Ally Financial Inc.ALLYNYSE
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Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2025 Ally Financial Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 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, Chief Financial Planning and Investor Relations Officer. Please go ahead.
Sean Leary: Thank you, Daniel. Good morning, and welcome to Ally Financial's Third Quarter 2025 Earnings Call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, 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 Page two, GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Page 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.
Michael Rhodes: Thank you, Sean, and good morning, everyone. I appreciate you joining us for our third quarter earnings call. Before we dive into results, I want to reflect on the refresh strategy we've rolled out in January, which has reshaped Ally into a more focused organization. These changes are not cosmetic. They are foundational, and the third quarter provides clear evidence that our strategy is working. If I had to choose one word to define this quarter, it would be momentum. Not isolated wins, but sustained improvement driven by our 10,000 colleagues who are executing with discipline, urgency, and purpose. We are seeing it in the traction each of our three core business franchises have with our customers. We're seeing it in our financial performance, and we're seeing it in the way our teams are showing up every day to serve our customers in a compelling way. With that, let's turn to our third quarter financial results. We achieved significant year-over-year earnings growth with adjusted EPS up 166% to $1.15 per share. Core ROTCE was 15% on a headline basis and about 12% excluding the impact of AOCI. These increases are driven by embedded structural tailwinds in the balance sheet, continued credit normalization, and disciplined expense and capital management. Third quarter adjusted net revenue of $2.2 billion, up 3% year over year, despite the sale of the card business earlier this year. Excluding the sale of credit card, year-over-year net revenue growth was 9%. Net interest margin excluding core OID, expanded to 3.55%, up 10 basis points quarter over quarter driven by continued optimization on both sides of the balance sheet. And we remain confident in our ability to deliver on our medium-term target. Meanwhile, CET1 of 10.1% equates to $4.5 billion of excess capital above our regulatory minimum. Importantly, these results reflect momentum across our franchise. Margin is expanding with a clear path to the upper 3% range. Operating leverage is improving, supported by top-line revenue growth and disciplined expense management. Credit trends are supportive as delinquency rates continue to normalize and the net charge-off rates improve due to underwriting actions and servicing enhancements implemented over the past two years. And our capital ratios are growing steadily. Expense discipline remains paramount, and this quarter, we rolled out our proprietary AI platform, ally.ai, to 10,000 teammates to help them streamline tasks, automate routine work, and make more informed decisions. Looking beyond the financial results, our unmatched brand and leading culture continue to provide distinct advantages in the markets we serve. Our brand continues resonating in the market as consumers once again choose Ally for a reputation at a higher rate than the industry average. Our employees show up for our customers and communities every day, and that impact is felt in everything we do. While recognition is never the goal, Ally was recently honored by the American Banker with an award for the most powerful woman in banking, top team. That's a first for a digital-only bank. We also climbed the rankings on Fortune's best workplaces within our industry. Recognitions like these are testament to our culture, our people, and what it means to be uniquely Ally. With that context, let's turn to Page five and discuss the core franchise that are fueling our momentum and position us for sustained growth moving forward. Dealer financial services continues to be the cornerstone of our performance. Within the auto finance business, consumer originations of $11.7 billion were driven by 4 million applications. That's our highest application volume ever. The strength of our dealer relationships and the scale of our franchise enable us to be selective in loans we book, optimizing for both pricing and credit. Simply put, dealers want to do business with Ally, and we're seeing it in our results. Our differentiated model provides dealers a comprehensive suite of solutions spanning consumer and commercial financing, smart auction, and pass-through programs, and a broad range of insurance products. This positions Ally as a unique strategic partner to our customers. Originated yield came in at 9.7% with 42% of originations for our highest credit quality tier, a direct reflection of our disciplined strategy to balance attractive pricing with prudent risk management. Turning to insurance, we continue to leverage synergies with auto finance to enhance the overall value proposition we offer to our dealer partners. Our insurance team remains focused on expanding relationships and deepening engagement with the 7,000 dealers they currently support. In Corporate Finance, we delivered another strong quarter generating a 30% ROE, along with 10% growth in loan portfolio. We're maintaining disciplined risk management while actively exploring new verticals, structures, products, and solutions to generate incremental accretive business. This is a business built on trust, speed, and performance, and we're committed to scaling it responsibly. Turning to our digital bank, it remains a key differentiator in the marketplace. Our customer-first approach continues to set us apart. We ended the quarter with $142 billion in balances, reinforcing our position as the largest all-digital bank in the U.S., serving 3.4 million customers. Deposits remain the foundation of our funding profile, representing nearly 90% of total funding. 92% are FDIC insured, demonstrating the strength and stability of our deposit base. Our mobile app continues to earn top-tier accolades for customer satisfaction, and our suite of digital products is driving deeper engagement, fueling loyalty, and reducing rate sensitivity. Before I turn over to Russ, I want to leave you with this. We are pleased with our progress and even more confident in where we're heading. But let me be clear, we still have work to do. We are doubling down on our core franchises. They are driving improved results and setting us up for focused growth moving forward. We're creating long-term value for shareholders, customers, employees, and the communities we serve. We've built a differentiated foundation, resilient, scalable, and aligned with our long-term goals, and we see room for organic growth across each of our businesses over the years to come. Momentum is real, and we are confident in our ability to sustain it. And with that, Russ, I'll turn it over to you to walk through the financials in more detail.
