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Finance Companies Report 2Q Results

July 31, 2008

The following is a brief summary of second quarter financial reports from captive and non-captive finance companies. Among the captives, Ford Motor Credit reported a net loss in income, as well as a $2.1 billion write-off for operating leases. Among the non-captives there were mixed second quarter results. JPMorgan Chase, Wells Fargo and Wachovia recorded losses, while Capital One posted second quarter gains.

Ford

For the second quarter of 2008, Ford Motor Credit Company reported a net loss of $1.4 billion, compared to a year earlier profit of $62 million. Ford Motor Credit reported a loss of $2.3 billion on a pre-tax basis, compared with earnings of $112 million in the previous year. Minus a $2.1 billion impairment charge for operating leases, Ford Motor Credit acquired a pre-tax loss of $294 million in the second quarter of 2008.

The decrease in pre-tax earnings primarily reflected the impairment charge for operating leases, higher depreciation expense for leased vehicles, and higher provision for credit losses. These were offset partially by the non-recurrence of net losses related to market valuation adjustments from derivatives, higher financing margin, and a gain related to the sale of approximately half of Ford's ownership interest in its Nordic operations, and lower operating costs.

"Dramatic, rapid marketplace changes are driving increased weakness in the vehicle auction markets, in turn affecting the entire industry, including Ford Motor Credit," Mike Bannister, chairman and CEO of Ford Motor Credit said.

Higher fuel prices and the weak economic climate during the second quarter of 2008 have changed consumer preferences from full-size trucks and traditional sport utility vehicles to more compact, fuel-efficient vehicles. The change in consumer preferences coupled with a weak economic climate has resulted in a large reduction in auction values for used full-size trucks and traditional SUVs.

Ford Motor Credit also estimated that lease-end residual values would be significantly lower than previously anticipated for full-size trucks and traditional sport utility vehicles. Because of these market factors and Ford Motor Credit's portfolio review, Ford Motor Credit determined a pre-tax impairment charge of $2.1 billion was required. Bannister added, "We regularly review and adjust lease residual values to align with market conditions. In addition, the core of our business remains strong, because it is built upon lending practices, risk management and collections activities that are consistent and prudent."

Capital One

Capital One's auto finance division posted net income of $33.6 million in the second quarter, compared to a loss of $82.4 million last quarter, and a profit of $38.0 million in the second quarter of 2007. The company said the return to profitability in this segment was driven by the seasonal improvement in charge-offs, solid revenue margins, and continuing reductions in operating costs. Beyond this second quarter, the significant cyclical economic challenges facing the auto finance industry continue to be the longer term driver of performance in the auto finance business.

Total revenues decreased $12.4 million, or 3.0 percent, compared to the first quarter of 2008, but increased $7.9 million, or 2.0 percent, over the prior year's same quarter. Non-interest expenses declined 9.7 percent over the previous quarter and 21.7 percent relative to the second quarter of 2007. Net charge-offs of 3.84 percent declined slightly from 3.98 percent in the first quarter of 2008 while delinquencies increased 120 basis points from the prior quarter to 7.62 percent. Originations in the first quarter of $1.5 billion were down 38.0 percent, or $926.5 million, compared to the prior quarter. Managed loans of $23.4 billion as of June 30, 2008, were down 5.0 percent relative to the first quarter of 2008 and down 2.8 percent from the second quarter of 2007.

JPMorgan Chase

Auto finance net income for JPMorgan Chase reached $83 million, a decrease of $2 million, or 2 percent, from the previous year. Net revenue for the company was $498 million, up $48 million, or 11 percent, due to higher loan balances and increased automobile operating lease revenue. The provision for credit losses was $117 million, up $25 million, which reflected higher estimated losses. The net charge-off rate was 1.07 percent, compared with 0.61 percent in the preceding year. A non-interest expense of $243 million increased by $24 million, or 11 percent, driven by increased depreciation expense on owned automobiles subject to operating leases. Auto loan originations were $5.6 billion, up 6 percent. Average loans were $44.7 billion, up 11 percent.

The company says it is very confident that ongoing businesses they have picked up like prime services and equity are going to contribute on a go-forward basis. They expect the billion-dollar plus after tax of annualized earnings by the time they get ramped back up and exit 2009 going into 2010.

On the firm's outlook, Jamie Dimon, chairman and chief executive officer, said, "Our expectation is for the economic environment to continue to be weak - and to likely get weaker - and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer. However, the firm has delivered underlying growth across most of our businesses, and with our substantial capital base we can continue to invest for the future. In spite of the environment, we are confident that we are building an increasingly strong and profitable company."

Wachovia

For the second quarter of 2008, auto loan originations for Wachovia rose 12 percent. Average consumer loans in the auto segment reached $26.4 billion in the second quarter, up from $24.5 billion in the first quarter. Installment and other loan net charge-offs of $170 million declined $15 million, driven by a $17 million reduction in auto. Allowance for credit losses increased $4.2 billion to $11.0 billion, reflecting increased risk in the consumer real estate, commercial and auto portfolios.

"These bottom-line results are disappointing and unacceptable," responded Lanty L. Smith, Wachovia's board chairman, who served as interim chief executive officer starting June 1. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility. Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities."

"In the short term, the entire organization is focused on protecting, preserving and generating capital; reinforcing Wachovia's strong liquidity position; and reducing risk," said Robert K. Steel, who was named Wachovia’s CEO and president on July 9.

Wells Fargo

"Losses in the Wells Fargo Financial auto portfolio declined $47 million from first quarter 2008. The process improvements and underwriting changes made in prior quarters continued to produce the desired results, however, increased economic stress will place additional pressure on any portfolio closely tied to the consumer," said Chief Credit Officer Mike Loughlin.

Auto finance receivables/operating losses were down 10 percent to $27.5 billion. Well Fargo has taken action to reduce credit risk and, in the process, curtail higher-risk loan products. "In the first half of this year, we continued to tighten underwriting standards in our real estate, auto and credit cards businesses to effectively manage risk in this difficult credit environment," said Tom Shippee, Wells Fargo Financial CEO. "Auto originations declined 40 percent as we intentionally shrank the U.S. auto portfolio."

He goes on to say that the auto group will focus on nonprime and near-prime lending through both the indirect and direct channels. Shippee cites unacceptable returns as the reason prime auto lease business is no longer a strategic fit for the company.

"In the first half of this year, we continued to tighten underwriting standards in our real estate, auto and credit cards businesses to effectively manage risk in this difficult credit environment … Our auto group is focusing on its core business of nonprime and near-prime lending through both the indirect and direct channels. We're particularly pleased with the growth and performance of our direct auto channel, which we integrated into our consumer store network two years ago and now comprises 30 percent of our new auto originations in the U.S.," said Shippee. "We've decided to stop originating new auto leases effective the end of July. Second quarter lease volumes were approximately 6 percent of our total auto volume. The prime auto lease business is no longer a strategic fit for us, partly because the returns are not acceptable. However, we will continue to service our existing lease contracts."

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