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PSMH > SEC Filings for PSMH > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for PSM HOLDINGS INC



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This section should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2013, and our interim financial statements and accompanying notes to these financial statements filed with this report.


PSM Holdings, Inc. (the "Company" or "PSMH") originates mortgage loans funded either directly off our warehouse lines of credit or through brokering transactions to other third parties. Approximately 90% of our mortgage origination volume is banked off of our current warehouse lines. We have relationships with multiple investors who purchase the loans funded on our warehouse lines. All of our lending activities are conducted by our subsidiary, PrimeSource Mortgage, Inc. ("PSMI").

Historically, a significant portion of our business has been referral based and purchase orientated (versus refinance). The Company does not directly participate in the secondary markets and further does not maintain a servicing portfolio. Approximately 75% of total loan applications are generated from business contacts and previous client referrals. Realtor referrals and other lead sources like Costco and NWBO account for the balance of loan applications.

We have retail offices located around the United States from which we derive revenue from the loan origination volume from these offices. We are able to leverage the Company's warehouse lines of credit relationships with related parties in order to provide us the funding capacity to support our anticipated growth. PSMI is licensed in 27 states and operates out of approximately 23 offices around the country.

Current Environment

Regulatory changes from Federal and State authorities have placed a significant amount of pressure on mortgage companies across the United States. The regulatory changes have applied operational pressure for deeper and more disciplined internal processes, limitations on loan officer compensation and increased compliance requirements all making it difficult for small to mid market mortgage firms to operate profitably as independent businesses. This dynamic has spurred consolidation in the industry as many firms feel the need to join larger more established platforms. This industry shift has left the remaining mortgage businesses forced to either make the financial investments in their business to operate in today's environment or become part of a more stable, mature operation that is better suited to compete in a contracting market.

Further, since the middle of June 2013, interest rates on mortgages have experienced a significant increase and industry wide volumes have decreased significantly. The increase in rates has directly impacted the refinance business and has led to the market for purchase business being extremely competitive. In addition to the reduced volumes, most of the industry has experienced declining origination margins. The Company cannot predict with certainty that margins and or origination volumes will return to the levels experienced prior to June of 2013.

The following table represents a production matrix reflecting our past production by number of Loans Closed and Dollar Volume:

Nine Months Ended March 31, Number of Loans Closed Dollar Production 2013 2,812 $499,859,078 2014 1,620 $292,886,008

Strategy For Growth

Over the last year, we embarked on a strategy to become a national lending platform that we anticipate other small to medium sized brokers and lenders will want to join as they face challenges due to the changing regulatory environment and mounting competitive pressures on their businesses. Quite simply, we want to be the destination they think of first when they are considering a move. We have taken steps to prepare our platform in order to support our anticipated growth. Specifically, we have completed our capital raise, hired additional experienced management, strengthened and improved our corporate governance, obtained additional state licensing in key markets, implemented programs where our stock is an attractive currency for recruiting and implemented reporting metrics and management analysis tools to help us better manage our business. Further, we continue to evaluate additional opportunities to monetize our origination volume by participating in such things as service release premium and gain on sale in the secondary markets.

We are one of ten approved lenders designated as preferred mortgage lenders on the Costco Mortgage Services Platform (the "MSP") that began in January 2010, and is operated and managed by First Choice Bank. Our office in Newport Beach, CA has loan originators dedicated to servicing this platform. We intend to significantly increase the number of states we are obtaining Costco leads in during the calendar year 2014. We believe we have committed the appropriate resources in terms of monetary and human capital to position us as a leading lender on this platform.

As a result of the market consolidation in the mortgage banking industry, we continue to recruit and onboard new entities, as well as work with existing offices to increase their loan originators, locations and production. During the nine months ended March 31, 2014, we added a total of 6 locations through onboarding of other mortgage operations. We will continue to recruit loan originators and existing mortgage banking or broker operations as we believe our current infrastructure can support a significant scaling of our operations without the need for additional resources or capital.

