over-quarter, but increased year-over-year, reflecting strong gain on sale results, partly offset by the ongoing impact of elevated prepayment activity. Direct-to-consumer originations of $1.4 billion represented our strongest quarter since launching in 2016. The loan mortgage rate environment resulted in robust refinancing activity, accounting for 70% of Q4 volume. Our digital end-to-end offering continues to resonate with consumers. Over a half of originated volume comes from existing depositors. Average cycle times have continuously improved, ending the year in the 40-day to 45-day range, while our NPS scores in the upper 50s are industry-leading and reinforce the friction-less experience we're delivering.

I'll wrap up on Slide 23 with our financial outlook. We've continued to demonstrate the expanding earnings power as a franchise with significant opportunities ahead, assuming a gradually improving economic environment. As I mentioned at the start, our financial trajectory will be driven by embedded balance sheet tailwinds, ongoing pricing optimization within our established businesses, and organic growth across our expanded product offerings. ROTCE will grow to 12% in 2021 before expanding to mid-teens in 2022 and 2023. NIM expansion of over 3% will drive net financing revenue growth in the mid-teens year-over-year. Adjusting for significant items, other revenue will steadily grow, fueled by our broader set of consumer offerings and ongoing insurance expansion. And as a reminder, we embed modest investment gains in our outlook. These factors will drive PP&R expansion and positive operating leverage as revenue growth outpaces expenses. Based on pandemic-related uncertainty reflected in our reserves, we expect NCOs to peak in 2021, before stabilizing in 2022 and 2023.

I'll close by reiterating the gratitude and pride I have in our Ally teammates who drove our results and positioned us for success by doing it right for our customers, communities, and our shareholders.

And with that, I'll turn it back to JB.

Jeffrey J. Brown -- Chief Executive Officer

Thank you, Jenn. I'll wrap up with a few comments on Slide number 23. I want to thank my teammates for their tremendous efforts during 2020. The resolve they've shown in balancing a myriad of personal and family obligations while working from home and taking care of our customer serves as a testament to our ability to do it right, and that reinforces the pride I have in leading our Company. The troughs and transparency that exists inside Ally is simply energizing. To our customers and communities, our relentless work will continue as we preserve and build upon the trust and loyalty you continue to show in us. And regardless of challenges we may face in the weeks and months ahead, we will continue to lead with our values and focus on these consistent priorities as we continue to enhance long-term value for all of our stakeholders.

Daniel, that's, I think it for the prepared remarks, and we'll turn it to you for Q&A.

Daniel Eller -- Investor Relations

Thank you, JB. Operator, please begin the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Ryan Nash with Goldman Sachs. Your line is now open.

Ryan Nash -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone.

Jeffrey J. Brown -- Chief Executive Officer

Good morning.

Jennifer LaClair -- Chief Financial Officer

Good morning.

Ryan Nash -- Goldman Sachs -- Analyst

So, may be to just dig in a little bit more on the ROTCE progression. So, JB, Jenn, the Bank is clearly benefiting from the environment as well as investments that you've made in the business and bringing down funding costs, optimizing on the asset side. So, you may be just dig in a little bit more on the drivers of getting us to 15% returns. And I think more importantly, can you talk about the ability to sustain these returns, particularly as the interest rate environment may evolve over time, and what are some of the drivers to doing that?

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. I appreciate the question, Ryan. I'll jump in and JB may want to add. With the progression to the mid-teens ROTCE, I think you described it really well, it will be revenue-driven positive operating leverage. I just mentioned the NII trajectory next year, which will be progressing into the mid-teens, coupled with the fact that we'll continue to see other revenue expand over time minus some of those one-time. So, when you wrap that all up, we're expecting total revenue next year to be around 9% or so. And so, really nice positive operating leverage driven by that revenue growth. Coupled with the fact that on the credit side, we do expect that to migrate more toward normalized levels as we exit '21 and into '22 and '23. So, those are some of the big dynamics there.

I would absolutely expect that the 15% is sustainable and I think that's due to all of the drivers that we kind of just described this morning around consistent customer growth, continued value-add across every one of our businesses. We don't see any signs of stopping in the Auto segment, continuing to groom relationships, grow relationships, deals per relationship, and just our positioning in the market couldn't be any better than it is today, and we don't see any sign of that stopping over the next several years.

