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

(Adds information from conference call, background on stock repurchases, TARP).

 
   By Andrew R. Johnson and Ben Fox Rubin 
 

Ally Financial Inc.'s third-quarter profit dropped 76% as the government-owned auto lender recorded a charge related to mortgage settlements with government regulators and continued to exit none-core businesses.

The Detroit company said Tuesday its profit fell to $91 million, down 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.

Last month, Ally said it would take a $170 million charge in the third quarter stemming from settlements with Federal Deposit Insurance Corp. and Federal Housing Finance Agency, the regulator for government-backed mortgage-finance firms Freddie Mac (FMCC) and Fannie Mae (FNMA), over mortgage-backed securities sold during the financial crisis.

The settlements are the latest effort by Ally to put behind it costly mortgage litigation that has stalled efforts to repay the government bailout it received during the financial crisis.

Ally is 74% owned by the U.S. government after receiving $17.2 billion in funds through the Treasury Department's Troubled Asset Relief Program.

Last May Residential Capital LLC subsidiary filed for Chapter 11 bankruptcy in a move intended to distance Ally from mortgage litigation and looming bond payments. 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. Those liabilities were one factor that caused Ally to fare poorly on the Federal Reserve's stress tests of big banks in March.

In August, Ally announced a plan to raise about $1 billion in equity through the private placement of common stock with a group of about a dozen investors. As part of the plan, the company said it was seeking the Fed's approval to buy back about $5.9 billion in preferred shares owned by U.S. Treasury.

Chief Executive Michael Carpenter said during a conference call with analysts Tuesday that it should receive an answer from the Fed in the next few weeks.

Repurchasing the stock would lower the government's stake in Ally to about 65%, the company has said. It would also bring the amount of money Ally has repaid taxpayers to more than $12 billion from about $6.3 billion.

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

But Ally, formerly the in-house financing arm for GM, faces headwinds in the auto-lending business. The company has faced increased competition from other banks, such as Wells Fargo & Co. (WFC) and U.S. Bancorp (USB), that have made a bigger push into the business in recent years.

It's also under pressure to sustain loan originations as agreements with its two biggest partners--GM and Chrysler Group LLC--phase out. Ally has had contracts with both auto makers under which it has 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.

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.

Ally's mortgage operations, which represent a significantly smaller part of its business following ResCap's bankruptcy and the company's sale of other mortgage assets, posted an operating loss of $5 million versus a profit of $331 million a year earlier and a loss of $27 million in previous quarter.

Write to Andrew R. Johnson at [e-mail] and Ben Fox Rubin at [e-mail]

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