Ally Financial Inc

NYSE:ALLY

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the Second Quarter 2022 Ally Financial Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speakers today, Sean Leary, Head of Investor Relations. Please go ahead.

[Sean Leary, Head, Investor Relations]

Thank you, Katherine. Good morning and welcome to Ally Financial’s second quarter 2021 earnings call. This morning, our CEO, Jeff Brown; and our CFO, Jenn LaClair, will review Ally’s results before taking questions. The presentation will reference on today’s call can be found on the Investor Relations section of our website, ally.com. Forward-looking statements and risk factor language governing today’s call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slide 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix.

And with that, I will turn the call over to JB.

[Jeff Brown, Chief Executive Officer]

Thank you, Sean. Good morning. We appreciate everyone joining us this morning. I will begin on Slide #4. Financial and operational results remained strong and demonstrate the unique scale and positioning of our businesses. Broadly speaking, macro uncertainty and market volatility are elevated. The challenges of persistent inflation, rapidly rising interest rates, quantitative tightening and geopolitical conflict are very real. The combination of these events occurring simultaneously presents unique challenges that are likely to continue in the quarters ahead. However, I remain optimistic in Ally’s outlook given the strength of our businesses and the power of our people and culture.

Staying true to our culture has enabled us to successfully grow through various economic environments in the past and that will continue as we navigate the environment ahead. Our focus and actions for all stakeholders will remain rooted in our do-it-right philosophy. In June, we pledged to reach equal media spend across men’s and women’s sports. Beyond the financial impact, supporting of quality is the right thing to do and we hope our pledge inspires others as well. We are well underway with our recognition of supplier diversity month in July. This initiative is integral to our broader goals for financial and social inclusion. And while we aren’t done, we have seen a significant increase in diverse spend since the program’s inception.

Ally will remain nimble and ready to pivot quickly to the evolving landscape. We remain intensely focused on controlling what we can control and have further heightened our emphasis on prudent investment discipline and expense management given the range of possible economic outcomes. Jenn and I are deeply engaged with our business leaders on ensuring only the most essential projects and hires are prioritized. Our industry leading auto and insurance businesses have deep relationships with thousands of dealer customers. Over Ally’s history, we have proven to be a reliable and adaptable partner driving growth and value creation, again through various economic cycles. Across Ally Bank, we continue to see solid customer momentum and engagement across the array of complementary businesses. So while different operating and economic environments will be encountered, we remain true to our long-term strategy of serving customers and staying nimble as operators.

Let’s turn to Slide #5, where I will touch on a few highlights from 2Q. Second quarter adjusted EPS of $1.76, core ROTCE of 23.2%, and revenues of $2.2 billion reflected another strong quarter of financial results. ROTCE was approximately 19%, excluding the impact of OCI. The scale and depth of dealer relationships, coupled with healthy consumer demand drove strong originations in the quarter. That requires a meaningful initial provision expense under CECL, but positions us well to drive accretive risk-adjusted returns going forward. Recent CCAR results conveyed the strength and resilience of our company overall. Our preliminary SCB of 2.5% was down – excuse me, 100 basis points from the 2020 exam. Capital and liquidity levels also remain healthy.

Within auto, consumer originations of $13.3 billion represented our highest quarterly flows since 2006 and originated yields expanded 75 basis points quarter-over-quarter to 7.8%. Industry vehicle sales were down 21% and 17% year-over-year across new and used, respectively. Despite that headwind, our ability to generate strong consumer originations shows the scale of our auto business and depth of application flow. Credit normalization in the second quarter continued in line with expectations and retail NCOs of 54 basis points remained well below pre-pandemic levels. We are monitoring for market indicators of consumer health, including wage and price inflation, employment conditions, deposit balance changes and overall debt payment trends.

From an auto industry production perspective, the story remains consistent. Supply chain challenges continue and demand remains robust resulting in low levels of inventory and therefore support for used vehicle values. Dealer health also remains very strong. Jenn will discuss used vehicle dynamics in more detail in a moment and I think it is very important for you to understand what’s actually happening in the industry. Frankly, I am not sure the constant focus on used car price implications on Ally’s earnings is warranted. Within insurance, written premiums of $262 million reflected lower overall inventory levels and industry sales. Investment portfolio performance remained solid, but below last year’s record levels.

Turning to Ally Bank, retail deposit customers exceeded $2.5 million expanding 6% year-over-year and representing our 53rd consecutive quarter of customer growth. As we have indicated in recent months, retail balances were pressured by elevated tax payments observed across the industry. While retail balances declined nearly $5 billion in the quarter, they were up year-over-year and total deposits of $140 billion account for roughly 85% of our funding profile. Our compelling consumer engagement and product adoption trends remain compelling. Ally Home originated $900 million in the quarter, reflecting a disciplined approach to navigating a rising interest rate environment. I also think it’s important to note that our partnership model isolated us from some of the substantial operating volatility others have reported.