Russ Hutchinson: Thank you, Michael. I'll walk through third quarter performance starting on Page six. As mentioned last quarter, our financial results reflect the closing of the sale of our credit card business at the beginning of the second quarter. Prior year comparisons may be impacted by the sale, I'll highlight those areas as we move through the results. Excluding core OID, net financing revenue totaled $1 billion, up approximately 4% on a linked quarter and year-over-year basis. We continue to benefit from the momentum in our core franchises, given ongoing optimization of deposit pricing, and strategic remixing of the balance sheet toward higher-yielding asset classes. I'll provide more detail on margin shortly. Adjusted other revenue totaled $557 million, up 5% quarter over quarter and approximately flat year over year. Growth in insurance, smart auction, and our pass-through programs offset the headwinds in the sale of credit card and ceasing mortgage origination. Taken together, total revenue of $2.2 billion is up 3% year over year, but up 9% when you adjust for the sale of credit card. Provision expense of $415 million was down approximately 36% year over year given continued normalization in retail NCOs and reserve build in the prior year period. In retail auto, the NCO rate declined 36 points year over year to 1.88%. We continue to be encouraged by the trends within the portfolio as Vintage Dynamics and enhanced servicing strategies drive favorable loss trends. I'll cover credit performance in more detail shortly. Noninterest expense was $1.2 billion, down $22 million sequentially and up $15 million versus the prior year. As mentioned previously, controllable expenses were up year over year driven by nonrecurring benefits recorded in 2024. We continue to anticipate flat expenses this year and are committed to maintaining disciplined expense management going forward. In total, adjusted earnings per share of $1.15 was up 166% year over year. Another encouraging step as we progress towards our medium-term targets. Turning to page seven. Net interest margin, excluding OID, was 3.55%. An increase of 10 basis points from the prior quarter. On a quarter-over-quarter basis, NIM expansion was driven by repricing of the liquid deposit and CD portfolios, and continued remixing of the balance sheet as growth across retail auto and corporate finance replaced lower-yielding mortgages and securities. Retail auto portfolio yield, excluding hedges, was up two basis points quarter over quarter to 9.21%. Looking ahead, we expect modest expansion in portfolio yields. Lower benchmark rates will influence originated yield and impact the portfolio's ultimate trajectory. But retail auto loan growth is expected to support accretive remixing of the balance sheet. Industry-wide liquidation activity has increased, partly due to demand pull forward. Traditional trade-ins continue to represent most of the activity, and liquidations have been concentrated in lower-yielding loans, resulting in minimal impact to net interest margin. On the liability side, 3Q results reflected the full benefit of the 10 basis point reduction in liquid savings rates we made in June, and a modest benefit from our most recent liquid savings rate reduction in September. We also continue to benefit from the natural tailwind in CD repricing as $8 billion of CDs carrying a 4.3% yield during the third quarter. The value of our brand extends well beyond rate, and fosters our consistently strong retention and renewal rates. The stability of the portfolio and our pricing power the strength of our digital bank. With balances tracking in line with our expectation of relatively flat balance for the year. Just like last year, we expect deposit beta will start slow and gradually migrate to our cumulative beta target. We have included an additional schedule in the appendix providing a detailed view of how deposit beta played out starting this time last year as the Fed reduced benchmark rates by 100 basis points from 5.5 to 4.5%. This historical example is not guidance. But we feel it's a valuable comparison to frame how beta evolves to a series of Fed fund rate reduction. As we've previously noted, Ally is the liability sensitive over the medium term but asset sensitive in the very near term. Driven by floating rate commercial loans and pay fixed hedge exposure. Therefore, reductions in short-term rates particularly material reduction, pressure margin expansion early on. I'll discuss our outlook for margin in more detail shortly. Turning to Page eight. Our CET1 ratio of 10.1% represents approximately $4.5 billion of excess capital above our SCD minimum. On a fully phased-in basis for AOCI, CET1 for the period is 8%, an increase of 90 basis points year to date. In August, we executed a $5 billion retail auto credit risk transfer transaction which generated approximately 20 basis points of CET1 at issuance. With significant investor demand, the was the tightest spread we have seen today. We will continue to use these structures opportunistically as a mechanism to efficiently supplement organic capital generation. To date, we've completed three transactions, and while they provide a low cost of capital, we remain balanced in our use given the relatively short duration of the capital they generate. Our capital management priorities remain unchanged. We are focused on deploying capital to drive accretive growth in our core franchises, while continuing to move our fully phased-in CET1 level higher. Last week, we announced a quarterly common dividend of $0.30 per share for the 2025. Consistent with the prior quarter. Share repurchases remain a key capital management priority. The continuing strength of our CET1 position and increasing organic capital generation through earnings. Provide greater flexibility, and inform the appropriate timing to resume repurchases. Turning to book value at the bottom of the page. Adjusted tangible book value per share of $39 increased over 11% from the prior year. 