Ally Financial Inc. (NYSE:ALLY) Q1 2024 Earnings Call Transcript

Ally Financial Inc. (NYSE:ALLY) Q1 2024 Earnings Call Transcript April 18, 2024

Ally Financial Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Ally Financial First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sean Leary, Head of Investor Relations. Please go ahead.

Sean Leary: Thank you, Elizabeth. Good morning, and welcome to Ally Financial’s first quarter 2024 earnings call. This morning, our Interim CEO, Doug Timmerman; and our CFO, Russ Hutchinson, will review Ally’s results before taking questions. The presentation we’ll reference can be found in the Investor Relations section of our website, ally.com. Forward-looking statements and risk factor language governing today’s call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slide 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I’ll turn the call over to Doug.

Doug Timmerman: Thank you, Sean. Good morning, everyone, and thank you for joining the call. I’ll start on Page 4. Before we get into the quarter, I want to comment on our CEO transition. As we announced last month, Michael Rhodes will be taking over as CEO on April 29. I’ve been fortunate to spend time with Michael throughout the process, and I’m certain he is the right person to lead Ally. He respects what we’ve built and his deep banking experience based on a natural fit to continue advancing Ally’s businesses. On behalf of myself and the entire leadership team, we are thrilled to welcome Michael to Ally in a few weeks. I’d also like to say it’s been an absolute privilege for me to serve as the interim CEO these past few months.

I’ve been with Ally for over 30 years and the things that have always energized me the most are our people and culture. At Ally, the culture runs deep and it revolves around our employees, customers and communities. It starts and stops with our 11,000 associates and very importantly to my teammates, thank you for your support, hard work and dedication and, of course, caring for our customers. I firmly believe when you take care of your people, they take care of everything else, including our customers and communities. In the first quarter, we were once again named on Fortune 100’s Best Companies to Work For List. For us, it’s never about awards, but it’s an achievement we can be proud of. What I’m most proud of are the employee survey results.

89% of employees said Ally is a great place to work. 93% of employees felt good about the way Ally contributes to the community. And the staff that most resonated with me was that more than 90% of employees were proud to tell others they are part of Ally. Creating an engaged workforce that embraces our Do It Right approach is essential to our business and our growing customer base. And as we continue to navigate a fluid environment, we’ll continue leaning our culture, and lead core values to guide our actions. With that, let’s turn to Page number 5 and get into the results. First quarter adjusted EPS were $0.45, a revenue of $2 billion reflects solid operational execution as our teammates remain focused on priorities that are big enough to matter and drive solid returns.

Net interest margin of 3.16% was again pressured by rising rates. However, we’ve now raised an inflection point and expect NIM expansion beginning in the second quarter. Before discussing operational results, I want to hit a few notable items in the first quarter. In March, we successfully closed on the sale of Ally Lending, which generated capital and allows us to better serve our dealer and consumer customers. We also tapped the securitization market to deconsolidated retail auto loans from the balance sheet, which created incremental capital and generated a nice earnings benefit within the period. Strong investor interest and the earnings benefit created by this transaction are another validation the loans we originate have attractive returns.

And finally, we recognized an incremental $10 million of expense from a revised FDIC special assessment, which was not included in core results. Moving to operational results in dealer financial services, within auto, we decisioned a record 3.8 million applications and booked nearly $10 billion of originations. Retail auto originations had an average yield of 10.92% while 40% of originations came from our highest quality credit tier. First quarter net charge-offs of retail auto were 227 basis points, in line with the guidance we gave about a month ago. Insurance earned premiums of $349 million were also a record, and we see continued momentum as we grow OEM partnerships and continue leveraging our expansive auto finance dealer network. Turning to Ally Bank, deposits continue to be a source of strength for Ally.

We grew deposits $2.9 billion in the quarter, while adding more than 100,000 customers. Our deposit franchise was established 15 years ago and now serves more than 3 million customers, provides stable and efficient funding and makes Ally a structurally more profitable company. Ally Credit Card is performing in line with expectations. As we’ve mentioned, losses will be elevated near-term. However, we remain encouraged by its long-term compelling return profile. Corporate finance continued to drive strong financial results and next month, we’ll celebrate its 25th anniversary. The business generated a 31% ROE in the first quarter, and our $10 billion portfolio remains historically strong from a credit standpoint. Let’s turn to Page number 6 to talk about Ally’s market-leading franchises.

