Ally Financial Inc.

Welcome to the Q2 2025 Ally Financial Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Thank you, Daniel. Good morning and welcome to Allied Financial's second quarter 2025 earnings call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, will review Allied's results before taking questions. The presentation we'll reference can be found in the Investor Relations section of our website, allied.com. Forward-looking statements and risk factor language governing today's call are on page two. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on slide three. 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 Michael.

Thank you, Sean. Good morning, everyone. And thank you for joining us for our second quarter earnings call. Let's begin on page four. I'll start by saying that I'm encouraged and energized by the progress we've made as an organization over the first half of the year. Our sound strategic positioning and discipline execution are contributing to an improved financial trajectory, which is clearly reflected in our second quarter results. In the second quarter, Ally delivered adjusted earnings per share of 99 cents and core pre-tax income of $418 million. We achieved double-digit year-over-year growth in both metrics, underscoring the benefits of a more focused, streamlined, and purpose-driven institution. Net interest margin, excluding core OID, was 3.45%. expanding 10 basis points quarter per quarter. That's more than offsetting the 20 basis point drag related to the sale of the credit card business. We continue to run off low yielding mortgages and securities and add higher yielding retail auto and corporate finance assets funded by high quality, stable, and low cost deposits. This structural remixing of the balance sheet sets the foundation for continued margin expansion going forward. Our first half trajectory reinforces my conviction in our ability to deliver compelling and sustainable returns over time. We delivered a core ROTCE of 13.6% in the quarter, but as you know, AOCI reduces the ROE denominator. Excluding that benefit, we generated a core ROTCE of 10%. I'm pleased the progress we've made and I'm even more encouraged by the momentum we're building. We recognize there's significant opportunity ahead, and we are well positioned to capitalize on it. As I reflect on the quarter, there are three key takeaways that I will expand on. First, our sharp strategic focus is transforming Ally into a stronger, more profitable institution. Second, the Ally brand continues to resonate deeply with our customers, building loyalty and trust. And third, our customer-centric culture remains one of our greatest differentiators. Our strategy remains clear and is being executed with discipline by our over 10,000 colleagues across the organization. Our three core franchises are meaningfully differentiated with tremendous runway and scale. The new business we're putting on the balance sheet today is expected to generate a mid-teens return over its life. In dealer financial services, we're booking new fixed-rate retail auto loans at nearly 10%, funded by core deposits below 4%, with expected annual losses between 1.6% and 1.8%. DFS also continues to benefit from strong fee revenue driven by our pass-through and smart auction adjacencies. Our insurance business continues to benefit from natural auto-related synergies, lean to robust written premium growth and investment revenue. In corporate finance, our portfolio has attractive floating rate yields, and we continue to see healthy fee income from syndications. This business continues to deliver strong returns across different credit cycles, anchored by seasoned leadership and disciplined underwriting. Altogether, these businesses, backed by a strong deposits franchise, are positioned to deliver mid-teens returns. And now to our brand. Whether through strategic partnerships, impactful marketing, or deep community partnerships, the Ally name stands as a brand that is synonymous with trust and purpose. Our Net Promoter Score remains well above industry averages, reflecting the strength of the relationships we've built. Our customers are our greatest brand advocates. Roughly 15% of new deposit clients are sourced from our Refer a Friend program. A strong, trusted brand is a powerful growth multiplier, and we are seeing that every day through efficient customer acquisition, strong retention, and deeper engagement. And finally, a few reflections on our culture. Do it right is more than a slogan. It's a shared ethos that shapes how we serve our customers, support our teammates, and show up in the communities we serve. We invest deliberately in nurturing our culture, and our results are clear. In fact, just last week, our latest employee engagement survey ranked us in the top 10% of all companies for the sixth consecutive year, eight points above the financial services industry benchmark. Beyond attracting and retaining top talent, this level of engagement fuels performance. It accelerates change and enhances the customer experience which is reflected in our customer service satisfaction rating, which is holding strong around 90%. With that context in place, let's turn to page five to dive into operational results and performance trends this quarter. Within our auto finance business, consumer originations of $11 billion were driven by 3.9 million applications, marking our highest quarterly application volume ever for the second consecutive quarter. This sustained momentum of application flows speaks to the strength of our dealer relationships and the scale of our franchise, and reinforces our position as the top bank auto lender in the country. Our scale enables us to be highly selective in the loans we book, optimizing both pricing and credit decisioning. Origination yields of 9.82% were up slightly versus the prior quarter, and down 77 basis points from the prior year. Notably, this decrease was more modest than the decline in benchmark rates, highlighting the relative strength in our pricing position. Forty-two percent of our originations come from the highest credit quality tier, which will continue to support strong risk-adjusted returns moving forward. This quarter marked the ninth consecutive with over 40 percent S-tier mix in new origination volume. As we've outlined in previous calls, we expect our origination mix to normalize gradually over time. Our ability to dynamically adjust both price and risk appetite gives us the flexibility to evolve alongside market conditions. Let's turn to insurance, where our average dealer inventory exposure rose by 23% year over year. Driven by new relationship wins, and tight integration with our auto finance business. We have 3.9 million active policies outstanding, an increase of over 1 million since our IPO. Our insurance team supports 7,000 dealers across the United States and Canada, and with access to a broader network, we see meaningful opportunity to grow our footprint. I'm pleased with the strong performance and the alignment between our auto and insurance businesses, which enhances the value proposition we offer our dealer customers. In corporate finance, we delivered another strong quarter, generating a 31% ROE. Our longstanding relationships with financial sponsors have supported solid growth, which attracted returns, all while maintaining disciplined risk management. We continue to see opportunities for prudent organic growth within our current verticals, and are actively exploring new products and solutions to generate incremental creative business. Turning to our digital bank, we remain focused on delivering best-in-class digital experiences that empower customers to save, invest, and spend with confidence. With no hidden fees, an award-winning mobile app, nationwide ATM rebates, and 24-7 access to live customer care, Our customer-first approach sets us apart. This commitment earned us multiple accolades again this quarter for customer satisfaction. Our robust suite of digital tools is driving deeper engagement, fueling customer loyalty, and reducing rate sensitivity. We proudly serve an all-time high of 3.4 million customers, marking 65 consecutive quarters of net customer growth. We ended the quarter with balances of $143 billion, reinforcing our position as the nation's largest all-digital bank. Overall, deposit balances were down approximately $3 billion quarter over quarter. Now, this is aligned with our April guidance, largely due to seasonal tax outflows. For the year, we continue to expect relatively flat balances which is sufficient to support the asset side of our balance sheet. At the end of June, we lowered liquid savings pricing an additional 10 basis points, representing a cumulative 70% beta since the start of the Fed easing cycle in the second half of 2024. Deposits are the foundation of our funding profile, representing nearly 90% of total funding, and 92% are FDIC-insured, demonstrating both strength and stability of our deposit base. Now, before I turn it over to Russ, I'd like to leave you with this. If there's one thing to take away from today's call, it's that Ally's focused strategy is working, and you're starting to see it in our results. We have three market-leading franchises with tremendous runway, backed by an industry-leading brand and a culture that sets us apart. And with that, I'll turn it over to Russ.