Equity markets resulted in a decline in Ally Invest assets, while accounts actually increased 5% versus prior year. Ally Lending generated record origination volume of $591 million, which nearly doubled year-over-year as we continued our expansion of merchant relationships and volume in the healthcare and home improvement verticals. Ally Credit Card reached $1.2 billion of loan balances, up more than 90% year-over-year and now has over 900,000 active cardholders, up 58% from prior year. And Corporate Finance generated another solid quarter of loan growth with the held-for-investment portfolio reaching $8.5 billion. Deep partner relationships and expansion into new verticals has enabled steady, disciplined growth in that business.

Let’s turn to Slide #6, where I will touch on the value proposition we have established. Ally has a unique combination of established, leading and scale businesses, coupled with newer and growing businesses. Specifically, more than 10.5 million customers span our leading auto and deposit businesses, and more recently, we benefited from accelerating growth from card, lending and invest, areas we saw as white spaces for our company. At Ally Bank, our position as the number one all digital bank is fueled by more than 2.5 million deposit customers, which have grown at a nearly 20% annual rate since its founding in 2009. We have been relentlessly focused on digital disruption and leveraging shifts in consumer preferences, including nearly 100% digital interactions within deposits and invest.

Within auto, our 100 plus year history has positioned Ally as the number one prime auto lender as we have simultaneously grown dealer relationships to over 22,000, up more than 20% in the past few years. The scale of our operations enables our full spectrum, adaptable approach to consumer and commercial auto lending that has proven resilient as operating and economic conditions change. Our all digital auto auction platform provides an attractive disposition channel and real-time data into used vehicle trends nationwide. Our auto collections team has also enhanced its digital engagement with consumers. From here, we are focused on strengthening all of our customer relationships as higher engagement has significant benefits with a few examples just mentioned and also highlighted on the page.

Looking ahead, we know our customer-centric, modern, digital-first approach will position us to drive further customer growth, strong engagement and value in the years ahead. I think the important takeaway is that while COVID might have accelerated the benefits of our business model, we don’t believe a great unwind will happen now that the pandemic is slowing. Our model was built because we believe it is how consumers want to bank today and in the future. We also think car ownership was again proven to be a mainstay in consumers’ lives. Yes, we will have fluctuations in various quarters, just like everyone, but long-term, the company remains poised for substantial value creation.

Last quarter, one of our key stakeholders perhaps said at best. Ally is one of the great corporate transformation stories of our lifetimes. Obviously, I could not agree anymore and suggest that a longer term focus on our evolution and sustainable earnings power is a much better indicator of our focus and success. So, we will keep our head down, we will keep taking care of customers, we will be smart and dynamic operators, and we will be disciplined stewards of capital deployment. I still firmly believe that is what drives long-term value creation and that is our focus.

And with that, Jenn, over to you.

[Jenn LaClair, Chief Financial Officer]

Thank you, J.B., and good morning, everyone. I will begin on Slide 7 with a few consumer health indicators we are watching closely. Starting with our deposit accounts, the average savings balance remains well above pre-pandemic levels across all income bands. While balances have started to normalize, they remain robust despite elevated tax outflows, strong spending and persistent inflation.

In retail auto, we generated a 3% increase in application flow, while industry sales fell 19%. We have continued to see strong demand, particularly in the higher income segments, where we originate the majority of our loans. On the bottom left, delinquency levels remain generally favorable, especially in the higher volume, higher income deciles. And lastly, both frequency and severity metrics remain below 2019 levels driven by healthy payment trends and elevated collateral values. While we expect further credit normalization, we are starting from a strong position and have prudent underwriting and servicing strategies to navigate a variety of macroeconomic environments.

Let’s turn to Slide 8, where we have included a snapshot of key measures demonstrating the strength of our balance sheet. Our liquidity, capital and reserves remain robust and above pre-pandemic levels. CET1 ended the quarter at 9.6%, reflecting nearly $1 billion of excess capital relative to our internal operating target of 9%. And based on recent CCAR results, our stressed capital buffer has declined 100 basis points to 2.5% resulting in nearly $4 billion of excess capital relative to SCB requirements. Our deposit portfolio represents 85% of funding relative to 64% in 2018 and we maintain access to multiple efficient funding sources enhanced by our investment grade rating. Allowance for loan losses of 2.68% or $3.5 billion represents over 2.7x our reserve level in 2019 and approximately $900 million higher than CECL day 1.

Detailed results for the quarter are on Slide 9. Net financing revenue, excluding OID, of $1.8 billion grew nearly $220 million or 14% year-over-year despite a decline in lease revenue. This represents the eighth consecutive quarter of expanding net financing revenue. Performance in the quarter was driven by continued strength in origination volumes and auto pricing, growth in unsecured consumer products, normalization of excess liquidity, and hedging activity partially mitigating impacts from short-term rate increases. Adjusted other revenue of $448 million reflected solid performance across our insurance, SmartAuction and consumer banking businesses. Revenues declined year-over-year as we generated significant investment gains in the prior period.

Provision expense of $304 million reflected robust origination volume and the gradual normalization of credit performance. Loan growth across retail auto, unsecured consumer lending and corporate finance drove $151 million reserve build. While CECL provisioning is a headwind for the current period, strong originations will drive accretive long-term risk returns.

Net charge-offs in the period of $153 million remained below pre-pandemic levels, but are up versus prior year, which included a net recovery in the period. Non-interest expense of $1.1 billion includes the seasonal increases in insurance weather losses and continued investment in technology and business growth. As a reminder, the prior period included one-time items related to the Ally Foundation and retirement eligibility benefit. GAAP and adjusted EPS for the quarter were $1.40 and $1.76 respectively, including a $0.33 impact from the provision build.