You slide over to the deposit business, and you look at the 10 years of sustained customer growth, and really the transition from customers that were chasing price to really know customers that have bought in to the digital transformation, COVID has certainly helped with that, but I do think that is a permanent shift in customer, just propensity to purchase digitally. And with cash-rich balance sheets across direct banks as well as the entire industry, I don't think we're going to see a lot of appetite around increased pricing on the deposit side.

And then last, but certainly not least, just the rapid scaling that we've seen in our newer customer segments. Every one of our newer customer segments is up 70% plus this quarter. And you just continue to see that added value and the added ability for us to diversify our revenue into these higher growth return products, whether that's Ally Lending, or Invest product, as well as mortgage as well. So, maybe a long-winded answer, but bottom line here is really confident in getting to that 15% short order and sustaining it over the long term.

Ryan Nash -- Goldman Sachs -- Analyst

Got it. Thanks for all the color. And maybe if I could dig in a little bit further on the credit expectation. So, Jenn, a couple of things. I think you mentioned 3% decline in used car prices, unemployment ending about 6%, and I also think you mentioned that charge-offs are going to peak in 2021. So, can you just give us a little bit more color on where you see charge-offs headed? And then second, I think you said that you think losses are returning to more normal levels in 2022 and 2023. What is embedded in the 12% reserve -- in the 12% plus returns in terms of where the reserve is headed? Is there any assumptions of reserve releases? And how long would you expect until we actually get back to that pre-COVID level on the reserve front?

Jennifer LaClair -- Chief Financial Officer

Yeah. So, Ryan, maybe let me start with some of the assumptions around reserves, and then I'll get to the NCO trajectory, but embedded in our reserves and you are listening really well, you pretty much captured it, we have a pretty adverse macroeconomic scenario embedded in our modeling. So we used November forecast. We're exiting 2020 at about 8% unemployment rate, migrates down to just about 6% at the end of this year. And because we have a short RNS forecast, we've revert to a mean that's over 6.5% in unemployment. So there is definitely some adversity built into that macroeconomic forecast.

I'll also remind you that we have not built any stimulus benefits into our reserve trajectory. So, you think about stimulus that has already been rolled out, that new stimulus potentially on the horizon, as well as the fact that consumers spending has dropped and we're seeing savings rates that's really all-time high -- are highest level we've seen in recent future. So, embedded in our reserves is a lot of conservative assumptions. And so I do think depending on macros, depending on the continued performance of the consumer, there could be some upside as we continue to roll through 2021. So, that's some context around the reserves. Embedded in those reserves, we have NCOs really starting to accelerate in the first quarter, second quarter of this year, and peaking in Q3 and Q4 before returning to more normalized levels into '22 and '23.

So, bottom line here is, we are well reserved. We've taken the pain through the income statement in 2020, could potentially be some upside as you think about macro outperformance and consumer outperformance. And then last, but not least, we do not model any kind of reserve releases in our forecast. The reserve level will migrate down as we run through NCOs, assuming that the projections play out as I just described.

Ryan Nash -- Goldman Sachs -- Analyst

Got it. Thanks for all the color.

Jennifer LaClair -- Chief Financial Officer

Sure. Thank you, Ryan.

Operator

Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. And that set of answers actually answers a lot of the questions, but maybe we could drill down a little bit into -- on the deposit side or the funding side. I mean, one of the things that we've talked about over the years is both optimizing your mix of funding overall, and then you're kind of deposit pricing, and some of the comments that you made, sounded like you think that's relatively near given the liquidity at yourselves and some of your peers. Could you just talk about the opportunities there and what that could mean to your cost of funds?

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. Thank you for the question, Moshe. So, a couple of things just first on the cost of funds trajectory. I think this quarter is a really nice reflection of what we're expecting to see as we continue to roll through '21 and '22, which is that cost of funds will migrate down. It reflects a couple of things. The full run rate impact of the OSA reductions this year, the CD repricing that will continue throughout 2021 and 2022. You think about CDs are rolling off at 2% and rolling back on at material levels under 1%.

