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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 1-12109
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DELTA FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3336165
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 WOODBURY ROAD, SUITE 200,
WOODBURY, NEW YORK 11797
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(516) 364-8500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 26, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of $0.45, was
approximately $2,513,885.
As of March 31, 2001, the Registrant had 15,883,749 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III, Items 10, 11, 12 and 13 are incorporated by reference from Delta
Financial Corporation's definitive proxy statement to stockholders which will be
filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2000.
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PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Delta Financial Corporation (together with its subsidiaries, the "Company" or
"Delta") is a Delaware corporation that was organized in August 1996. On October
31, 1996, in connection with its initial public offering, the Company acquired
all of the outstanding common stock of Delta Funding Corporation ("Delta
Funding"), a New York corporation that had been organized on January 8, 1982 to
originate, sell, service and invest in residential first and second mortgages.
On November 1, 1996, the Company completed an initial public offering of
4,600,000 shares of common stock, par value $.01 per share.
Delta, through its subsidiaries, is a specialty consumer finance company that
has engaged in originating, acquiring, selling and servicing non-conforming home
equity loans since 1982. Throughout its operating history, Delta has focused on
lending to individuals who generally do not qualify for conforming credit.
Management believes that these borrowers have largely been unsatisfied by the
more traditional sources of mortgage credit, which underwrite loans to
conventional guidelines established by the Federal National Mortgage
Associations ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Company makes loans to these borrowers for such purposes as debt
consolidation, home improvement, refinancing or education, and these loans are
primarily secured by first mortgages on one- to four-family residential
properties.
The Company originates home equity loans indirectly through licensed mortgage
brokers and other real estate professionals who submit loan applications on
behalf of borrowers ("Brokered Loans") and, prior to July 2000, also purchased
loans from mortgage bankers and smaller financial institutions that satisfy
Delta's underwriting guidelines ("Correspondent Loans"). The Company decided to
discontinue its correspondent operations in July 2000 to focus on its less cash
intensive broker and retail channels. Delta Funding currently originates the
majority of its loans in 20 states, through its network of approximately 1,500
brokers.
The Company develops retail loan leads ("Retail Loans") primarily through its
telemarketing system and its network of 11 retail offices located in Illinois,
Indiana, Missouri, North Carolina, Ohio (4), Pennsylvania (2), Tennessee, and a
call center in New York. During the twelve months ended December 31, 2000, the
Company closed two under-performing retail offices in Georgia and Florida, and
opened a new retail origination call center at its headquarters in Woodbury, New
York. In January 2001, the Company closed two additional under-performing retail
offices in Florida.
The Company's business strategy is to increase its loan originations platform
by focusing its efforts on its broker and retail channels of originations by (1)
continuing to provide top quality service to its network of brokers, and retail
clients, (2) maintaining its underwriting standards, (3) further penetrating its
established and recently-entered markets and expanding into new geographic
markets, (4) expanding its retail origination capabilities, and (5) leveraging
and continuing its investment in information and processing technologies.
For the year ended December 31, 2000, the Company originated or purchased
approximately $933 million of loans, of which approximately $604 million were
Brokered Loans, $260 million were Retail Loans and $69 million were
Correspondent Loans, compared to $891 million, $319 million and $261 million,
respectively, for the year ended December 31, 1999.
Through the first three quarters of 2000, substantially all of the loans
originated and purchased by the Company were sold in securitizations in which
the loans were sold to a trust, which in turn issued certificates evidencing
ownership interests in the trust, in return for capital to fund the purchase of
the loans by the trust. These certificates are issued through the sale of
asset-backed securities primarily to institutional investors. For the year ended
December 31, 2000, Delta sold a total of $840 million of loans through four real
estate mortgage investment conduit ("REMIC") securitizations. Each of these four
securitizations was credit-enhanced, by an insurance policy provided through a
monoline insurance company and/or a senior-subordinated structure, to receive
ratings of Aaa from Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA
("Fitch") and AAA from Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("S&P"). The Company sells loans through
securitizations to improve its operating leverage and liquidity, to minimize
financing costs and to reduce its exposure to fluctuations in interest rates.
1
In the fourth quarter of 2000, the Company again securitized the majority of
its loan production in a $115 million securitization. In contrast to the past
several quarters, however, the Company also sold a considerably larger amount -
$47 million of loans - of its loan production for a cash premium through whole
loan sales, without retaining the right to loan servicing. The Company plans to
continue to utilize a combination of securitization and whole loan sales in the
foreseeable future.
The majority of the Company's revenues and cash flows primarily result from
the sale of mortgage loans (through securitization and on a whole loan basis)
and sale of its servicing rights on newly originated or purchased pools of
home-equity loans. In connection with a securitization, the Company sells loans
to a trust for a cash payment while (1) retaining the interest-only and residual
certificates in the trust, and (2) either (a) retaining the right to service the
loans and receive contractual and ancillary servicing fees, or (b) selling the
servicing rights relating to the securitization to a third party for an up-front
cash premium.
The interest-only and residual certificates in the trust entitle the Company
to receive any "Excess Servicing" income, consisting of any remaining cash flows
collected by the trust from principal and interest payments on its loans after
the trust has first paid (a) all principal and interest required to be passed
through to holders of the trust's securities, (b) all contractual servicing
fees, and (c) other recurring fees and costs of administering the trust. Upon
securitizing a pool of loans, the Company recognizes a gain on sale of loans
("net gain on sale of mortgage loans") equal to the difference between cash
received from the trust when it sells asset-backed pass-through certificates and
the investment in the loans remaining after allocating portions of that
investment to record the value of either the retained servicing rights or the
sale of servicing rights, and the interest-only and residual certificates
received by Delta in the securitization. The majority of the net gain on the
sale of mortgage loans results from, and is initially realized in the form of,
interest-only and residual certificates and the retention or sale of the
mortgage servicing rights. The interest-only and residual certificates and
retained servicing rights are recorded based on their fair values, estimated
based on a discount rate which management believes to be reasonable, and the
stated terms of the transferred loans adjusted for estimates of future
prepayment rates and defaults among those loans. If actual prepayments and/or
defaults exceed the Company's estimates, the future cash flows from the
servicing rights and interest-only and residual certificates would be negatively
affected. (See "-Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Certain Accounting Considerations").
Through and including the first quarter of 2000, the Company retained the
right to service the loans in all securitizations it issued. In exchange for
servicing the mortgage loans in a securitization, the Company receives
contractual service fees and other ancillary service fees over the life of the
loans. As servicer in securitizations, the Company incurs the following
expenses, among others, (i) the cost of capital associated with making monthly
delinquency and servicing advances on mortgage loans where the underlying
borrower of such mortgage loan has defaulted, and (ii) prepayment interest
shortfall. Prepayment interest shortfall represents the amount that the servicer
must pay when a mortgage loan in a securitization trust repays in full prior to
the month end and equals the remaining interest that would otherwise have been
due in that month on that mortgage loan had it not repaid early. Beginning in
the second quarter of 2000, the Company sold the servicing rights associated
with each securitization for up-front cash proceeds and recognized a premium on
such sale that was recorded in Net Gain on Sale. As of December 31, 2000, the
Company had a loan servicing portfolio of $3.3 billion.
Although the Company recognizes income from its retention of interest-only
and residual certificates, and retained servicing rights (where applicable), the
Company receives cash flows from these interest-only and residual certificates
and retained servicing rights over the life of the transferred loans. The
Company typically begins to receive cash flows from the interest-only and
residual certificates retained upon securitization approximately twelve to
twenty months after a securitization, with the specific timing depending on the
structure and performance of the securitization. Initially, securitization
trusts utilize the Excess Servicing cash flows to make additional payments of
principal on the pass-through certificates in order to establish a spread
between the principal amount of the trust's outstanding loans and the amount of
outstanding pass-through certificates. Once a spread of between 1.50% and 3% of
the initial securitization principal (the "overcollateralization limit") is
established, the Excess Servicing cash flows are distributed to Delta as the
holder of the interest-only and residual certificates. The Company utilizes the
more conservative "cash-out" method of valuing future cash flows from residual
certificates (See "-Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Certain Accounting Considerations."). With
retained servicing fees, the Company begins to receive cash flows from monthly
2
contractual servicing fees in the month following a securitization. The
Company's retained servicing fees range from 0.50% to 0.65% per annum of the
outstanding balance of the loans being serviced.
In addition to the income and cash flows earned from the Company's
securitizations and whole loan sales, the Company also earns income and
generates cash flows from the net interest spread earned on loans while they are
held for sale and from loan origination fees on Brokered Loans and Retail Loans.
The Company has primarily operated on a negative cash flow basis in the past
(see "-Liquidity and Capital Resources"), having historically utilized various
financing facilities and an equity financing to offset negative operating cash
flows and support its loan originations, securitizations and general operating
expenses. In July 1997, the Company completed an offering of $150 million
aggregate principal amount of 9 1/2% senior notes due 2004 (the "Senior Notes").
A portion of the Senior Notes proceeds were used to pay down various financing
facilities with the remainder used to fund the Company's loan originations and
its ongoing securitization program. Since the issuance of the Senior Notes, the
debt and equity markets (other than the asset-backed securitization market) have
largely been shut off to monoline non-conforming mortgage lenders like Delta. As
a result, the Company's primary sources of liquidity since 1997 have been (a)
warehouse and other financing facilities, (b) securitizations of mortgage loans
and (c) sales of whole loans and mortgage servicing rights. In 2000, the Company
helped finance its operations by completing securitizations of interest
(delinquency) advances and servicing advances and, following the modification of
the Senior Notes in August 2000 (see "-Corporate Restructuring and Debt
Modification"), obtaining financing against certain interest-only and residual
certificates and subsequently selling certain of these certificates in a Net
Interest Margin securitization (the "NIM Transaction").
