Ally Financial Inc. (NYSE:ALLY) Q1 2023 Earnings Call Transcript

Ally Financial Inc. (NYSE:ALLY) Q1 2023 Earnings Call Transcript April 19, 2023

Ally Financial Inc. misses on earnings expectations. Reported EPS is $0.82 EPS, expectations were $0.87.

Operator Good day and thank you for standing by, and welcome to the First Quarter 2023 Ally Financial Incorporated 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 Mr. Sean Leary, Head of Investor Relations. Please go ahead.Sean Leary Thank you, Carmen. Good morning, and welcome to Ally Financial’s First Quarter 2023 Earnings Call. This morning, our CEO, Jeff Brown; and our Interim CFO, Brad Brown, will review Ally’s results before taking questions. The presentation we’ll reference can be found on the Investor Relations section of our website, ally.com.Forward-looking statements and risk factor language governing today’s call are on Slide 2.

GAAP and non-GAAP measures pertaining to our operating performance and capital results are on 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 J.B.Jeff Brown Thank you, Sean. Good morning. We appreciate you joining us this morning to review our first quarter results. I’ll begin on Page number 4. Adjusted EPS of $0.82 and core ROTCE of 12.5% and revenues of $2.1 billion reflects continued execution across our businesses in a dynamic operating environment.Net interest margin remained resilient at 3.54% as a result of disciplined pricing on both sides of our balance sheet. Originated yields on retail auto averaged 10.9% for the quarter, reflecting our ability to leverage dealer relationships to originate strong risk-adjusted returns.Since the start of the tightening cycle, we’ve added 455 basis points of price into the market, implying a beta of nearly 100%, while we’re remaining disciplined on risk content.

The total portfolio yield will continue to move upward towards newly originated yields, which represents a nice tailwind for the foreseeable future.While operating results were in line with expectations, adjusted EPS is below consensus, driven by a $0.10 headwind from valuation adjustments of certain equity investments. Despite the $41 million impact this quarter, these investments have generated accretive returns for Ally.Given the events in our industry that transpired in March, we thought it was important to spend additional time highlighting our deposits franchise and overall liquidity position. Retail deposits finished the quarter up $813 million. We also added a record 126,000 net new deposit customers. Our retail deposits exceed $138 billion, of which 91% in are insured by the FDIC.Our insured deposit balances increased $4 billion within the quarter.

In addition to retail deposits, we maintain access to multiple other funding sources and currently have total available liquidity of $43 billion. For context, our liquidity position is 3.6x our uninsured deposit balances.Common equity Tier 1 was relatively flat quarter-over-quarter at 9.2%. Current CET1 exceeds our SCB regulatory minimum by $3.5 billion and we absorbed another year of the CECL phase-in.Operational highlights reflect the strength of our leading franchises. Within Auto Finance, we decisioned more than 3.3 million applications in the quarter. Said another way, we evaluated $100 billion in potential originations this quarter and booked $9.5 billion of loans that met our risk-adjusted return hurdles. Consumer demand remained strong.Net charge-offs were 168 basis points.

Results within the quarter were in line with expectations and Brad will provide detailed commentary on our credit outlook later. Within Insurance, written premiums of $307 million were up meaningfully and reflect continued momentum as we grow and deepen dealer relationships.Turning to Ally Bank. Total deposits of $154 billion, were up $11.5 billion year-over-year. Consumer engagement and adoption trends across our other Ally Bank product offerings remain strong. 1.6 million customers across credit card and point-of-sale lending provide opportunities to deepen relationships and diversify our earnings profile.Corporate Finance remains focused on serving customers, while delivering strong risk-adjusted returns. Our held-for-investment portfolio of $10 billion was flat quarter-over-quarter.

In terms of credit quality, the portfolio is all first lien positions. Our CRE exposure is limited in size, concentrated entirely within the health care space and represents approximately 1% of total loans on the balance sheet.Turning to Slide number 5. A strong purpose-driven culture is more important now than ever. We maintained a consistent focus on culture over the past decade and has fueled significant progress strategically and financially. Our focus remains on driving long-term value for all stakeholders that, that is only made possible by delivering for our employees, customers and communities on a daily basis.For our employees, the first year of our OwnIt Grant Program vested providing 100 shares of Ally stock to those employees who have been with us for the past three years, further strengthening the owner’s mentality we embraced across the organization.