Results of Operations Three and Nine Months Ended March 31, 2014

We reported a net loss of $(1,880,182) and $(4,621,812) for the three and nine months ended March 31, 2014 compared to a net loss of $(1,419,695) and $(975,213) for the comparable periods in the prior year. The increased loss was a direct result of lower production volumes, decreased revenue and increases in both fixed and variable compensation. The Company has taken certain measures to more closely align costs with the current and anticipated productions levels. Additionally, the Company continues to actively recruit new operations and loan officers to its platform in an effort to increase production and revenue.


Our total revenues decreased by $(2,124,711) or 47.8% to $2,323,858 for the three months ended March 31, 2014, as compared to $4,448,569 for the three months ended March 31, 2013. Our total revenues decreased by $(6,391,207) or 39.3% to $9,886,133 for the nine months ended March 31, 2014 compared to $16,277,340 for the nine months ended March 31, 2013. For the current nine-month period, our origination dollar volumes decreased by $206,973,070 compared to the prior year. This decrease is due, in part, to the departure of three of our larger lending centers during January and February of 2014. Additionally, as the entire market experienced reduced origination volumes, competitive pricing pressure increased which directly reduced yield spreads in the current period. We believe these competitive pressures and depressed origination volume are likely to continue through the remainder of calendar 2014. We anticipate that our recruitment of additional operations in key markets across the country will help offset the declines we are currently experiencing. However, there is no assurance that we will be successful in these efforts and our operating results may continue to decline.

Operating Expenses

Our total operating expenses decreased by $(1,725,193) or 29.0% to $4,223,358 for the three months ended March 31, 2014 as compared to $5,948,551 for the prior year period. For the nine months ended March 31, 2014, operating expenses amounted to $14,579,278, a reduction of $2,773,327 or 16.0% from the prior nine months in which operating expenses amounted to $17,352,605. Our largest single operating cost is compensation, both in terms of fixed salaries and wages and commissions paid on closed loans. During both the three and nine month periods ended March 31, 2014, salaries and commissions as a percentage of revenue increased significantly to 82.5% and 81.5% compared to 71.8% and 64.2% for the three and nine month periods ended March 31, 2013, respectively. This increase as a percentage of total revenue is directly associated with both increased personnel costs associated with our new delegated platform as well as the newer rules surrounding loan originator compensation in which the loan originators get paid a fixed fee per loan regardless of the profitability of that loan. In the current periods, the competitive landscape was such that overall margins on closed loans were lower yet compensation paid on those loans was unchanged compared to the prior year. We are aggressively looking at modifications to our current compensation structure that would more closely align our compensation and overhead to the future expected origination volume and to industry norms.

Depreciation and amortization expense increased by $15,629 to $76,358 for the three months ended March 31, 2014, and increased by $39,741 to $223,041 for the nine months ended March 31, 2014. This is attributed to a higher balance of fixed assets compared to the prior period.

Non-operating Income (Expense)

Our total non-operating income was $19,318 and $71,333 for the three months and nine months ended March 31, 2014 as compared to non-operating income of $80,287 and $100,052 in the same periods in the prior year. In all periods presented, sponsorship income for the Company's annual conference is the largest contributor to other income. The timing of the receipt of the sponsorship income varies between the quarters it is received. In the current three month period, the Company recorded non-operating expense related to a loss recorded on retired assets in the amount of $(18,628).

Liquidity and Capital Resources

Our cash and cash equivalents were $186,170 as of March 31, 2014. In addition, we have cash of $902,989 that is restricted as collateral against various state licensing bonds or is in escrow for ongoing renovation loans. As shown in the accompanying consolidated financial statements, we recorded a net loss of $(4,621,812) for the nine months ended March 31, 2014, compared to a net loss of $(975,213) for the comparable period in the prior fiscal year. Our current liabilities exceeded our current assets by $1,658,442 at March 31, 2014. In October of 2013, we closed our first loans as a full correspondent lender on our delegated platform. This means that we performed all of the back office functions beyond the origination, essentially delivering a closed loan to the ultimate investor. In February 2014, we rolled out our delegated platform to all of our offices. We estimate that during the most recently completed quarter approximately 50% of our loans were delivered as a full correspondent lender. We anticipate that greater than 90% of our loan volume in future quarters will go through our delegated platform. It is anticipated that operating as a full lender delivering closed loans to investors will increase our profitability per loan and improve our ability to recruit additional operations currently operating in a similar manner. There are no assurances that we will be successful in rolling out our fully delegated platform throughout our entire Company, or that we will be able to successfully recruit additional profitable mortgage operations to join our platform. If we are unsuccessful in these initiatives, our revenue and profitability may continue to decline and we may not have enough capital to continue to implement our growth plans. Further, we may be required to raise additional operating capital which would require the issuance of additional equity securities which would dilute our current shareholders. There are no assurances we would be successful in raising additional capital and as such, our business could fail.