CORPORATE RESTRUCTURING AND DEBT MODIFICATION
In August 2000, Delta announced a corporate restructuring in its continuing
efforts to improve operating efficiencies and to address its negative cash flow
from operations. As part of this restructuring, the Company recorded charges
primarily relating to employee severance associated with the layoffs, a
reduction to goodwill and office equipment write-offs.
Also in August 2000, the Company announced an agreement to modify its
Senior Notes (the "Debt Modification"). With the consent of greater than fifty
percent of its Senior Note holders, a negative pledge covenant in the Senior
Notes Indenture, which previously prevented the Company from selling or
otherwise obtaining financing against any of its interest-only or residual
certificates (the "Residual Assets"), was modified. In consideration for the
Senior Noteholders' consent, the Company agreed, in an exchange offer (the
"Exchange Offer"), to offer current Senior Noteholders the option of exchanging
their then existing Senior Notes for (a) new senior secured notes (the "Senior
Secured Notes") and (b) ten-year warrants to buy approximately 1.6 million
shares of Common Stock, at an initial exercise price of $9.10 per share, subject
to upward or downward adjustment in certain circumstances. The Senior Secured
Notes have the same coupon face amount and maturity date as the Senior Notes
and, up until the Second Debt Restructuring (see "Subsequent Events below"),
were secured by at least $165 million of the Company's Residual Assets. The
Exchange Offer was consummated in December 2000, with holders of greater than
$148 million of Senior Notes tendering in the exchange.
SUBSEQUENT EVENTS
In 2000, the Company had taken the steps described above to improve operating
efficiencies and to address its negative cash flow from operations. However,
management believed that additional steps were necessary to permit Delta to
continue as a going concern. Management's principal concerns were: (1) the cash
drain created by its ongoing monthly delinquency and servicing advance
requirements as servicer (the "Securitization Advances"), (2) the high cost of
servicing a seasoned loan portfolio, including the capital charges associated
with making Securitization Advances, (3) the Company's ability to make timely
interest payments on the Senior Secured Notes, and (4) its ability to effectuate
a successful business model given the overhang of corporate ratings of "Caa2" by
Moody's and "CC" by Fitch. Therefore in the first quarter of 2001, management
embarked upon a business plan aimed at alleviating some of these concerns and
issues.
First, in January 2001, the Company entered into a subservicing agreement
with Ocwen Financial Corporation ("Ocwen"), under which Ocwen will subservice
Delta's existing loan portfolio. While the Company remains the servicer, Ocwen
will take over servicing responsibilities, including making Securitization
Advances, and in return
3
Ocwen will retain all servicing related fees. Management expects to complete the
transfer on or before June 1, 2001, at or before which point, it is anticipated
that Ocwen will purchase from the Company its outstanding monthly Securitization
Advances, subject to certain conditions. Until the transfer of servicing, Delta
will continue to service the loan portfolio and earn an interim service fee that
will be used to offset some of its servicing related expenses. By transferring
servicing and, along with it, the responsibility for making advances, the
Company expects to save approximately $5.5 million of annual capital charges, in
addition to the significant cash outlays associated with making such advances.
Second, in February 2001, the Company entered into a Letter of Intent with
the beneficial holders of over fifty percent of its Senior Secured Notes to
restructure, and ultimately extinguish, the Senior Secured Notes (the "Second
Debt Restructuring"). In March 2001, the Company obtained the formal consent of
these beneficial holders of the Senior Secured Notes through a Consent
Solicitation that modified certain provisions of the Senior Secured Notes
Indenture to, among other things, allow for the release of two residual
certificates currently securing the Senior Secured Notes. In consideration for
their consent, the Company has agreed to offer the Senior Secured Noteholders
the option to exchange their existing Notes (the "Second Exchange Offer") for
new securities that will evidence a commensurate interest in a Liquidating Trust
(to be formed in connection with the Second Exchange Offer), into which residual
certificates then securing the Company's obligations under the Senior Secured
Notes (totaling approximately $150 million) will be transferred as well as an
interest in preferred stock of Delta. The Second Debt Restructuring will provide
for, among other things, the following:
(a) The Liquidating Trust will receive $15 million of newly issued Delta
preferred stock bearing a 10% dividend payable semi-annually (with the
first three dividends payable in kind). Delta may redeem the preferred
stock at its liquidation preference plus accrued dividends at any time
prior to conversion (which can occur only once five dividends have not
been paid in cash).
(b) Delta will receive all cash flows from the residual certificates
transferred into the Liquidating Trust through, and including, the June
2001 distributions. Thereafter, the Company will earn a management fee
in return for its oversight and its efforts to maximize the value of
the Residual Assets in the Liquidating Trust, and for absorbing certain
costs and fees on behalf of the Liquidating Trust.
(c) The Company is monetizing the two residual certificates together with
other residual certificates owned by the Company but not securing the
Senior Secured Notes, to provide working capital.
Delta believes that, upon successful consummation of the Second Exchange
Offer (which requires at least 90-95% of the holders agreeing to the exchange
offer), Moody's and Fitch will withdraw their corporate ratings on the Company
as the underlying debt will have been largely extinguished. Delta hopes to
complete the Second Debt Restructuring, subject to receipt of noteholder and
regulatory approvals, some time in the second or third quarter of 2001.
In March 2001, in connection with the Second Debt Restructuring, the Company
entered into a forward purchase agreement to sell five of its residual
certificates during the second quarter of 2001 for a cash purchase price. The
purchasers of these five residuals have provided bridge financing, in the form
of residual financing equal to approximately 64% of the cash purchase price. The
remainder of the purchase price will be paid to the Company upon the transfer of
servicing to Ocwen. The proceeds from the residual financing and subsequent sale
will be used by the Company for working capital.
Management believes that its agreement to transfer servicing to Ocwen and the
Second Debt Restructuring are essential steps in its ongoing effort to
restructure its operations and reduce its negative cash flow associated with its
servicing operations and Senior Secured Notes.
HOME EQUITY LENDING OPERATIONS
OVERVIEW
Delta's consumer finance activities consist of originating, acquiring,
selling and (until the transfer to Ocwen) servicing non-conforming mortgage
loans. These loans are primarily secured by first mortgages on one- to
four-family residences. Once loan applications have been received, the
underwriting process completed and the loans funded or purchased, Delta
typically packages the loans in a portfolio and sells the loan portfolio through
a
4
securitization or on a whole loan, servicing released basis. Historically,
Delta retained the right to service the loans that it securitized. However,
beginning in the second quarter 2000, Delta has sold the servicing rights
relating to its new securitizations to third party servicers for an up front
cash premium.
Delta provides its customers with an array of loan products designed to meet
their needs. Delta uses a risk-based pricing strategy and has developed products
for various risk categories. Historically, Delta offered fixed-rate loan
products and, to date, the majority of Delta's loan production is fixed-rate. As
Delta has expanded geographically, it has expanded its product offerings to
include adjustable-rate mortgages and fixed/adjustable-rate mortgages. However,
since the fourth quarter of 1998, Delta has virtually eliminated originations of
its six-month LIBOR (London InterBank Offered Rate) adjustable rate mortgages,
which are less profitable and more prone to early prepayment.
Delta conducts all of its broker and correspondent lending operations out of
its Woodbury, New York headquarters and a regional branch office in the
Southeast. As part of Delta's corporate restructuring (See "-Corporate
Restructuring and Debt Modification"), two other regional branch offices that
Delta operated in the Midwest and Southwest were closed. Final underwriting
approval for Brokered Loans is centralized and required from the Woodbury, New
York headquarters. Delta's Retail Loans are underwritten by one operational
office in Cincinnati, Ohio, which has full underwriting authority. As part of
Delta's corporate restructuring in August 2000, it closed a second Retail Loan
underwriting office that was previously located in Florida.
Delta adheres to a Best Practice Lending Program aimed at ensuring the
origination of quality loans and helping to better protect consumers. This
Program includes (a) fair lending initiatives to ensure all borrowers are
treated fairly and similarly regardless of race, color, creed, religion,
national origin, sex, sexual orientation, marital status, age, disability, and
the applicant's exercise, in good faith, of any right under the Consumer Credit
Protection Act; (b) increased oversight of mortgage brokers and closing agents;
(c) enhanced fraud detection and protection; (d) enhanced plain English
disclosures; and (e) other originations, underwriting and servicing initiatives
which Delta's management believes help protect consumers.
LOAN ORIGINATION AND PURCHASES
Delta's loan originations and purchases decreased by 37% to $933 million in
2000 from $1.47 billion in 1999. The decrease in loan production was primarily
the result of (a) the Company's strategic decision to first decrease, and
ultimately close, its correspondent operations, and to focus more exclusively on
its less cash-intensive broker and retail channels and (b) a higher interest
rate environment, which management believes deterred borrowers from refinancing
industry-wide.