And I’m particularly proud of the enhanced benefits we’ve offered to our associates and their families to help manage mental health.For our customers, we continue to enhance digital capabilities across our product suite to ensure we’re offering a seamless customer experience. For our communities, we continue to advance the equality in women’s sports through partnerships like the one announced in February with the Walt Disney Company. I’m more confident than ever that our culture will be a critical differentiator in both the good times and tough times.Turning to Slide number 6. We’ve highlighted the strength of our consumer deposit franchise. Over the past 14 years, we built a sustainable model focused on doing the right thing for our customers.

The steady growth for new and existing depositors demonstrates their desire to keep their money at Ally and grow with us. Our customer base is now $2.8 million strong with growth led by millennial and younger cohorts, signaling the continued opportunity ahead.Our performance throughout the market volatile March highlights the overall strength of our consumer deposit business. 91% of our deposits are insured with the FDIC. Average balances within uninsured deposits are some of the lowest among peers.The portfolio in total has an average account balance of approximately $50,000, and our customer-centric approach continues to resonate, evidenced by 96% customer retention. Importantly, we’ve delivered this performance while consistently providing best-in-class technology and customer service and pricing below top rate payers.Moving to Slide number 7.

We provided incremental detail on trends within our retail deposit portfolio. The composition of our portfolio and the strength of our brand enabled us to navigate the volatility of the past several weeks with minimal impact.Looking at the bottom left, we had our strongest quarter of net customer acquisition since 2009, which is essentially the best quarter in our bank’s history. Since we’ve reached deposit core funding, we’ve been able to focus on growing and deepening customer relationships.On the bottom right, we’ve seen a gradual decline in uninsured balances over the past year. In total, uninsured balances are down $4.4 billion year-over-year, but more than offset by $6.9 billion of insured deposit growth. Outflows among uninsured accounts were elevated the week of March 13, but were more than offset by strong inflows.For new customers during the market volatility, the Ally brand resonated as a source of strength as they look to diversify their deposit balances across institutions.

Looking ahead, I remain confident in our ability to balance growth and pricing given our 88% deposit funding and multiple market-based alternatives.On Slide number 8, we’ve highlighted the depth of our non-deposit funding sources. While recent events have highlighted the resiliency of our deposits book, we will continue to maintain access to multiple alternative sources of liquidity for risk management and diversification purposes.In the case of total loan bank advances or repo agreements, we can access more than $30 billion of incremental funding in a matter of hours. Importantly, we found that home loan bank advances in the month of March were executed efficiently despite the elevated activity seen in the industry. Brokered CDs continue to serve as an efficient complement to the retail book and we have access through several firms and across the maturity curve.Our unsecured debt issuances are investment grade and a key source of parent company liquidity.

Based on our current liquidity profile and liquidity risk metrics, we don’t have to issue any unsecured debt in 2023, but we will remain opportunistic depending on market conditions. Obviously, there’s been pretty modest big issuance since early March, but we expect markets will start to open as stress starts to wane.We have a mature securitization platform that is well known in the market that we can leverage to match fund retail auto assets. We’ve grown the retail deposit book by almost $60 billion over the past five years, which has reduced our need for other funding. Today, we leverage these options more opportunistically, allowing us to optimize cost of funds and manage duration. I know this is a lot more to cover than normal, but given the volatility of the past month, we wanted to highlight the significant access we maintain to non-deposit funding.Moving to Slide number 9.

We provided a snapshot of our current funding stack and available liquidity. Again, we remain core funded with deposits making up 88% of our funding footprint. On the right side, we summarized our total available liquidity position of $43 billion, which is up nearly 30% in just the last six months. In total, this liquidity is 3.6x uninsured deposit balances. We have seen time and time again that liquidity is the single most important factor for a healthy bank.We have always prioritized prudent liquidity risk management and will continue to do so going forward. Obviously, it was an interesting quarter, but we fared well, and I’m proud of how the team responded. We are well positioned from a variety of perspectives and while some of the defensive but prudent actions pressured the next six months of earnings guidance, long term, we still forecast the impressive return expansion.With that, I’ll turn it over to Brad to cover our detailed financial results.Brad Brown Thank you, J.B. Good morning everyone.