And then to your point on other funding sources, the excess cash we have on the asset side of the balance sheet will be used in part to kind of replace FHLB, our broker deposits, we've terminated our demand notes program, and we haven't been active in the ABS markets either. So, we see other sources of funding rolling down, at the same time, we continue to see overall deposit growth and pricing move down as well.

So, hopefully that gives you a bit of color, Moshe, just on what we're expecting. But I think this quarter kind of really summarizes it perfectly and we'd expect that trajectory to continue.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. And then I think the -- you made a very strong point about the impact of the margin on revenue growth in 2021, but it does sound like there is some of that that extends kind of beyond and provides further lift even if there are some elements of current profitability that are kind of better than normal.

Jennifer LaClair -- Chief Financial Officer

Yeah, absolutely, Moshe. This is a trend that we'd expect over the next several quarters. And then in your first question, you did kind of allude to the market pricing. I mean, we have cash-rich balance sheets across the direct banks, liability stocks have been optimized. And so there is not -- I don't believe there is a whole lot of appetite across the industry to see pricing increase in '21 or beyond. And of course, that's the dynamic around loan growth as well. But we feel confident in our pricing and the ability to continue to take down funding costs beyond '21.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks.

Jennifer LaClair -- Chief Financial Officer

Thank you, Moshe.

Operator

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley. Your line is now open.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Jeffrey J. Brown -- Chief Executive Officer

Good morning.

Jennifer LaClair -- Chief Financial Officer

Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. One quick follow-up, and then a separate question. But the rate environment that you're looking for, could you just help us understand just using the forward curve is what is embedded in your outlook, and if rates move higher, does that materially change your thoughts around NIM?

Jennifer LaClair -- Chief Financial Officer

Yeah, Betsy, a couple of things. So, we're not embedding any rate increases into our projections right now. The interesting thing is, if you do consider a rising -- a more rapidly rising rate environment, we're really confident in continuing to hit these higher NIM levels, and that's -- all of the dynamics that we have on pricing in Auto on the asset side as well as in deposits, we think will be persistent in almost any rate environment. I mean, you never want to say that a 100%, but as we look at a variety of different rate forecast, we continue to see that NIM rolling through just because of the strength of the pricing we have on both sides of the balance sheet.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. So, you're saying that if the short-end starts moving up that you can maintain the spread relative to what you're getting on the Auto side?

Jennifer LaClair -- Chief Financial Officer

Yeah, I mean, I think if we do see rates rise, I think it will be a positive on the asset side. If you think about LIBOR-based commercial floor plan, and I think if anything -- if you see any interest rate increases across the curve, that's only a net positive for some of our longer duration assets like investment securities or auto book, mortgage, etc.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. And then, just separately on loan demand and the portfolio, and how it's been migrating, maybe if you could give us some sense on what you're seeing on the ground, demand for both used and new, asking the question because one of the pushbacks I get on [Indecipherable] call on Ally is, well, eventually everyone's going to have one, two or three cars whatever they need. So, shouldn't loan demand pull back? So, a little color on that.

And if you could give us a sense as to how the portfolio has been migrating from a credit perspective in the various buckets, prime, near prime, subprime. I asked that question because the other pushback I get is that used car prices are so strong, that's why credit doing so well. When used car prices start to stabilize or come down slightly year-on-year, you're going to see the credit quality come through, and just wanted to get your sense as to what you're seeing there so we can better address those questions we're getting from investors. Thanks.

Jennifer LaClair -- Chief Financial Officer

Okay. Sure. Thanks, Betsy. A lot in there. Let me try to tackle it one at a time. I mean, I think on Auto, what I direct you to is the performance, and our exit run rate in terms of volumes, in terms of pricing continues to persist, and we really don't see that stopping, and a couple of net dynamics there. One is, certainly COVID is helping. We've seen a shift from services to durables, and the whole environment around COVID impact on appetite for rideshare or mass transit has obviously really spurred demand for personal vehicle ownership. So, that is a net plus. But I will say just the resiliency of consumer balance sheet, the high savings rates, above and beyond that dynamic there is demand that has persisted kind of pretty much off the chart.

