Delta Financial Corporation Reports Second Quarter 2007 Results, Announces $70 Million in Additional Capital with Angelo, Gordon & Co. and Mohnish Pabrai

Delta Financial Corporation (NASDAQ: DFC) today reported net income of $777,000, or $0.03 per diluted share, for the quarter ended June 30, 2007, compared to net income of $7.2 million, or $0.31 per diluted share, for the same period last year. Delta originated a record $1.4 billion of mortgage loans, an approximate 9% increase from the first quarter 2007 and an approximate 39% increase from the second quarter of 2006.

For additional information on the second quarter earnings, please see the section later in this release entitled More on Our Second Quarter Earnings.

Liquidity has become one of the most important issues facing lending institutions today as the credit disruption widens and rating agencies modify their reserve level requirements, explained Hugh Miller, president and chief executive officer. This has created a capital intensive environment in which it is increasingly more costly to operate. While our adherence to Deltas proven business model, with a focus on fixed rate loans and a diversified wholesale/retail origination platform, provided some insulation and helped us generate positive earnings during the second quarter, it became apparent this current environment would unduly strain our liquidity.

Accordingly, I am pleased to announce we have entered into two transactions to help strengthen our Company and provide additional financial flexibility, continued Mr. Miller. First, we obtained a $60.0 million financing facility from an affiliate of Angelo, Gordon & Co., a leading alternative asset management firm. The financing is collateralized by all of our currently existing securitization cashflow certificates. As part of the transaction, Angelo, Gordon & Co. will receive warrants to purchase 10.0 million shares of our Common Stock with an initial exercise price of $5.00 per share, expiring February 2009, subject to extension if we do not obtain stockholder approval for the warrant issuance within 90 days of the closing date. The fair value of the warrants issued will be amortized to interest expense as a non-cash yield adjustment over the life of the associated financing facility.

At the same time, we have agreed to issue $10.0 million of convertible notes to funds managed by Mr. Mohnish Pabrai, one of our largest stockholders, Mr. Miller explained. The notes are convertible into an aggregate of 2.0 million shares of our Common Stock, at a conversion price of $5.00 per share. The exercise of most of the warrants and the issuance of all of the shares upon conversion of the notes are both subject to shareholder approval, which we intend to pursue in the near future.

We are pleased to be associated with Delta Financial, said David Roberts, Senior Managing Director of Angelo, Gordon & Co. We have confidence in the Companys business model, which is focused on fixed-rate loans, and its experienced management team, which is well-qualified, to execute the Companys strategy.

Mohnish Pabrai stated, Delta is one of the best companies and management teams in this space. I look for them to emerge from the current market disruption and be well-positioned to take advantage of a less populated competitive landscape.

In addition to the new capital infusion, we have taken other steps to strengthen the Company including increasing our mortgage rates, modifying our underwriting guidelines, and discontinuing certain loan products, explained Mr. Miller. The effects of these recently-made changes to rates and products are expected to mitigate, to some extent, the impact of rating agencies changes. However, for those loans originated under our previous guidelines but not yet securitized or in our pipeline, we expect to receive materially less favorable securitization or whole loan execution.

With uncertainty still in the credit and mortgage-backed securities markets, and the housing market expected to further soften, the second half of 2007 is proving to be very challenging. As such, we will not be providing any guidance at this time as it relates to portfolio growth, net interest margins or whole loan sale premiums, and we are suspending any prior guidance. While there is pressure on short term earnings, we believe our new financing arrangements will help enable us to weather the storm, continued Mr. Miller.

More on Second Quarter Earnings

Although we set a record for quarterly loan originations and cost to originate this quarter, our earnings were lower than expected primarily due to the effect of slower than forecasted prepayment speeds on our fixed-rate loans, which comprise the vast majority of our portfolio, explained Mr. Miller. It was necessary to record a $3.9 million non-cash reduction to our net interest income to reflect an adjustment to the prepayment assumptions we use to accrete deferred income under the interest method in accordance with accounting pronouncement SFAS No. 91. The deferred income is comprised primarily of the net origination fees collected at the time mortgage loans are originated, and the purchase price received when the Company sells mortgage servicing rights in connection with securitizations, both of which are recognized over the estimated life of the related mortgage loans.