Last week marked 10 years of being a publicly traded company and the transformation since that time has been remarkable. What began as an auto finance captive has now made up of 2 market-leading franchises, a dealer-centric and diversified auto finance provider and the largest all-digital direct U.S. bank with more than 3 million customers and $145 billion of retail deposits. Our Dealer Financial Services platform revolves around the dealer, deepening those relationships and providing a comprehensive value proposition to help grow their businesses. We have continued to evolve the business to find new ways to help our dealer customers while also optimizing risk-adjusted returns for Ally. Over the past 10 years, Ally Bank has built on its reputation as the leading, innovative digital bank.

We pride ourselves on providing best-in-class customer experiences and a strong value proposition that extends beyond rates. And our deposits franchise has been the key driver for customer acquisition and engagement. We have expanded our products and features to deepen customer relationships, including Ally Home and Ally Invest; and Credit Card and Corporate Finance are businesses that diversify revenue and improve our consolidated profitability. Both dealer financial services and Ally Bank have scaled, lead in the respective markets and position Ally for profitable growth in the years ahead. And with that, I’d like to turn it over to Russ to cover detailed financial results.

Russ Hutchinson: Thank you, Doug. Good morning, everyone. I’ll begin on Slide 7. In the first quarter, net financing revenue, excluding OID, of $1.5 billion is down versus prior periods, driven by higher funding costs, partially offset by strong originated yields. Increasing funding costs have been a persistent headwind since the tightening cycle began, but we’ve reached an inflection point as rates have stabilized. Continued strength in originated yields in the auto business has positioned the balance sheet for NIM expansion beginning in the second quarter. We’ll discuss asset and liability dynamics that are driving our NIM expansion in a few slides. Adjusted other revenue of $519 million is up from prior periods, driven by continued momentum in diversified fee revenue, including insurance, as higher vehicle inventory balances drove higher earned premiums.

We continue to see expanding other revenue driven by strength in insurance and fee revenue streams in auto, including our smart auction and pass-through programs. Insurance, smart auction and our pass-through programs are highly valued by our dealers, and they drive capital-efficient revenue for Ally. Provision expense of $507 million increased from prior year and was down on a linked quarter basis. Credit performance in the quarter was in line with our expectations. Retail auto NCOs came in around the middle of our guide that we provided at the conference last month. Losses within the quarter were impacted by softer used values throughout much of the quarter, but we did see stability in March and are exiting the first quarter flat versus December.

I’ll cover retail auto credit in more detail shortly. As Doug mentioned, we executed another loan sale via the securitization market, which drove a $15 million earnings benefit in the quarter that was realized through the provision expense line. We deconsolidated $1.1 billion of retail auto loans originated predominantly in 2023, with yields below our average originated yield for the year. Investors’ strong interest in our loans and the $15 million earnings benefit we realized demonstrate the attractive return profile in a dynamic environment. Adjusted noninterest expense of $1.3 billion was up year-over-year, primarily driven by continued growth in the insurance business. Controllable expenses, which exclude insurance losses, commissions and FDIC fees were down 1% year-over-year.

Tax expense of $14 million resulted in an effective tax rate of 8%, which is lower than our guide as we continue to benefit from strong EV lease originations. GAAP and adjusted EPS for the quarter were $0.42 and $0.45, respectively. Moving to Slide 8, net interest margin excluding OID, of 3.16% decreased four basis points quarter-over-quarter and was slightly above the high end of guidance we provided at an investor conference last month. Earning asset yields expanded modestly quarter-over-quarter, while funding costs increased by nine basis points. As I mentioned earlier, margin has been pressured by increasing funding costs throughout the tightening cycle, but we’ve positioned the balance sheet for NIM expansion from here. Strength in fixed rate asset pricing, particularly retail auto loans with originated yields at 10.9%, will continue to drive earning asset yields higher as our portfolio naturally turns over.

