Amid present subprime mortgage carnage Delta Financial performance is impressive.
Sticking to their strategy to focus on the fixed-rate loans niche (87% of their loans in 2006), the seasoned and conservative management reached 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 they spread their fixed cost on 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) Their underwriting profit that is still near record highs.
| period | Q3 2005 | Q4 2005 | Q1 2006 | Q2 2006 | Q3 2006 | Q4 2006 |
| gain on sale of whole loan sales | 1.4% | 1.4% | 1.1% | 1.3% | 1.8% | 1.6% |
Regarding the outlook, the company CEO Hugh Miller is positive. He has not seen so far 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, Accredited Home Lenders or Novastar Financial which are currently fetching a fraction of their tangible book value, we believe that the company 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