5
The following table shows the channels of Delta's loan originations and
purchases for the years shown:
Year Ended December 31,
1998 1999 2000
---- ---- ----
(Dollars in thousands)
Broker:
Principal balance............................... $ 841,079 $ 890,822 $ 603,616
Average principal balance per loan.............. $ 92 $ 85 $ 74
Combined weighted average initial loan-
to-value ratio(1)............................. 72.8% 72.8% 71.1%
Weighted average interest rate.................. 10.0% 10.4% 11.7%
Retail:
Principal balance............................... $ 234,011 $ 319,227 $ 260,388
Average principal balance per loan.............. $ 75 $ 68 $ 67
Combined weighted average initial loan-
to-value ratio(1)............................. 79.9% 77.6% 76.9%
Weighted average interest rate.................. 9.4% 9.8% 10.6%
Correspondent:
Principal balance............................... $ 652,503 $ 261,289 $ 69,434
Average principal balance per loan.............. $ 82 $ 77 $ 75
Combined weighted average initial loan-
to-value ratio(1)............................. 73.9% 72.0% 70.5%
Weighted average interest rate.................. 10.8% 11.0% 11.5%
Total loan purchases and originations:
Principal balance............................... $1,727,593 $1,471,338 $ 933,438
Average principal balance per loan.............. $ 85 $ 79 $ 72
Combined weighted average initial loan-
to-value ratio(1)............................. 74.2% 73.7% 72.7%
Weighted average interest rate.................. 10.2% 10.4% 11.4%
Percentage of loans secured by:
First mortgage.................................. 95.5% 94.6% 90.9%
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(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage
property at origination. The weighted average initial loan-to-value ratio
of a loan secured by a second mortgage is determined by taking the sum of
the loan secured by the first and second mortgages and dividing by the
lesser of the purchase price or the appraised value of the mortgage
property at origination.
6
The following table shows the channels of loan originations and purchases
on a quarterly basis for 2000:
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
-------- -------- -------- --------
(Dollars in thousands)
Broker:
Number of Brokered Loans...................... 2,271 2,208 1,944 1,741
Principal balance............................. $ 173,458 $ 167,240 $ 136,619 $ 126,299
Average principal balance per loan............ $ 76 $ 76 $ 70 $ 73
Combined weighted average initial loan-
to-value ratio(1).......................... 72.1% 71.5% 70.6% 69.9%
Weighted average interest rate................ 11.2% 11.4% 12.2% 12.1%
Retail:
Number of retail loans........................ 1,006 1,055 954 880
Principal balance............................. $ 71,488 $ 70,667 $ 59,713 $ 58,520
Average principal balance per loan............ $ 71 $ 67 $ 63 $ 67
Combined weighted average initial loan-
to-value ratio(1)........................... 77.7% 76.4% 76.6% 77.0%
Weighted average interest rate................ 10.2% 10.6% 11.1% 10.9%
Correspondent:
Number of Correspondent Loans................. 561 339 24 0
Principal balance............................. $ 42,241 $ 25,666 $ 1,527 $ 0
Average principal balance per loan............ $ 75 $ 76 $ 64 $ 0
Combined weighted average initial loan-
to-value ratio(1)........................... 69.8% 71.8% 69.1% 0%
Weighted average interest rate................ 11.3% 11.7% 11.9% 0%
Total loan purchases and originations:
Total number of loans......................... 3,838 3,602 2,922 2,621
Principal balance............................. $ 287,187 $ 263,573 $ 197,859 $ 184,819
Average principal balance per loan............ $ 75 $ 73 $ 68 $ 71
Combined weighted average initial loan-
to-value ratio(1)........................... 73.2% 72.8% 72.4% 72.1%
Weighted average interest rate................ 10.9% 11.2% 11.9% 11.7%
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(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage
property at origination. The weighted average initial loan-to-value ratio
of a loan secured by a second mortgage is determined by taking the sum of
the loan secured by the first and second mortgages and dividing by the
lesser of the purchase price or the appraised value of the mortgage
property at origination.
7
The following table shows lien position, weighted average interest rates
and loan-to-value ratios for the years shown:
Year Ended December 31,
--------------------------
1998 1999 2000
--- --- ---
First mortgage:
Percentage of total purchases and originations........... 95.5% 94.6% 90.9%
Weighted average interest rate........................... 10.2% 10.3% 11.4%
Weighted average initial loan-to-value ratio(1).......... 74.3% 74.1% 73.1%
Second mortgage:
Percentage of total purchases and originations........... 4.5% 5.4% 9.1%
Weighted average interest rate........................... 10.5% 10.8% 11.5%
Weighted average initial loan-to-value ratio(1).......... 70.6% 66.6% 71.1%
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(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage
property at origination. The weighted average initial loan-to-value ratio
of a loan secured by a second mortgage is determined by taking the sum of
the loan secured by the first and second mortgages and dividing by the
lesser of the purchase price or the appraised value of the mortgage
property at origination.
The following table shows the geographic distribution of loan purchases and
originations for the periods indicated:
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1998 1999 2000
----------------------- --------------------- ----------------------
Region Percentage Dollar Value Percentage Dollar Value Percentage Dollar Value
- ------ ------- --------- ------- -------- ------- --------
(Dollars in millions)
NY, NJ and PA............. 55.0% $ 949.3 50.8% $ 747.9 43.9% $ 409.7
Midwest.................. 19.7 340.3 24.5 361.1 29.1 272.0
Southeast................. 9.3 161.0 8.4 123.5 9.4 87.5
New England............... 7.3 125.8 5.8 85.1 7.1 66.6
Mid-Atlantic*............. 6.9 119.1 8.6 126.7 10.5 97.6
West...................... 1.5 26.6 1.9 27.1 0 0
Canada.................... 0.3 5.5 n/a n/a n/a n/a
- ------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
BROKER AND CORRESPONDENT MARKETING. Throughout its history Delta has been
successful in establishing and maintaining relationships with brokers and, prior
to July 2000, correspondents offering non-conforming mortgage products to their
clientele. The Company decided to discontinue its correspondent operations in
July 2000 to focus on its less cash intensive broker and retail channels.
Delta typically initiates contact with a broker through Delta's Business
Development Department, supervised by a senior officer with over ten years of
sales and marketing experience in the industry. Delta usually hires business
development representatives who have contacts with brokers that originate
nonconforming mortgage loans within their geographic territory. The business
development representatives are responsible for developing and maintaining
Delta's broker network within their geographic territory by frequently visiting
the broker, communicating Delta's underwriting guidelines, disseminating new
product information and pricing changes, and by demonstrating a continuing
commitment to understanding the needs of the customer. The business development
representatives attend industry trade shows and inform Delta about the products
and pricing being offered by competitors and new market entrants. This
information assists Delta in refining its programs and product offerings in
order to remain competitive. Business development representatives are
compensated with a base salary and commissions based on the volume of loans
originated or purchased as a result of their efforts.
APPROVAL PROCESS. Before a broker becomes part of Delta's network, it
must go through an approval process. Once approved, brokers may begin
submitting applications and/or loans to Delta.
8
To be approved, a broker must demonstrate that it is properly licensed and
registered in the state in which it seeks to transact business, submit to a
credit check and sign a standard broker agreement with Delta that requires
brokers to, among other things, abide by Delta's fair lending policy, follow the
National Association of Mortgage Brokers Best Practices Policies, comply with
all state and federal laws, and submit only true and accurate documents and
disclosures. Delta also performs searches on all new brokers using a third party
database that contains public and nonpublic information on individuals and
companies that have incidents of potential fraud and misrepresentation. In
addition, Delta regularly reviews the performance of loans originated through
its brokers.
BROKERED LOANS. For the year ended December 31, 2000, Delta's broker network
accounted $603.6 million, or 65%, of Delta's loan purchases and originations,
compared to $890.8 million, or 60%, of Delta's loan purchases and originations
for the year ended December 31, 1999 and $841.1 million, or 49%, of Delta's loan
purchases and originations for the year ended December 31, 1998. No single
broker contributed more than 2.0%, 3.1% or 5.2% of Delta's total loan production
in the years ended December 31, 2000, 1999 and 1998, respectively.
Once approved, a broker may submit loan applications for prospective
borrowers to Delta. To process broker submissions, Delta's broker originations
area is organized by geographic regions and into teams, each consisting of loan
officers and processors, which are generally assigned to specific brokers.
Because Delta operates in a highly competitive environment where brokers may
submit the same loan application to several prospective lenders simultaneously,
Delta strives to provide brokers with a rapid and informed response. Loan
officers analyze the application and provide the broker with a preliminary
approval, subject to final underwriting approval, or a denial, typically within
one business day. If the application is approved by Delta's underwriters, a
"conditional approval" will be issued to the broker with a list of specific
conditions to be met and additional documents to be supplied prior to funding
the loan. The loan officer and processor team will then work directly with the
submitting broker to collect the requested information and meet all underwriting
conditions. In most cases, Delta funds loans within 14 to 21 days after
preliminary approval of the loan application. In the case of a denial, Delta
will make all reasonable attempts to ensure that there is no missing information
concerning the borrower or the application that might change the decision on the
loan.
Delta compensates its loan officers, who on a loan-by-loan basis are the
primary relationship contacts with the brokers, predominantly on a commission
basis. All of Delta's loan officers must complete an extensive 9- to 12-month
training program to attain the level of knowledge and experience integral to
Delta's commitment to providing the highest quality service for brokers.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed three central factors which determine where a broker
sends its business: (i) the speed with which a lender closes loans, (ii) the
lender's knowledge concerning the broker and his business and (iii) the support
a lender provides. Included in this support, Delta offers fair lending training
to all brokers with whom it does business.
CORRESPONDENT LOANS. For the year ended December 31, 2000, Delta's
correspondent network accounted for $69.4 million, or 7%, of Delta's loan
purchases and originations, compared to $261.3 million, or 18%, of Delta's loan
purchases and originations for the year ended December 31, 1999 and $652.5
million, or 38%, of Delta's loan purchases and originations for the year ended
December 31, 1998. The decrease in production was primarily the result of
Delta's strategic decision to close its correspondent operations and to focus
more exclusively on its broker and retail channels, which are less cash
intensive. No single correspondent contributed more than 1.5%, 1.9% or 3.8% of
Delta's total loan production in 2000, 1999, or 1998, respectively.