Thank you, Michael, and good morning, everyone. Let's turn to page six and walk through second quarter performance. Our financial results for the quarter reflect the closing of the sale of our credit card business on April 1st. Accordingly, comparisons to both prior quarter and prior year are impacted. Excluding Core OID, net financing revenue totaled approximately $1.5 billion, consistent with both the prior year and the prior quarter. We're seeing strong momentum in our core franchises, led by continued yield expansion in our retail auto portfolio, strategic remixing of the balance sheet toward higher-yielding asset classes, and the ongoing optimization of deposit pricing. On a quarter-over-quarter basis, this momentum more than offset the lost revenue from the sale of credit card. Turning to adjusted other revenue, which totals $531 million, results were approximately flat year-over-year, as the removal of fee income from credit card and the wind-down of our direct-to-consumer mortgage origination platform was offset by growth from insurance, smart auction, and our pass-through programs. Adjusted provision expense of $384 million was down 23% to the prior quarter and down 16% year-over-year, primarily driven by the sale of credit cards. In retail auto, the NCO rate declined six basis points year over year to 1.75%. We are encouraged by the trends within the portfolio as vintage dynamics and servicing strategy enhancements continue to drive an improvement in losses. However, we remain mindful of macroeconomic uncertainty. I'll speak more about credit performance in a moment. Adjusted non-interest expense was $1.3 billion. down 4% sequentially and 2% to the prior year. Notably, controllable expenses, which exclude insurance losses, commissions, and FDIC fees, were down for the seventh consecutive quarter, underscoring our commitment to cost discipline. We do not expect a year-over-year decline in controllable expenses next quarter, driven by non-recurring benefits recorded in 2024. However, we remain committed to prudent expense management going forward. In the quarter, we recognized tax expense of $84 million, resulting in an effective tax rate for the quarter of 19%. This rate was favorably impacted by a recent state law change that drove a revaluation of certain tax credits. Looking ahead, we continue to expect a normalized effective tax rate in the range of 22% to 23%. However, discrete items may cause the effective rate to differ in any given quarter. On a GAAP basis, we generated earnings per share of $1.04 for the quarter. Adjusted earnings per share for the quarter was 99 cents. Turning to page seven, net interest margin excluding OID was 3.45%, an increase of 10 basis points from the prior quarter. Margin expanded 30 basis points, excluding the impact from the credit card sale, which was an approximate 20 basis point headwind in the quarter. On a quarter-over-quarter basis, NIM expansion was driven by the following. Organic yield expansion in the retail auto loan portfolio, normalization in retail auto lease yields following a loss on lease terminations in 1Q, the benefit of securities repositioning transactions executed in March, deposit repricing across liquid savings and CDs, and continued portfolio remixing to higher-yielding retail auto and corporate finance assets. Some of these factors that are now embedded in our run rate NIM will not contribute to additional NIM expansion going forward. The normalization of lease gains and execution of securities repositioning transactions added eight basis points to the linked quarter margin expansion in 2Q, but are not expected to contribute to additional NIM expansion from here. Also, we saw benefits from elevated securities runoff as well as higher auto prepayments, particularly in lower-yielding loans, likely tied to the pull forward of new vehicle sales. We expect to see continued margin expansion from liquid savings and CD repricing going forward, albeit at a slower pace than we saw in 2Q. In retail auto, excluding the hedge, portfolio yield expanded eight basis points quarter over quarter to 9.19%. As the lower yielding back book rolls down, we expect the portfolio yield to migrate towards originated yield over time. Turning to our retail auto lease portfolio, overall yield increased 119 basis points sequentially, as lease remarketing gains normalized in line with our expectations. On the liability side, two key results reflected the full impact of reductions in liquid savings rates in the first quarter. In late June, we lowered liquid rates by 10 basis points to 3.5%, notably ahead of any upcoming Fed action, bringing cumulative liquid beta to 70%. Also in the quarter, we continued to benefit from a natural tailwind in CD repricing, with $11 billion in maturities this quarter, with strong retention and renewal rates. We're pleased with the momentum of the franchise, stability of the portfolio, and the pricing power to date. As we've covered previously, Ally is liability sensitive over the medium term, but asset sensitive in the very near term, driven by floating rate commercial loan and pay fixed hedge exposure. As a result, reductions in Fed funds, particularly material reductions like we saw in late 2024, are a headwind to margin expansion in the near term. I'll cover the outlook in more detail later, but we remain confident in our ability to deliver a full year NIM of 3.4 to 3.5%. More importantly, we maintain conviction in our ability to achieve a sustainable margin in the upper threes over the medium term. Turning to page eight, our CET1 ratio of 9.9% represents more than $4 billion of excess capital above our SEB minimum. On a fully phased-in basis for AOCI, CET1 for the period would have been 7.6%, an increase of 80 basis points from the prior year. Both measures include the 20 basis points of capital generated from the closing of the credit card transaction on April 1st, a transaction that contributed 40 basis points of capital in total and enabled us to reposition a portion of the securities portfolio last quarter. While we did not execute a credit risk transfer transaction in the quarter, we continue to view CRT as an efficient way to generate excess capital that we will likely leverage in the second half of the year. Our capital management priorities remain unchanged. We are deploying capital to drive a creative growth in our core franchises while continuing to move our stated and fully phased-in CET1 levels higher. In terms of capital distributions, earlier this week, we announced a quarterly dividend of 30 cents per share for the third quarter of 2025, consistent with the prior quarter. Buying back shares, particularly at the current valuation, remains a key capital management priority. The combination of higher CET1 levels, improved returns, and consistent organic capital generation are key factors that will determine the appropriate time to repurchase shares. Turning to book value at the bottom of the page, adjusted tangible book value per share of $37 increased 12% from the prior year. Excluding the impacts of AOCI, adjusted tangible book value per share of $48 is up over 125% from 2014. We remain focused on growing tangible book value per share and driving shareholder value through disciplined capital management in the years ahead. Turning to page 9, credit quality trends across all our lending portfolios remain encouraging. The consolidated net charge-off rate was 110 basis points, a decline of 40 basis points to