and bolts" is almost sure to come up.
In an industry of big ambitions and bigger egos, observers say, Mr. Miller, the president and chief executive officer of Delta Financial Corp., is one executive who thoroughly understands the day-to-day working of his business.
"The most remarkable thing I've ever seen a CEO of a financial services company do happened the day I was out visiting Delta and Hugh was giving a tour," says Bear, Stearns & Co. managing director James Wolf. "It didn't matter where in the company he went -- he could hop on any terminal and perform that function."
It is an observation that reveals as much about the subprime mortgage industry as it does about Mr. Miller. Where others have overreached and failed, Mr. Miller's small company, based in Woodbury, N.Y., is among very few survivors -- despite an industrywide shakeout and a series of lawsuits questioning Delta's lending practices.
Mr. Miller said he has emphasized a conservative approach, even when the market was looking for rapid growth. At a 1996 session with investors, Mr. Miller recalls being cut short when he gave a presentation that emphasized risk management and loan quality. Now, he says, the wisdom of his approach is clear.
"All they wanted to talk about was how fast you're growing the business, and where the growth is going to come from. And that to me was beyond scary," he said. "The bottom line is: Anyone can originate loans; it's getting your money back that's the secret of any lending business."
Mr. Miller joined Delta in 1985 as chief operating officer and was appointed president and chief executive six years later. His father, Sidney, founded the company in 1982 and is still chairman. Mr. Miller's two brothers both hold senior vice president positions in the company: Marc Miller is Delta's general council and Lee Miller is in charge of risk management. Aside from adopting a slow-and-steady growth strategy, Mr. Miller has been more conservative in accounting than his industry counterparts. That helped Delta avoid the recurring hits that put some larger competitors into bankruptcy after liquidity in the capital markets dried up last fall.
Delta's fourth-quarter net income declined to $4.9 million, from $8.3 million the year earlier. In the first half, however, it reported $7.9 million of net income, up from $3.3 million the year before.
"If you take Delta's strategy over the last number of years, especially in the 1996 to 1998 heyday, we never participated in the bulk correspondent market. People were not only paying crazy prices, but there was a 'sweep the table' attitude where you had to buy almost everything people gave you. But we knew that one bad loan could wipe out the profits of 30 good loans," Mr. Miller said. "We never ran our business as if the capital markets were endless, because we knew that they weren't. Everything in life is cyclical. Everything."
Delta's small size -- its servicing portfolio totaled $3.4 billion June 30 -- also worked in its favor when the industry hit hard times, because it did not have to cough up loans that were in inventory with margin calls attached.
"We did immediately cut back our correspondent business in the fourth quarter, which was the most cash-intensive aspect" of the business, Mr. Miller said. "Because our business was more conservatively run from the get-go, it was easy for us to quickly make those necessary changes and become cash-flow positive in the same quarter when the financial crisis took place."
Additionally, analysts said that lenders were not as quick to pull the plug on Delta, as they did with other competitors because their individual investments were not large enough to constitute a crisis. Delta's credit lines totaled about $1 billion as of April.
Finally, Delta never tried to securitize its excess servicing receivables to get extra cash like most of its competitors did. This gave the company cash flows from its securitized pools, while other players were borrowing against theirs.
Jennifer S. Scutti, a first vice president at Prudential Securities, added that Delta's smaller size lets it respond more quickly to market shifts and have closer control on its portfolio.
Delta has "a very good infrastructure and back-office system that enabled management to monitor the performance of loans very closely. So when things got really ugly last summer, they (Delta's management) were able to figure that out quickly and then were able to correct the problem, originating fewer and fewer of those loans," Ms. Scutti said.Delta has maintained a positive cash flow for three consecutive quarters, without relying on whole loan sales. The company said its second quarter retail originations rose 19% from the first quarter and 76% from the second quarter last year.
To be sure, some observers say Delta may not be out of the woods.
Fitch IBCA Inc. director Thomas Abruzzo said Delta's geographic concentration poses a risk. About half of Delta's fixed-rate loans -- which make up 85% to 90% of the assets backing its securities -- are concentrated in New York State. But he added that Delta can be much more successful as a local niche player than a national one.
"Are they going to be a significant in the financial services industry?" Mr. Abruzzo said. "No, I don't think so. But if they were national, they might have gotten into even more problems."
What's more, a series of lawsuits alleging abusive lending practices prompted Moody's Investors Service to put Delta's debt on watch for a possible downgrade.
Delta's lending practices have been under investigation by the New York Attorney General's office, the New York State Banking Department, and the U.S. Department of Justice. Delta was alleged to have unfairly induced low-income homeowners to take out high-interest mortgages they could not afford, then foreclosed on properties when payments could not be made.
Mr. Wolf said the charges are "perplexing."
"The suggestion being made that it is profitable for the company to foreclose on people is just about the most preposterous accusation I've ever heard leveled at a home equity lender. There is no lender that has ever made money by lending to people that can't repay it," Mr. Wolf said. "It's particularly interesting that this comes out of the state of New York because it is the most difficult place to foreclose and therefore is the most expensive state in which to go through the process."
Delta settled the banking and justice department suits on Aug. 20 by agreeing to a $7.25 million reduction in loan payments and to put $4.75 million in Delta stock in a trust fund to provide restitution to customers and finance consumer education -- a costly settlement for a company Delta's size.
But state Attorney General Eliot Spitzer backed out of the settlement and leveled new charges, saying Delta made more than 1,000 illegal high-interest loans -- in some cases charging as much as 14% annually -- to borrowers in the boroughs of Brooklyn and Queens over the past three years.
Mr. Wolf said that the typical subprime customer base tends to cluster in such neighborhoods, and it is not a sign of any bias on Delta's part that its loans are concentrated in those areas.
"I don't think financially this issue amounts to a hill of beans," Mr. Wolf said. "But no lender wants to be hauled into court, particularly not on a civil rights action. It seems to me that this is primarily a political issue and not one about business practices, which is why I think the attorney general backed out of the original settlement."
Mr. Miller said that his company has not violated any laws and that it agreed to settle the earlier suits for the "best interest of shareholders and investors.
"Protecting consumers would benefit us as a lender at the end of the day. If borrowers get loans they're unhappy with, they are going to prepay; and if they get loans they can't afford, they default," Mr. Miller said. "And if there are two things I don't want, it's a prepayment and a default."
Some observers say one reason Delta is being targeted in predatory lending suits is because it is the only lender specializing to less creditworthy customers still around to sue.
"If you are the district attorney and you want to go after a company, you must realize that you're not going to get a fine or anything from a company that can't pay you," Mr. Abruzzo said.
Mr. Miller said Delta plans to continue its strategy.
"We have always really shined in an adverse market and that is an unfortunately reality," Mr. Miller said. "Because that is when people really start focusing on the things they should have been focusing on all along, which is credit quality and how loans have performed."
Analysts said neither rapid growth nor massive cutbacks are in store for Delta.
"This is not a company that has ever grown for the sake of growing, which is what a lot of their competitors did," Mr. Wolf said. "And all of those competitors are out of business."
Ms. Scutti said Delta has access to access to the historical information about its market and a conservative cutlture that will help it to prosper. "They're going to focus on originating loans that are tried-and-true products; they're not going to be the first to go out there with a new type of loan."
Still, some questioned whether a small subprime company can be viable under hostile regulatory environment and with gain on sale accounting under fire.
"A company like Delta has to be prepared to pull back when markets aren't favorable. If they were to try to expand their operations, it would probably be better to do that under the umbrella of a larger financial services company," Mr. Abruzzo said. "Then again, companies like this haven't exactly been swallowed up lately either."