NEW YORK — Ally Financial Inc., the government-owned lender that may seek bankruptcy protection for its struggling mortgage business, posted a $310 million profit in the first quarter driven by solid auto-finance results and improvements in its mortgage operations.

The company's core auto-lending business, which mainly finances General Motors Co. (GM) and Chrysler Group LLC dealers and customers, posted a pre-tax profit of $611 million, down 10.1% from a year earlier but up 3.2% from the fourth quarter. However, Ally faces ongoing pressure in that business as well as the prospect of losing key business from its largest partners.

Ally's overall profit compares to a year-earlier profit of $146 million and a loss of $206 million in the fourth quarter, when mortgage costs weighed on results.

"We continue to have a keen focus on taking steps to reduce risk in that business, while protecting the remaining Ally franchises and enabling them to thrive," Michael Carpenter, chief executive of Ally, said in a statement issued with results.

Ally is 74% owned by the U.S. government after taking more than $17 billion of bailout funds during the financial crisis. The lender, which is reeling from its foray into subprime mortgages prior to the housing bust, faces mounting pressure to resolve losses from its Residential Capital mortgage subsidiary.

Ally last week said ResCap missed a $20 million debt-interest payment, which has a grace period until mid-May, when the unit already faces more than $300 million of bond-related payments.

The lender has been pursuing a sale of some of ResCap's assets to Fortress Investment Group LLC (FIG), a process that also would involve a prepackaged bankruptcy for ResCap, The Wall Street Journal has reported. Management's hope is it can sever ResCap from the rest of Ally, allowing it to focus on its auto-lending and online-banking businesses.

Ongoing losses at ResCap hindered Ally's plans last year for an initial public offer, which was intended to help the U.S. government recoup its remaining investment in the company.

"We think that the single most important thing that we can do to preserve and enhance shareholder value is to distance Ally from the mortgage business," Carpenter said during a conference call with analysts Thursday.

ResCap's fate has been a lingering cloud over Ally's results.

Earlier this month Ally said it was extending by one month the maturity on $2.1 billion in financing it provides ResCap through intercompany credit agreements. The loans had come due April 13 and now mature May 14, just before bond payments hit.

Carpenter has stressed ongoing financial support for ResCap isn't guaranteed, though executives didn't say when they might make a decision on the subsidiary.

Ally was told in March to resubmit its capital plan to the Federal Reserve after it failed the regulator's most recent round of stress testing. The Fed determined key capital levels at Ally wouldn't meet its minimum requirements in the event of a severe, prolonged economic downturn, though Ally said the Fed overstated its exposure to mortgage risk and did not fully take into account its options for dealing with the business.

The company plans to resubmit its plan to the Fed likely in the next 90 days, executives said.

Ally's mortgage operations posted a pretax profit of $191 million, up from $43 million a year earlier and a loss of $258 million in the fourth quarter, when it took a charge related to a foreclosure settlement reached in February that involved four other mortgage servicers and federal and state regulators.

The improvements in the mortgage business were driven by positive servicing asset valuation and better margins, executives said.

Formerly the in-house financing arm of GM, Ally saw continued strength in the auto-lending business, though its loan volume has declined as competition with other lenders has intensified.

U.S. consumer financing originations were $9.7 billion in the first quarter, down from $11.6 billion a year earlier but up from $9.2 billion in the fourth quarter.

Pressure is likely to grow for Ally as more banks focus on auto lending and its key partners take steps to diversify their financing partners.

Chrysler Group, which has used Ally for dealer and customer financing since 2009, notified the lender Wednesday of its plans to not renew a contract for providing "subvented" loans, or consumer loans that dealers offer under special rates, after it expires April 30, 2013.

Ally said in a filing with the Securities and Exchange Commission that it competes for "all other parts" of Chrysler's business, including wholesale financing and loans and leases offered under standard rates.

Carpenter downplayed the effect of the contract, noting the company has anticipated Chrysler would diversify its lending sources.

"Our business is dealer focused and because it's dealer focused we have no reason to believe we will lose share with dealers," Carpenter said.

Ally financed 28% of Chrysler's U.S. customers and 62% of its dealers in the first quarter, down from 33.7% and 69.9%, respectively, from a year earlier. It financed 30.7% of GM's U.S. customers and 72.2% of its dealers, down from 51.9% and 82.3%, respectively.

Chrysler's contract was set to auto-renew another year unless Chrysler notified Ally by the end of this month of its plans to end the contract. Chrysler has been exploring other options, including forming a lending joint venture with other banks to fulfill its dealers' and customers' financing needs, the Journal has reported.

"The announcement reflects an increasingly competitive landscape," said Kirk Ludtke, managing director with CRT Capital Group LLC, adding that Chrysler's decision further highlights the need for Ally to "continue to conquest new business in their existing markets and move into new markets like the used-car market."

"The need to do that is clearly going to increase, and they face a lot of the same issues with GM," Ludtke said.

Ally said it originated $2.6 billion of used-loan volume in the U.S., up 15% from a year earlier.

The lender has a contract with GM, its former parent, to offer subvented retail loans to its customers, though starting in 2011 GM has had the ability to offer such loans through other lenders. Most recently it struck a deal with Wells Fargo & Co. (WFC) to provide dealer and consumer financing, including subvented loans, in GM's U.S. Western region.

Ally's contract with GM runs through the end of next year.

"Because it is uncertain whether GM will seek to renew the agreement with Ally when it terminates in December 2013, Ally's positioning in this business is vulnerable," Moody's Investors Service wrote in a report last month.

Subvented loans accounted for 36% of the new consumer loans and leases Ally originated in North America in 2011, down from 41% in 2010.

However, subvented loans through Chrysler accounted for about 5% of Ally's total U.S. consumer originations in the first quarter, Ally said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.