An approved correspondent was a licensed mortgage banker or savings and loan
who sold loans to Delta that conformed with Delta's underwriting standards,
which the correspondent had originated, processed, closed and funded in its own
name. The loans were sold to Delta either on an individual flow basis or in
block sales. When selling on a flow basis, a correspondent typically sought a
pre-approval from Delta prior to closing the loan, and Delta approved the loan
based on a partial or full credit package, stipulating any items needed to
complete the package in adherence to Delta's underwriting guidelines. On a block
sale, a correspondent offered a group of loans, generally loans that have not
been pre-approved, to Delta for sale, and Delta purchased those loans in the
block that meet Delta's underwriting criteria.
RETAIL LOANS. For the year ended December 31, 2000, this channel accounted
for $260.4 million, or 28%, of Delta's loan purchases and originations, compared
to $319.3 million, or 22%, of Delta's loan purchases and originations for the
year ended December 31, 1999 and $234.0 million, or 13%, of Delta's loan
purchases and
9
originations for the year ended December 31, 1998. Through its marketing
efforts, the retail loan channel is able to identify, locate and focus on
individuals who, based on historic customer profiles, are likely customers for
Delta's products. Its telemarketing representatives identify interested
customers and refer these customers to loan officers at the retail branch
offices who then proceed to determine the applicant's qualifications for Delta's
loan products, negotiate loan terms with the borrower and process the loan
through completion.
LOAN UNDERWRITING
All of the brokers and, prior to July 2000, correspondents who submit loans
to Delta are provided with Delta's underwriting guidelines. Loan applications
received from brokers, correspondents and retail customers are classified
according to particular characteristics, including but not limited to: ability
to pay, credit history of the applicant, loan-to-value ratio and general
stability of the applicant in terms of employment history and time in residence
and condition and location of the collateral. Delta has established
classifications with respect to the credit profile of the applicant, and each
loan is placed into one of four letter ratings "A" through "D", with subratings
within those categories. Terms of loans made by Delta, as well as maximum
loan-to-value ratios and debt-to-income ratios, vary depending on the
classification of the applicant. Loan applicants with less favorable credit
ratings are generally offered loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings. The
general criteria used by Delta's underwriting staff in classifying loan
applicants are set forth below.
10
DELTA'S UNDERWRITING CRITERIA
"A" RISK "B" RISK "C" RISK "D" RISK
-------- -------- -------- --------
Credit profile............. Excellent credit history Good overall credit Good to fair credit Fair to poor credit
Existing mortgage
history.................. Current at application Current at application Up to 60 days delinquent 90 days delinquent
time and a maximum of two time and a maximum of at applic-ation time and or more
30-day late payments in four 30-day late one 90-day late payment
the last 12 months payments in the last 12 in the last 12 months
months
Other credit............... Minor 30-day late items Some slow pays allowed Slow pays, some open Not a factor.
allowed with a letter of but majority of credit delinquencies allowed. Derogatory credit
explanation; no open and installment debt Isolated charge-offs, must be paid with
collection accounts, paid as agreed. Small collection accounts or proceeds. Must
charge-offs, judgments isolated charge-offs, judgments case-by-case demonstrate ability
collections, or to pay
judgments allowed
case-by-case
Bankruptcy filings......... Discharged more than Discharged more than Discharged more than one May be open at
three years prior to two years prior to year prior to closing closing, but must be
closing and excellent closing and excellent and good reestablished paid off with
reestablished credit reestablished credit credit proceeds
Debt service to
Income ratio ............ 55% or less 55% or less 55% or less 55% or less
Maximum loan-to-value
ratio:
Owner-occupied........... Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Non-owner occupied....... Generally 75% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
85%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment............... Minimum 2 years Minimum 2 years No minimum required No minimum required
employment in the same employment in the same
field field
* On an exception basis
Delta uses the foregoing categories and characteristics as guidelines only. On a
case-by-case basis, Delta may determine that the prospective borrower warrants
an exception, if sufficient compensating factors exist.
Examples of compensating factors are:
o low loan-to-value ratio,
o low debt ratio,
o long-term stability of employment and/or residence, excellent
payment history on past mortgages, or a significant reduction in
monthly expenses.
11
The following table sets forth certain information with respect to Delta's
originations and purchases of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown and
highlights the improved credit quality of Delta's originations and purchases.
(dollars in thousands)
Percent
Year Credit Total of Total WAC(1) WLTV(2)
- ---- ---- ---- ------ ----- ------
2000 A $596,946 63.9% 10.8% 75.7%
B 164,024 17.6 11.7 70.2
C 127,041 13.6 12.6 67.3
D 45,427 4.9 13.8 56.9
--------- ---- ---- ----
Totals $933,438 100.0% 11.4% 72.7%
========= ==== ==== ====
1999 A $859,935 58.4% 9.8% 76.4%
B 298,253 20.3 10.7 72.9
C 245,862 16.7 11.3 69.5
D 67,288 4.6 13.0 57.3
--------- ---- ---- ----
Totals $1,471,338 100.0% 10.4% 73.7%
========= ==== ==== ====
1998 A $ 990,988 57.3% 9.7% 77.0%
B 425,056 24.6 10.4 73.2
C 248,488 14.4 11.3 69.0
D 63,061 3.7 12.7 57.2
--------- ---- ---- ----
Totals $1,727,593 100.0% 10.2% 74.2%
========= ==== ==== ====
- ------------------
(1) Weighted Average Coupon ("WAC").
(2) Weighted Average Initial Loan-to-Value Ratio ("WLTV").
The mortgage loans originated by Delta have amortization schedules ranging
from 5 years to 30 years, generally bear interest at fixed rates and require
equal monthly payments which are due as of a scheduled day of each month which
is fixed at the time of origination. Substantially all of Delta's mortgage loans
are fully amortizing loans. Delta primarily originates fixed rate loans that
amortize over a period not to exceed 30 years. Loans that are not fully
amortizing generally provide for scheduled amortization over 30 years, with a
due date and a balloon payment at the end of the fifteenth year. The principal
amounts of the loans originated by Delta generally range from a minimum of
$10,000 to a maximum of $350,000. Delta generally does not acquire or originate
any mortgage loans where the combined loan-to-value ratio exceeds 90%. The
collateral securing loans acquired or originated by Delta are generally one- to
four-family residences, including condominiums and townhouses, and these
properties may or may not be occupied by the owner. It is Delta's policy not to
accept commercial properties or unimproved land as collateral. However, Delta
will accept mixed-use properties of 1-4 units where a portion of the property is
used for residential purposes and the balance is used for commercial purposes,
and will accept small residential multifamily properties (5 to 8 units), both at
reduced loan-to-value ratios. Delta does not originate loans where any senior
mortgage contains open-end advance, negative amortization or shared appreciation
provisions.
Delta's mortgage loan program includes:
o a full documentation program for salaried borrowers;
o a limited documentation program;
o a no-income verification program for self-employed borrowers; and
12
a "stated" income program.
The total monthly debt obligations, which include principal and interest on
the new loan and all other mortgages, loans, charge accounts and scheduled
indebtedness, generally is 55% or less of the borrower's monthly gross income.
Loans to borrowers who are salaried employees must be supported by current
employment information in addition to employment history. This information for
salaried borrowers is verified based on written confirmation from employers, one
or more pay-stubs, recent W-2 tax forms, recent tax returns or telephone
confirmation from the employer. For Delta's limited documentation program, Delta
requires a job letter to be submitted which contains the same information one
would find on a standard verification of employment form:
o job position;
o length of time on job;
o current salary; and
o the job letter should appear on the employer's letterhead.
For Delta's no-income verification program, proof of self-employment in the
same business plus proof of current self-employed status is required. Delta's
stated income program, which represents a very small percentage of Delta's
loans, is only offered for better credit quality borrowers where a telephone
verification is done by an underwriter to verify that the borrower is employed.
Delta usually requires lower combined loan-to-value ratios with respect to loans
made under programs other than the full documentation program.
Delta employs experienced non-conforming mortgage loan credit underwriters to
scrutinize the applicant's credit profile and to evaluate whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths, and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. Assessment of an applicant's ability and willingness to pay is
one of the principal elements in distinguishing Delta's lending specialty from
methods employed by traditional lenders, such as savings and loans and
commercial banks. All lenders utilize debt ratios and loan-to-value ratios in
the approval process. Many lenders simply use software packages to score an
applicant for loan approval and fund the loan after auditing the data provided
by the borrower. All loans underwritten by Delta's underwriters are underwritten
with regard for the borrower's ability to repay, and are not underwritten solely
on the value of the collateral property or the amount of equity therein. All
loans are underwritten to ensure that the loan has a solid purpose and provides
tangible benefits to the borrower.
Delta has a staff of approximately 45 underwriters with an average of
approximately 9 years of non-conforming lending experience. With the exception
of Delta's Atlanta, Georgia office, all underwriting functions for broker
originations (and, prior to July 2000, correspondent purchases) and the New York
Retail Loan call center are centralized in its Woodbury, New York office.
Underwriting functions for its retail operations (other than the New York call
center) is centralized in Delta's retail underwriting "hub" located in
Cincinnati, Ohio. In August 2000, as part of its corporate restructuring
efforts, Delta closed its other retail underwriting "hub" located in West Palm
Beach, Florida (See "-Corporate Restructuring and Debt Modification"). Delta
does not delegate underwriting authority to any broker (nor, prior to July 2000,
to any correspondent). Delta's underwriting department functions independently
of its business development and mortgage origination departments and does not
report to any individual directly involved in the origination process. No
underwriter at Delta is compensated on an incentive or commission basis.
Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two underwriters
and/or an AVP of Underwriting, with some higher loan amounts requiring a third
approval. Delta believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process and before funding.