I’ll begin on Slide 10. Net financing revenue, excluding OID, of $1.6 billion was down year-over-year, driven by higher funding costs given the rapid increase in short-term rates, largely offset by strength in auto pricing, higher floating rate assets, our hedging program and growth in unsecured products.Adjusted other revenue of $433 million included the $41 million impact from certain equity investments as mentioned by J.B. Underlying momentum continued across our Insurance, Smart Auction and Consumer Banking businesses. We continue to see a path for further expansion and remain committed to achieve our target of approximately $2 billion this year.Provision expense of $446 million reflected the expected increase in charge-offs and modest reserve build to reflect the evolving macro environment.

Non-interest expense of $1.3 billion reflects investments in our businesses and in technology. We remain focused on diligent expense management and expect the pace of increases to decline in the quarters ahead. GAAP and adjusted EPS for the quarter were $0.96 and $0.82, respectively.Moving to Slide 11. Net interest margin, excluding OID, of 3.54% was in line with expectations and decreased 41 basis points year-over-year and 14 basis points quarter-over-quarter. As we’ve mentioned on prior calls, despite underlying momentum on asset pricing, the impact of ongoing increases in short-term rates and re-pricing dynamics of our balance sheet create some near-term margin pressure.Our NIM thesis is largely unchanged as we still see full year NIM in the 3.5% range this year before inflecting higher.

I’ll share more detail on NIM dynamics shortly. Our retail auto pricing and origination strategies continue to drive current earning asset yields higher and will generate significant tailwinds in future periods. Total average loans and leases are up $13 billion versus prior year with more modest growth of $1.5 billion versus the fourth quarter.Earning asset yield of 6.71% grew 47 basis points quarter-over-quarter and nearly 200 basis points year-over-year, reflecting the continuation of trends we’ve highlighted previously, including strong originated yields within retail auto, growth in higher-yielding assets and over $50 billion of floating rate exposure across the loan and hedging portfolios.Retail auto portfolio yield expanded 29 basis points from the prior quarter as newer originations continue to comprise a larger portion of the portfolio, including the impact of hedges, yields reached 8.49% up 51 basis points quarter-over-quarter, and we expect yields will migrate towards 9% as we exit 2023.

Commercial portfolio yield continued their expansion given their floating rate nature.Turning to liabilities. Cost of funds increased 67 basis points quarter-over-quarter and 241 basis points year-over-year. The increase in deposit costs was in line with expectations shared last quarter and reflects higher benchmark rates and a competitive market for deposits.Moving to Slide 12. We provided some color on our interest rate risk positioning and hedging strategy given the volatility in rates for the past year and how we dynamically position ourselves for a variety of outcomes. Given our naturally liability sensitive position, we’ve leveraged our hedge program to mitigate near-term NIM pressure and to reduce the duration of our AFS securities portfolio.While we’ve routinely hedged our fixed rate auto assets and securities portfolio, new hedge accounting rules we adopted last year provided incremental flexibility and capacity.

Throughout the first quarter, we increased our pay fixed position as rates markets presented opportunities to lock in incremental hedges at attractive rates. The increased pay fix position shown on the bottom of the page provides significant protection against a potential higher for longer scenario, which candidly is more our house view on rates.Effective notion at quarter end was $35 billion, and the positive carry on these hedges will generate meaningful NII over the coming year as the retail auto portfolio migrates toward current originated yields. Putting all this together, we are relatively neutral from a rate risk perspective in the near term, but expect to benefit from lower rates over a longer horizon, given our core funding to liquid savings deposits.Slide 13 provides incremental detail on our outlook for margin.

We’ve seen modest pressure to our 2023 full year NIM outlook, but continue to expect it will be around 3.5%, though we may see quarters slightly below that level. This outlook is based on the forward curve as of quarter end, which has fed funds peaking at 5.25% before declining to 4.5% in December of this year.This modest adjustment to NIM relative to last quarter is the result of strategic action we felt appropriate given recent events, including maintaining higher cash balances and changes to our retail auto origination outlook, which is lower than previously expected and higher in the credit spectrum.An accelerated rotation into CD has seen across the industry added incremental pressure. Despite the headwinds, underlying operational trends remain resilient and are shown at the bottom of the page.