the prior quarter, and a decrease of 16 basis points to the prior year. This quarter's consolidated net charge-off rate reflects the impact of the card sale, which contributed to the year-over-year improvement. In retail auto, the net charge-off rate was 175 basis points, down 37 basis points sequentially and six basis points year-over-year. This marks the second consecutive quarter of year-over-year improvement, reflecting strong performance from recent vintages and continued enhancements to our digital servicing capabilities. That said, we remain mindful of the elevated level of uncertainty that we are currently navigating. Moving to the top right of the page, 30-plus day all-in delinquencies of 4.88% represents the first year-over-year improvement in delinquency rates since 2021, a positive inflection point for credit performance. Since delinquency trends are a leading indicator of charge-offs, this improvement reinforces our constructive view on the near-term loss trajectory. Vintage-level delinquency performance trends are included in the supplemental section of the earnings presentation and are also disclosed in our 10Q and 10K. We continue to observe stable and consistent delinquency performance trends across the 2022 and 2024 vintages and added the 2025 vintage to the disclosure. As we noted last quarter, the benefit of vintage rollover is clearly playing out in actuals. Looking holistically at credit measures, we remain encouraged by the performance of the portfolio and the effectiveness of our servicing strategies, but remain cautious of macroeconomic uncertainty going forward. Turning to the bottom of the page on reserves, consolidated coverage increased one basis point this quarter, while the retail auto coverage rate remained flat at 3.75%. As we guided last quarter, the increase in the consolidated coverage rate was due to mixed dynamics. Our retail auto coverage levels continue to balance the favorable credit trends we're seeing, namely improved delinquency rates and recent turnover in the portfolio to higher quality vintages against an uncertain macroeconomic outlook and the expectation of worsening unemployment. As we've consistently said, we do not forecast reserve releases and they are not incorporated into our mid-teens return guidance. Moving to our auto finance segment on page 10. Free tax income of $472 million was $112 million lower year-over-year, primarily driven by lower lease gains and a decline in commercial auto balances. Our lease remarketing performance improved quarter-over-quarter to approximately break-even versus a loss in one queue. Going forward, we expect remarketing performance to be less of a factor given the reduced volume of terminating units not covered by residual value guarantees. Commercial floor plan balances reflect industry trends and inventory levels, partly influenced by tariffs that likely pulled forward consumer demand. That said, while dealer inventory levels remain lower, increased sales activity and the financing of leaner inventories have continued to support overall dealer health and profitability. As illustrated on the bottom left, retail auto portfolio yields, excluding the impact from hedges, increased eight basis points quarter over quarter. As we noted, the portfolio yield will continue to migrate towards originated yields through time. Originated yield of 9.82% was up two basis points quarter over quarter, with 42% of all retail volume coming from our highest credit tier. Turning to our insurance business on page 11, we recorded a core pre-tax loss of $2 million as higher losses more than offset strong growth in premiums and investment revenue. Total written premiums of $349 million were up $5 million year-over-year and down $36 million on a sequential basis. As a reminder, our annual excess of loss policy renews each April. This year's renewal came at a higher cost as we increased coverage levels in response to growth in the business. The associated premium paid for this policy is recognized as a reduction in written premium, which impacted results for the current period. Excluding the impact of excessive loss, written premiums increased 6% year over year. We continue to see great momentum across the business. The year over year increase in losses was primarily driven by an increase in exposure. Inventory exposure increased by $9 billion, or 23% to the prior year. But importantly, our weather loss ratio remains in line with the five-year historical second quarter average. Our reinsurance program continues to materially reduce weather exposure within the book. Looking ahead, our focus remains on leveraging relationships in auto finance and growing earned premiums over time. This remains a key driver of our long-term, capital-efficient other revenue expansion. Corporate finance results are on page 12. Core pre-tax income of $96 million reflected another strong quarter and translated to a 31% return on equity. Net financing revenue of $108 million was up $4 million quarter over quarter and down $4 million year on year, with the annual decline driven by lower amortized fee income. End-of-period HFI loans ended at $11 billion. an increase of $1.3 billion year over year, reflecting our focus on prudently growing the business. We had no new non-performing loans and recorded no new specific reserves, a leading indicator of stable credit. Criticized assets and non-accrual loan exposures were 10% and 1% of the total portfolio, near historically low levels. The team has leveraged its longstanding relationships with financial sponsors, along with the strategic expansion of our product suite to drive accretive, responsible loan growth even in a competitive market. Turning to page 13, I'll close with a brief update on our financial outlook. We're pleased with the execution of our core franchises. Our financial performance through the first half of the year has been in line to better than we expected in January. On net interest margin, we have maintained our prior guidance range of 3.4% to 3.5%. We see a path to the upper half of that range based on current trends. Of course, the timing and magnitude of rate cuts will influence the exit rate given our near-term asset sensitivity, but we remain confident that full-year results will align with our guidance across a variety of interest rate scenarios. Turning to credit, we are narrowing the range of our retail auto net charge-off guidance by 10 basis points to a range of 2 to 2.15%. which results in a full-year consolidated net charge-off outlook of 1.35% to 1.45%. We're encouraged by the strong trends year-to-date and a solid 2Q delinquency exit, which together give us incremental confidence in near-term portfolio behavior. That said, we continue to approach credit with caution and discipline given the current macroeconomic backdrop. Moving to average earning assets, we now anticipate balances to decline by around 2% year over year. Through the first half of the year, commercial floor plan balances have been lower than expected due to tariff-related announcements following our January guidance. Dealer inventory trends are choppy and difficult to predict. However, lower floor plan balances are supporting healthier dealer fundamentals, reinforcing our confidence in the credit quality of the portfolio. So in total, some moving pieces to our full-year financial guidance, but we're on track or ahead of our performance expectations for the year. With that, I'll turn it back to Michael for a wrap-up.

