Ally Financial 3rd-Quarter Profit Falls 76% on Settlement Charge -- 2nd Update

--Company recorded a $170 million charge tied to settlements with government agencies

--CEO: Advisers have told the company an IPO is still feasible

--CEO: Company expects to hear from Fed on share repurchase plan in next few weeks

(Updated with CEO comments and new details throughout.)

By Andrew R. Johnson

Ally Financial Inc.'s third-quarter profit dropped 76% as the government-owned lender took additional steps to put behind it costly mortgage litigation by reaching settlements with federal regulators.

The Detroit company said Tuesday its profit fell to $91 million, from $384 million a year earlier. Core pretax income, which reflects continuing operations and the exclusion of certain items, was $269 million, down from $373 million a year earlier.

The smaller profit was driven by a $170 million charge related to agreements Ally announced last month with the Federal Deposit Insurance Corp. and Federal Housing Finance Agency, the regulator for government-controlled mortgage-finance firms Freddie Mac (FMCC) and Fannie Mae (FNMA), over mortgage-backed securities. Including the charge, Ally has reserved $520 million for both matters.

The settlements are latest move by Ally to get out from under legal liabilities that have been a drag on its financial performance and a roadblock to efforts to repay a government bailout it received during the financial crisis.

"We continue to put mortgage in the rearview mirror," Chief Executive Michael Carpenter said during a conference call with analysts Tuesday.

With several legal problems off its plate, Ally has its sights set on repaying the $17.2 billion bailout it received through the U.S. Treasury Department's Troubled Asset Relief Program and focusing squarely on its core auto-lending business.

Mr. Carpenter said during the call that Ally expects to receive an answer from the Federal Reserve in the next few weeks over its request to repurchase about $5.9 billion in preferred shares the Treasury owns in the company.

That move is part of a plan Ally announced in August under which it is also raising $1 billion through the sale of common stock to about a dozen investors. The sale is intended to boost Ally's common-equity levels, which the Fed deemed too low to survive a hypothetical economic downturn under the regulator's "stress tests" of big banks earlier this year.

Treasury currently owns 74% of Ally, which will have repaid $6.3 billion of its bailout as of this month. If the Fed approves its plan, Ally will boost repayment to $12.3 billion, and lower Treasury's stake in the firm to about 65%.

The question then becomes how will Treasury unload its remaining stake in the firm.

Ally in 2011 had planned an initial public offering that would allow Treasury to reduce its ownership in the company. However, it scrapped those plans as legal problems tied to its subprime mortgage subsidiary, Residential Capital LLC, mounted, and the financial markets faced turmoil.

ResCap, once one of the country's largest subprime lenders, filed for Chapter 11 bankruptcy in May 2012 in a move intended to help Ally shake itself free of liabilities tied to soured mortgage bonds and foreclosure practices. In July, a U.S. Bankruptcy Judge approved a $2.1 billion settlement Ally reached with ResCap and the subsidiary's creditors that will help shield Ally from ResCap's legal liabilities.

A bankruptcy judge will consider ResCap's Chapter 11 plan at a Nov. 19 hearing.

How Treasury chooses to deal with its remaining stake in Ally is "their decision and not ours," Mr. Carpenter said. "The timing and the exact method of exit is completely under their control, not under our control."

A spokesman for Treasury didn't immediately respond to a request for comment on Tuesday.

Mr. Carpenter indicated an IPO could still be a top option for the company.

"The market environment right now is very, very responsive, so our advisers are telling us that an IPO is certainly very feasible in the near term," he said. Doing a private-placement transaction could also be an option for Treasury, he added.

"I don't think Treasury wants to be a long-term shareholder so I imagine...they won't wait for several years to make a decision," he said.

Ally's goal is to focus its efforts on its auto-lending business, which provides financing to auto dealers and car buyers, as well as Ally Bank, its online depository unit that offers checking and savings accounts and other banking products.

The company's auto-lending business posted income from continuing operations of $339 million, versus $337 million a year earlier and $382 million in the prior quarter.

But Ally, formerly the in-house financing arm for General Motors Co., also faces headwinds in that business, including increased competition from other banks, such as Wells Fargo & Co. (WFC) and U.S. Bancorp (USB).

Key agreements with its two biggest partners--GM and Chrysler Group LLC--are also phasing out. Ally has had contracts with both auto makers under which it had the exclusive right to finance a certain portion of their auto sales.

Ally's agreement with Chrysler ended in April, while its agreement with GM expires at the end of this year.

The company also faces scrutiny from the Consumer Financial Protection Bureau, the federal agency established under the Dodd-Frank overhaul legislation that is reviewing the auto-lending industry for potential antidiscriminatory practices. The agency has said it may hold banks responsible for actions by auto dealerships, which often have the ability to mark up the cost of loans to consumers through what is known as a dealer participation fee.

Ally has said the CFPB is investigating its financing practices.

Total auto-loan originations were $9.6 billion in the quarter, unchanged from a year earlier but down from $9.8 billion in the second quarter.

To diversify, the company has made efforts to increase financing for leases and used-car purchases. Lease originations were $2.8 billion in the quarter, up from $2.6 billion a year earlier and flat with the previous quarter. Used originations increased to $2.6 billion from $2.3 billion a year earlier and $2.5 billion in the previous quarter.

--Ben Fox Rubin contributed to this article.

Write to Andrew R. Johnson at [e-mail]

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