The second thing that I would say is, if you look at just this market, it's a very large and fragmented market and we have differentiated capabilities and we see in kind of any environment the ability to continue to grow dealers, dealer relationships, increase apps per dealer, and continue to persist in terms of both originations as well as pricing.

And then lastly, keep in mind our forecast -- our forecast in '21 and beyond does not embed a whole lot of growth. I mean, we have, I think achievable assumptions in our guide. We're guiding toward the mid 35 -- or $35 billion in originations, and we're assuming that pricing actually comes down about 50 basis points. So, I really think there is strong demand in this environment. I think there is persistent opportunity for us because of our model. And last, but not least, the guide does not have really aggressive assumptions.

And then on your questions on credit, Betsy, just a couple of things that I'd say there. I'd say the entire book is really performing much better than expected, and that's kind of all cycle down all areas of the book. We're not seeing any kind of issues in particular customer segments. It's really been broad-based outperformance.

And on your question on used vehicle prices, losses will be reflective of frequency as well as severity. And if you look at frequency, you will see delinquencies across 30-plus [Phonetic] down over 1%, 50-plus [Phonetic] continues to come down as well. And so, frequency metrics are also trending very strong. And then on the severity, we'll see. I mean, we are expecting a decline of about 3% new vehicle prices in 2021. I think there is a bull case around outperforming that. Most of it is in -- the decline is in the back half of '21. But as I said, if there is persistent demand for new and used, I think we could outperform that. But that 3% is again built into the guide. And as I described in response to Ryan's question, there is a lot of moving pieces in parts around credit, but I'm not overly worried about the very side of it.

Betsy Graseck -- Morgan Stanley -- Analyst

So, then we're looking at the net charge-offs that should come with what you're baking in for unemployment and the 3% down in Auto, does that get us to kind of a normalized loss rate of 1.3% to 1.6% or is that kind of a decent range, or do you have a different outcome?

Jennifer LaClair -- Chief Financial Officer

Yeah. So, this year, we are expecting NCOs -- or we've modeled NCOs to increase above that level. Our reserve is at 3.95%. As I mentioned earlier, we're expecting NCOs to really start accelerating more reflective of frequency versus severity here in the first half, and really peaking in Q3 and Q4. And Betsy, with the 3.95% reserve level that those NCOs are higher than that 1.3% number. Now as we exit '21, we would absolutely expect NCOs to migrate back into that more normalized range of kind of 1.3% to 1.6% that you've seen historically. But we do have those pandemic-related NCOs accelerating here in '21 and potentially have room to outperform that.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it, OK. Thank you. I appreciate the color.

Jennifer LaClair -- Chief Financial Officer

Thank you so much, Betsy.

Operator

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

Sanjay Sakhrani -- KBW -- Analyst

Thanks, good morning. I wanted to follow-up on some of the questions and comments before. Maybe just focusing on the auto yields, those have been pretty resilient, suggesting it could be worse, I guess. Maybe you guys could talk about the competition there and the environment. Is there something different about this environment, where you're not seeing a lot of competitive pressure on those yields? And then maybe just broadly, in terms of thinking about the risks to the targets that you guys have provided, taking the economy aside, what are those risks?

Jennifer LaClair -- Chief Financial Officer

Okay. So a couple of things there just in terms of auto yields and competition. I mean, Sanjay, as you know, this is always a really competitive space, and I think, everyone is seeing kind of the performance of this asset class through 2020, and it's been one of the stronger across the consumers. So, competition is always strong. I think we could see some more competition heading throughout 2021 year. But in the belly of the curve where we're playing, we continue to see a lot of opportunity to grow and to put price in the market. But we are mindful of that and that's why we have baked in kind of a 50 basis point reduction in retail auto origination pricing this year. When I talked to the team heading here in January, I think they're really pleased with what they saw exiting '20, and even more pleased with what they're seeing at the outset here in 2021.

And then, second, just with inventory levels continuing to be pressured and really pressured here starting the first quarter because of the strong demand I described, I think used vehicle pricing and pricing overall will remain strong. And then, sorry...

Sanjay Sakhrani -- KBW -- Analyst

On the risks.