Delta's underwriting of every loan submitted consists not only of a thorough
credit review, but also the following:
o a separate appraisal review conducted by Delta's appraisal review
department and/or underwriter; and
o a full compliance review, to ensure that all documents have been
properly prepared, all applicable disclosures given in a timely
fashion, and proper compliance with all federal and state regulations.
13
Appraisals are performed by third party, fee-based appraisers or by Delta's
approved appraisers and generally conform to current Fannie Mae and Freddie Mac
secondary market requirements for residential property appraisals. Each
appraisal includes, among other things, an inspection of both the exterior and
interior of the subject property and data from sales within the preceding 12
months of similar properties within the same general location as the subject
property.
Delta performs an appraisal review on each loan prior to closing or prior to
purchasing. While Delta recognizes that the general quality control practices of
conventional mortgage lenders is to perform only drive-by appraisals after
closings, Delta believes this practice does not provide sufficient protection.
In addition to reviewing each appraisal for accuracy, Delta accesses other
sources to validate sales used in the appraisal to determine market value. These
sources include:
o Multiple Listing Services in nine states;
o assessment and sales services, such as Comps, Inc., Pace, 1st
American and Transamerica;
o internet services such as Realtor.com; and
o other sources for verification, including broker price opinions and
market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, Delta randomly selects
one out of every ten appraisals, and performs a drive-by appraisal. This
additional step gives Delta an added degree of comfort with respect to
appraisers with which Delta has had limited experience. Delta actively tracks
and grades, on criteria that it has developed over time, all appraisers from
which it accepts appraisals for quality control purposes and does not accept
work from appraisers who have not conformed to its review standards.
Upon completion of a broker loan's underwriting and processing, the closing
of the loan is scheduled with a closing attorney or agent approved by Delta. The
closing attorney or agent is responsible for completing the loan closing
transaction in accordance with applicable law and Delta's operating procedures.
Title insurance that insures Delta's interest as mortgagee and evidence of
adequate homeowner's insurance naming Delta as an additional insured party are
required on all loans.
Delta performs a post-funding quality control review to monitor and evaluate
Delta's loan origination policies and procedures. The quality control department
is separate from the underwriting department, and reports directly to a member
of senior management.
At least 10% of all loan originations and purchases are subjected to a full
quality control re-underwriting and review, the results of which are reported to
senior management on a monthly basis. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. A typical quality control review
currently includes:
o obtaining a new drive-by appraisal for each property;
o running a new credit report from a different credit report agency;
o reviewing loan applications for completeness, signatures, and for
consistency with other processing documents;
o obtaining new written verification of income and employment;
o obtaining new written verification of mortgage to re-verify any
outstanding mortgages; and
o analyzing the underwriting and program selection decisions.
The quality control process is updated from time to time as Delta's policies
and procedures change.
LOAN SALES
Delta sells virtually all the loans it originates or purchases through one of
two methods: (i) securitizations, which involve the private placement or public
offering by a securitization trust of asset-backed pass-through securities; and
(ii) whole loan sales, which include the sale of blocks of individual loans to
institutional or individual investors on a servicing released basis. Over the
past several years, including 1999 and 1998, Delta has sold close to 100% its
loans through securitizations, with the remainder being sold on a whole loan
servicing released basis. In 2000, Delta securitized approximately 90% of its
loan originations and purchases and sold on a whole loan servicing released
basis approximately 6% of its loan originations and purchases. The majority of
the loans sold by Delta on a
14
whole loan basis occurred in the fourth quarter of 2000, when Delta sold
approximately $47 million, or 25%, of its loans production through whole loan
sales, which is far greater than it had in previous quarters. Going forward,
Delta expects to continue to use a combination of securitizations and whole loan
sales, with the amounts of each dependent upon the marketplace and Delta's goal
of maximizing earnings and liquidity.
SECURITIZATIONS. During 2000, Delta completed four securitizations totaling
$840 million. The following table sets forth certain information with respect to
Delta's securitizations (all of which have been rated AAA/Aaa by S&P Fitch, and
Moody's, respectively) by offering size, which includes prefunded amounts,
duration weighted average pass-through rate and type of credit enhancement.
Duration
Offering Size Weighted Average Credit
Securitization Completed (Millions) Pass-Through Rate Enhancement
- --------- -------- ---------- ----------- ----------
2000-1....................... 03/30/00 $250.0 7.40% Hybrid *
2000-2....................... 06/30/00 $275.0 7.84% Hybrid *
2000-3....................... 09/28/00 $200.0 7.59% Hybrid *
2000-4....................... 12/14/00 $115.0 7.22% Hybrid *
- ------------------
* Senior/Sub Structure with Bond Insured AAA Tranche
When Delta securitizes loans, it sells a portfolio of loans to a trust (a
"Home Equity Loan Trust") for a cash payment and the Home Equity Loan Trust
sells various classes of pass-through certificates representing undivided
ownership interests in such Home Equity Loan Trust. As servicer for each
securitization, Delta collects and remits principal and interest payments to the
appropriate Home Equity Loan Trust which, in turn, passes through such payments
to certificateholders. For each of the 2000 securitizations, Delta retained 100%
of the interests in the residual certificates while selling the interest-only
certificates for cash. Management contemplates continuing to retain residual
certificates in the future as long as, in management's opinion, this practice
maximizes earnings while remaining within the Company's liquidity requirements.
Each Home Equity Loan Trust has the benefit of either a financial guaranty
insurance policy from a monoline insurance company or a senior-subordinated
securitization structure, which insures the timely payment of interest and the
ultimate payment of principal of the credit-enhanced investor certificate, or
both (known as a "hybrid"). In "senior-subordinated" structures, the senior
certificate holders are protected from losses by subordinated certificates,
which absorb any such losses first. In addition to such credit enhancement, the
Excess Servicing cash flows that would otherwise be paid to Delta as holder of
the residual certificate is initially applied as additional payments of
principal for the investor certificates, thereby accelerating amortization of
the investor certificates relative to the amortization of the loans and creating
overcollateralization. Once the overcollateralization limit is reached, the use
of Excess Servicing to create overcollateralization stops unless it subsequently
becomes necessary to obtain or maintain required overcollateralization limits.
Overcollateralization is intended to create a source of cash (the "extra"
payments on the loans) to absorb losses prior to making a claim on the financial
guaranty insurance policy or the subordinated certificates.
WHOLE LOAN SALES WITHOUT RECOURSE. From time to time, Delta has found that it
can receive better execution by selling certain mortgage loans on a whole loan,
non-recourse basis, without retaining servicing rights, generally in private
transactions to institutional or individual investors. Delta recognizes a gain
or loss when it sells loans on a whole loan basis equal to the difference
between the cash proceeds received for the loans and Delta's investment in the
loans, including any unamortized loan origination fees and costs.
In 2000 and 1998, Delta sold $58.3 million and $8.7 million of loans,
respectively on a whole loan, non-recourse basis. In 1999, Delta did not have
any whole loan, non- recourse basis sales.
LOAN SERVICING AND COLLECTIONS
Historically, Delta has serviced virtually all loans it originated or
purchased since its inception in 1982. In the second quarter of 2000, however,
management determined that the cash purchase premium third party servicers were
willing to pay to purchase the servicing rights on Delta's newly issued
securitizations was higher than the value
15
Delta would ascribe to retaining such servicing rights. Therefore beginning in
the second quarter 2000, and in each of the following two quarters in 2000,
Delta sold the servicing rights on its newly issued securitizations to a third
party servicer for an up-front cash purchase price.
In the fourth quarter of 2000, management further determined that its
existing portfolio became more costly to service for a variety of reasons,
including: (1) higher servicing personnel costs associated with a portfolio that
became increasingly more seasoned (delinquent) as Delta continued to sell its
newly originated mortgage loans to the third party servicer, (2) increased
monthly delinquency and servicing related advances, and (4) an inability to
recognize economies of scale on a loan portfolio which was declining in size but
had certain fixed costs associated with it. Consequently, Delta entered into the
subservicing agreement with Ocwen (see "- Subsequent Events") in January 2001,
to have Ocwen subservice its entire loan portfolio with the actual transfer date
to be on or before June 1, 2001. Servicing involves, among other things,
collecting payments when due, remitting payments of principal and interest,
furnishing reports to the current owners of the loans, enforcing the current
owners' rights with respect to the loans, including, recovering delinquent
payments, instituting foreclosure and liquidating the underlying collateral, and
making required monthly delinquency and servicing advances. As of December 31,
2000, Delta had a servicing portfolio of $3.3 billion.
Until the transfer of servicing to Ocwen, Delta will continue to service all
loans out of its headquarters in Woodbury, New York, utilizing LSAMS, a leading
in-house loan servicing system, and FORTRACS, a default management sub-servicing
system with separate "modules" for foreclosure, bankruptcy, and REO. These
sub-servicing modules provide detailed tracking of all key events in foreclosure
and bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track
and account for all pre- and post-petition payments received in bankruptcy from
the borrower and/or trustee; and the ability to monitor, market and account for
all aspects necessary to liquidate an REO property after foreclosure.
Information entered on FORTRACS is automatically uploaded to LSAMS on a daily
basis. Further, information entered on LSAMS is automatically reflected on
FORTRACS. Additionally, Delta's Management Information Systems Department has
created a market value analysis program to run with LSAMS, which provides Delta
with the ability to monitor its equity position on a loan-by-loan and/or
portfolio-wide basis. These features have led to cost savings through greater
automation and system upgrades and have helped mitigate loan losses as the
Servicing Department has been able to identify problem loans earlier, thus
allowing for earlier corrective action.
Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a preforeclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system using Delta's proprietary payment profiling
software. If timely payment is not received, LSAMS automatically places the loan
in the assigned collector's auto queue and collection procedures are generally
initiated on the day determined by the proprietary software to be after the
borrower's typical payment date. This payment profiling allows Delta to focus
its collections efforts on those borrowers who are delinquent and outside their
typical payment date as opposed to those borrowers who are delinquent but
typically pay on or about a specific date each month. These loans are
automatically queued into LSAMS auto queue as well as a Davox predictive dialer.
The predictive dialer initiates the telephone calls and transfers the calls to a
collector when a borrower is reached. If the predictive dialer determines a line
is busy or receives a no answer, it automatically cycles those calls through the
same day at pre-determined intervals. If the predictive dialer contacts an
answering machine, an automated message is left. The account remains in the
queue unless and until payment is received, at which point LSAMS automatically
removes the loan from the collector's auto queue until the next payment profile
pattern is broken. In the case of seriously delinquent accounts, collection
calls can begin as soon as two days after the payment due date.
When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment
16
arrangements have been made. Standard form letters are utilized when attempts to
reach the borrower by telephone fail and/or, in some circumstances, to
supplement the phone contacts. During the delinquency period, the collector will
continue to contact the borrower and property inspections are performed on or
about the 45th day of delinquency. Delta's collectors have computer access to
telephone numbers, payment histories, loan information and all past collection
notes. All collection activity, including the date collection letters were sent
and detailed notes on the substance of each collection telephone call, is
entered into a permanent collection history for each account on LSAMS.
Additional guidance with the collection process is derived through frequent
communication with Delta's senior management.
On or about the ninety-first day of delinquency, the loan is referred to the
loss mitigation department. This department is comprised of the collectors with
the ability to negotiate payment plans, deeds in lieu, short sales and other
cures. If their efforts have also been exhausted without success, the loss
mitigation representative responsible for the account recommends the loan be
sent to foreclosure at one of several foreclosure committee meetings held each
month. The foreclosure committee is comprised of the loss mitigation
representative, the foreclosure department manager and two members of the
executive department. This meeting is held to determine whether foreclosure
proceedings are appropriate, based upon the analysis of all relevant factors,
including a market value analysis, reason for default and efforts by the
borrower to cure the default.
Regulations and practices regarding the liquidation of properties and the
rights of a borrower in default vary greatly from state to state. As a result,
all foreclosures are assigned to outside counsel, located in the same state as
the secured property. Bankruptcies filed by borrowers are similarly assigned to
appropriate local counsel. All aspects of foreclosures and bankruptcies are
closely monitored by Delta through its sub-servicing loan system described above
and through monthly status reports from attorneys.
Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes:
O a current valuation of the property obtained through a drive-by
appraisal or broker's price opinion conducted by an independent
appraiser or a broker from Delta's network of real estate brokers,
complete with a description of the condition of the property, recent
price lists of comparable properties, recent closed comparables,
estimated marketing time and required or suggested repairs, and an
estimate of the sales price;
O an evaluation of the amount owed, if any, for real estate taxes;
O an evaluation of the amount owed, if any, to a senior mortgagee; and
0 estimated carrying costs, brokers' fee, repair costs and other
related costs associated with real estate owned properties. Delta
bases the amount it will bid at foreclosure sales on this analysis.
If Delta acquires title to a property at a foreclosure sale or otherwise, the
REO department immediately begins working the file by obtaining an estimate of
the sale price of the property by sending at least two local real estate brokers
to inspect the premises, and then hiring one to begin marketing the property. If
the property is not vacant when acquired, local eviction attorneys are hired to
commence eviction proceedings or negotiations are held with occupants in an
attempt to get them to vacate without incurring the additional time and cost of
eviction. Repairs are performed if it is determined that they will increase the
net liquidation proceeds, taking into consideration the cost of repairs, the
carrying costs during the repair period and the marketability of the property
both before and after the repairs.
Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of that lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
Following the transfer to Ocwen, all servicing functions will be performed by
Ocwen and Delta will discontinue its Servicing Operations, laying off the
majority of the Servicing employees, and give back the entire leased premises to
the Landlord.
17
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth information relating to the delinquency and
loss experience of the mortgage loans serviced by Delta (primarily for the
securitization trusts) for the periods indicated. Delta is not the holder of the
securitization loans, but generally holds residual or interest-only certificates
of the trusts, as well as the servicing rights, each of which may be adversely
affected by defaults. (See "-Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations Certain Accounting
Considerations"). Following the transfer of a majority of Delta's Residual
Assets in connection with the anticipated consummation of the Second Debt
Restructuring in 2001, and anticipated sales of certain other Residual Assets
for a cash purchase price, Delta will no longer be the holder of the vast
majority of the residual and interest-only certificates of the trusts that own
the loans, the performance of which is reflected in the table:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
` ---- ---- ----
(DOLLARS IN THOUSANDS)
Total Outstanding Principal Balance
(at period end)................................... $ 3,312,582 $ 3,631,830 $ 2,950,435
Average Outstanding(1)................................ $ 3,638,398 $ 3,362,377 $ 2,436,343
DELINQUENCY (at period end) 30-59 Days:
Principal Balance................................. $ 238,047 $ 208,302 $ 153,726
Percent of Delinquency(2)......................... 7.19% 5.73% 5.21%
60-89 Days:
Principal Balance................................. $ 110,730 $ 83,000 $ 50,034
Percent of Delinquency(2)......................... 3.34% 2.28% 1.70%
90 Days or More:
Principal Balance................................. $ 69,802 $ 56,435 $ 47,887
Percent of Delinquency(2)......................... 2.11% 1.55% 1.62%
Total Delinquencies:
Principal Balance................................. $ 418,579 $ 347,737 $ 251,647
Percent of Delinquency(2)......................... 12.64% 9.56% 8.53%
FORECLOSURES
Principal Balance................................. $ 206,281 $ 185,843 $ 145,679
Percent of Foreclosures by Dollar(2).............. 6.23% 5.11% 4.94%
REO
Principal Balance................................ $ 57,981 $ 36,663 $ 18,811
Percent of REO.................................. 1.75% 1.01% 0.64%
Net Gains/(Losses) on liquidated loans................ $ 28,918 $ (14,722) $ (8,704)
Percentage of Net Gains/(Losses) on liquidated
loans (based on Average Outstanding Balance)...... (0.79%) (0.44%) (0.36%)
- ---------------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
COMPETITION
As an originator of mortgage loans, Delta faces intense competition,
primarily from diversified consumer financial companies and other diversified
financial institutions, mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than Delta. Competition can take many
forms, including interest rates and costs of the loan, convenience in obtaining
a loan, service, marketing and distribution channels. Furthermore, the level of
gains realized by Delta and its competitors
18
on the sale of the type of loans originated and purchased has attracted
additional competitors into this market with the effect of lowering the gains
that may be realized by Delta on future loan sales. In addition, efficiencies
in the asset-backed market have generally created a desire for even larger
transactions giving companies with greater volumes of originations a competitive
advantage.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors which have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit Delta's borrowers to refinance their
loans. During economic slowdowns or recessions, Delta's borrowers may have new
financial difficulties and may be receptive to offers by Delta's competitors.
Over the past few years, many of the independent mortgage banking companies,
which previously were among Delta's most intense competitors, have either gone
out of business or been acquired by larger, more diversified national financial
institutions. At the same time, many larger finance companies, financial
institutions and conforming mortgage originators have adapted their conforming
origination programs and allocated resources to the origination of
non-conforming loans and/or have otherwise begun to offer products similar to
those offered by Delta, targeting customers similar to those of Delta. Fannie
Mae and Freddie Mac have also expressed interest in adapting their programs to
include products similar to those offered by Delta and have begun to expand
their programs and presence into the subprime market. The entrance of these
larger and better-capitalized competitors into Delta's market may have a
material adverse effect on Delta's results of operations and financial
condition.
REGULATION
Delta's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Delta's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Equal
Credit Opportunity Act of 1974, as amended (ECOA), the Fair Credit Reporting Act
of 1970, as amended, the Real Estate Settlement Procedures Act (RESPA), and
Regulation X, the Home Mortgage Disclosure Act and the Federal Debt Collection
Practices Act, as well as other federal and state statutes and regulations
affecting Delta's activities. Delta is also subject to the rules and regulations
of, and examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, impose licensing obligations on Delta,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loans repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions.
In September 1999, Delta settled allegations by the New York State Banking
Department and a lawsuit by the New York State Office of the Attorney General
alleging that Delta had violated various state and federal lending laws. The
global settlement was evidenced by that certain (a) Remediation Agreement by and
between Delta Funding and the NYSBD, dated as of September 17, 1999 and (b)
Stipulated Order on Consent by and among Delta Funding, Delta Financial and the
NYOAG, dated as of September 17, 1999. As part of the Settlement, Delta, among
other things, implemented agreed upon changes to its lending practices; is
providing reduced loan payments aggregating $7.25 million to certain borrowers
identified by the NYSBD; and created a fund financed by the grant of 525,000
shares of Delta Financial's common stock. The proceeds of the fund will be used,
for among other things, to compensate certain borrowers and for a variety of
consumer educational and counseling programs.
In March 2000, Delta finalized an agreement with the U.S. Department of
Justice, the Federal Trade Commission and the Department of Housing and Urban
Development, to complete the global settlement it had reached with the NYSBD and
NYOAG. The Federal agreement mandates some additional compliance efforts for
Delta, but it does not require any additional financial commitment.
Delta believes it is in compliance in all material respects with applicable
federal and state laws and regulations.