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 nine. Credit trends across our portfolios remain encouraging. The consolidated net charge-off rate was 118 basis points. A decline of 32 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 188 basis points. Up 13 basis points sequentially given seasonal trends, but down 36 basis points year over year. A third consecutive quarter of year-over-year improvement reflects strong performance from recent vintages and the benefits of continuing servicing enhancements. Moving to the top right of the page, 30 plus all in delinquencies of 4.9% is down 30 basis points from the prior year and marks the second quarter of improvement year over year. This continued improvement further reinforces our constructive view on the near-term loss trajectory within our portfolio. But we continue to assess the dynamic macro environment. Vintage level delinquency trends are included in the supplemental section of the earnings presentation and are also disclosed in our 10 Q and 10 Ks. The benefit of vintage rollover continues to be evident in actual results. Turning to the bottom of the page on reserves. Consolidated coverage increased one basis point this quarter to 2.57%. While the retail auto coverage rate remained flat at 3.75%. Our retail auto coverage levels continue to balance the favorable credit trends within our portfolio against an uncertain macroeconomic outlook and softening employment. Our modeled reserve contemplates the consensus outlook with peak unemployment of 4.6% before reverting to a historical mean near 6%. As we have consistently messaged, 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. Pretax income of $421 million was up $66 million year over year, primarily driven by lower provision expense. Our lease remarketing performance was breakeven for the second consecutive quarter. As noted, we expect remarketing performance to be less of a factor moving forward given the reduced volume of terminating units not covered by residual value guarantees. As illustrated on the bottom left, retail auto portfolio yield, excluding the impact from hedges, increased two basis points quarter over quarter. Originated yield of 9.72% was down 10 basis points quarter over quarter with 42% of retail volume generated from our highest credit tier. We actively calibrate our buy box to adapt to the evolving market, with a sharp focus on risk-adjusted returns. These capabilities give us conviction in our ability to sustain attractive originated yields through the cycle, while also improving the overall credit quality of our portfolio. Prime credit remained the majority of our originations in the quarter with average FICO of 708. FICO scores below 620 represented roughly 10% of volume while sub 540 volume was only 2%. Both consistent with historical trends. On the bottom right of the page, you'll see consumer originations of $11.7 billion, up 25% year over year fueled by a record 4 million applications. Importantly, strong application volume increases our ability to be highly selective in underwriting, targeting attractive risk-adjusted returns while maintaining discipline and prudence. For context, our 22,000 dealer network enabled us to look at roughly $125 billion worth of volume during the quarter. Providing the opportunity to drive accretive growth and monetize declined applications through our pass-through program. Turning to our insurance business on page 11. We recorded core pretax income of $52 million, which was up $6 million versus the prior year. Total written premiums of $385 million were up $1 million year over year and up $36 million on a sequential basis. We continue to leverage synergies with auto finance to drive momentum within the business. The year-over-year increase in losses was primarily driven by loss reserves as we grew the portfolio. We didn't observe any large weather events in 3Q. But our reinsurance program continues to reduce exposure within the book. Insurance remains a key component of our capital-efficient other revenue expansion as we continue to focus on growing our premiums over time. Corporate finance results are on page 12. Core pretax income of $95 million reflected another strong quarter with a 30% return on equity. Net revenues of $136 million was up $9 million quarter over quarter and down $10 million year on year. With higher syndication and fee income in the prior year driving the annual decline. End of period HFI loans ended $11.3 billion. An increase of approximately $1 billion year over year reflecting our focus on prudently growing the business. We delivered another quarter with no new nonperforming loans and no charge-offs. Criticized assets and nonaccrual loan exposures were 9%, and 1% of the total portfolio, remaining near historically low levels. We continue to leverage long-standing relationships with financial sponsors along with the strategic expansion of our product suite. Together, they drive accretive, responsible loan growth even in a competitive market. On page 13, I'll conclude with