Moving to Slide 10, net interest margin, excluding OID, of 4.06%, expanded 11 basis points quarter-over-quarter and 49 basis points year-over-year. Total earning assets have been relatively flat as excess cash normalizes, but total loans and leases are up nearly $15 billion versus prior year. Overall margin expansion reflects the structurally enhanced balance sheet we have built over several years. Earning asset yield of 5.11% grew 25 basis points quarter-over-quarter and 42 basis points year-over-year, reflecting the same NII drivers I just mentioned. Retail auto portfolio yields expanded 10 basis points from the prior quarter as originated yields moved materially higher. We are pleased we have been able to capture significantly higher rates while growing origination volume.

As rates have increased, our pay-fixed hedges, against the retail auto portfolio has delivered a meaningful linked quarter benefit. On an absolute basis, edges were a slight drag on yields for the full quarter, but have moved into a positive carry position and will help drive portfolio yields above 7% in the third quarter. Yields also expanded across commercial portfolios and credit card as they benefit from higher rates. Looking forward, we expect earning asset yield expansion driven by our leading market position in auto finance continued growth across our newer consumer portfolios and the impact of higher interest rates.

Turning to liabilities, cost of funds increased 13 basis points quarter-over-quarter, but declined 11 basis points year-over-year. The increase in average deposit cost reflects higher benchmark rates and a competitive market for deposits, particularly in the direct bank space. Other borrowings increased $5 billion on average this quarter driven by FHLB advances and efficient funding alternative. Broadly speaking, funding costs will move higher as the Fed continues with the tightening cycle, but we remain confident in our ability to manage interest expense due to our customer value proposition that goes beyond rate, core funding status and access to diverse funding sources. The growth and strength of our businesses on both sides of the balance sheet allowed us to achieve a 4% plus NIM this quarter. For the next few quarters, the rapid increase in benchmark rates will pressure margins as deposits initially repriced faster than earning assets. Over the medium-term, we continue to see a strong NIM in the upper 3%.

Turning to Slide 11, our CET1 ratio declined to 9.6% as earnings supported $3 billion in RWA growth and $600 million in share repurchases. Last week, we announced a dividend of $0.30 per share and have completed approximately $1.2 billion in repurchases through June. We remain on track to complete our $2 billion buyback program for 2022 and will remain flexible and disciplined considering potential changes in the macroeconomic environment. On the bottom of the slide, shares outstanding have declined 17% since we resumed share repurchases in 2021 and 35% since the inception of our buyback program in 2016. Our priorities remain focused on maintaining prudent capital levels while investing in the growth of our businesses and returning capital to shareholders.

Let’s turn to Slide 12 to review asset quality trends. Consolidated net charge-offs of 49 basis points remains below pre-pandemic levels and are normalizing in line with expectations. The charge-off of a specific credit in the Corporate Finance portfolio added 9 basis points to the consolidated NCO rate for the quarter. As a reminder, NCOs in this portfolio can be uneven, but the business has averaged annualized losses below 30 basis points over a sustained period. In addition, our new unsecured consumer products will drive higher consolidated losses and higher risk-adjusted returns as they grow. Retail auto portfolio performance continues to reflect resilient consumer payment trends and favorable loss given default rates, supported by elevated vehicle collateral values.

In the bottom right, 30-day delinquencies increased due to typical seasonality and a gradual normalization of consumer trends but remained below 2019. 60-day delinquencies are equal to 2019. However, they are elevated due to the impact of strategic repossession timing changes that have improved flow to loss rates. We expect gradual increase in delinquencies as consumer trends normalize post pandemic, and we are closely monitoring additional inflationary pressures. We have continued to invest in talent and technology to enhance our servicing and collection capabilities and remain confident in our ability to effectively manage credit in a variety of environments.

On Slide 13, consolidated coverage increased 5 basis points to 2.68%, reflecting growth in our retail auto, unsecured consumer lending and corporate finance portfolios. The total reserve increased to $3.5 billion or $900 million higher than CECL day 1 level. Retail auto coverage of 3.51% increased 2 basis points and remains 17 basis points higher than CECL day 1. Under our CECL methodology, our baseline forecast assumes stable unemployment ending the year slightly below 3.5% before gradually reverting to a historical mean of about 6.5%.

On Slide 14, total deposits of $140 billion declined $2 billion as increases in brokered CDs, partially offset a decline in retail deposits. Retail balances decreased $5 billion quarter-over-quarter, driven by elevated tax outflows. As we’ve mentioned previously, our portfolio includes significant balances from affluent depositors generally more susceptible to tax liability outflows. Consistent with prior cycles, we expect flows from traditional banks to direct banks will increase as the price gap widens especially with savings rates now exceeding 1%. We saw retail deposit growth in June and continue to expect growth on a full year basis. We added another 28,000 customers in Q2, our 53rd consecutive quarter of customer growth. Loyalty and engagement across our 2.5 million customers are reflected in industry-leading and consistent retention of 96% and growth of multi-product relationships.