Strong momentum in auto pricing has scored our expectation for the portfolio yield to hit around 9% as we exit 2023. Since last year, we’ve added 455 basis points in a targeted fashion and are currently originating loans near 11%.On the deposit side, pricing has moved in line with expectations shared on last quarter’s call. We expect continued movement in deposit costs as the portfolio fully tracks for current yields on liquid savings and TV mix continues to increase. Clearly, this is a dynamic environment and there are a range of possible outcomes, but we remain confident in our balance sheet posture and corresponding the trajectory. And while there continues to be a lot of focus on the near-term NIM trough, we continue to see a steady migration up to 4% over time even without the benefit of rate cuts.Turning to Slide 14.

Our CET1 ratio was relatively flat, 9.2% given our disciplined approach to capital allocation. We announced another quarterly common dividend of $0.30 per share payable this quarter. We are not currently contemplated share repurchases, which will be market dependent. And we remain focused on ensuring loan originations across our consumer and commercial portfolios to meet our return hurdles.At current levels, we exceed our 7% regulatory CET1 operating minimum by $3.5 billion. We phased in another quarter of capital impact from the transition to CECL, which was worth 19 basis points this quarter. Two more phase-in periods remain with the total impact fully phased in by the first quarter of 2025. We remain focused on maintaining prudent capital levels, while investing in our businesses and supporting our customers.Slide 15 provides detail on AOCI and our securities portfolio, which currently comprises 17% of average earning assets.

As a reminder, we hold securities as a core part of our overall liquidity position and generally classify them as available for sale, which supports our intention to manage the portfolio with a true the cycle view by maintaining hedging and monetization flexibility. Unrealized gains and losses of the AFS portfolio are included in tangible book value, but as a category for a bank, we have opted out of including AOCI and regulatory capital and are mindful of pro forma CET1 levels.The top left of the chart shows pro forma CET1 would be 6.9%, slightly below our Fed requirement with a number of important distinctions to make. First, this impact doesn’t contemplate a potential phase-in similar to CECL. Second, it doesn’t consider any change in rates before implementation of the impact.

And third, it ignores the consistent accretion we will see absent in rates and spreads as the securities accrete to par.Adjusted tangible book value per share at quarter end was $32, up $2 quarter-over-quarter. When excluding the impact of AOCI, that figure increases to $44, up 13% since the beginning of 2022. The box in the center of the page provides a high-level summary of the accretion we expect, assuming stable rates. We see around $400 million of AOCI annually, which corresponds to approximately 25 basis points of CET1 and more than $1 of book value per share.The bottom of the page highlights a few additional aspects of our securities portfolio. Roughly 20% of the portfolio’s interest rate risk is hedged via the pay fix swaps we just discussed, and the portfolio is comprised primarily of highly liquid securities that can be leveraged to generate Federal Home Loan Bank and repo capacity as J.B. mentioned earlier.Let’s turn to Slide 16 to review asset quality trends.

Consolidated net charge-offs of 120 basis points reflected the combination of seasoning within retail auto and an increased proportion of higher-yielding unsecured consumer assets. First quarter net charge-offs of 168 basis points were largely in line with the guidance we shared last quarter as key drivers of performance largely offset one another.In the bottom right, 30-day delinquencies declined 32 basis points quarter-over-quarter. Typical seasonality was impacted by lower tax refund benefits. 60-day delinquencies reflected similar trends, but also reflect our strategic shift in collection practices to provide more time to work with customers and avoiding repossession, which has led to favorable flow to loss rates. We expect increases in delinquencies and continue to monitor the cumulative impact of inflation on consumers.

And our investments in servicing and collection practices improve our ability to communicate with and support our customers.Slide 17 shows that consolidated coverage increased 2 basis points to 2.74%, which reflects additional reserve build in the unsecured portfolios. The total reserve increased to $3.8 billion or $1.2 billion higher than CECL day one levels. We continue to model a worsening macroeconomic environment with unemployment exceeding 6% under our reversion to historical mean methodology.We also contemplate the unique nature of the current environment given largely unprecedented inflationary pressures over the past year. Retail auto coverage of 3.6% was flat quarter-over-quarter and remains 26 basis points or roughly $600 million higher than CECL day one.