We anticipate that slower-than-previously-expected prepayments on fixed-rate loans will continue for the foreseeable future, Mr. Miller explained. While these slower-than-anticipated prepayment speeds also resulted in less-than-expected prepayment penalty income for the quarter, it could result in more net interest income recognized in later periods, as slower prepayment speeds means mortgage loans will remain outstanding for a longer period of time.

As announced last quarter, other income was $4.0 million lower during the second quarter of 2007 compared to the quarter one year ago as the Company sold all remaining excess cashflow certificates during the first quarter of 2007.

Second Quarter 2007 and Related Highlights

  • Total cost to originate, as a percentage of total loan production, was 1.5%.
  • Originated a record $1.4 billion in mortgage loans as both the retail and wholesale channels reported record volume.
  • On-balance sheet loan portfolio increased 39% to $7.7 billion from $5.6 billion in June 30, 2006.
  • Fixed rate loans for the quarter comprised approximately 96% of total production, up from approximately 86% a year ago.
  • Sold approximately $205 million loans on a whole-loan basis for an average premium of 3.2%.
  • Completed an asset-backed securitization collateralized by $850 million of mortgage loans in June 2007.
  • Announced quarterly cash dividend on June 5, 2007 of $0.05 per share of common stock to stockholders of record on June 25, 2007. The dividend was paid on July 3, 2007.

For the six-months ended June 30, 2007, the Company reported net income of $5.7 million, or $0.23 per diluted share, compared to net income of $13.8 million, or $0.61 per diluted share, for the six- months ending June 30, 2006.

Additional Second Quarter 2007 Information

Net Interest Income

The Companys net interest income, after provision for loan losses, decreased to $25.7 million in the second quarter of 2007, from $29.4 million in the second quarter of 2006. The decrease was attributable to several factors, including (a) the aforementioned $3.9 million non-cash reduction to net interest income related to changes in our prepayment assumptions, (b) a decline in prepayment penalty fee income to 25 basis points per annum (as a percentage of average loans held for investment) for the second quarter of 2007 compared to 37 basis points for the second quarter of 2006, (c) a $6.3 million increase in the loan loss provision for the second quarter of 2007 compared to the second quarter of 2006 as the portfolio continues to grow and season, and (d) the continued flattened yield curve, which compresses the net interest margin due to higher short-term funding costs.

Level Yield Adjustment

In accordance with SFAS No. 91, we amortize certain direct loan origination fees, origination costs, and certain other premiums and discounts to income on a level-yield basis over the estimated life of the mortgage loans and related securitization debt using estimated prepayment speeds. The Company is required to adjust the life-to-date amortization of these deferred fees and costs when differences arise between actual and estimated prepayments. Changes to the prepayment speed estimates are applied to the level-yield calculations as if the revised estimates had been in place since the origination of the loans and inception of the securitization debt. The Company therefore adjusted its life-to-date amortization and current period amortization to reflect the effect of the changes.

The changes made by the Company to reflect a slower-than-previously anticipated prepayment environment resulted in a $3.9 million non-cash reduction to net interest income in the second quarter of 2007 and a corresponding increase in our deferred revenue, which will be amortized to net interest income over the remaining expected life of the related mortgage loans and related securitization debt.

Credit Performance

The allowance for loan losses represents 86 basis points, or $66.9 million, of the outstanding net loan portfolio at June 30, 2007, compared to 87 basis points, or $60.9 million, at March 31, 2007. The $6.0 million increase reflects the growth in the size, performance and seasoning of the outstanding on-balance sheet loan portfolio at June 30, 2007. The Companys allowance for loan losses is currently expected to cover principal losses over the next 18 to 24 months on the outstanding loan portfolio. During the second quarter of 2007, the Company charged-off $7.3 million of loans, or 39 basis points annualized, against the allowance for loan losses. Loans delinquent greater than 90 days constituted 6.2% of the outstanding loan balance at June 30, 2007.