Jennifer LaClair -- Chief Financial Officer

On the risks, OK, risks to the forecast. Okay. Sanjay, I think if we reflect on 2020, I think if we learned anything is that things can change very rapidly. And so what I would say the big risk for us is just to be mindful of this environment. I mean, we have a lot of changing political landscape, changes potentially to the tax rate, to regulation, to consumer spend, consumer behavior. I mean, I think we felt 2020 was quite a roller coaster ride and I think we're incredibly well-positioned to navigate any environment, and our performance this year demonstrated that. But we're mindful of potential volatility to come, and that would be the biggest risk if we didn't see anything. But I think, as I reflect great performance this year, really well-positioned for next year, and a variety of rate environments, I think we've established a strong reserve. So, feel really good about where we are, but just want to be mindful of the environment.

Sanjay Sakhrani -- KBW -- Analyst

I think you guys have done a great job. Just a follow-up, M&A. Just curious JB, and any thoughts on where there might be opportunities if there are opportunities? I know consumer lending has been a focus at points in time. I mean, is that something you're looking to get larger? Thanks.

Jeffrey J. Brown -- Chief Executive Officer

Yeah, I mean, Sanjay, I'd say we really like the position of the existing businesses and the state of the Company right now. And obviously, Jenn and I announced -- with our Board announced the large capital return program. So I think in the short-term, we're more kind of hunkered down, focused on scaling our existing businesses and the newer businesses. Longer-term, I think as we've said for quite some time, I mean the unsecured space we think fits well with the overall consumer position of Ally. We like the asset class. We think it can generate the right types of returns. But we got to be smart on that. And so, I think in the near term, it's more kind of head down, focus on what we have in-house today. But you always sort of stay open to things to come. So nothing [Indecipherable].

Sanjay Sakhrani -- KBW -- Analyst

Thank you.

Jeffrey J. Brown -- Chief Executive Officer

Thanks, Sanjay.

Jennifer LaClair -- Chief Financial Officer

Thanks, Sanjay.

Operator

Thank you. Our next question comes from Bill Carcache with Wolfe Research. Your line is now open.

Bill Carcache -- Wolfe Research -- Analyst

Thank you. Good morning, everyone. JB, I'm sorry if I missed this in the call, but I had a big picture question for you. Ally's net interest margin performance during the rate hike cycle that started in late 2015, and what we've seen from you guys so far in this reserve environment along with the strong credit performance, positive operating leverage and the ROTCE trajectory that you guys have laid out, it feels like we're setting up for the investment community to gain greater comfort with the -- through the cycle performance of auto as an asset class. So, the ability for you guys to deliver on the guidance you laid out is obviously critical, but could you kind of characterize that as beatable or aspirational? Maybe just give us a sense of how much conviction you guys have. Just overall high level thoughts would be helpful.

Jeffrey J. Brown -- Chief Executive Officer

Sure, Bill. Thanks for the question. And obviously, Jenn can go through any of the details on it. But I think, inside the house, we have this kind of pound to outperform mentality that exist. So, I think, Jenn has highlighted what's embedded in the forecast. I think obviously we put the 12-plus, and that's our focus really, continue driving strong disciplined execution. And I think what you're really starting to see come through now in the results is a function of the past several years of work and very disciplined execution, the businesses scaling really strong position. So, we feel really good about the state of the Company now and the sustainability of earnings. And certainly as you pointed out, the margin is going to be a big component of that. And Jenn hit all the highlights of several years of kind of 7% plus yields on the asset side, and you're starting to still see the book migrate up to these new origination yields at a time when deposit costs and funding costs overall continue to come down.

And Jenn and her team -- I just can't say it enough what our treasury team and Jenn has been doing to continue optimizing the liability structure. I mean, we've been very aggressive there past couple of quarters, obviously in trades we've done on the FHLB side, which just further gives us confidence and the strength going forward. So, I mean it's been -- it's really been fun and energizing to see the Company starting to really strut its stuff yet, but we've got a high degree of confidence in kind of what we're going to be able to deliver going forward.

Jenn, obviously, you've got the details.

Jennifer LaClair -- Chief Financial Officer

JB, I think you summarized that extremely well. And maybe I'll just offer two points to add on. One is, Bill, on the pricing side, a lot of that as JB just summarized is already embedded, right? So, we've got front book, back book, repricing dynamics in retail auto, and there is kind of no stopping that. And similarly on the deposit side, the trajectory to come really reflects that robust positioning that we have across the entire liability stuff. So, a lot of that is kind of hard-coded into our metrics in our forecast.