As the remaining life of our existing portfolio is slightly less than two years, we believe these reserve levels very appropriately cover expected lifetime losses.Slide 18 highlights the actions we’ve taken in retail auto across underwriting and pricing given the current environment. We now anticipate we’ll originate around $40 billion this year, slightly lower than the expectation communicated last quarter. But as we always do, we’ll continuously refine our appetite for loan growth as we move throughout the year. Our unique model combining a high-tech platform with a high-touch human element continues to serve us well.Our underwriting and origination strategy is always informed by front book vintage performance and the bottom of the page provides some insight into the actions we have taken.

As you can see, our origination mix has skewed towards higher credit tier segments on a year-over-year basis. We’ve added significant price across the entirety of the credit spectrum, but our pricing action has been very targeted.The middle of the page illustrates our elevated pricing actions in segments that present higher credit risk. Most of our first quarter price actions occurred near the end of the quarter limiting their impact on first quarter results, but will become more meaningful in the second quarter. The bottom right reviews how we expect our pricing and underwriting actions to unfold over the coming months and impact second quarter results.We anticipate slightly more super prime volume as we’ve modestly reduced pricing within that space.

We remain competitive at the intersection of time and use where we’ve been able to generate our strongest volume and solid risk-adjusted returns, while adding considerable price. And in lower credit tiers, we continue to increase our selectivity as well as our risk pricing premium.We see the impact of our recent pricing actions already taking shape with super prime or STR loans accounting for 40% of originations in the past couple of weeks. We continue to see attractive opportunities in the market, and we remain a consistent partner for our dealers, while being extremely disciplined in the current environment.On Slide 19, we show our latest view on used vehicle values given year-to-date trends. We maintain a classic outlook for the entirety of 2023 despite the 8% increase year-to-date.

Consumer demand has been strong to start the year, but given the dynamic and macro environment, we feel it’s prudent to remain balanced. The bottom of the page highlights this, along with what has unfolded so far and our current outlook for 2023.Our guide in January assumes a 13% decline in values this year. Given the year-to-date performance, our base case now assumes a 9% decline on a full year basis or a 15% decline from current values. Beyond 2023, the ongoing lack of quality used vehicle supply is expected to keep auction prices above pre-pandemic levels.Slide 20 includes the latest in our retail auto net charge-off outlook. First quarter losses of 1.68% were in line with our 1.7% guide as favorable use values were offset by elevated loss frequency.

A variety of factors will continue to influence performance throughout the year, including used vehicle values, front book performance, delinquencies, flow to loss rates and the denominator impact of lower origination volumes.The timing actions we’ve taken will drive future performance and primarily impact net charge-off rates beyond 2023. The bottom half of the page frames up some of the tailwinds and headwinds relevant to performance as we continue to navigate the current environment.As just discussed, although we’ve updated our used values outlook for 2023, we remain conservatively postured relative to some industry forecast. Keep in mind, a 1% change in used values in isolation is worth approximately 2 basis points of net charge-offs.Total loss rates remained favorable versus pre-pandemic levels given the strategic actions we’ve taken across servicing and collections, which include increased digital outreach and repo timing updates.

Delinquency rates were elevated in first quarter versus our expectations and to present headwinds.We observed a smaller benefit from tax refunds than in prior years, and without continued total loss favorability, elevated delinquencies pose risk to future defaults. Additionally, the macro environment continues to pressure consumers. We currently expect unemployment to peak around 4.6%, but are equally mindful of the ongoing impact of inflation. So, net-net, no change in the outlook at this time.Moving to Ally Bank on Slide 21. Retail deposits of $138 billion increased $813 million quarter-over-quarter, reflecting the resilience and strength of our leading all-digital franchise. Total deposit balances of $154 billion, increased $11.5 billion year-over-year.

We delivered record customer growth, adding 126,000 new customers in the first quarter, our 56th consecutive quarter of growth.Given where we are in the tightening cycle, we’ve begun to see an increased consumer appetite for time deposits. The bottom left shows our retail deposit mix where retail CD composition increased 6 percentage points quarter-over-quarter. We do expect this migration to continue for the next couple of quarters, though the rate of change should slow. The new CD volume we’ve observed has been concentrated in the 11- and 18-month products.Turning to Slide 22. We continue to drive scale and diversification across our digital bank platforms and maintain a balanced approach to loan growth given the environment. Ally Invest remains a nice complement to our deposit platform and 86% of new account openings were from existing Ally Bank customers.

