More than most banking companies, Ally Financial has been at the mercy of its regulators since the company's near-death experience in late 2008.
Slowly, the Detroit-based auto lender is taking steps toward normalcy, with the government exerting less control over the firm's everyday operations. In December the U.S. Treasury sold its last remaining shares in the bailed-out company.
And on Tuesday, Ally announced that its government overseers are allowing the company to move a higher-risk slice of its flagship car-lending business into Ally Bank, the online deposit franchise that the company built in the wake of the financial crisis.
The regulatory thumbs-up allows Ally to fund a larger percentage of its loans with deposits, which cost the company nearly 3 percentage points less than other funding options.
Specifically, auto loans to borrowers with FICO scores of 620-660 will now be allowed into Ally Bank. By many definitions those are subprime loans. Ally executives on Tuesday did not identify the regulator that provided the necessary blessing, but Ally Bank's primary federal regulator is the Federal Deposit Insurance Corp.
The regulators' approval should raise the percentage of the firm's assets funded through its bank from 68% to closer to 75%, Chief Financial Officer Christopher Halmy said during the company's quarterly earnings call. "But obviously we are focused on eventually getting everything funded at the bank," he said.
Today, Ally loans to car buyers with FICO scores of less than 620 still cannot be funded with bank deposits. That is a borrower segment in which the company has been looking to expand, to partly compensate for General Motors' decision to phase out Ally's role in the automaker's subsidized leasing business.
Loans to borrowers with FICO scores below 620 accounted for 13.7% of Ally's auto loan originations in the second quarter, up from 9.4% a year earlier, the company reported.
When Chief Executive Officer Jeffrey Brown was asked Tuesday about what it will take to get approval for using Ally Bank deposits to fund loans to those less creditworthy borrowers, his response was succinct, if not terribly encouraging in the short term.
"Patience," he said in response to an analyst's question.
"It's an ongoing dialogue that we have with our regulators to make sure they are comfortable with the quality of loans," Brown added. "You look at some of our large and regional bank competitors that book everything inside of the bank we don't think there's any reason why, through time, we won't get there."
Many of the regulatory edicts that Ally must abide by are not public knowledge. But they clearly include restrictions on the exposure that the firm's $104 billion-asset, federally insured bank has to some risks.
Shortly before he left the company in early February, then-CEO Michael Carpenter said that the government had held Ally "to a different standard in many regards, in terms of capital ratios, in terms of control of our deposit pricing, in terms of the eligibility of certain assets going into the bank."
Jason Stewart, an analyst at Compass Point Research & Trading, was encouraged Tuesday by the company's announcement that more auto loans will be funded through Ally Bank.
But he said that the firm is not yet out of the woods, noting that Ally Bank's regulators will want to see how its deposit base, which may prove less resilient than those of banks that rely on brick-and-mortar branches, fares when interest rates rise.
"I'm positive," Stewart said in reference to the regulatory outlook for Ally. "But I don't think you can sound the all-clear by any means."
During Tuesday's conference call, Ally executives outlined steps they are taking to prepare for higher interest rates.
The company has been getting rid of contractual provisions tied to variable-rate loans made to auto dealers that lock in profits for Ally in a low-rate environment. Those provisions would put a damper on yields when rates go higher.
In the second quarter, Ally reported net income of $182 million, including a $155 million pretax charge for the company's extinguishment of high-cost debt. That compared to net income of $323 million in the same period a year earlier.
The company said that its consumer auto origination in the quarter totaled $10.8 billion, which was down 1% from a year earlier.
But analysts were encouraged by the moves that Ally made to compensate for the sharp reduction in its subsidized auto-leasing business with GM. All other auto loans grew by 36% compared with the second quarter of 2014.
"Ally continued to make significant progress in transitioning away from GM," Mark Palmer, an analyst at BTIG, wrote in a research note.
Ally reported that it added $1.1 billion in retail deposits during the second quarter, which resulted in 13% balance growth from the same period last year. And the company also said that it reduced expenses by $84 million, or more than 10%, in the second quarter.
Investors drove up Ally's stock price Tuesday by more than 4%, to $22.47. Still, the shares were trading at 10% below the price at Ally's initial public offering in April 2014.