a brief update on our financial outlook. We remain encouraged by the momentum across our core franchises and the strong execution from our team. On margin, we narrowed the range to 3.45 to 3.5%. Consistent with what we indicated in July, we said we expected full-year NIM to land in the upper half of our 3.4% to 3.5% full-year guide. We expect fourth-quarter NIM to be roughly flat to third quarter as the Fed embarks on a series of Fed fund rate reductions. As a reminder, given our near-term asset sensitivity, the magnitude and timing of rate cuts will influence margin over the next couple quarters. We expect NIM to migrate to the upper threes over time, but it won't be a straight line. The strong NIM expansion we saw in the second and third quarters of this year following Fed actions at the end of last year support our confidence in our medium-term NIM trajectory. On credit, we've said full-year NCOs could fall towards the low end of our two to 2.25% guide if the constructive trends we were seeing declining delinquencies, strong photo loss rates, and supportive used car prices continued through the year. We now expect full-year NCOs of approximately 2%. At the low end of our full-year guide based on the continuation of those trends. We could print full-year NCOs a few basis points higher or lower than 2%, based on year-end, total loss rates, or changes in used car prices. As a reminder, the constructive trends we're seeing started in the fourth quarter last year, which will impact the year-over-year comparison in fourth quarter relative to what we printed in 3Q. As a result of the update on retail auto NCOs, our outlook for consolidated NCOs is now approximately 1.3%. We continue to approach credit with discipline. Ensure we remain well-positioned in the current macroeconomic environment. The outlook for average earning assets is consistent, but it's important to note the underlying growth trends. Our guide continues to be impacted by commercial floor plans. Dealers are maintaining leaner inventory levels due to the impact of tariffs, and the effects of demand pull forward. These leaner inventory levels are supportive to overall dealer health. However, even with this impact to average balances, we expect ending earning asset balances to be flat year over year. Growth in the portfolios we want to grow, retail auto and corporate finance loans, are offsetting lower inventory levels as well as the nearly $4 billion headwind from the sale of card and runoff of mortgage assets. This trade-off supports our margin expansion and earnings growth. Finally, we expect our full-year effective tax rate to be approximately 22%. The remainder of our guidance is unchanged, reflecting consistent execution across our business businesses. With that, I'll turn it over to Sean for Q and A.
Sean Leary: Thank you, Russ. As we head into Q and A, we do ask that participants limit yourself to one question. And one follow-up. Daniel, please begin the Q and A. One one on your telephone. And wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Sanjay Sakhrani with KBW. Your line is open.
Sanjay Sakhrani: Obviously, lots of jitters around some of the cracks that we've seen in subprime auto and just broader consumer credit trends. Michael, it seems like your metrics don't necessarily suggest a lot of that, and I know you guys have gotten ahead by containing some of the growth and tightening your underwriting standards. But I'm just curious if you can comment on that and sort of how you see the path forward and if you've seen any contagion, so to speak.
Michael Rhodes: And maybe I'll start. Sanjay, thanks. And Russ, if you see if have anything to add. But, look, we're observing consumer behaviors that are, you know, honestly better than our expectations. And, appreciate there's a lot of macro uncertainty in the but we're not seeing that impact our credit performance. And so we're we're you know, we feel good about what we're seeing right now.
Russ Hutchinson: Yeah. We're certainly, you know, benefiting from a lot of the decisions we made around underwriting, you know, dating back to 2023 when we really started tightening, and that's giving us the benefit in terms of vintage rollover that quite frankly still has some legs to it. We've also, as we've talked about before, made a number of enhancements to our servicing strategies. And so we've got some benefits kind of baked into the trends we're seeing in our portfolio. That we're seeing in the outcomes. I'd say as we kinda look through our portfolio, I know subprime has been a particular focus for folks. We look at some of our lower credit tiers and, quite frankly, those tiers are performing better than our expectations at the time when we price them. So, yeah, we continue to feel pretty good about what we're seeing in our book. You know, all that being said, we have to acknowledge that there's an uncertain macro, you know, and as you'd expect, we're watching that very closely.
Sanjay Sakhrani: Thank you. And just to follow-up on the NIM. Obviously, Russ, you gave us some sort of expectations on a go-forward basis with the push and pull of rates going lower, just, you know, that target of getting into the upper threes, I mean, like, over what timeline, you know, if you assume the forward curve, do you anticipate getting there? And then just on that specific point, if we think about the yields component, we've heard about banks kind of reengaging with the market. I'm just curious if you guys are seeing any impact related to that. Thank you.