19
ENVIRONMENTAL MATTERS
To date, Delta has not been required to perform any investigation or clean up
activities, nor has it been subject to any environmental claims. There can be no
assurance, however, that this will remain the case in the future. In the
ordinary course of its business, Delta from time to time forecloses on
properties securing loans. Although Delta primarily lends to owners of
residential properties, there is a risk that Delta could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by Delta, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
EMPLOYEES
As of December 31, 2000, Delta had a total of 851 employees (full-time and
part-time). None of Delta's employees are covered by a collective bargaining
agreement. Delta considers its relations with its employees to be good.
ITEM 2. PROPERTIES
Delta's executive and administrative offices are located at 1000 Woodbury
Road, Woodbury, New York 11797, where Delta leases approximately 120,000 square
feet of office space at an aggregate annual rent of approximately $2.4 million.
The lease provides for certain scheduled rent increases and expires in 2008.
Delta's servicing operations are located at 99 Sunnyside Boulevard, Woodbury,
New York 11797, where Delta leases approximately 40,000 square feet of office
space at an aggregate annual rent of approximately $0.9 million.
The lease is scheduled to expire in June 2001.
Delta also maintains a full service office in Atlanta, Georgia and business
development offices in New Jersey, Ohio, Pennsylvania and Virginia. Delta's
retail operation currently maintains eleven retail mortgage origination offices
in Illinois, Indiana, Missouri, North Carolina, Ohio (4), Pennsylvania (2) and
Tennessee; one telemarketing hub in Ohio; and a retail call center at Delta's
headquarters in Woodbury, New York. The terms of theses leases vary as to
duration and escalation provisions, with the latest expiring in 2004.
ITEM 3. LEGAL PROCEEDINGS
Because the nature of Delta's business involves the collection of numerous
accounts, the validity of liens and compliance with various state and federal
lending laws, Delta is subject, in the normal course of business, to numerous
claims and legal proceedings. Delta's lending practices have been the subject of
several lawsuits styled as class actions and of investigations by various
regulatory agencies including the New York State Banking Department (the
"NYSBD"), the Office of the Attorney General of the State of New York (the
"NYOAG") and the United States Department of Justice (the "DOJ"). The current
status of these actions are summarized below.
o In or about November 1998, Delta received notice that it had been named
in a lawsuit filed in the United States District Court for the Eastern
District of New York. In December 1998, plaintiffs filed an amended
complaint alleging that Delta had violated the Home Equity and Ownership
Protection Act ("HOEPA"), the Truth in Lending Act ("TILA") and New York
State General Business Law ss. 349. The complaint seeks (a) certification
of a class of plaintiffs, (b) declaratory judgment permitting rescission,
(c) unspecified actual, statutory, treble and punitive damages (including
attorneys' fees), (d) certain injunctive relief, and (e) declaratory
judgment declaring the loan transactions as void and unconscionable. On
December 7, 1998, plaintiff filed a motion seeking a temporary restraining
order and preliminary injunction, enjoining Delta from conducting
foreclosure sales on 11 properties. The District Court Judge ruled that in
order to consider such a motion, plaintiff must move to intervene on
behalf of these 11 borrowers. Thereafter, plaintiff moved to intervene on
behalf of 3 of these 11 borrowers and sought the injunctive relief on
their behalf. Delta opposed the motions. On December 14, 1998, the
District Court Judge granted the motion to intervene and on December 23,
1998, the District Court Judge issued a preliminary injunction enjoining
20
Delta from proceeding with the foreclosure sales of the three intervenors'
properties. Delta has filed a motion for reconsideration of the December
23, 1998 order. In January 1999, Delta filed an answer to plaintiffs'
first amended complaint. In July 1999, plaintiffs were granted leave, on
consent, to file a second amended complaint. In August 1999, plaintiffs
filed a second amended complaint that, among other things, added
additional parties but contained the same causes of action alleged in
the first amended complaint. In September 1999, Delta filed a motion to
dismiss the complaint, which was opposed by plaintiffs and, in June 2000,
was denied in part and granted in part by the Court. In or about October
1999, plaintiffs filed a motion seeking an order preventing Delta, its
attorneys and/or the NYSBD from issuing notices to certain of Delta's
borrowers, in accordance with a settlement agreement entered into by and
between Delta and the NYSBD. In or about October 1999 and November 1999,
respectively, Delta and the NYSBD submitted opposition to plaintiffs'
motion. In March 2000, the Court issued an order that permits Delta to
issue an approved form of the notice. In September 1999, plaintiffs
filed a motion for class certification, which was opposed by Delta in
February 2000, and ultimately withdrawn without prejudice by plaintiffs
in January 2001. Delta believes that it has meritorious defenses and
intends to defend this suit, but cannot estimate with any certainty
its ultimate legal or financial liability, if any, with respect to the
alleged claims.
o In or about March 1999, Delta received notice that it had been named in a
lawsuit filed in the Supreme Court of the State of New York, New York
County, alleging that Delta had improperly charged certain borrowers
processing fees. The complaint seeks (a) certification of a class of
plaintiffs, (b) an accounting, and (c) unspecified compensatory and
punitive damages (including attorneys' fees), based upon alleged (i)
unjust enrichment, (ii) fraud, and (iii) deceptive trade practices. In
April 1999, Delta filed an answer to the complaint. In September 1999,
Delta filed a motion to dismiss the complaint, which was opposed by
plaintiffs, and in February 2000, the Court denied the motion to dismiss.
In April 1999, Delta filed a motion to change venue and plaintiffs opposed
the motion. In July 1999, the Court denied the motion to change venue.
Delta appealed and in March 2000, the Appellate Court granted Delta's
appeal to change venue from New York County to Nassau County. In August
1999, plaintiffs filed a motion for class certification, which Delta
opposed in July 2000. In or about September 2000, the Court granted
plaintiffs' motion for class certification, from which Delta filed a
Notice of Appeal. Delta believes that it has meritorious defenses and
intends to defend this suit, but cannot estimate with any certainty its
ultimate legal or financial liability, if any, with respect to the alleged
claims.
o In or about July 1999, Delta received notice that it had been named in a
lawsuit filed in the United States District Court for the Western District
of New York, alleging that amounts collected and maintained by it in
certain borrowers' tax and insurance escrow accounts exceeded certain
statutory (RESPA) and/or contractual (the respective borrowers' mortgage
agreements) ceilings. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory relief finding that Delta's practices violate
applicable statutes and/or the mortgage agreements, (c) injunctive relief,
and (d) unspecified compensatory and punitive damages (including
attorneys' fees). In October 1999, Delta filed a motion to dismiss the
complaint. In or about November 1999, the case was transferred to the
United States District Court for the Northern District of Illinois. In
February 2000, the plaintiff opposed Delta's motion to dismiss. In March
2000, the Court granted Delta's motion to dismiss in part, and denied it
in part. Delta believes that it has meritorious defenses and intends to
defend this suit, but cannot estimate with any certainty its ultimate
legal or financial liability, if any, with respect to the alleged claims.
o In or about August 1999, the NYOAG filed a lawsuit against Delta alleging
violations of (a) RESPA (by paying yield spread premiums), (b) HOEPA and
TILA, (c) ECOA, (d) New York Executive Law ss. 296-a, and (e) New York
Executive Law ss. 63(12). In September 1999, Delta and the NYOAG settled
the lawsuit, as part of a global settlement by and among Delta, the NYOAG
and the NYSBD, evidenced by that certain (a) Remediation Agreement by and
between Delta and the NYSBD, dated as of September 17, 1999 and (b)
Stipulated Order on Consent by and among Delta, Delta Financial and the
NYOAG, dated as of September 17, 1999. As part of the Settlement, Delta
will, among other things, implement agreed upon changes to its lending
practices; provide reduced loan payments aggregating $7.25 million to
certain borrowers identified by the NYSBD; and create a fund of
approximately $4.75 million to be financed by the grant of 525,000 shares
of Delta Financial's common stock valued at a constant assumed priced of
$9.10 per share, which approximates book value. The proceeds of the fund
will be used, for among other things, to pay borrowers
21
and for a variety of consumer educational and counseling programs. As a
result, the NYOAG lawsuit has been dismissed as against Delta.
The Remediation Agreement and Stipulated Order on Consent supersede
Delta's previously announced settlements with the NYSBD and the NYOAG. In
March 2000, Delta finalized a settlement agreement with the United States
Department of Justice, the Federal Trade Commission and the Department of
Housing and Urban Renewal, to complete the global settlement it had
reached with the NYSBD and NYOAG. The Federal agreement mandates some
additional compliance efforts for Delta, but it does not require any
additional financial commitment.
o In November 1999, Delta received notice that it had been named in a
lawsuit filed in the United States District Court for the Eastern District
of New York, seeking certification as a class action and alleging
violations of the federal securities laws in connection with the Company's
initial public offering in 1996 and its reports subsequently filed with
the Securities and Exchange Commission. The complaint alleges that the
scope of the violations alleged recently in the consumer lawsuits and
regulatory actions indicate a pervasive pattern of action and risk that
should have been more thoroughly disclosed to investors in the Company's
common stock. In May 2000, the Court consolidated this case and several
other lawsuits that purportedly contain the same or similar allegations
against Delta and in August 2000 plaintiffs filed their Consolidated
Amended Complaint. In October 2000, Delta filed a motion to dismiss the
Complaint in its entirety, which was opposed by plaintiffs in November
2000, and is now pending. Delta believes that it has meritorious defenses
and intends to defend these suits, but cannot estimate with any certainty
its ultimate legal or financial liability, if any, with respect to the
alleged claims.
o In or about April 2000, Delta received notice that it had been named in a
lawsuit filed in the Supreme Court of the State of New York, Nassau
County, alleging that Delta has improperly charged and collected from
borrowers certain fees when they paid off their mortgage loans with Delta.