We expect earning assets to be flat over the medium term, but favorable mix dynamics will continue to drive asset yields higher as lower yielding mortgages and securities are replaced by higher-yielding auto, corporate finance and credit card loans. Turning to liabilities, cost of funds moved up within the quarter, driven primarily by higher deposit costs. We moved our OSA rate in mid-December, so our 1Q results reflect a full quarter at the peak rate, and we continue to see CD portfolio yields move slightly higher as expected. Within the quarter, we took meaningful actions to reduce deposit pricing across CDs and our $100 billion liquid savings portfolio. We’ve been delighted with the trends we’ve seen in deposits, which enabled us to move meaningfully well in advance of Fed rate cuts.

Strength in retail auto yields, favorable asset mix and now having moved past the peak in retail deposit costs, we are confident in NIM expansion starting in the second quarter. Let’s turn to Page 9 and talk about the auto franchise. Our model is simple. We help our dealers sell as many cars and trucks as possible and encourage our dealers to send us all of their application volume. We leverage our differentiated go-to-market approach, coupling high-tech and high-touch to earn their partnership. 22,000 dealer partners delivered 13.8 million applications last year, and that momentum has continued in 2024. This quarter, we saw 3.8 million applications, our best quarter ever and resulted in $9.8 billion of consumer volume within the quarter.

Strength in application flow enabled us to be dynamic in what we originate. We shifted our credit mix in April of 2023 and since that time, more than 40% of our originations have been in our highest credit year. We’ve now originated over 10% yields for five consecutive quarters that creates momentum, which I will cover on the next page. Let’s turn to Slide 10 to discuss retail auto portfolio yields in more detail. The current yield on the total retail auto portfolio is just over 9%. While we continue to originate loans at close to 11% each quarter, as older vintages mature and are replaced with new origination, the portfolio yield will continue to migrate higher. Given the natural liability-sensitive nature of our balance sheet, we consistently utilized pay-fixed hedges tied to retail auto loans to reduce exposure to rising rates.

These hedges are serving as an effective bridge while our retail auto loan portfolio is repricing higher over time. We manage the hedge position dynamically, but currently expect it to amortize down over time, which means its contribution to NIM will continue to decline. The natural repricing momentum created by strong originated yields will continue to outpace a declining hedge contribution, resulting in a total portfolio yield that we expect to increase to 9.5% by year-end and continue to migrate towards originated yields over time. This momentum coupled with deposit costs that at peak position Ally for NIM expansion without the benefit of Fed rate cuts. The other dynamic influencing portfolio yield is origination mix. As we covered on the prior slide, we are consistently originating more than 40% of our consumer volume in our highest credit tier.

Historically, that tier has accounted for just under 30% of total originations. Over time, we do expect to migrate closer to our historical origination mix. For context, a shift to our historical mix would add up to 100 basis points of originated yield today. With 10.9% yields on originations that skew heavily towards our S-tier, we are pleased with the risk-adjusted yields we’re getting today and are not assuming any significant shift over the next few quarters. But over time, we would anticipate a gradual migration closer to historical mix, which provides yet another yield tailwind going forward that will help offset an eventual decline in benchmark rates. Let’s move to Slide 11 to talk about the strength of the deposits franchise. Ally Bank was launched 15 years ago and has evolved into the largest all-digital direct bank in the U.S., serving more than 3 million customers.

We have been intentional about creating a comprehensive value proposition that goes beyond consistently competitive range. We offer best-in-class customer service and digital experiences and over time, added features and products that are important for our customers, including how I invest, home and credit card, and we continue to serve as relentless allies to our customers with high levels of service through online, mobile, text and telephone as well as a consumer-friendly approach to fees, including leading the way on overdraft elimination. This approach has led to 95% plus customer retention rates, 90% plus satisfaction scores, favorable NPS and strong balance trends across every vintage inception of the bank. And while we do not focus on accolades, we do think the countless awards received over the last 15 years validates the strength of the brand and the bank.

The 15-year journey led to exceptionally strong performance over the tightening cycle and puts Ally in a position of strength moving forward. We have consistently grown deposits and seen record customer acquisition without being a top payer since the Fed began tightening. As we sit today, we’re core funded with 90% of our liability stack in the form of deposits, and we expect earning assets to be relatively flat over the next few years, which results in less need for significant deposit growth going forward. The combination of a great brand and comprehensive value proposition enabled us to lag competition from a pricing perspective on the way up and positions us to lead on the way down. We took significant pricing actions in the quarter while maintaining our commitment to offering our customers attractive deposit rates and a compelling overall experience.