Russ Hutchinson: Great. Maybe I'll start with your question on the NIM trajectory first. You know, we put in our presentation on page 19 in the supplemental portion, you know, a bit of a historical case study. We basically looked at our beta evolution following the Fed's rate reduction last year this time, as you'll recall, yeah, between September and December, they took a 100 basis points out of Fed funds. Know? And just as we're guiding this year, it translated into, you know, a slower early beta. And then what you really saw with us is, you know, that NIM expansion that we saw in, you know, was really driven by the catch-up of that beta. And so Q2 of last year and this past quarter Q3, yeah, that's a dynamic that we expect to repeat as the Fed has once again embarked on a series of rate cuts to fed funds. And so I think that provides useful help in terms of understanding how our NIM and our how our beta evolves through these rate-cutting cycles. And I think that should give you and others confidence in terms of our overall trajectory and how we see the path to high threes. On your second question around just kind of competition in the market, yeah, maybe I'd start by saying, you know, the level of competition in the market isn't unexpected to us. It's not unexpected to us to see, you know, other smart, sophisticated financial institutions recognize the attractiveness of the market that we play in. And, you know, we've talked extensively about just kind of how attractive we think our 2024 vintage has been in terms of the risk-adjusted returns on that vintage as well as, quite frankly, the '23. So, you know, it's not surprising to us to see other institutions attracted to the sector. And they've been here all year. I mean, we've seen that increased competition from a number of players all year. You know, all that being said, you know, we've been really thoughtful about where we play and how we play. And that's translated into a tremendous amount of momentum with our dealers. You know, we are a consistent player in the market. We are a consistent partner to the dealers and the OEMs that we work with. And we've been quite frankly rewarded in terms of the amount of application volume we've seen. We've had, you know, three straight quarters of record application volume. It's translated into, you know, really great originations both in terms of volume as well as in terms of credit and yield. You know, this is a large and fragmented market, and you know, I think we've been thoughtful about where we play. We've been thoughtful about providing a really attractive value proposition to our dealer and OEM partners. And we're seeing the benefit of that. I think we've also seen the benefit of, you know, some degree of demand pull forward just given some of what's going on with tariffs as well as the EV lease tax credit program that terminated at the end of last month. And so, you know, we're seeing some benefits in terms of volume there that have certainly helped in terms of creating a great opportunity set. But I'd say we feel really good about our ability to compete in this market. And our ability to continue to get, you know, really great originations in terms of credit, in terms of risk yield. That ultimately support our overall NIM trajectory.
Sanjay Sakhrani: Thank you, guys.
Sean Leary: Thank you. Our next question comes from Robert Wildhack with Autonomous Research. Your line is open.
Robert Wildhack: Hey, guys. The past few quarters, you've called out favorable flow to loss trends. Was wondering if you could just give us a quick update on what you're seeing there most recently. Are they still as favorable as they were earlier in the year?
Russ Hutchinson: Yeah. They've continued to be favorable. You know? And as you've seen, we've now had we've now seen delinquency levels overall start to come down, and I'd say, you know, we're encouraged by the fact that our flow to loss rates continue to be solid even as delinquencies have come down.
Robert Wildhack: Okay. Great. And then if I look back, in 2020, you bought back stock within an 8.5% CET1 ratio that was kind of fully marked for CECL. Obviously, higher than that on a reported basis. I appreciate that's not a perfectly comparable period to the present and obviously depends on the final rule going forward. But is there any reason you could think of why that wouldn't be, like, at least a reasonable benchmark for the potential for capital return going forward here?
Russ Hutchinson: Yep. Maybe I'll pull back a little bit, and I'll just maybe at the risk of reiterating some of the stuff we said in our prepared remarks. Yeah, we feel great about the progress we've made in capital over the course of this year. I mean, we've both increased our CET1 ratio, you know, on a stated basis and a fully phased-in basis, while supporting the growth of our core businesses. You know? And that obviously comes from a lot of hard decisions we made about the businesses that we've chosen to exit. It also comes from some of the flexibility we get from transactions like the CRT transactions that we've been doing and that we talked about earlier. But we feel great about our progress there. We also feel good about the organic capital generation of business and our outlook and our expectation that we'll continue to increase that level of organic capital generation. So, you know, we feel really good about the progress, and as we said in the prepared remarks, share repurchases remain a key priority for us in terms of capital management. And I did, you know, I kind of go back to the remarks that, you know, and I think you're kind of pointing out some of the right factors to consider. But, you know, as we continue to see improvement in our fully phased-in CET1 ratio, you know, and as we continue to see in our organic capital generation, yes, those are the things that we're gonna look towards in terms of determining the appropriate timing of returning to our share repurchase program. Yeah. Those are kind of the right important kind of benchmarks that we think about.
Robert Wildhack: Okay. Thanks.
Sean Leary: Thank you. Our next question comes from John Pancari with Evercore. Your line is open.
John Pancari: Good morning.
Russ Hutchinson: Morning, John.