Operating Activities

Net cash used in operating activities for the nine months ended March 31, 2014 was $(4,407,428) compared to net cash used in operating activities of $(201,792) for the nine months ended March 31, 2013. In the current nine-month period, our net loss of $(4,621,812) was the single largest contributing factor to the cash used by operating activities. Other significant items impacting cash used by operating activities were pay down of accrued liabilities in the amount of $(755,931), increase in prepaid expenses and reduction of employee advances of $(144,822) and $11,789, respectively offset somewhat by collection of accounts receivable of $368,497 and an increase in accounts payable of $319,247. Current period operating activities were also impacted by an increase in the cash held in escrow for project costs related to 203K renovation loans. In the prior period, net loss of $(975,213) was a significant contributor the cash used in operating activities. The other largest contributing factors to cash used in operating activities were a write-off of notes receivable and employee advances totaling $484,192, collection of accounts receivable of $333,476, paydown of accounts payable and accrued liabilities of $(460,995), a reduction of prepaid expenses of $126,063 and expense related to stock transactions issued to employees and consultants of $108,693.

Investing Activities

Net cash used in investing activities for the nine months ended March 31, 2014, was $(219,766) resulting almost entirely from cash used to purchase property and equipment of $(208,425). Increase in security deposits for new offices also resulted in $(11,341) of change in cash. For the nine months ended March 31, 2013 net cash used in investing activities amounted to $(48,603) resulting from cash used for purchase of property and equipment amounting to $(42,929) and cash paid for security deposits of $(5,674). We do not currently have material commitments for capital expenditures and do not anticipate entering into any such commitments during the next twelve months.

Financing Activities

Net cash provided by financing activities for the nine months ended March 31, 2014 was $700,735 consisting of cash paid for preferred dividends amounting to $(256,500) and cash received from short term financing of $957,235. Net cash provided by financing activities in the prior year period was $5,072,035 consisting of cash received from sale of preferred stock $5,700,000 net against transaction fees incurred in the stock transaction totaling $(527,965). In addition, the company made repayments on loans totaling $(100,000) in the prior year period.

As a result of the above activities, we experienced a net decrease in cash of $(3,926,459) for the nine months ended March 31, 2014. Our ability to continue as a going concern is still dependent on our success in recruiting profitable and stable mortgage businesses, expanding the business of our existing branches, and reducing our current expense structure proportionate to the volumes we are currently experiencing and that are expected to continue for the foreseeable future.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make estimates and judgments. (See Note 1 to our consolidated financial statements, "Summary of Significant Accounting Policies"). We believe that the following paragraphs reflect accounting policies that currently affect our financial condition and results of operations:

Share Based Payment Plan

Under the 2012 Stock Incentive Plan, the Company can grant stock or options to employees, related parties, and unrelated contractors in connection with the performance of services provided to the Company by the awardees. The Company uses the fair value method to account for employee stock compensation costs and to account for share based payments to non-employees.

Revenue Recognition

Our revenue is derived primarily from revenue earned from the origination of mortgage loans that are funded by third parties. Revenue is recognized as earned on the earlier of the settlement date or the funding date of the loan. In addition, we receive supplemental compensation from our warehouse line providers based on achieving certain production levels which we recognize as revenue when the loans are sold off the warehouse lines.

Recent Accounting Pronouncements

The Company has evaluated the possible effects on its financial statements of the accounting pronouncements and accounting standards that have been issued or proposed by FASB that do not require adoption until a future date, and that are not expected to have a material impact on the consolidated financial statements upon adoption.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity, capital expenditures or capital resources.

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