We reduced rates 75 basis points on our most popular CD term, 15 basis points on our money market account and 10 basis points on an $84 billion savings product. In terms of deposit flows, we saw nearly $3 billion of growth within the quarter while adding more than 100,000 customers. Growth within the quarter was favorable to our expectations and positions us well for a seasonal tax outflow in the second quarter. We expect deposit balances to decline in 2Q as we typically see outflows from existing customers related to tax payments. Given outperformance in 1Q and our fully funded flat balance sheet, we’re not expecting to drive growth to offset seasonal taxes like we have in prior years. We do expect growth on a full year basis, but less than what we delivered in 2023.

Turning to Page 12. CET1 of 9.4% increased quarter-over-quarter. At current levels, we exceed our 7% regulatory CET1 operating minimum by $3.8 billion. We recently submitted our capital plan as we are scoped into CCAR for 2024, and we’ll get an updated view of our SCB later this year. Within the quarter, we closed on the sale of Ally Lending generating a 15 basis point CET1 benefit and executed another retail auto loan sale generating 6 basis points of CET1. The loan sale reflected strong investor interest in our loans and drove a $15 million pre-tax earnings benefit while creating capital and generating servicing income going forward. We faced in another quarter of the capital impact from the transition to CECL, which was worth 18 basis points in the quarter, which was more than offset by the sale of Ally Lending and the retail auto loan sale.

One more phase-in remains with total impact fully phased in by 1Q 2025. We recently announced our quarterly dividend of $0.30, which remained flat to prior quarter. We remain committed to acting on attractive opportunities to create excess capital to invest in our highest returning businesses and driving tangible book value per share growth over time. Let’s turn to Slide 13 to review asset quality trends. The consolidated net charge-off rate of 155 basis points reflects performance in line with expectations. Net charge-offs were down quarter-over-quarter as discrete losses in corporate finance and commercial auto in the prior period did not repeat. Retail auto net charge-offs of 227 basis points were in line with expectations. In the bottom right, 30 and 60-day retail auto loan delinquencies reflect seasonal trends.

The year-over-year increase in 30-day delinquencies has moderated for the fifth consecutive quarter and give us confidence that delinquencies are at or near peak on a seasonally adjusted basis. Moving to Slide 14. Consolidated coverage remains steady at 2.57%. Retail auto coverage of 3.65% was unchanged from the prior quarter, while allowance was down $32 million driven by lower balances. We maintained robust retail auto coverage level at 10% above CECL Day-1, partly driven by portfolio mix as we’ve shifted into more profitable volume over time. Assuming macro variables remain consistent, we’re not anticipating much change in the retail auto coverage rate over the medium-term. While the retail auto coverage rate is well above CECL Day-1 levels, our mid-teens ROE guidance does not assume any reductions in coverage from here.

As a reminder, our CECL reserving process has a 12-month reasonable and supportable forecast, which assumes unemployment increasing to 4.1% later this year, and we assumed gradual reversion to 6% unemployment from months 12 and 36. Let’s turn to Slide 15 to discuss retail auto credit in more detail. First quarter NCOs were consistent with the preview we gave at a recent investor conference. And we saw another quarter of declining year-over-year increase in total portfolio delinquency as shown in the bottom left chart. Losses for the first half of this year will be elevated as the 2022 vintage, which is producing losses above price expectations, works through its peak loss period. That vintage is at its peak loss period today and accounted for more than 40% of losses reported in the first quarter.

As we move throughout the year, portfolio losses will increasingly – will be increasingly driven by more recent vintages, which continue to show favorable loss and delinquency trends relative to the 2022 vintage. Similar to last quarter, we’ve shown a comparison of delinquency trends for the 2022 and 2023 vintages on the bottom of the page. After 15 months on book, the 2023 vintage delinquency rate is now 28 basis points below where the 2022 vintage was at the same point in time. Excluding the impact of recent loan sales, which skew the words high credit quality loans, the gap is 34 basis points. That gap has widened since our last earnings call, which showed the 2023 vintage, 22 basis points favorable at 12 months on book. I also want to point out this particular comparison after 15 months on book is impacted by where the last day of the month fell.