John Pancari: Just wanna see if I could get a little bit of color around your earning asset expectation. I know you had reiterated the down 2% this year, and I believe previously you had indicated on a more normalized basis, which we believe would be more like 2026, that you could see the average earning assets up low single digits. So implying, you know, that inflection into next year, can you just give us that updated view there in terms of the components? Do you feel confident in that in the low single-digit pace that we could see next year and that inflection? And then maybe if you could also talk about liquidations. That you might be seeing. I know you had indicated that refinancing pressure has picked up a little bit, although off of a low base, but just driven by some of the larger competitors in the space. Wanted to see if that's continuing, if that poses any risk. Thanks.
Russ Hutchinson: Yeah. I'll start with the thanks, John. I'll start with the earning assets trajectory, and you know, I think the dynamics that you generally pointed out sound correct to me, and maybe I'll just kind of go through it a little bit. You know, what we've seen this year is, you know, we've obviously seen the impact of exiting the card business as well as mortgage. And then we've also seen the impact of leaner dealer inventories. And so at this, you know, so when we kind of look at our points of, you know, end-to-end earning asset levels start of the year, to our ending earning assets at the end of the year, you know, to point to flat, the way we get there is through growth in the portfolios we really want to grow. Our highest margin, highest returning portfolios in retail auto, and corporate finance. And so, you know, underlying that flat year-to-year comp on earning assets is really growth in the businesses we wanna grow. And the impact of winding down some of the stuff we've exited as well as softness on the dealer inventory side. As we look forward, you know, obviously, we've exited what we've exited. And so as we go forward, you know, really the dynamic comes to the ongoing runoff of our mortgage loan portfolio, which we continue to wind down versus the growth in our core businesses. You know? And as you know, from a business perspective, you know, floor plan's an important business for us. But it's important to us really, you know, as it supports a dealer relationship that gets us more business. That's higher margin that we really like in terms of retail auto loans as well as insurance and smart auction and pass-through. But as we look forward, our expectation is, you know, call it low single-digit percentage growth in earning assets overall. Obviously, you know, faster growth in the places that we really wanna grow in retail auto loans and corporate finance. You know, of course, the opportunity we said that we see will impact our overall growth rates in any particular period. But I think if you look at us over the medium term, you should generally expect that kind of single low single-digit growth overall but faster growth in retail auto loans and corporate finance.
Michael Rhodes: And, Russ, just to underscore that, like, we really feel good about the places we're growing. We're growing where we wanna be growing and think that will set us up very well.
Russ Hutchinson: Your question on liquidation rates. And I'd say, look. Liquidation rates are certainly normalizing, you know, from a period post-pandemic where they were a little lower. You know? But I would say, you know, when you think about liquidation rates, it's still predominantly a trade-in story. That is, it's more, you know, people trading in their vehicles as opposed to refinancing. They, you know, continues to be a pretty small part of the population overall. The auto product is not really a refinance product per se. All that being said, you know, we're seeing trends that are consistent with the industry. We are seeing refinances come up. But, again, it's coming off of a really small base. It's still a really small part of the overall picture. When we look at liquidations more broadly, you know, it's still kind of more driven by trade-ins, and it tends to be lower-yielding loans. And so it really hasn't had a significant impact on us from a NIM perspective.
John Pancari: Great. Okay. Thanks for that, Russ. Appreciate it. And then just one follow-up. Just around the business base, Mike, I was wondering if you can give a little color here. I know you made some real good progress in streamlining the business base. You talked about mortgage, talked about card exits, and really focusing on your core strength in auto and commercial in corporate finance. You know, over time, do you see any additional modifications to the business base, either expansion into areas that you feel better about from a risk-adjusted return basis, or you may not have critical mass now? I mean, just as you had time now to work with this business mix, how do you view that evolving longer term?
Michael Rhodes: Well, a great question. Thanks. Look. Overall, when I look at our businesses, I feel really good about the businesses that we're in. And, you know, one of the characteristics of the businesses that we're in and where we're investing and growing is they're generally fragmented businesses where we have what I call, relevant scale. As we feel great about our position today, we feel no desire. We're done doing any work to try to figure out, you know, what's the next, you know, kind of product line to go into. We think there's lots of organic runway in front of us. You know, are there gonna be adjacencies within dealer financial service or adjacencies within the corporate finance business, which are, you know, kind of close cousins to what we're doing. Yeah. There may be, and we'll look at those. But those are the situations where actually leveraging some strength we already have as opposed to try to do something totally new and different. And so, you know, think about what we've done in dealer financial service around insurance or the pass-through programs or smart auctions. Kinds of examples where we've got a great set of relationships and distribution capability with our customers. And there's something else that fits that nicely, yeah, we'll be looking at those. But kind of going, you know, far afield and other types of products, that's not on the radar screen.
John Pancari: Okay. Great. Thanks for taking my question.