Other Income

As the Company reported during its first quarter 2007 conference call, other income, as expected, was minimal in the second quarter of 2007 and is expected to remain minimal in the future as the majority of other income in previous years was primarily related to the increase in the fair values recorded on our excess cashflow certificates, all of which were sold during the first quarter of 2007.

Secondary Marketing (Securitized Loans and Loan Sales)

The Company completed an asset-backed securitization collateralized by $850 million of mortgage loans in June 2007, under its Renaissance Mortgage Acceptance Corp. shelf, and continued to distinguish itself in the market place by receiving attractive whole-loan sale premiums in the second quarter. Whole-loan sales in the second quarter of 2007 represented approximately 15% of total loan originations, or $205 million, with an average whole-loan sale premium of 3.2%.

The following table provides certain information regarding securitized loans and loans sold on a whole-loan basis during the three months ended June 30, 2007 and 2006:

For the Three Months

Ended June 30,

(Dollars in thousands)20072006
Securitized loans - portfolio based $ 849,998 $ 824,978
Whole-loan sales 205,379 154,008
Total securitized loans and whole-loan sales $ 1,055,377 $ 978,986

Loan Originations and Characteristics

The following tables provide information on the Companys loan originations by loan type and origination channel for the three months ended June 30, 2007 and 2006:

For the Three Months

Ended June 30,

Loan Type:20072006
Fixed-Rate Mortgages 95.8 % 85.6 %
Adjustable-Rate Mortgages 4.2 % 14.4 %
Total 100.0 % 100.0 %
(Dollars in thousands)For the Three Months Ended June 30,Quarter-Over-Quarter

Percentage Change

Origination Channel:20072006
Wholesale $ 728,234 54 % $ 515,353 53 % 41 %
Retail 624,601 46 % 455,259 47 % 37 %
Total $ 1,352,835 100 % $ 970,612 100 % 39 %

Conference Call and Webcast

The Company will host a conference call to discuss its financial results at 4:30 p.m. EDT, Tuesday, August 14, 2007. The live conference call can be accessed by dialing (866) 585-6398 (domestic) or (416) 849-9626 (international). A live listen-only webcast of the conference call will be available in the Corporate Highlights portion of the Investor Relations section of the Companys website at A replay of the conference call and the question/answer session will be available on the Companys website shortly after the live call is completed, and will be available through Tuesday, August 28, 2007. The telephone replay will also be available shortly after the live call is completed and can be accessed by dialing (866) 245-6755 (domestic) or (416) 915-1035 (international), and using the code: 497268.

About the Company

Founded in 1982, Delta Financial Corporation is a Woodbury, New York-based specialty consumer finance company that originates, securitizes and sells non-conforming mortgage loans. The loans the Company originates are primarily fixed rate, and are secured by first mortgages on one- to four-family residential properties. The Company originates non-conforming loans through a network of approximately 3,200 independent brokers and the Companys retail offices. Since 1991, Delta has completed 52 asset-backed securitizations, collateralized by approximately $19.8 billion in mortgage loans.

