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Delta Originations Up, Earnings Evaporate

$1.4 billion 2nd quarter volume

August 14, 2007

By staff

Delta Financial Corp. was able to boost quarterly originations, but earnings were down by more than 80 percent. The subprime lender took out new financing in an effort to maintain liquidity.

Second quarter production of $1.4 billion increased from $1.2 billion the prior quarter, according to an earnings release today. A year earlier, fundings amounted to $1.0 billion.

Just over half of the latest quarter's activity was originated from the companies network of 3,200 mortgage brokers, and the rest was originated by inside retail originators, Delta reported.

The on-balance sheet loan portfolio reportedly increased 39 percent from a year earlier to $7.7 billion.

The Woodbury, N.Y.-based company said it obtained a $60 million financing facility from affiliates of Angelo, Gordon & Co. which, in return, will receive warrants to purchase 10 million shares of common shares at an initial exercise price of $5 per share.

Funds owned by Delta's largest shareholder, Mohnish Pabrai, will also lend the company $10 million in return for convertible notes that can be converted into 2 million shares for $5 each, according to the report.

"The second half of 2007 is proving to be very challenging," Delta President and Chief Executive Officer Hugh Miller said in today's announcement. "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."

Hurt by rising prepayment speeds on its fixed rate mortgages -- which accounted for 96 percent of second quarter production, net income fell to $0.8 million from $4.9 million in the first quarter and $7.2 million a year earlier, the data indicated.

At its annual shareholder meeting in May, Delta boasted about its success despite problems that had emerged in the subprime sector. The positive results were attributed to the origination of mostly fixed-rate mortgages, its avoidance of riskier mortgage products and a balance between direct and broker origination channels.

But like its Alt-A counterparts, Delta was apparently not immune to problems in the nonconforming secondary market.

"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," Miller explained. "We have taken other steps to strengthen the company including increasing our mortgage rates, modifying our underwriting guidelines, and discontinuing certain loan products."

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