Thank you, Russ. Before we turn to Q&A, I'd like to close by highlighting a few key points on our strategic positioning. We've taken deliberate and decisive actions to fortify the foundation of this institution. This includes solidifying our capital and liquidity positions and reducing interest rate risk and credit risk. We maintain over $4 billion in excess capital above our regulatory minimum and stress capital buffer. And both headline and fully phased-in CE2-1 are meaningfully up year-over-year. This, despite absorbing the final CECL phase-in, changing the accounting method for EV tax credits, and redeploying capital to reposition the securities portfolio. We bolster our capital position through non-core business sales, including our point-of-sale lending and credit card portfolios. We enhanced our toolkit with credit risk transfers, which we plan to continue to use opportunistically going forward. On the liquidity front, we maintain over $66 billion in available liquidity, representing 5.9 times uninsured balances. Deposits represent 90% of our interest-bearing liabilities and 92% are FDIC-insured, both among the highest in the industry. These efficient, stable deposits remain a key component in our strategy and overall profitability, enabling Ally to generate compelling returns. The deposits platform has created a uniquely strong funding profile and is a key differentiator for Ally. We have also materially reduced interest rate risk through a combination of our hedging program, securities repositioning, and continued remixing of the loan portfolio. On the credit side, we proactively reduced risk and volatility by eliminating exposure to higher risk unsecured consumer credit. Within retail auto, we made targeted underwriting enhancements to strengthen credit performance while preserving strong yields and risk-adjusted returns. These steps position us well to navigate potential headwinds, from tariff-related affordability pressures to the resumptions of student loan repayments and broader consumer health dynamics. We also made significant investments in our collection strategies, introducing targeted digital capabilities that improve customer engagement and payment behaviors. Through it all, we remain committed to rigorous cost discipline, with controllable expenses declining for a seventh consecutive quarter. At the same time, we continue to invest with intention, allocating expense dollars to areas that drive revenue growth and expand operating leverage. This includes our insurance business, where we're focused on driving profitable written premium growth. We're also prioritizing investments across other critical areas, enhancing cyber defenses, advancing AI capabilities, and developing innovative products, tools, and solutions that elevate the customer experience. This focus on cost control will continue to be a core pillar of our strategy as we remain mindful on how we deploy every dollar of shareholder capital. So let's pull all this together. The actions we've taken to improve returns and reduce risk have meaningfully strengthened our foundation. As a result, We believe we are in the strongest strategic position we've been in as a public company. And with that, I'd like to turn it over to Sean for Q&A.