The final calendar day of 1Q 2023 was a Friday, which is typically our strongest day of cash collection as it lines up with the pay periods for many consumers. In 2024, the final calendar day fell not only on a Sunday, but also a holiday. As a result, the spot delinquency rate for the 2023 vintage after 15 months was elevated. As we move into the first few days of April, the gap between 2022 and 2023 vintages widen further. So we remain confident, 2023 and 2024 vintages will perform favorably to the 2022 vintage that is driving higher losses today. In addition to delinquency and loss frequency trends, we continue to closely monitor the impact of used values on loss severity. Values were weaker for much of the quarter, which drove 1Q losses slightly higher than expectations, but we saw a nice rebound in March, which has persisted through the first half of April.

Used vehicle values have since rebounded and are now flat to year-end as we begin the second quarter. Used vehicle guidance have been choppy. However, we continue to expect the Ally use index to settle out around 120 by the end of the year, which would imply a 5% to 6% decline from where we are today. Based on 1Q actuals and elevated loss content from the 2022 vintage, our estimate of losses is up marginally versus January to approximately 2% for the year. Importantly, we remain pleased with the impact of curtailments over the past 12 months and performance trends on recent vintages. Let’s turn to Slide 16 to review auto segment highlights. Pre-tax income of $322 million was lower year-over-year driven by higher provision expense and non-interest expense.

Provision reflected elevated net charge-off performance compared to the prior year period. Non-interest expense is up year-over-year as we navigate a period of elevated loss content driving higher servicing costs. Other revenue of $97 million is up $20 million year-over-year as we continue to focus on diversifying revenue with fee income. Our SmartAuction and pass-through platforms are great examples of how we help serve our dealers while also generating capital-efficient revenue. SmartAuction enables dealer to dealer transactions generating fee revenue while providing real-time data on market pricing and trends. Despite pressure on industry volume, SmartAuction grew revenue by 60% between 2019 and 2023. Through White Label relationships, we see more opportunity to grow this business and deliver incremental fee revenue while strengthening our dealer value proposition.

With a focus on increasing application volume, our pass-through program is yet another way for us to deliver enhanced value to our dealers. For certain loans that do not meet our underwriting criteria, we pass through those applications to our partners. For loans that are ultimately funded by our partners, Ally receives an origination fee and generate servicing revenue without using any capital. SmartAuction and pass-through revenues are expected to grow to $190 million in 2024, up 120% since 2019. Both products demonstrate the strength and scale we have in the marketplace and are a win-win for Ally and the dealer. Lease portfolio trends are on the bottom right, dealer and lessee buyouts declined to 57%, but remain elevated compared to historical levels.

Turning to insurance results on Slide 17. Core pre-tax income of $53 million included the highest quarterly premium earned since our IPO. Insurance losses of $112 million are up $24 million year-over-year, driven primarily by growth, including higher insured values and higher weather losses. We saw solid operating leverage within the quarter as premiums earned increased by $40 million, while acquisition and underwriting expenses were up modestly. Total written premium of $354 million increased 15% year-over-year as we see continued success in expanding our all-in dealer value proposition. We have seen nice momentum related to conquest activity as we recently launched relationships with two major OEMs, which will provide an immediate boost to written and earned premiums.

Growth in insurance will naturally increase our non-controllable expenses, specifically commissions and losses, but those are more than offset with fee revenue. And importantly, we have a reinsurance program in place that reduces volatility from weather losses across our P&C inventory exposure. As we look ahead, insurance remains integral to our dealer value proposition and is the main driver of continued fee revenue growth. Turning to Corporate Finance on Slide 18. The pretax income of $90 million reflects solid financial performance. Net financing revenue was up, driven by higher average balances and higher benchmarks as the entire portfolio is floating rate. Our $10.1 billion HFI portfolio is well diversified in virtually all first lien.