Turning to Slide 15, we continue to drive scale and diversification across our digital bank platforms. Deposits serve as a gateway to our other banking products, which enhance brand loyalty, drive engagement and deepen customer relationships. We also see a clear path for expansion among our newer point-of-sale lending and credit card products, which are helping to offset more cyclical businesses like mortgage. Our focus on delivering integrated, diversified and digital-first capabilities for our customers supports our outlook for continued growth and accretive returns in the years ahead.

Let’s turn to Slide 16 to review auto segment highlights. Pre-tax income of $600 million was driven by growth in retail auto balances and yields and solid credit performance. The increase in provision expense versus prior periods resulted from CECL reserve build to support over $13 billion in consumer originations with attractive risk-adjusted returns.

Looking at the bottom left, the originated yield of 7.82% was up 75 basis points from the prior quarter, reflecting significant pricing actions. We have put more than 150 basis points of price into the market through last week and expect to originate at over 8% for the quarter while maintaining consistent underwriting standards reflective of strong dealer engagement. While pricing beta will move around from quarter-to-quarter and should be viewed through the tightening cycle, we are pleased with the momentum to date and we remain confident in our ability to generate higher yields from here. We continue to see elevated retail trade-in activity and lessee buyouts, which create temporary headwinds for retail portfolio yields and remarketing gains that will normalize over time. I’ll talk about these dynamics in more detail on the next page.

On Slide 17, we have provided perspective on used vehicle values and the associated impact to current period earnings. We are aware of and understand the heightened focus on used values given the 60% increase over the past 2 years. As we’ve outlined before, there are offsetting impacts to Ally that net over time as used vehicle values rise and fall in this environment. Elevated collateral values continue to drive a positive impact on loss severity, which contributes to lower net charge-offs. From a lease perspective, option proceeds remain elevated, but more than 85% of lease terminations are purchased by the lessee or dealer, which limits our ability to monetize the off-lease gains.

While collateral values have been a benefit to lease gains and credit losses, the main driver of increased used vehicle values has been limited to the supply of new inventory. Lower inventory has reduced commercial assets by approximately $10 billion and has increased retail trading activity, both of which are a headwind to net interest income. We expect each of these factors to gradually reverse as supply chains improve and new vehicle production normalizes. These dynamics will likely occur unevenly over the next several quarters and years, but in aggregate, should not result in a meaningful impact to earnings on a net basis.

Turning to Slide 18, our leading agile platform is built to adapt to dealer and customer needs in a comprehensive manner, reflected in our performance and the multiyear growth of our dealers. We now have over 22,000 active dealer relationships, up more than 20% over the past 3 years. We continue to focus on deepening these relationships and increasing application flow. In the upper right, ending consumer assets expanded to $93 billion, up 7% on a year-over-year basis. Retail auto assets increased $3 billion in the quarter, and are up over $6 billion from prior year. Based on current market conditions, we see a clear path to over $45 billion of consumer originations in 2022. Commercial balances ended at $16.1 billion as new vehicle supply remained near historic lows in the quarter.

Turning to origination trends on the bottom half of the page, auto volume of $13.3 billion represents our highest quarterly origination level since 2006. Used accounted for 69% of originations this quarter, also reflecting a high watermark and a testament to our ability to adapt to market conditions. Our disciplined and consistent approach to underwriting and entrenched dealer relationships, have driven increased originations while maintaining consistent FICO and non-prime trends.

Turning to insurance results on Slide 19, core pre-tax income of $14 million decreased year-over-year from the impact of lower industry vehicle sales, dealer inventories and elevated investment gains versus prior year. The increase in losses was primarily driven by weather claims, which were at an all-time low in the prior period. Total written premiums of $262 million reflected lower unit sales and inventory levels across the industry. We remain focused on leveraging our significant dealer network and holistic offerings to drive future growth in the insurance business.

Turning to Corporate Finance on Slide 20, core income of $60 million reflected disciplined growth in the loan portfolio, a year-over-year decline in other revenue from elevated investment gains in the prior period and stable credit trends. Net financing revenue was impacted by interest rate floors on a portion of the loan portfolio which limited yield expansion following initial rate hikes. Given the current level of benchmark rates, we expect yields to expand from here. The loan portfolio remains diversified across industries with asset-based loans comprising 57% of the portfolio. Our $8.5 billion HFI portfolio is up 38% year-over-year, reflecting our expertise and disciplined growth within a highly competitive market.

Mortgage details are on Slide 21. Mortgage generated pre-tax income of $6 million and $900 million of DTC originations, reflecting tighter margins on conforming production and reduced demand from refinancing activity. Mortgage remains a key product for our customers who value a modern and seamless digital platform. We are prioritizing a great experience for our bank customers and enhanced risk-adjusted returns, which may lead to changing origination levels in any given quarter or year. Our partnership model ensures we avoid considerable operational volatility seen across the industry.

I’ll close by thanking our Ally teammates who remain the driving force behind our strong operating and financial results. And with that, I’ll turn it back to J.B.