Thank you, Michael. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Daniel, please begin the Q&A.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question comes from Sanjay Sakrani with KBW. Your line is open.

Sanjay Sakrani Thank you. Good morning. My first question is on net interest margin. Obviously, good traction there. You've had a couple of headwinds and still saw very good performance in NIM. Russ, I got sort of the guidance you gave for the second half. I'm just curious what could lead you to outperform that expectation or underperform that expectation, sort of what's baked into your assumptions for the rate outlook in the second half. And then just specific to the 4% NIM target, what's the timeline from this point onwards to get there?

Great. Thanks for the question, Sanjay. Maybe I'll... Maybe I'll start with your question around things that are driving the NIM outlook or the NIM guide for the year. As we said on the call, the second quarter expansion, particularly when you look at it excluding the headwind from the card sale, was particularly strong. And we had a number of items that are now baked into our NIM at 345, but, you know, that aren't expected to contribute to NIM expansion going forward. And so, you know, as we think about NIM expansion in the remainder of the year, I think you need to factor that in. So, for example, we got eight basis points from the combination of the securities repositionings that we did towards the end of first quarter. as well as the benefit we got from the recovery in lease termination performance. And there were some good guys also that we saw throughout the quarter associated with securities repayments as well as some acceleration in retail auto loan repayments that We think skewed towards higher credit, lower yielding customers who may have been going into the dealership to get new vehicles ahead of the implementation of tariffs. So we saw some good guys in the quarter. We also saw, you know, we also I would say would continue to expect benefits from liquid deposit repricing and CD repricing going forward, but probably not as big as what we saw in the second quarter. And so as you'll recall, we had reduced rate on liquids by 20 basis points in the first quarter. We saw the full effect of that in the second quarter. We also saw the benefit of CD repricing. So we had $23 billion of CDs repriced in the first half of the year with a repricing spread of about 100 basis points. We certainly expect to continue to benefit from both repricing on liquids and CDs, but smaller. And so you saw we had a 10 basis point reduction. in liquid pricing late in the second quarter. We'll benefit from that in the third quarter. We added to the supplemental some of the stats around CD repricing, and so you can see the volume of CDs repricing in the second half is smaller. But in addition, that repricing spread is also smaller as we go forward. So we'll continue to benefit from all that, albeit at a smaller pace. As we think about the things that impact NIM positively or negatively with respect to our guide, as we've said before, we are asset sensitive in the very near term. We're liability sensitive in the medium term. And so to the extent that we see, similar to what we saw last year in terms of frequent and significant cuts in the rate environment in a short period of time, that's something that's going to negatively impact us in the short term. As we think about what we factored into our rate outlook, we've considered a range of different paths for rates. Our base case assumes three cuts in the back half of this year, and then additional cuts early in 2026. That being said, you know, our guide for this year, for 2025, is relatively insensitive to those cuts depending on, you know, assuming that they come late in the year. But obviously to the extent that we see, you know, more significant cuts that could impact us certainly in the short term. Similar to last year, we'd expect that over the medium term, we get the benefit from those cuts as we are liability sensitive. And so, you know, as we realize our full deposit data. And I would also point out, you know, in the quarter with the last cut in liquid pricing, we did realize our 70% deposit data. And so, you know, to the extent we saw bigger cuts than we expect, that's something we benefit from next year as well. Your last part of your question around the 4% guide. So post pro forma for the sale of card or post the sale of card, we're targeting towards the high threes, right? Remember, just taking into account that 20 basis point headwind from the card sale. we still feel very confident and comfortable with that outlook. You know, as we've said before, you know, we're not going to put a particular quarter on it, given that near-term asset sensitivity that we've discussed. But, again, we feel great about achieving that guide, and we think the momentum that we showed this quarter, and I think the confidence that's expressed in our guide for the rest of the year, you know, I think both all speak to that confidence.

Thank you. Thank you for the detailed explanation. Michael, just one quick one for you. Obviously, credits seems better in control now with the 2022 and 2023 vintages kind of performing better. I'm just curious, do you feel like it might be time to lean in a little bit more towards growth, or do you feel pretty good where you guys are at right now, just trying to think about if you could get an acceleration in growth as a result of the underwriting stuff that you guys have done? Thanks.