The 1.6 million covers across card and lending provides further opportunities ahead. We will remain disciplined in underwriting, which will temper near-term growth, but we remain confident in the outlook for these businesses over time.Let’s turn to Slide 23 to review auto segment highlights. Pretax income of $442 million was a result of continued pricing actions, offset by higher provisions. Looking at the bottom left, originated retail auto yield of 10.9% was up 134 basis points from the prior quarter, reflecting significant pricing actions.As mentioned previously, we put 455 basis points of price into the market since last year and are continuing to see solid flows with originated yields near 11%. The bottom right shows lease portfolio trends where average gain per unit has continued to perform well.

Dealer and lessee buyouts declined further to 76% and while we also benefited from stronger-than-anticipated used values.Turning to Slide 24. We continue to realize the benefits of our leading agile platform underpinned by a high-tech and high-touch model. Consistent application flow shown in the top left enables us to be selective in what we approve and ultimately originate. First quarter results showed a further decline in approvals, now 31%. In the upper right, ending consumer assets of $94 billion were flat quarter-over-quarter. Commercial balances ended at $19.3 billion as new vehicle supply gradually normalizes the used supply remains constrained.Turning to origination trends on the bottom half of the page, consumer auto volume of $9.5 billion demonstrates our ability to add price in the market while maintaining solid origination volume, putting us on track to originate around $40 billion this year.

Lastly, use accounted for 64% of originations in the quarter as we enter the typical used vehicle selling season. Non-prime volume of 10% is slightly below pre-pandemic trends.Turning to Insurance results on Slide 25. Core pretax income of $27 million decreased $47 million year-over-year, driven by elevated investment gains in the prior year period. Total written premiums were $307 million, up 16% year-over-year reflecting higher dealer inventory and growth in other dealer products.This should be a nice tailwind to earn premium over time. First quarter results were impacted by severe weather in which resulted in $14 million of weather losses, including $7 million incurred during the last week of March. Going forward, we remain focused on leveraging our significant dealer network and holistic offerings to drive further integration of Insurance across our existing Auto Finance dealer base.Turning to Corporate Finance on Slide 26.

Core pretax income of $72 million reflected growth in the loan portfolio and favorable syndication and fee income. Net financing revenue was driven by higher asset balances as well as higher benchmarks as the entire portfolio is floating rate. The loan portfolio continues to be highly diversified across industries with asset-based loans comprising 59% of the portfolio and a first lien position in virtually 100%.Commercial real estate exposures makes up about $1 billion, which is less than 1% of Ally’s consolidated loan book and is entirely related to the health care industry, which we think will continue to perform well. Our $10 billion HFI portfolio is up 20% year-over-year or relatively flat quarter-on-quarter as the team leverages their expertise to navigate a highly competitive market and a disciplined approach to growth.Mortgage details are on Slide 27.

Mortgage generated pretax income of $21 million and $197 million in direct-to-consumer originations, reflecting current market conditions. We remain focused on a great experience for our customers, but refrain from any specific volume targets.Before closing, I’ll share a few thoughts on the outlook for 2023. Slide 28 contains our financial outlook as we see it today. Last quarter, we provided our thoughts on earnings trajectory for 2023 and beyond. As I noted during that call, the dynamic environment makes us hard than ever to provide granular guidance and events in the past three months have only heightened that difficulty, but we remain committed to transparency. Based on what we know today, we see adjusted EPS closer to $3.65 in 2023 relative to the roughly $4 we shared in January.We still anticipate NIM in the 3.5% range, but the outlook has ticked down by approximately 5 basis points or about $0.25 per share.

The decline is due to factors covered in depth already, including higher CD rotation, higher cash balances and lower retail auto originations. Additionally, the guide last quarter did not contemplate the activity on certain equity investments discussed previously. This drove another $0.10 of unfavorability.The right side of the page lists the detailed assumptions embedded in our current outlook. Notably, all of these ranges are consistent with the January guide, but a modestly lower revenue outlook results in slightly lower EPS. Last quarter, we provided a framework to think about earnings expansion beyond 2023. While we haven’t included a specific EPS figure for 2024, we continue to expect earnings growth.The ultimate timing of that expansion will be the result of multiple variables, including interest rates, liquidity and capital levels and origination strategies.