[Jeff Brown, Chief Executive Officer]

Thanks, Jenn. Finally, I’ll close with a few comments on Slide #22. I maintain a tremendous amount of pride leading our company. Over many years, we’ve developed a purpose-driven culture, which is integral to our financial and operational performance. Ingrained within that culture is the unwavering focus on delivering for our teammates, customers, communities and stockholders. This broad and deeply ingrained purpose will define our long-term success. I’m sure you’ve seen various letters from CEOs to shareholders right about the power of purpose in guiding your company and management teams. That is a message we certainly embrace inside of Ally. And part of the reason I have the confidence that we will be able to deliver durable returns for our shareholders. I continue to challenge our teammates to see around corners, focus on essentialism, adopt an owner’s mindset and live our purpose to be an Ally for all. It’s embedded in our culture and has prepared us for changing times. Ally’s results this quarter demonstrate we are equipped to successfully navigate and win in challenging environments.

With that, Sean, let’s head into Q&A.

[Sean Leary, Head, Investor Relations]

Thank you, J.B. [Operator Instructions] Katherine, please begin the Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question comes from – I’m sorry, Moshe Orenbuch with Credit Suisse. Your line is open.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks. Jenn, you had talked a little bit about the pricing actions that you’ve taken so far. Can you talk a little bit about like how far that can go? And at what point do you think the impact on the monthly payment will kind of limit the ability to take price? So can you just talk about that a little? Thanks.

[Jenn LaClair, Chief Financial Officer]

Yes, sure. Thanks for the question, Moshe. Maybe some pricing comments on the asset side, and then I’ll go over to the liability side. But on the asset side, Moshe, we have been really pleased with not only the flows we’ve been able to originate, but the pricing actions we’ve taken, which I mentioned is about 150 basis points. And through the second quarter, we’re looking at kind of a close to a 90% beta relative to Fed funds in retail auto pricing. Now going forward, we got to be measured in terms of our ability to continue at that pace. I think if you look at last cycle, it’s more like a 50% beta. So somewhere in the middle there, we will be opportunistic. We love the flows we’re seeing, the returns we’re seeing and we will continue to put price in. But we’ve been at a 90% beta, probably will fluctuate a little bit as we move ahead, especially as we’re anticipating another eight hikes in the forwards.

And I’d also comment, it’s not just retail auto. We see a lot of opportunities to continue to see yield expansion. We are growing our unsecured portfolios, Ally Lending, credit card. We see really robust originated yields in the low teens for Ally Lending in the upper teens for credit card, and we’re growing those very quickly and see a path kind of $4 billion to $6 billion in those portfolios. Corporate Finance continues to grow. We hit a high watermark at $8.5 billion in HFI this quarter, continuing to see a clear path to about $10 billion and yields expanding from there. And then last but not least, we’ve been really, I think, thoughtful around our investment securities portfolio managing duration in the book, also putting hedges on. We have about $20 billion notional against retail auto and that takes about quarter of our retail auto portfolio and flips it to floating in a rising rate environment.

So, Moshe, on the asset side, which is a very powerful driver of NII and NIM, we continue to see just robust growth, robust ability to put pricing and yields on the books. And I’ll just make note that we had a $15 billion increase in loans on a year-over-year basis. It’s the highest loan growth we’ve ever seen with really great pricing momentum. And then on the deposit side, I’d say, Moshe, things have materialized as expected. I think we’re really pleased with the positioning. We’re 85% deposit funded. We’ve had about a 33% pricing beta relative to Fed funds. We could see that accelerate a bit from here. But we’ve got access to diverse and efficient funding sources. We put on about $6.5 billion of term funding at locked in some duration at great rates. So we feel really good about both sides of the balance sheet. And Moshe, we really see that we can generate that upper 3% NIM as we head into the medium term.

[Moshe Orenbuch, Credit Suisse]

Thanks very much. And just you talked a bit about credit normalization and the reserve on auto kind of being 17 basis points above CECL day 1 and up 2 basis points in the second quarter. How should we think about the pace of reserving? Is it – and what should we – or that level of the reserve relative to retail auto loans as we go through the rest of 2022?

[Jenn LaClair, Chief Financial Officer]

Yes, sure. And let me just hit on what I think most bots at least are picking up across the media and the outlets this morning. I mean, look, we had incredibly robust retail auto originations this quarter, the highest level that we’ve had since 2006 and the vast majority of the increase in our reserving this quarter is a result of loan growth and its accretive loan growth, serving our customers, positioning us well to drive accretive returns over time to generate that 16% to 18% plus percent ROTC that we guide to. And so we are kind of unapologetic about our reserve build this quarter. And the vast majority of that again was retail auto growth as well as growth in some of our other newer products. Moshe, from there, we will see reserves bounce around a couple of basis points. I mean, as you’re pointing out, we’re up 2 basis points on coverage rate. A lot of that’s just seasoning of the portfolio, timing of when originations flow on and the portfolio slows off, especially the post-COVID portfolio vintages. But we see pretty likely stable from here. It could migrate down more towards that day 1 CECL level over time, but we are not in a hurry to do that, especially considering some of the uncertainty on the horizon relative to macros.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks very much.

[Jenn LaClair, Chief Financial Officer]

Thank you, Moshe.

[Operator]

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

[Betsy Graseck, Morgan Stanley]

Hi, good morning.

[Jenn LaClair, Chief Financial Officer]

Good morning, Betsy.