The complaint seeks (a) certification of a class of plaintiffs, (b)
declaratory relief finding that the payoff statements used include
unauthorized charges and are deceptive and unfair, (c) injunctive relief,
and (d) unspecified compensatory, statutory and punitive damages
(including legal fees), based upon alleged violations of Real Property Law
274-a, unfair and deceptive practices, money had and received and unjust
enrichment, and conversion. Delta answered the complaint in June 2000.
Delta believes that it has meritorious defenses and intends to defend this
suit, but cannot estimate with any certainty its ultimate legal or
financial liability, if any, with respect to the alleged claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 16, 2000. At the meeting,
Richard Blass and Arnold B. Pollard were elected as a Class I Directors for a
term of three years. Sidney A. Miller, Hugh Miller, Martin D. Payson and
Margaret Williams continue to serve as members of the Board of Directors.
Votes cast in favor of Mr. Blass' selection totaled 14,598,596, while
30,340 votes were withheld.
Votes cast in favor of Mr. Pollard's selection totaled 14,598,596, while
30,340 votes were withheld.
The stockholders also voted to ratify the appointment of KPMG LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000.
Votes cast in favor of this ratification were 14,620,621, while votes cast
against were 7,365 and abstentions totaled 950.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Delta's Common Stock was listed on the New York Stock Exchange (the "NYSE")
under the symbol "DFC" on November 1, 1996. The following table sets forth for
the periods indicated the range of the high and low closing sales prices for
Delta's Common Stock on the NYSE.
2000 High Low
- ---- ---- ----
First Quarter ............................................... $ 4.13 $ 2.00
Second Quarter .............................................. 2.31 1.25
Third Quarter................................................ 1.63 0.50
Fourth Quarter .............................................. 0.69 0.22
1999 High Low
- ---- ---- ----
First Quarter ............................................... $ 8.25 $ 4.75
Second Quarter .............................................. 8.13 4.88
Third Quarter................................................ 7.81 5.00
Fourth Quarter .............................................. 5.06 3.63
In January 2001, the Company announced that it received notification from the
NYSE that it has fallen below the continued listing standards of the NYSE. The
Company currently does not meet the NYSE's continued listing standards requiring
the maintenance of a minimum of $15 million in market capitalization over a
30-day trading period and the maintenance of a minimum share price of $1 over a
30-day trading period. In accordance with the rules of the NYSE, the Company has
supplied the NYSE with its business plan to address promptly the market
capitalization and minimum share price issues. There can be no assurance,
however, that the Company will be successful in meeting those requirements on a
continuing basis. If the Company is delisted from the NYSE, it will apply for
quotation, and would expect its Common Stock to trade, on the OTC Bulletin
Board.
On December 31, 2000, Delta had approximately 79 stockholders of record. This
number does not include beneficial owners holding shares through nominee or
"street" names. Delta believes the number of beneficial stockholders is
approximately 1,900.
DIVIDEND POLICY
Delta did not pay any dividends in 2000 and, in accordance with its present
general policy, has no present intention to pay cash dividends.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
INCOME STATEMENT DATA: (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Revenues:
Net gain on sale of mortgage loans..... $ 47,550 78,663 91,380 85,890 46,525
Interest............................... 32,287 31,041 12,458 22,341 16,372
Servicing fees......................... 14,190 16,341 10,464 7,511 5,368
Origination fees ...................... 24,944 28,774 25,273 18,108 5,266
---------- -------- -------- -------- --------
Total revenues.................... 118,971 154,819 139,575 133,850 73,531
---------- -------- -------- -------- --------
Expenses:
Payroll and related costs ............. 56,525 65,116 56,709 41,214 17,633
Interest............................... 30,386 26,656 30,019 19,964 11,298
General & administrative............... 94,685 55,318 34,351 21,522 11,112
---------- -------- -------- -------- --------
Total expenses................... 181,596 147,090 121,079 82,700 40,043
---------- -------- -------- -------- --------
Income (loss) before income tax expense (benefit)
and extraordinary item................. (62,625) 7,729 18,496 51,150 33,488
Provision for income tax expense (benefit) (13,208) 3,053 7,168 20,739 9,466
---------- -------- -------- -------- --------
Income (loss) before extraordinary item.... (49,417) 4,676 11,328 30,411 24,022
Extraordinary item:........................
Gain on extinguishment of debt......... -- -- -- -- 3,168
---------- -------- -------- -------- --------
Net income (loss).......................... $ (49,417) 4,676 11,328 30,411 27,190
---------- -------- -------- -------- --------
Pro forma information (1)(2):
Provision for pro forma income tax expense
before extraordinary item.............. -- -- -- -- 14,400
---------- -------- -------- -------- --------
Pro forma income (loss) before
extraordinary item.......................... (49,417) 4,676 11,328 30,411 19,088
---------- -------- -------- -------- --------
Per share data(1)(3):
Earnings (loss) per common share -
basic and diluted................ $ (3.10) 0.30 0.74 1.98 1.46
Weighted average number of
shares outstanding............... 15,920,869 15,511,214 15,382,161 15,359,280 13,066,485
Selected Balance Sheet Data:
Loans held for sale, net................... $ 82,698 89,036 87,170 79,247 82,411
Capitalized mortgage servicing rights..... -- 45,927 33,490 22,862 11,412
Interest-only and residual certificates.... 216,907 224,659 203,803 167,809 83,073
Total assets............................... 452,697 556,835 481,907 393,232 231,616
Senior notes, warehouse financing and
other borrowings....................... 238,203 258,493 229,660 177,540 95,482
Investor payable........................... 69,489 82,204 63,790 40,852 20,869
Total liabilities.......................... 354,973 409,694 344,219 266,779 138,098
Stockholders' equity....................... 97,724 147,141 137,688 126,453 93,518
- ---------------
(1) Figures for December 31, 2000, 1999, 1998 and 1997 are actual; pro forma
presentation for the year 1996.
(2) Prior to October 31, 1996, Delta Funding (a wholly-owned subsidiary) was
treated as an S corporation for Federal and state income tax purposes.
The pro forma presentation reflects a provision for income taxes as if the
Company had always been a C corporation at an assumed tax rate of 43%.
(3) Pro forma earnings per common share has been computed by dividing pro forma
net income by the sum of (a) 10,653,000 shares of the Company's common
stock received by the former shareholders in exchange for their shares of
Delta Funding, and (b) the effect of the issuance of 1,976,182 shares of
the Company's common stock issued in the Company's initial public offering
to generate sufficient cash for certain S corporation distributions paid to
the former shareholders, which shares are treated as if they had always
been outstanding.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND ACCOMPANYING NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS SET FORTH THEREIN.
GENERAL
Delta, through its wholly-owned subsidiaries, engages in the consumer finance
business by originating, acquiring, selling and servicing non-conforming home
equity loans. Throughout its 19 years of operating history, the Company has
focused on lending to individuals who generally have impaired or limited credit
profiles or higher debt-to-income ratios for such purposes as debt
consolidation, home improvement, mortgage refinancing or education.
Delta originates home equity loans indirectly through licensed mortgage
brokers and other real estate professionals who submit loan applications on
behalf of borrowers ("Brokered Loans") and, prior to July 2000, also purchased
loans from mortgage bankers and smaller financial institutions that satisfy
Delta's underwriting guidelines ("Correspondent Loans"). The Company decided to
discontinue its correspondent operations in July 2000 to focus on its less cash
intensive broker and retail channels. Delta Funding currently originates the
majority of its loans in 20 states, through its network of approximately 1,500
brokers.
Delta develops retail loan leads primarily through its telemarketing system
and its network of 11 retail offices located in Illinois, Indiana, Missouri,
North Carolina, Ohio (4), Pennsylvania (2), Tennessee, and a call center in New
York ("Retail Loans"). During the twelve months ended December 31, 2000, the
Company closed two under-performing retail offices in Georgia and Florida, and
opened a new retail origination call center at its headquarters in Woodbury, New
York. In January 2001, the Company closed two additional under-performing retail
offices in Florida.
In March 2000, the Company finalized its settlement with the U.S. Department
of Justice (the "DOJ"), completing its global settlement with the NYSBD and the
NYOAG. The DOJ settlement, which parallels the NYSBD and NYOAG settlement
agreements, was also signed by the FTC and HUD. See "- Legal Proceedings" for a
discussion of the settlement.
In July 2000, the Company received $2 million in connection with the sale of
one of its domain names previously used as an internet address.
In August 2000, the Company announced a corporate restructuring and
modification of its Senior Notes (see " - Corporate Restructuring and Debt
Modification") to improve operating efficiencies and to address its negative
cash flow. The corporate restructuring was aimed at reducing overhead and
operating expenses. The debt modification enabled the Company to monetize a
portion of its Residual Assets, first by obtaining approximately $17 million in
residual financing in August 2000 and subsequently through the sale of a portion
of its Residual Assets through a net interest margin securitization ("NIM
Transaction") in November 2000. (See "-Liquidity and Capital Resources").
CORPORATE RESTRUCTURING AND DEBT MODIFICATION
In August 2000, Delta announced a corporate restructuring (the
"Restructuring") in its continuing efforts to improve operating efficiencies and
to address its negative cash flow from operations. As part of this
restructuring, the Company recorded a $6.7 million charge primarily relating to
employee severance associated with the layoffs, a reduction to goodwill and
office equipment write-offs. After a cash payment for personnel related costs,
the balance of Delta's restructuring liability at December 31, 2000 was $1.3
million.
Also in August 2000, the Company announced an agreement to modify the Senior
Notes (the "Debt Modification"). With the consent of greater than fifty percent
of its Senior Note holders, a neg