Delta Financial: A Cut Above Other Subprime Lenders

This morning Delta Financial Corporation (DFC), a subprime mortgage lender we analyzed in September 2006, released its 4th quarter and fiscal year 2006 earnings.

Amid present subprime mortgage carnage Delta Financial performance is impressive.

Sticking to their strategy of focusing on the fixed-rate loans niche (87% of their loans in 2006), the seasoned and conservative management achieved amazing results:

1) Profits per share increased 22% compared to same quarter of last year while virtually all other subprime mortgage lenders reported losses in 4th quarter 2006.

2) They originated a record $4 billion loans, 5% more than 2005 volume.

3) They reached a truly outstanding low cost to originate (1.6%). According to the information we have in our hands we believe that in the 4th quarter they were the low origination cost leader in the subprime mortgage universe despite that their fixed cost were spread over a much smaller volume compared to their bigger competitors. The secret here is that are using their in-house origination platform which sports very low (1.1%) origination costs against the 2.2% supported by the broker channel.

4) Underwriting profit is still near record highs.

Regarding the outlook, the company CEO Hugh Miller is positive. So far he has not seen the usual seasonal decline in loan volume during the first quarter of the year and he plans to hire new loan officers to grow retail origination platform.
Loan losses are within expectations and 90+ days delinquent loans reached 5%, about half of what we believe to be the industry average.

At the current quote of $9.58 the company trades at 1.51 x book value, 7.5 x 2007 expected earnings and pays a 2.2% dividend.

Though company evaluation is richer than the other distressed subprime distressed competitors like New Century(NEW , Accredited Home Lenders (LEND) or Novastar Financial (NFI) which are currently fetching a fraction of their tangible book value, we believe that the company's superior business model and management deserve the premium.

Disclosure: the author is long Delta Financial and Accredited Home Lenders Holding Co. at the time of posting

DFC 1-yr. chart:

Related Articles: Pabrai Gives Cause to Examine Delta Financial Corporation • Stifel: Subprime Mortage Sector in 'Downward Spiral' • Only the Strongest Sub-Prime Lenders Will Survive

Comments

[FIG trader]

Surely this must have been written with comical intent. It is little solace that investors have lost only 25% of their money in the last month, versus 50% to 75% in the case of the triplets, FMT, NEW and NFI. Sure you say, from your September call, the stock is flat. Congrats, but this stock is going much lower as well. Its $9 support level is tenuous at best; First stop is $7, next stop is probably circa $2. Look at the longer term multi-year chart, show the trading volume and look at the institutional liquidation of the stock in process. Sorry to be so harsh, but I am trying to save you money. That sucking sound is ABS market removing liquidity as we speak.