[Betsy Graseck, Morgan Stanley]

I guess I have two questions. One is, as you’re thinking about the medium term for NIM, I know you mentioned in the high 3s. Could you just give us a sense of – or in the upper 3s, I think it’s the word you used. Could you just give us a sense as to upper 3s, is that like 3.5% plus or is that 3.7% plus? And I know it’s maybe you don’t want to be that specific on the call, but it’s just a bit of a debate out there, what upper means to you?

[Jenn LaClair, Chief Financial Officer]

Yes, sure. I mean let me jump in on this. Betsy, as we think about the long-term earnings power of the company, look, we delivered over 4% this quarter. Could we see that coming down a bit to kind of 3.7% plus in the medium term? Yes. And then in between now and the medium term, it could bounce around a bit from here. Just you know our balance sheet, we have liabilities that reprice faster than assets. We’re going to see if we realize the forwards another eight hikes between now and December. And so there could be some pressure on our margin just because deposits are going to reprice faster than assets. But as I just mentioned in response to Moshe’s call, we’ve got terrific momentum on the asset side that will eventually catch up to the liability side. It’s just a matter of timing as we go between now and kind of the tightening cycle, but feel really confident medium term around that 3.7% plus number with things moving around a bit here just relative to the forward.

[Betsy Graseck, Morgan Stanley]

And then could you just give us a little more color on the comments that you had around the delinquencies? When you were on Page 12, I think you mentioned that you have taken some actions or recognized some parts of the portfolio differently maybe than you had in prior quarters. So maybe you could give us a sense as to what drove that delinquencies up? And if you could speak to what your expectation is as you look out over the next is 6 to 12 months, how you see that trajecting either seasonally or structurally because the financial slide was removed, the financial outlook slide was removed this deck and there is been some questions on how you’re thinking about the delinquencies and the NCOs there? Thanks.

[Jenn LaClair, Chief Financial Officer]

Yes, sure. So, first on the delinquencies, NCO to the guide. So, on delinquencies look, you are seeing some normalization flow through both the 30-day and the 60-day, it’s all within our expectations. I did mention in the 60-day, look, we are always investing in new strategies and new approaches to help our customers, keep our customers in their cars longer. So, I made note of one of those around repossession timing, which is essentially just giving our customers a little bit more time to pay. We have had tremendous success with that approach, and that just keeps that 60-day number up temporarily as we are rolling through this new policy. But it’s normalization of the portfolio as expected. There is some seasonality in there from a delinquency perspective and then some policy changes that are driving that growth. What I would say relative to NCOs is we are still performing relative to the guide that we provided last quarter. And quite frankly, we didn’t include the outlook slide because nothing really has changed, Betsy. So, under 1% this year, migrating slowly back up to that 1.4% to 1.6% by 2024, I mentioned the NIM guide still intact and we still see a trajectory to that 16% to 18%-plus ROTCE. And I will note this time it’s ex-OCI. So hopefully, there is no confusion on that front, which with continued really strong performance here in 2022. J.B. mentioned we printed 19% ROTCE ex-OCI will be kind of in that range for full year 2022 as well. So, I just want to be really clear. We didn’t put the financial outlook slide in simply because the longer term, medium-term guide every single quarter.

[Betsy Graseck, Morgan Stanley]

Okay. Thank you. Appreciate the clarification there.

[Jenn LaClair, Chief Financial Officer]

Absolutely. Thank you, Betsy, for the questions.

[Operator]

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

[Sanjay Sakhrani, KBW]

Thanks. Good morning. I wanted to go back to a question Moshe asked about the re-pricing of the loans and sort of when you might see more stress for the consumer to make those payments or demand erosion. I mean if we go back in time, can you just talk about when you hit up against these pricing levels and sort of what the impact might have been?

[Jenn LaClair, Chief Financial Officer]

Yes. Sure. Sure, Sanjay. So, we have not traditionally seen increases in interest rates impact demand. And I would say that this cycle is very similar to what we have seen in the past. And if anything, providing additional tailwinds simply because supply has been constrained, we continue to estimate 4 million to 5 million consumers on the sidelines simply because they cannot find a vehicle to purchase. And you couple that demand with our model that has consistently grown dealer relationships and dealer engagement. And in a period where you see a 19% reduction in sales units were generating a 3% increase in application flow. So, strong demand, a model that continues to win across prime and in particular, prime used and we really don’t see that slowing down. I mean keep in mind, a 100 basis point increase in pricing for a loan – for a car loan is at $15 to $20 a month. And according to some data this week, that’s kind of two loafs of bread these days. So, we are not seeing a lot of price sensitivity just from the car interest rates. And in particular, I would say, in the more affluent segments. And if you look at the Page 7 that I provided this morning, we do see really strong application flow in the higher-income earners, which we have defined as kind of over $50,000. And our average in terms of income of our customers that we are originating with is over $100,000. So, in that segment, with the supply constraints and with our model, we really don’t see this slowing down. And we don’t see a lot of price sensitivity for the interest rates, nor do we even for the car, which is a material, which is materially higher in these days. So, hopefully, that could take some color, Sanjay.