However, we feel strongly in the margin tailwind embedded in the balance sheet today. We booked loans at 9%, 10% and now above 10% for several quarters. This will create asset yield expansion in an environment where deposit pricing has stabilized or is potentially declining.So consistent with my message last quarter, earnings expansion over the next several years will occur as NIM moves past the trough and migrates back towards 4%. We think that migration occurs under the forward curve or a more conservative scenario where rates remain elevated for the next year or more, which underscores the power of our balance sheet and pricing approach over the past year.We continue to view mid-teens as the return profile of the Company based on all the structural enhancements we’ve made over the past several years and remain confident in our ability to continue to execute and drive long-term profitability.We acknowledge that 2023 will continue to be a dynamic year given macroeconomic headwinds and volatility.

Importantly, no one should take the removal of the outer period outlook as a fundamental shift in guidance. The Company will migrate toward that $6 per share outlook, but obviously, several moving pieces at the moment may impact the pace in which we get there.And with that, I’ll turn it back to J.B.Jeff Brown Thank you, Brad. I want to close by reiterating the strategic priorities that guide everything we do. First and foremost is ensuring we maintain strong alignment between our culture and all stakeholders. We’re focused on highlighting the differentiated offerings across our businesses for both consumer and commercial customers.We’ll continue finding ways to disrupt the industry and remove friction for customers by delivering leading digital experiences.

And even more important in this dynamic environment is our disciplined approach to risk management and capital allocation. I remain incredibly proud to lead our company, and over time, I’m confident these priorities will serve us well and deliver value for all stakeholders.And with that, Sean, back to you and into Q&A.Sean Leary Thank you, J.B. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Carmen, please begin the Q&A.

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Question-and-Answer Session Operator [Operator Instructions]

And we have our first question from the line of Sanjay Sakhrani with KBW. Please proceed.Sanjay Sakhrani I appreciate that there’s a lot of things in flux, and it’s sort of hard to predict, but maybe just a question first on credit and your expectations.

I know there’s a lot of puts and takes that you guys outlined on that Slide 20. But as we think about the reserve rate, do we feel like going forward, there should be modest changes to the reserve rate from here, all else equal and you just kind of reserve to growth? Or maybe you could just talk about that in general.Brad Brown Yes. Sanjay, it’s Brad. Yes, absolutely. I guess a couple of things I would highlight. First, retail auto is the big driver there. You saw that coverage stay the same here this quarter. We really don’t see at this point any significant drivers of increase going forward in that product. Away from that, you did see a slight build for some of the unsecured consumer assets. And so that did drive a bit, and that was 2 basis points you saw this quarter.And as you mentioned, I mean, the uncertainty is certainly more than ever.

But given a lot of the dynamics we’ve talked about, two things. One, we feel really good about our risk-adjusted approach in terms of capital allocation and what we’re putting on the books today from an overall risk management perspective.And then ultimately, we really do think it does make sense to really retain this conservative posture around capital, just given the uncertainty, both economically and the macros, but also the dynamics around just potential regulatory response to the early turmoil we saw in early March, I should say.And then lastly, it’s really about growth, right? And so from a balance sheet perspective, we don’t really have significant asset growth in the forecast. Of course, that is a driver in terms of potential increases in build as well.

But again, coming back to the risk management approach and our actions, there tactically will be even more conservatively postured going forward, we feel good about where we are and what the outlook entails.Sanjay Sakhrani Maybe just a follow-up on the greater super prime mix. Understandably, you’re seeing growth because you’ve sort of pulled back on rates. Could you just talk about the competitive backdrop there? And sort of what drove that and where that’s coming from? And if we might see that work its way into prime, I guess that would be a little bit of a risk. Maybe J.B., you could talk about that. And just a follow-on to that, how does that then play into credit quality? Does that start affecting it positively? And then we could have some more positive implications to the provision?Jeff Brown Sure.