Yeah, no, it's not a great question. And, you know, this is overall on credit. You know, the phrase I would use is we're encouraged by the trajectory in terms of what we're seeing. Clearly, delinquency performance on a year-over-year basis. You look at the individual buckets. You look at some of our roll rate trends where used car values are holding up. You know, it's all pointed to something, you know, encouraging. That being the case, I think you've heard us say before, you know, we're going to be very disciplined and prudent when it comes to... you know, unwinding and the curtailment that we've undertaken. And so we're going to be a bit data-informed. You know, there's still a lot of uncertainty in the environment and we're, you know, you can never get perfect clarity on a go-forward basis. I know that. But we're going to be prudent to be data-informed is the way I would view it. And so nothing to call right now, but, you know, if and when we make the changes, we'll certainly be transparent about that.

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

Hey, good morning. Thanks for taking my questions. I just wanted to circle back on your credit trends. They certainly seem to be improving and inflecting here. I know, Michael, you just talked about some of the roll rates and used car prices, but I guess just You know, affordability concerns aside over the longer medium term, should we be expecting used car prices to continue to, you know, help credit over the back half of the year? And I guess, you know, I think you are, you know, still evaluating whether you want to maybe pare back the S tier a little bit more and get some more yield, but What would be the consideration at hand or the benchmarks you'd look at before you decide you want to lean a little bit back more into that below S tier tranche?

Thanks, Jeff, and good morning. There's a lot in there to dissect in terms of that question, and so maybe I'll just start generally with our overall outlook around credit. And you mentioned used car prices. As we've said in prior discussions, you think about credit in terms of, you know, kind of the given year in terms of really kind of three kind of broad variables. You know, our overall delinquency rates, our flow to loss, and then, of course, as you pointed out, used car prices. And I'd say all three of those things play into our expectations for a given year. And, you know, as Michael and I pointed out on the call, delinquencies have improved, but we'd still characterize them as elevated, right? And so that's certainly something that factors into how we think about the outlook going forward. Our flow to loss rates, you know, obviously coming out of last year in the fourth quarter, so far this year, you know, have been really solid. And that's something that gives us a lot of encouragement. I think that's a reflection of, you know, kind of the servicing strategy changes that we've made, as well as the vintage rollover to the newer vintages, you know, kind of the 23, 24, and now the 25 vintages. And then, as you pointed out, used car pricing has been strong. You know, part of that may in fact be related to the broader macro and tariffs in particular. You know, but as we think about our credit guide for the year, we're kind of looking at really all three of those variables. And, you know, we've seen some encouraging signs over the last six months and the fourth quarter of last year in terms of all of those. And I'd say, you know, we're looking forward to kind of continuation of improvement in delinquencies, you know, strong flow to loss and used car prices. And, you know, those things give us a lot of confidence with the guide that we have in front of us. As Michael pointed out, as we look at real-time decisions around how we underwrite in terms of new originations, it's very much data-driven. We're looking at recent vintage performance, and we're looking at a really granular level in terms of places where we open and close and widen our approach on a micro-segment basis.

Okay, great. Thanks, Russ. And if I could just sort of talk about capital return or ask about capital return. You know, you've talked about the higher CET1 levels and consistent organic capital generation is a key factor in determining a return to share or purchase here. It does look like you're very close to that 10% CET1, which is a nice buffer from where you've targeted historically. I know you still have that. you know, AOCI hit to deal with. But, you know, we've been asked by investors if next year's stress test is sort of the right barometer we'd be thinking about for capital return. Is that necessarily a gating factor you think about? Or maybe just talk a little bit about how you're thinking about capital return over the medium term here?

Sure. Look, I think the increase in our capital ratios, you know, over the course of the last year has been really encouraging. And, you know, as you pointed out, seeing real progress both in terms of our stated CET1 as well as our fully phased in CET1, which gives us a lot of encouragement. We're clearly moving in the right direction. And that combined with just improvement in our overall margins and earning profile and our ability to generate capital organically give us a lot of confidence around kind of getting to the point where we can look at share repurchases. And as you know, that's a priority for this team. It's a priority for this company. As you think about the timing of that, we don't really think about it in terms of the stress test. I mean, if you look at our capital level now at 9.9% CET1 versus our CCAR requirement, you know, at 7.6%, you know, we carry a considerable amount of excess capital related to that. And so we don't see that as a gating item. And so we're really looking towards our fully phased-in CET1 ratio and our organic capital generation just based on the strength of our earnings. Those are really the two things that we're looking at in terms of kind of getting to the point where we can repurchase shares.

Okay, great. Thank you.

Thank you. Our next question comes from Ryan Nash with Goldman Sachs. Your line is now open.

Hey, good morning, Michael. Good morning, Russ. Maybe just to follow up on credit, so it's good to see delinquencies, you know, better delinquency and performance. They're now down year over year. I guess sort of a two-part question, like, Russ, what we need to see or what would it take to actually move the charge-off range down? And Last quarter you talked about shifting seasonality. Maybe just help us think about seasonality for the back half of the year on losses. Thank you.