[Sanjay Sakhrani, KBW]

No, that’s very helpful. And then maybe just a follow-up question on the origination. That was a really strong number. I am just curious how much of that is being driven by units versus share gains versus inflation. Maybe you could just touch on like LTVs and sort of the migration of LTVs as well? Thank you.

[Jenn LaClair, Chief Financial Officer]

Yes, sure. I mean look, Sanjay, we are seeing really strong unit application flow. But as we have come through COVID, definitely the price per unit is driving the strong flows. And so I have guided towards kind of $45 billion plus in terms of retail flows this year. We would still see really strong originations as contract values potentially come down with used vehicle values. As you know, we have modeled a 3% reduction in used vehicle values. But that simply will be replaced by a shift to more units. So, we don’t see the overall number changing although we could see higher units driving that flow as we head into 2023 and beyond. To be determined, we have modeled used vehicle pricing coming down, but I think there is a lot of dynamics around the supply chain that could suggest that it stays elevated for longer. And then on LTV, it’s been interesting. We don’t actually see an overall change in the LTV. Just as you look at the dynamics between new and used, so not changing very materially at all. I think on severity, we are monitoring that very closely. We have modeled into our NCO rate simply the fact that used vehicle values do come down about 30%. But again, I think there is potentially some upside against that.

[Sanjay Sakhrani, KBW]

Okay, great. Thank you very much.

[Jenn LaClair, Chief Financial Officer]

Thank you, Sanjay. Thank you.

[Operator]

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

[Ryan Nash, Goldman Sachs]

Hey. Good morning everyone.

[Jenn LaClair, Chief Financial Officer]

Good morning Ryan.

[Ryan Nash, Goldman Sachs]

J.B., maybe a bigger picture question for you, Jenn highlighted numerous times the robust growth you saw. I think Jenn said best growth since 2006. Markets are obviously flashing a bit of yellow lights right now, and we have heard commentary from others regarding competitive forces and auto intensifying. So, just want to get a better sense for your – how you are thinking about growth at this point in the cycle and maybe any tweaks that you are making to underwriting at this point, just given what’s happened with the pricing of vehicles.

[Jeff Brown, Chief Executive Officer]

Yes. Ryan, thanks for the question. So, we hear and we see the yellow lights flashing too. And we do think the overall industry is tightening and competitive pressures are intensified. So, we would definitely agree with those statements, but I think it comes back to a little bit the power of the model that we built and the relationships that we have established. So, I mean I don’t think you can overstate the importance of growth in the dealer count, which is now 22,400 ish dealers, that’s up 20% over the past several years. And then also just the relationships we have established with big players and new players like EchoPark, Carvana and others. And while there is questions around their models, we are still seeing really strong flows from them in really high-quality paper. And so for us, we have not at all change underwriting standards, I think our FICO chart or FICO analysis is pretty boring through time. It really hasn’t changed. Jenn just talked about LTV. We really haven’t seen that change, DTI. Credit quality of the book remains really well intact. Obviously, the question, Jenn and I, when we sit down with our auto teams and our credit partners and our CRO, debate is around this outer look on severity. If you get a meaningful decline in used car prices, does that expose us, again, you don’t see speculation in auto lending. And we think, to Jenn’s point, you priced in all that risk already in our assumptions around used cars. So, for us, it’s back to you take care of your customers, you serve them very well, and it provides nice rewards in terms of just seeing really strong flows. I would also look at other stats around what are we seeing. Have we seen any changes in auto decisioning, we are not. So, right now, credit underwriting remains disciplined. I think the reason we are winning is we are just getting a bigger lock. We make it easy for dealers. And so the flows are really strong. Obviously, I appreciated Sanjay’s comments a minute ago about how strong of a quarter it was. And again, whilst we may flash a miss on EPS, I think Jenn and I would take that all day long because we put on really, really accretive high-quality loan growth that through time is going to contribute meaningfully to earnings. And again, back to – you are looking at this paper 7.8% for this quarter, Jenn talked about 8% plus. I remember, Ryan, when we sat down at your conference in December and kind of one of the questions you posed to me was the rising great outlook, and we talked around auto loans being able to achieve an 8% type of yield, well you are seeing it now. And so I think a lot of really positive dynamics, and we would not want anyone to have a takeaway that we have altered credit appetite up or down to achieve those flows. It’s just really strong relationships working well with your dealer partners. So, we are really proud of the results this quarter, Ryan.

[Ryan Nash, Goldman Sachs]

Got it. Maybe just one follow-up for me and I appreciate you remembering our conversation. Jenn, maybe just the outlook for funding and balance sheet dynamics, I think you said that you expect retail deposit growth for the rest of the year and I think you highlighted you saw growth in the month of June. Just how do you think about the level of growth in deposits from here? And maybe just help us think about the notion of growing deposits versus letting securities shrink versus further tapping wholesale funding? How do you think about using each of those as a lever to fund the balance sheet? Thanks.