Sean Leary: Thank you. Our next question comes from Jeff Adelson with Morgan Stanley. Your line is open.
Jeff Adelson: Hey, good morning, guys. Thanks for taking my questions. Just to sort of follow back up on the origination strength, you know, this was the fastest growth you've seen here, I think, in almost four years. You obviously highlighted the record application volumes, but it does maybe seem like you're approving a little bit more than the application growth, which I think was 11% growth year over year. So could you just talk about maybe what's driving the strength of application here? Maybe what's giving you some confidence to lean in a little bit more here. And how you're getting that with, you know, even keeping your s tier at 42% or above where it's been historically. And I think just also as a part of that lease also look like it has some strength going a lot faster than the rest of the, you know, loan origination book. So maybe comment on that. Thanks.
Russ Hutchinson: Yeah. Maybe I'll start off by saying our approval rates and our capture rates were entirely consistent with historical. So the, you know, the volumes that we saw were completely a function of the opportunity set, the application volume that we were able to drive. We can and we can go through the puts and takes with you know, as we kind of think about the call afterwards. Just on the strength we saw in lease volume in particular, a big component of that was EV leases. As you know, Jeff, the EV lease tax credit program expired on September 30, and we certainly saw some pull forward, you know, as consumers and dealers rush to get deals done ahead of that deadline and take advantage of that tax credit program. And, you know, quite frankly, you know, there's probably some pull forward we saw in the second and third quarter as a result of just some of the noise around tariffs as well. So definitely some demand pull forward in quarter, but I'd say yeah, we feel great about the traction that we have with our dealer and OEM customers. You know, I think our go-to-market helping them sell as many vehicles as possible and making their businesses better is clearly something that resonates. Our consistency in the market, you know, and just the overall value proposition we provide, you know, being for them, being there for them in terms of dealer floor plan, insurance, retail auto loans across a wide spectrum. As well as the additional value we provide to our pass-through programs and our smart option. It's clearly resonating and we're seeing a lot of benefit and traction that's helping us deal with some of the increased competition in the sector.
Jeff Adelson: Okay. Great. Thanks, Russ. And maybe just to follow-up on Sanjay's around, you know, credit performance. At least one of your peers did see some, you know, accelerating DQs this past quarter. And I think, you know, there's been some similar commentary around pulling back on, you know, standards and tightening standards over the past few years, which you've talked about, obviously. I guess, is there anything else you think you're doing different? Or what others are seeing that you're not at the low end of the spectrum. And just to maybe follow-up on the servicing strategies, could you talk about how that's performing, maybe modification rate, and what the stick rate has been of those coming off modification? Thanks.
Russ Hutchinson: Yeah. So, yeah, maybe I'll start and kind of what we're seeing, you know, within our own book in terms of kind of the lower end of the spectrum. Yeah, we said in our prepared remarks that, you know, the stuff that we do that's below, you know, call it a 620 FICO is pretty small. But as we look at some of our lower credit tiers, yeah, they're actually performing better than the expectations we set at pricing. But as you pointed out, you know, again, it's a small portion of our book. As you pointed out, you know, we've been tightening now for a couple of years. And so what we're seeing to a large degree is the benefit of some of the underwriting decisions that we made through the course of 2023. And that gave us, you know, these really strong books, the, you know, the back half '23 and in particular, the '24 vintage. And so, yeah, we're seeing the benefit of that. And then as you pointed out, we're also seeing the benefit of enhancements that we've made to our servicing strategies. You know, we've talked about these extensively in the past. There's nothing new or different this quarter. It's stuff that we've been doing and refining over the course of the last few years. But it comes down to, you know, one of the simple things is just, you know, how we communicate with our customers and, you know, we're a lot more digital in our communications, so we like to talk to our customers. In the way that they're most responsive to you, whether that's email or digital or chat or telephone. You know, we're just much better at tailoring our communications to, you know, to what resonates best with them. You know, we're also doing we have we've also been doing some interesting things over the last couple of years. Things like sending customers, you know, kind of more notifications and transparency around kind of where they are in the process. And so, for example, we'll issue a customer notification when the repo ticket is issued. And we found that those notifications help. Sometimes they spur a customer who really wants to stay in the car to give us a call and to work with us. And then on the other side of it, we've made changes in terms of kind of reducing some of the frictions and just making it easier and more seamless to run things like extensions and modifications. And then as you would imagine, we have been really careful to make sure that we're tracking those loans at this time to make sure we're getting the stick rates that we're looking for and that we truly are getting better outcomes and not kicking a can down the road. We've talked about this a little bit in the past, but we have policies in place in terms of really making the customers pony up in terms of putting cash on the table in order to earn those earn entry into those programs. And then finally, on repo timing. You know, in this, you know, these policy changes date back now a few years. But we've been adjusting our approach to the timing of repossession. Not across the board, but in a thoughtful way, you know, looking at specific kind of consumer behavior and tiers and using our behavioral modeling to figure out where it makes sense to delay the repossession. And we found giving our agents a little bit more time to work with the customer in a lot of cases, gives us a better outcome. Again, you know, paying attention to kind of how those loans behave over time. Yeah, we really do believe we're getting better outcomes here. So yeah, we've had a few years here in terms of making enhancements to our servicing and, you know, and we've had the benefit of being able to track, you know, how those changes have performed over time. And so we feel pretty comfortable that we're getting better outcomes here. Now you can't talk about credit without talking about the macro. You know? There's a macro uncertainty out there. Potentially weakening in the employment picture, and that's all stuff that we're watching very closely. And tracking. But I would say, you know, we are we definitely feel we're getting tangible benefits. From both the vintage rollover and the servicing enhanced work enhancements that we've put in place over the last few years.