Sure. Thanks for the question, Ryan. And maybe kind of building on my answer to Jeff's question earlier, we've talked about these kind of three variables, the kind of delinquency rates, the flow to loss. and used car prices. And just to get your question directly in terms of what would we need to see to get to, and maybe I'll characterize it, what would we need to see to get to the low end of our range? I'd say, look, we'd have to see continued improvement in delinquency levels, continued strong flow-to-loss rates, and continued strong used car prices, really a continuation of what we've been seeing so far this year. That being said, we have a guide. We have actually taken some of the high end of the guide off the table this quarter, but we do have a guide, and that guide entertains a range of potential outcomes. The way I would characterize that is, you know, even with the improvement we've seen in delinquency this quarter, we're still operating at elevated delinquencies. You know, we're entering an environment where the general expectation is for unemployment to worsen. You know, and so as we look forward, you know, we think about a range of potential outcomes depending on kind of what could transpire in terms of delinquency, how flow to loss behaves, and, you know, all that in the context of, a macro that could weaken, in particular with respect to unemployment, which is an important variable for us. So a lot that goes into kind of how we think about that guide. But again, we've taken 10 basis points off the top end of that, and so you should take that as an encouraging sign in terms of our building confidence around credit. On your question on seasonality, I think you're right to point out seasonality has been changing post-pandemic with kind of higher payments with the cumulative effect of inflation over the last few years. We are seeing changes in seasonality, and I'd characterize it as seasonality is muted now relative to how it looked pre-pandemic. We see kind of smaller dips moving from first quarter to second quarter in terms of NCO rates, and our expectation is to see smaller pickups as you move from second quarter through the back half of the year. And so we've taken that into account. We've updated our own models in terms of how we think about seasonality internally, and that's something that is baked into our NCO guidance for the remainder of the year.

Got it. And maybe as a follow-up, you know, we saw seasonal declines in the deposit book, but we obviously had, you know, really nice repricing. Maybe just talk about the strategy on deposits from here. I know that there's been remixing, you know, within the portfolio. And, you know, are there further opportunities to optimize? And how were you thinking about the tradeoff between growth and price as we look to, you know, further easing that could be coming in the back half of the year. Thank you.

Sure. Look, I'd characterize the quarter as kind of going exactly as expected. There's kind of really nothing notable that I would point to in the way the deposit book performed in the quarter. And I'd say it just reflects really solid performance across the board. So in terms of balances, as you pointed out, natural seasonality, as you know, This year, similar to 2024, we're managing for kind of full year flattish on deposits, which could be plus or minus one or a couple billion dollars. But we're managing towards flat similar to last year. And similar to last year, we saw very similar outflows during the second quarter. It's seasonality driven. It's a lot to do with the tax season. And so we look at that deposit balance performance as being very much consistent with what we're trying to do from a business perspective in terms of managing towards flat. On the pricing side, we feel pretty good about where we are from a pricing perspective. As we pointed out on the call, we achieved the 70% beta we targeted off of the Fed's rate cuts in the back part of last year. And so very much in line with our expectations and I'd say the competitive environment has pretty much behaved pretty much accordingly. And so I'd say the quarter in terms of how we look at the performance in terms of both balances as well as in terms of pricing is very much behaving consistently with the strategy that we've been executing this year as well as last year. That being said, as you also pointed out, we have seen some shift and it's continued shift in terms of our deposit book where we've seen a shift perhaps away from some of our more rate-sensitive customers and towards what we would characterize as our more engaged customer base. We think that's a good thing in terms of the migration of the book and points towards kind of greater deposit stability as we think about the book going forward.

Thanks for the call, Russ.

Thank you. Our next question comes from Moshe Orenbuck with TD Cowan. Your line is open.

Great. Thanks. And, you know, I think the improvement in capital that you've shown has been pretty notable. I guess I'm kind of maybe, you know, you still talk about using these CRT transactions. I guess it's not clear to me what those would do for you at this point, given that they have a revenue cost. It seems like the alternative might be to try and continue to chip away at the AOCI and, you know, maybe you could talk about how you're thinking about those tools as getting you closer to the point at which you could buy back stocks.

Yeah, so maybe I'll start with CRTs. And, you know, what the CRTs effectively do is, you know, we're basically transferring credit risk related to a portion of the portfolio, you know, generally skewed towards kind of higher credit quality loans within the portfolio to the capital markets. You know, in exchange for that, we're able to lower the risk weighting on those loans. And so the benefit there is lower risk weighting, which effectively translates into a pickup in terms of CET1, both on a stated basis as well as on a fully phased-in basis. It's a very cost-effective system. source of capital, if you kind of think about that CET1 pickup versus the cost of the effective capital markets insurance that we're picking up. We think it's a mid-single-digit cost of capital type venture. And so we think that's an economically attractive way of building capital and managing our book and preserving our capacity to both grow organically and to ultimately repurchase shares. And so We like the CRT. It's a tool that, again, as we said on the call, we expect to deploy over the back half of this year, and we think it'll help us in terms of adding more to our CET1 ratios moving forward. As far as additional securities repositioning transactions, As we said coming out of the first quarter, we had done two securities repositioning transactions. We feel like we took out the low-hanging fruit within our portfolio in terms of balancing what we were trying to achieve in terms of reducing our rate risk going forward and also getting some NIM pickup. And so we feel pretty good about what we have done, and we don't anticipate doing any more securities repositioning transactions certainly in the near term.

Got it. And thanks. Sorry for this next one not being or being so kind of technically oriented. But maybe, Russ, could you talk a little bit more about the the insurance business and what the renewal kind of means for profitability of the insurance business over the next year? You know, how how, you know, can you recover that in pricing and how we should kind of think about that? Thanks.