Important Information Regarding Forward-Looking Statements. Certain statements contained in this press release, which are not historical fact, may be deemed to be forward-looking statements under the federal securities laws, and involve risk and uncertainties. Forward-looking statements relate to, among other things, our statements as to the benefits to be realized from our financing arrangements and changes to our loan origination policies, our liquidity needs, our capital raising plans, our future earnings, profitability, net interest income, interest expense, growth, loan production, loan portfolio size, prepayment rates, loan performance (including delinquencies and losses), emphasis on originating fixed-rate loans, future product offerings and originations activity, the pricing of whole-loan sales, our future competitive position and the adequacy of our allowance for loan losses. There are many important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements. Such factors include, but are not limited to, the availability of funding at favorable terms and conditions, including, without limitation, the availability of warehouse, residual and other credit facilities; our ability or inability to continue to access the securitization and whole-loan markets on favorable terms and conditions or at all; our ability to obtain stockholder approval of the equity issuances described above and the consequences to us if we do not receive stockholder approval; the potential impact that amortizing the discount related to the warrants may have to our financial statements; rating agencies changes impacting reserve levels; competition; loan losses, loan prepayment rates, delinquency and default rates; repurchase obligations, early payment default, costs and potential liabilities associated with litigation, regulatory investigations or actions by state and/or federal agencies and other regulatory compliance matters and changes (legislative or otherwise) affecting mortgage lending activities and the real estate market; general economic conditions, including interest rate risk, future residential real estate values, future tax rates and demand for our products and services; the state of the housing market; and other risks identified in our filings with the Securities and Exchange Commission, including those discussed in our Form 10-K under the captions BusinessForward Looking Statements and Risk Factors and Risk Factors and our Form 10-Q under the caption Risk Factors. We disclaim any obligation to update or revise any of the forward-looking information contained in this press release at any future date, except as required under applicable securities laws.



(Dollars in thousands, except share and per share data)

Three Months Ended

June 30,


Six Months Ended

June 30,


Interest income $ 148,655 $ 112,736 $ 289,615 $ 214,709
Interest expense 109,638 76,294 210,160 143,560
Net interest income 39,017 36,442 79,455 71,149
Provision for loan losses 13,276 6,998 23,921 13,402
Net interest income after provision for loan losses 25,741 29,444 55,534 57,747
Non-interest income:
Net gain on sale of mortgage loans 8,027 7,038 15,867 14,099
Other income 261 4,256 2,084 7,632
Total non-interest income 8,288 11,294 17,951 21,731
Non-interest expense:
Payroll and related costs 17,565 16,563 34,782 33,593
General and administrative 15,244 12,421 28,916 23,583
(Gain)/Loss on derivative instruments (83 ) (148 ) 13 (423 )
Total non-interest expense 32,726 28,836 63,711 56,753
Income before income tax expense 1,303 11,902 9,774 22,725
Provision for income tax expense 526 4,661 4,110 8,898
Net income $ 777 $ 7,241 $ 5,664 $ 13,827
Per Share Data:
Basic - weighted average number of shares


23,335,936 22,903,098 23,313,648 21,706,899
Diluted - weighted average number of shares


24,178,759 23,696,358 24,127,377 22,535,209
Basic earnings per share - net income $ 0.03 $ 0.32 $ 0.24 $ 0.64
Diluted earnings per share - net income $ 0.03 $ 0.31 $ 0.23 $ 0.61



(Dollars in thousands)


June 30,


December 31,



Cash and cash equivalents $ 6,477



Mortgage loans held for investment, net of discounts and deferred origination fees 7,741,762 6,413,687
Less: Allowance for loan losses (66,864 ) (55,310 )
Mortgage loans held for investment, net 7,674,898 6,358,377
Trustee receivable 63,533 73,361
Accrued interest receivable 51,846 41,684
Excess cashflow certificates -- 1,209
Equipment, net 7,319 8,287
Accounts receivable 16,717 4,872
Prepaid and other assets 68,523 49,836
Deferred tax asset 36,108 45,760
Total assets $ 7,925,421



Liabilities and Stockholders Equity
Bank payable $ 1,521



Warehouse financing 754,664 335,865
Financing on mortgage loans held for investment, net 6,903,729 6,017,947
Other borrowings 5,529 5,970
Accrued interest payable 31,291 25,052
Accounts payable and other liabilities 74,638 53,160
Total liabilities 7,771,372 6,439,551
Stockholders Equity
Common stock 235 234
Additional paid-in capital 142,884 141,984
Retained earnings 13,511 10,180
Accumulated other comprehensive loss (1,263) (1,504 )
Treasury stock, at cost (1,318 ) (1,318 )
Total stockholders equity 154,049 149,576
Total liabilities and stockholders equity $ 7,925,421




Delta Financial Corporation
Larry Karpen, 516-812-8222
Vice President
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