Balances are up marginally year-over-year, but down linked quarter. Favorable capital markets conditions, including a strong CLO market, led to elevated payoffs, particularly within our lender finance vertical. From a credit standpoint, the portfolio is in fantastic shape with criticized assets and nonaccrual loans at historically low levels. Commercial real estate exposure makes up a little more than $1 billion and is entirely related to the health care industry. With a track record of delivering strong returns, including 25% in 2023 and 31% this quarter, we continue to be excited about the long-term trajectory of this business as we celebrate its 25th anniversary. Mortgage results are on Slide 19. Mortgage generated pretax income of $25 million and $233 million of direct-to-consumer originations reflective of the current environment and our predominantly variable cost structure.

Our health for investment assets continued to decrease quarter-over-quarter as loans mature and we operate the business on a primarily originate-to-sell basis. Our mortgage HFI [ph] assets will continue to decrease as we remain disciplined in allocating capital to our highest-returning businesses and managing the duration of our balance sheet. Mortgage remains a complementary product for our deposit customers, who accounted for the majority of our originations in the quarter. We are committed to providing a best-in-class customer experience and operational efficiency. I’ll touch on the 2024 outlook before we move into Q&A. We’ve been pleased with the execution of our business and our outlook for this year and beyond remains consistent. In terms of net interest margin, first quarter represents a trough in NIM, and we expect meaningful expansion from here with or without a decrease in the Fed funds rate.

As we’ve said before, we look at our outlook under a variety of right scenarios and are not relying on rate cuts to get to an exit rate of 3.4% to 3.5% this year. And we are confident we will reach 4% NIM run rate in late 2025. In terms of quarterly cadence, it won’t be a straight line as things like lease terminations and gains do have some seasonality, but we expect five to 15 basis points of NIM expansion per quarter for the rest of the year. We are increasing our fee revenue guidance from up 5% to 10% to up 9% to 12%. We continue to see momentum in growth in insurance and SmartAuction and the auto pass-through offerings, which drives durable revenues with minimal capital requirements. In insurance specifically, we’ve seen P&C exposure increased through higher dealer inventory levels and our new business complex, which immediately increases revenues.

Continued expansion in insurance is driving the only change to our operating expense guidance. Controllable expenses are still expected to be down 1%, but as we’ve talked about in the past, growth in P&C does add commission and loss expenses. So total expenses are expected to be up less than 2% year-over-year, which is up slightly from the original guide. Importantly, net changes in insurance are immediately accretive to pretax earnings as the revenue lift more than offsets expenses. This is a trade we will take all day, and that’s the guidance we continue to give our insurance teammates. No change to the expected consolidated loss rate of 1.4% to 1.5%. And as I mentioned, we see retail NCOs around 2%, up marginally from approximately 1.9% in January.

The continued runoff of the 2022 vintage and the favorable performance of the 2023 vintage is expected to drive seasonally adjusted loss rates down later in the year. And while structural supply and demand dynamics continue to give us confidence in the path of the used vehicles over the medium term, volatility in the short term will certainly impact our loss performance. We continue to expect the balance sheet in total to be pretty flat for the foreseeable future with favorable mix dynamics contributing to NIM expansion. On the tax rate, we’ve adjusted our full year guide to 15%, reflecting one quarter of actual and a rate of around 18% for the rest of the year. EV lease originations are the largest driver of the tax favorability we saw this quarter.

To the extent we continue to see strong momentum here, we may outperform that 15% guide for the year. We remain confident that we are on a path to a run rate with 4% NIM, $6 of EPS and mid-teens returns. As we have said before, the timing of Fed rate cuts will impact the timing of our expansion in 2025, but not the destination. We will remain focused on executing on our scale franchises, taking care of our associates and customers and being disciplined in allocating our resources, including capital. I’ll close by echoing Doug’s comments that we’re excited to welcome Michael Rhodes to Ally and we are confident in Ally’s ability to deliver for our shareholders for many years to come. And with that, Sean, I’ll turn it over to you for Q&A.

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

Operator: [Operator Instructions] Our first question will come from the line of Moshe Orenbuch with TD Cowen.

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Q&A Session

Moshe Orenbuch: Great. Thanks. I guess the question that seems to be the – there’s such a strong origination yield – and yet it feels like you’re letting – there’s opportunity to do more. And so the question is, I guess, is that in fact the case? And you did talk about the ability that stuff that you’re doing in your highest tiers versus the rest of the credit spectrum. Is there an opportunity to do more and perhaps sell those loans to keep your balance sheet flat as your plan? Is that something that you’re considering doing during 2024 or 2025?