Jeff Adelson: I really appreciate that. Thanks, Russ.
Sean Leary: Thank you. And our final question will come from Moshe Orenbuch with TD Cowen. Your line is open.
Moshe Orenbuch: Great, thanks. Maybe at the risk of talking again about the competitive environment, you were able to have very, very strong application volume. Are there things that you'll be doing in the future that would actually help the, you know, the conversion and closing rates or, you know, I mean, how do you sort of think about that? Like, is that something that we could look forward to, you know, at tail end of this year and into 2026?
Michael Rhodes: Moshe, this is Michael. You know, great question. As you know, we have the good fortune certainly on the auto side to look at a large volume of applications on a daily, weekly, quarterly basis. And, you know, one of the benefits that we have of having, you know, we're in this markets. We're in these markets through kind of all cycles and doing you create these very rich datasets. So you can imagine, we are always looking and trying to find the segments where we see incremental opportunity. And that's a never-ending process. Data evolves, and then we learn more and more. And when we look at our segments in different ways and really micro segments. So, yeah, we're gonna continue doing that. We'll do that today, tomorrow, and ongoing. And hopefully, in doing so, we'll find out, you know, new veins of profitable business for us to underwrite. And then, you know, as Russ said that you do need to overlay a little bit of a macro view. We gotta be careful not to overlay the for the macro because right now, things look good, but there is some uncertainty. On a go-forward basis. But we feel that we're just in a really good position to have the volume of applications that we see and be able to really go to school and try to understand really how to maximize not only business for ourselves, not only how to maximize the impact we have on the dealer community.
Russ Hutchinson: Yeah. And the only thing I'd add to that is, you know, we also have our pass-through programs. And so, you know, we're providing value to our dealers, you know, beyond what we're underwriting for our balance sheet. And we also have the benefit of being able to service that paper and obviously, it gets an economic benefit from it. But I think as Michael points out, I think, you know, we benefit tremendously just from the amount of application volume we see and the amount of loan activity we see in the sector.
Moshe Orenbuch: Yeah.
Michael Rhodes: And, Moshe, if you're the last question, I may use some of your time just for a bit of a wrap-up as I think about the quarter.
Moshe Orenbuch: Before you do that, Michael, could I just have one quick follow-up and, obviously, let some of that time go. But just from a capital standpoint, you did the CRT transaction. Should we expect more or less of that, Russ, as we go into 2026, I guess, recognizing that there's, you know, the RWA of the assets that ran off at 25 were higher than the ones probably running on the '26.
Russ Hutchinson: We'll certainly do more transactions. Yeah. We've done three transactions so far, and it's a tool that we like. It affords us a very low cost to capital. And it's a tool that we intend to continue using. However, we'll use it thoughtfully and opportunistically. And, you know, we pay very close attention to, you know, effectively the ramp we're creating as that capital runs off. Relatively quickly with the speed of the underlying loans. But, yeah, you can expect us to continue to be active in this market.
Moshe Orenbuch: Thanks very much.
Michael Rhodes: Good. And then so is Amortia's the kind of the rapid by can. You know, so I'm, what, about a year and a half into my role or so. And, as I kind of reflect about where we are, one of the comments I made in my prepared remarks was really this notion of momentum. And we talk about a strategy refresh we undertook, and we've talked about disciplined execution, and it's creating momentum. It's creating momentum in the areas that we signaled in the really quarters and quarters ago that we wanted do is that an improved net interest margin, auto losses, and being disciplined in expense and capital. And so we actually see this quarter as a real testament to the fact that we're on the right path. And are very pleased with the momentum that we're seeing right now.
Sean Leary: Thank you, Michael. Seeing no additional questions in the queue, we'll go ahead and conclude today's call. As always, if you have additional questions, please do feel free to reach out to investor relations, and thank you for joining us this morning.