[Jenn LaClair, Chief Financial Officer]

Yes. Sure. And you are spot on, you are listening well, Ryan. We are expecting full year retail deposit growth and we have been pleased so far with June results, which have been solid. And as I mentioned in my prepared remarks, as you see that price gap widened between the direct banks and the traditional banks, we tend to see outsized flows into the direct banks and in particular, to Ally. So, we are confident in the growth from here. I think in addition to that, especially as we are investment grade rated at this point, we do have options to tap into alternative funding sources. We did about $6.5 billion of term funding this quarter, locked in some duration around 2.5 years at incredibly low rates. So, we are really pleased with some of the brokered CDs we have put on the books, FHLB. We had some modest unsecured and secured issuances as well. And we will just continue to be opportunistic as we think about alternative funding sources. But we feel really good about the liability stack, the strength of our businesses, the pricing that we have had to-date has been very much in line with expectations. And we will just navigate the future the same way we have done in the past, and that’s continuing to focus on strong value for our customers and continuing to be opportunistic or broad – across a broad diversified set of funding alternatives.

[Ryan Nash, Goldman Sachs]

Got it. Thanks for the color.

[Jenn LaClair, Chief Financial Officer]

Yes. Thank you, Ryan.

[Operator]

Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.

[John Hecht, Jefferies]

Hey guys. Thanks very much for taking my questions and good morning.

[Jeff Brown, Chief Executive Officer]

Good morning John.

[John Hecht, Jefferies]

Both you guys have referred to assuming lower used car prices. I mean maybe can you give details like what kind of cadence you are expecting and what type of overall trends there? And then how – I guess the second follow-up question is, how does that affect the lease margin over the next several quarters?

[Jenn LaClair, Chief Financial Officer]

Yes. Sure, John. Let me just talk about what we have modeled and then what we are seeing in reality. And consistent with prior quarters, we are modeling a 30% point-to-point reduction linearly in used vehicle values from the end of 2021 to 2023. So, it’s a precipitous drop. We have done that just to be mindful of the environment. We know used vehicle values are elevated, and we want it to be just very prudent in how we model our medium-term outlook. So, that’s what we have modeled in there. Certainly, as you see used vehicle pricing come down, you would see some pressure on gains. Some of that, as I have mentioned several times, could be slightly offset by LBO and DBO dynamics, but all things considered, you might see used vehicle value gains and yields come down a tad from there. I mean, of course, there is also increases from rates there, but there could be some modest pressure on lease pricing, alright, I am sorry, on lease yields. What we are seeing in reality is very different. Yields and used vehicle pricing has remained robust heading into 2022. And as all of the dynamics that we have been talking around, strong consumer, strong demand continuing, especially at the intersection of prime and used. We don’t see that slowing down from a demand perspective and supply continues to be challenged. We continue to see OEMs, inventory levels kind of bouncing around the bottom of 20-days supply, and they have historically run 60-days, 80-days supply plus. So, favorable supply and demand dynamics could support used vehicle values to outperform our model. So, hopefully, that gives you some color, John.

[John Hecht, Jefferies]

Yes. Appreciate that very much. Thank you, guys.

[Jenn LaClair, Chief Financial Officer]

Yes. Sure.

[Operator]

Thank you. Our next question comes from Rob Wildhack with Autonomous. Your line is open.

[Rob Wildhack, Autonomous]

Good morning guys. Jenn, I just wanted to zoom in on your deposit comments a little while ago. A lot of the price action you have taken has come at the end of June and into July. So, just wondering if you could talk about how the receptivity has been to that so far for the first three weeks, both on the balance side and the beta side?

[Jenn LaClair, Chief Financial Officer]

Yes. Rob, look, we are really pleased with flows that we are seeing so far in June. We are mindful that we are six hikes into a potential 14-hike year here. So, I think as we have noted in the past, we will continue to lag rate – the Fed fund rate increases and we don’t need to be a leader across the industry. But look, we are moving into a rapidly rising Fed fund tightening cycle. And so you could see some additional increases in pricing on the deposit side. But as I have mentioned, I think we are really well positioned from a value proposition perspective with our customers as well as the fact that we are 85% deposit funded and we have access to alternative funding sources. So, we are feeling good about our position. We are mindful of this kind of unprecedented increase in Fed funds ahead of us, but know that we can continue to navigate with confidence and continue to win. And as I mentioned, we are really pleased with June flows and expecting full year deposit growth this year.

[Rob Wildhack, Autonomous]

Thanks. And you also talked about putting on some more short-term borrowings in the quarter. Can you just talk about how you expect that to factor into the funding mix going forward?

[Jenn LaClair, Chief Financial Officer]

Yes. I mean we are going to continue to do more of that opportunistically. I mean we have – you saw us add some FHLB even in the fourth quarter of ‘21, continue to add some FHLB in first and second quarters of 2022. We have had some secured and unsecured issuances. And I think you will see all of that going forward on an opportunistic basis. And we look at everything in terms of pricing, in terms of investor opportunities in the market. So, we don’t have any hard and fast numbers, but we are going to continue to leverage diverse funding sources as we move forward.

[Rob Wildhack, Autonomous]

Okay. Thanks a lot.

[Jenn LaClair, Chief Financial Officer]

Thank you, Rob.

[Operator]

Thank you. And that’s all the time we have for questions. I would like to turn the call back to Mr. Sean Leary for closing remarks.

[Sean Leary, Head, Investor Relations]

Thank you. If anyone has any additional questions, please feel free to reach out to Investor Relations. Thank you for joining us this morning. That concludes today’s call.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.