Russ Hutchinson: Thanks for the question, Moshe, I agree with you. The competitive environment remains favorable to us. Both the mix that we’re getting with continuing to get 40% in the S-Tier as well as the strong originated yield that we’re seeing are both testament to that. And so we agree with your sentiment on the competitive environment and the opportunity set remaining rich for us. As you know, as you’re well aware, we’re dealing in a capital-constrained environment with the expectation of regulations coming down the pipeline, all very manageable. And as you also pointed out, we’ve been – we’ve also been opportunistic in terms of looking for opportunities to liberally leverage our dealer relationships and our balance sheet.

So you saw us deconsolidate over the course of fourth quarter and this past quarter, $2.7 billion of auto loans through sales in the securitization markets. Those transactions were well received. We’re seeing strong appetite. You saw us take a $15 million earnings benefit this quarter on the sale of $1.1 billion of loans to the securitization market, again, testament to the attractiveness of our loans in the capital markets. We will continue to look at opportunities like that. We will continue to look at whether it’s deconsolidation through securitization, we’ll also look at credit risk transfer transactions as ways of freeing up RWA in order to redeploy in the business. So I think we are in agreement with you, and we continue to pursue opportunities opportunistically.

Doug Timmerman: I would just add what’s unique and obviously, I’ve been doing this for a long time, 30-plus years. So obviously, competition oftentimes softens during, call it, tougher credit environments. But today, it’s different. It’s also softening due to the fact that there’s change in regulatory environment coming at us. So everyone is seeing that impact to capital liquidity. So from my view, the opportunity for us is actually going to last longer than what you normally would say. So we feel really good about the competitive environment, really good about our ability to continue to originate at a high level and very importantly originate high yields.

Moshe Orenbuch: Great. Thanks. And maybe as a follow-up, the vintage performance that you discussed, is there a way to kind of separate out how much of that is a result of kind of that better – more of your originations coming in the higher tier of pricing or just kind of fundamental better performance from borrowers that you originated in 2023? And can you relate that to your comments about a flat reserve?

Russ Hutchinson: Yes. Maybe I’ll start and Doug can chip in here. But I would say when we look at the performance of our book, I would say delinquencies are elevated across the book – across vintage and across credit tiers. And we are dealing with a customer that is struggling with inflation. All that being said, when we look at the difference between the 2023 vintages versus 2022, I think what we’re seeing in that improvement is the effect of curtailments that we’ve been put in place over time. And as you know, we’ve been kind of ratcheting up the level of curtailment over the course of 2023. So we take a lot of confidence seeing that differentiation between the vintages. And as you would expect, we look at it at a pretty granular level, looking at vintages on a monthly basis, on a quarterly basis, and really kind of analyzing and understanding the differences in their performance in terms of both delinquencies and also net charge-off levels, which are also important.

So hopefully, that addresses your question, but I think the delinquency issue is one. The delinquency issue and the elevated credit that we’re seeing is across all vintages and across all credit tiers. But I think the main driver has just been the level of curtailment that we’ve put in place over the course of 2023.

Doug Timmerman: Yes, I agree. Obviously, it’s two-pronged. And it’s curtailing those segments that are underperforming the most. That’s our opportunity to be able to move to a better quality mix, which gets back to the benefit we have relative to our application flow. But I would also say that very importantly, we view credit to be very manageable and confident that the appropriate adjustments have been made and those adjustments are accounted for in our 2023 vintage.

Operator: Our next question will come from the line of Ryan Nash with Goldman Sachs.

Ryan Nash: Thanks. Good morning, Doug. Good morning, Russ.

Doug Timmerman: Good morning.

Ryan Nash: So maybe I start off a two-part question. So you reiterated the margin guidance, I noted you still expect 4% by end of next year, Russ. How does the cadence in 2024 and 2025 differ under higher – for longer and forwards? And then second, I think you recently decreased the savings and money market rates again for the second time in recent weeks. Are these cuts there to offset margin weakness in other areas? Or are they actually additive to the NIM? And does this actually improve the level of the timing you get to that 4%? And I have a follow-up.