And then on the reserve, I think I mentioned in prior question just -- there's a lot of assumptions in there that are fairly adverse. And so our view today is that we've taken the pain, our entire reserves have peaked, and so potentially there could be some upside there. And then to your question around kind of through the cycle performance on Auto, we're not projecting any change to kind of our day one CECL assumptions as reserves normalize. And so if we continue outperform at this level, potentially there could be some kind of just rerisk rating of the entire asset class, again, not embedded in the forecast.

Bill Carcache -- Wolfe Research -- Analyst

Got it. Thanks, Jenn. Thanks, JB. That's very helpful. Separately, there's been a lot of focus on dealer floorplan levels taking longer to return back to historical levels, and just hoping that you could comment on how you guys are thinking about the risk that dealers will be running with less inventory than they have historically or do we revert?

Jeffrey J. Brown -- Chief Executive Officer

Yeah. Bill, I guess our base case sort of calls for a slow reversion to more normalized levels. And obviously, you'll see some offset in our cash balance positions when that starts to happen. But I think the real reality is it's been much slower than the industry expected to see. Now obviously, that's impacted used car pricing and used car strength and the used car market overall. So, while you don't have as many new cars on the lot, the demand by consumers still remains, it's still very strong, and so they continue to shift in use.

So, I think to our base forecast sort of calls for that slow factory ramp back up, more new cars on lot, and that creating a little bit of the more softer used car pricing that used car prices that Jenn alluded to, but, I mean we're still ways away. I mean, while we did see some modest improvement, I think under $1 billion quarter-over-quarter, we're a long way from kind of the $30 billion plus levels that we would have expected in a normal environment.

Bill Carcache -- Wolfe Research -- Analyst

Got it. Thank you for taking my questions.

Jeffrey J. Brown -- Chief Executive Officer

Thank you, Bill.

Jennifer LaClair -- Chief Financial Officer

Thank you, Bill.

Operator

Thank you. Our next question comes from Rick Shane with J.P. Morgan. Your line is now open.

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

Hey, guys, thanks for taking my question. When we look at the day one reserve level to today, there's basically a 60 basis point addition. When you think about the duration of the loans, that equates to about 25 basis points a year on an annualized charge-off NCO rate. Given that there has been substantial amortization in the portfolio since we've entered the COVID scenario, cumulative losses are way below our original expectations. And at this point, essentially about 25% of the book has been underwritten in a post COVID environment. Is there a huge disconnect between the macro assumptions that you guys are using to set the CECL reserve and the actual sort of bottoms up experience that you're really seeing in the portfolio?

Jennifer LaClair -- Chief Financial Officer

Yeah, Rick. I appreciate your very well done summary there. Absolutely, I mean, we are seeing a disconnect across macroeconomic factors and the servicing performance, whether you look at 30-plus, 60-plus, or flow to loss metrics. That being said, we continue to operate in an environment of uncertainty. And so, as I described earlier, we've been prudent and balanced around setting a reserve using historical correlations to the macros and not embedding a lot of stimulus.

To your point, I do think there could be some upside should, A, the macros continue to outperform, because they have been outperforming, and B, if consumers continue to be as resilient as they had proven to be through 2020. And that's some of the upside, not only on the reserves, but also in the NCO trajectory I described earlier.

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

Great. Yeah, I like the terminology of correlation to macro because that's a lot of what we try to do, and I'll agree with you, it has not been nearly as predictive as it has been in the past. Anyway, thank you guys very much.

Jennifer LaClair -- Chief Financial Officer

Thank you.

Jeffrey J. Brown -- Chief Executive Officer

Thanks, Rick.

Daniel Eller -- Investor Relations

Thank you everyone for joining. That concludes the Q&A session. Operator, I'll turn it back over to you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Daniel Eller -- Investor Relations

Jeffrey J. Brown -- Chief Executive Officer

Jennifer LaClair -- Chief Financial Officer

Ryan Nash -- Goldman Sachs -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

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

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