So Sanjay, I’ll start and then Brad, obviously, feel free to dive in. I mean, I think — we look at the shift into greater super prime right now is pretty modest overall, Sanjay. I don’t think it’s going to be all that big of a driver right now. I mean the market continues to stay pretty competitive. But I would say we’ve seen some bigger names kind of dial back and step back on the retail front.Obviously, there was a bigger announcement of is out there about one of the other competitors stepping back from commercial lending. They weren’t really a huge player like we were. So the market is still competitive. We think this is just about trimming risk on the edges, wanting to have a slightly more conservative posture is, again, back to the scheme.

There’s a lot of uncertainty that out there.But I think this intersection of prime and used is still the space we like to play. It’s still a very big market, and I would expect that’s where you’re going to see the vast majority of our originations going forward. I mean the start April, the market’s probably moved a hair more into the super prime space. We’re taking advantage of that, but I don’t think it’s going to be a big driver of change in NIM guidance or any change in credit guidance going forward.Brad Brown And maybe I’ll add a little bit just in terms of as others pull back, that is more opportunities for us and looks at volume. And I think J.B. really framed that up well in terms of the vast nature of the industry and really how we probably have the best look out there and we can really pick the spots where we see the most value.In terms of the credit impact of that, I would say, we guided that we’ve been really micro segment analyzing around really the risk management aspects and to that point, we will, as I said in the prepared comments, we will see an impact of that as those actions take hold.

But certainly, all of that is embedded in our expectations we’ve guided.Jeff Brown And Sanjay, maybe one last point. I think maybe the only slight pivot this time is we probably would have told you we would have been $43 billion to $45 billion, $46 billion of origination flow. I think our outlook now is probably more in the $40 million to $43 million just as we trim risk on the edges.I mean some of that is factored in, obviously, to the guide, the timing, all these things that Brad talked about. But to the extent you get better market clarity, we see the consumer continuing to perform. You see losses in line and as you’ve said, there are a lot of puts and takes, and that was part of the reason we put the enhanced disclosure in there on Page 20, just to give some sensitivity on the different variables, but that’s maybe the one we’re watching.And if you see stronger consuming their strength continue, you see DQs sort of slow down a bit, we may lean back into originating a little bit more.

But right now, I think our house view is we trimmed $2 billion, $3 billion of originations out of the outlook.Operator Okay, one moment for next question please. And it comes from the line of Rick Shane with JPMorgan. Please proceed.Rick Shane So when you talk about migration upwards in terms of credit quality. My expectation is that won’t really have much impact in 2023 in terms of your target loss rates. But when we think about the prior ’24 guidance of 1.6% NCO rate, are you sort of solving back to that? And how do we think about the interplay between solving towards that 1.6% NCO rate and the NIM and sort of being on the efficient frontier in terms of margin?Brad Brown Yes. So, I guess, overall, in terms of when we kind of think about the guidance further out, we were pretty prescriptive last quarter around the trajectory we see through this year and then ultimately what we were looking at in 2024 as well.

I don’t think those pieces have changed really at all. To J.B.’s point around really trimming some of the origination expectations around some of these tightening underwriting aspects, marginally, I think, will be helpful.We also have the dynamic we highlighted around some of the challenged vintages from sort of that late 2021, early 2022. And then — so that remains front and center in terms of watching that performance within expectations, and that did drive some of that expectation as well. And so again, we feel good about what we’ve put out there as we talked about a lot. They are certainly puts and takes here.And when you think about those dynamics around macro, that has gotten slightly better, at least in the base 9, 12 months, but we have the strong labor situation with customers that are challenged.

Cost of living is higher and wage growth necessarily hasn’t kept up with that. So all of that to say, the pieces around those dynamics kind of lead us to still be comfortable with what we set forth previously.Rick Shane Got it. Okay. That’s helpful. And then my follow-up is a little bit of a non-secretor, but when we hear about things like golf ball and baseball sized hail in the Midwest, which we’ve heard reports of as we move through April makes us think about the Insurance business. Can you just provide an update in terms of storm damage quarter-to-date?Jeff Brown Yes. So Rick, it’s J.B. I think as we’ve said in our prepared remarks, unfortunately, the last week of March, cost us kind of $7 million, $10 million. So that was more expensive than normal.