Yeah, no, it's a great question. You know, as you'd expect, the renewal terms, you know, tightened on the back half of the experience that we saw in the last reinsurance cycle. You know, and so, you know, effectively the pricing is similar to last year, albeit at kind of higher deductibles or attachment points. And so that's something that we've baked into how we think about the insurance business going forward. The great thing about the insurance business is that those policies on the floor plan side, which is where we get impacted by weather, we reprice those annually. And so we're able to factor in kind of how we think about pricing in terms that we offer our dealers more broadly kind of based on what we're seeing in the reinsurance market on a very real-time basis. We continue to be very bullish on the insurance business. That's a business we're going to continue to invest in. It's accretive to our returns, and it's a valuable source of non-interest revenue for us. And so we're going to continue to invest in it, and we think the returns there are very robust and very stable moving forward. So that's a business we just, again, we continue to be very bullish on.

Thank you.

thank you our next question comes from john punkari with evercore your line is open morning um i just wanted to go back to the uh asset growth uh topic i wanted to just ask a bit more about you know the current limitations on growth i mean i hear you regarding You're going to be selective about when you scale back your curtailment and your overall risk appetite. And then I know you have the mortgage loan runoff as headwinds as well. But, you know, we're still seeing some, you know, solid auto origination activity. The backdrop still seems conducive for auto growth. So, can you remind us, you know, what are the greatest limitations as you look at the coming quarters, the greatest limitations on growth. Is it still the risk profile, or is it the focus on returns over growth, or is it your capital considerations? Thanks.

Great. Maybe I'll start. I imagine, Michael, you're going to want to comment on this as well, so I'll try and keep it brief. Look, I'd say as you look at that the second quarter, you saw the growth very much aligned with our focus strategy. And so you saw auto originations at $11 billion, pickup from a year ago, strong pickup from our first quarter origination levels. Similarly, you saw growth in our corporate finance book. at $11 billion, up about $1.3 billion from prior year. And so, again, you see growth focused exactly aligned with our strategy. And as you pointed out, we continue to see runoff in the mortgage book. Obviously, we saw the divestiture of the card business and the assets associated with that. And at the same time, you also saw our commercial floor plan balances somewhat muted. And that's really the main driver of the change in our guidance is kind of what we're seeing on the lot in terms of commercial floor plan balances. They've been muted. You know, certainly with tariffs, with all the activity on the dealer lots in the first half of the year, that's been, you know, that's been helpful to the dealers in terms of their overall health. You know, but it's hit the balances somewhat. You know, we're not concerned about that. In fact, again, it's a good thing in terms of dealer health and it actually contributes to their profitability as well. They don't have to carry around these large floor plan balances. So, We feel good about it overall, but it has caused us to make this adjustment to our earning assets outlook for the year. And so, again, I'd say what we saw in the quarter was very consistent with our focus on drawing the retail auto loan and corporate finance books. And I would characterize that strategy as being one of prudent growth. And so with retail auto loans in particular, you saw it in terms of S-tier continued to be north of 40%. the originated yield at 9.82%, again, very strong. And so you kind of see that kind of prudence. And so I'd say capital is not, at this point, what I would characterize as a limiting factor. I'd say it's more about being prudent about growing with an eye towards both credit as well as return and kind of getting the risk-adjusted returns that we like.

Yeah, maybe, Russ, maybe I'd just... wrap up with a sort of doubling down this notion of being quite disciplined in terms of what we're doing. If I ladder up and just take a look at the quarter, and I'd say that we're very pleased with the quarter results and are encouraged by the trajectory that we're seeing. If you look at what we've delivered this quarter, I think it's a real demonstration that this focus strategy and discipline execution are working. You've probably heard over and over again, we've talked about three things that we're really focused on is net interest margin, reducing auto credit losses and being disciplined in our expenses and our use of capital. We delivered against all of those this quarter, and I think the trajectory on a go-forward basis is attractive. Look, with growth, we're going to be very prudent, but I keep on anchoring back to those three things that we're really focused on, and we're quite pleased with the performance that we've seen with those.

Got it. Okay. Thanks for that. I appreciate it. And just one more, one quick follow-up just on On a competition, you saw the solid 9.8% retail origination yield. You know, what's your expectation there in terms of the origination yield? And, you know, a lot of banks and other players are back in the auto game here. So what do you see in terms of implications for origination yield as you consider that?

Yeah, I'd say, you know, we did see banks – Coming in a little stronger during the quarter, we saw the overall kind of bank market share increase. We've seen some of the banks that have reported already talk about their auto businesses specifically, and a few of them have shown significant pickups in terms of origination volume during the quarter. That being said, and as you pointed out, John, we had a great quarter. We had record application volume. Yeah, we had a strong yield actually up a couple of basis points from the first quarter, and we continue to see strong originations in the S tier. And so, yeah, we feel really great about where we play in the market. We think we're differentiated in terms of our relationships with dealers, and I think our focus on used is as well as Prime and kind of where we play in the market is clearly kind of resonating with dealers and gives us some support in terms of being able to continue to be disciplined and grow our business as we kind of think about things going forward.

Thanks, Russ. I'm showing a little past the hour here. So that's all the time that we have for today. If you have any additional questions, as always, please reach out to Investor Relations. Thank you for joining us this morning.

This concludes today's call.