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PSMH > SEC Filings for PSMH > Form 10-Q on 14-Nov-2012All 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, 2012, and our interim financial statements and accompanying notes to these financial statements filed with this report.


Since 1991, PSMI has been a retail mortgage origination firm and, since 2008, has also conducted business as a mortgage lender using warehouse lines of credit. Our revenue model is based on bank margin on loan funding and administrative fees. Our loans are purchased off of our warehouse lines by several investors. As a mortgage banking firm, we have the freedom to "broker" loans immediately to third parties or leverage our warehouse lines to "bank" the loans and then sell them on the secondary market. Historically, we fund or "bank" more than 90% of our loans with several wholesale relationships available for our offices to take advantage of in order to provide the consumer with the lowest monthly payment and lowest rate available to them in the marketplace.

In April 2012, management restructured the Company by changing the domicile of PSMI, formerly known as United Community Mortgage Corp. ("UCMC"), from the State of New Jersey to the State of Delaware, and changing the name of UCMC to PrimeSource Mortgage, Inc., a Delaware corporation. As a result of the restructuring, WWYH has a single operating wholly-owned subsidiary, PSMI, which has undergone a name change and conducts all business operations under that name. Based upon our current production, we estimate approximately 75% of loan applications are generated from business contacts and previous client referrals at each of the branch offices. Realtor referrals generate another approximately 15% and the remaining approximately 10% come from other advertising and marketing efforts, including Nationwide By Owner, Inc. ("NWBO") and the Costco lending platform.

We have retail offices located around the United States from which we derive revenue based on the aforementioned business factors (e.g. fees, margin and splits) resulting from the loan origination volume from these offices. We are able to leverage the Company's warehouse lines of credit relationships in order to provide the consumer with more competitive rates and fees while increasing our gross profits. With a growing national retail platform, it is important to remain competitive in targeted regions around the country whose market dynamics vary from one another. It is for this reason, a healthy mixture of wholesale and correspondent relationships exist from within our Company in order to ensure both service quality and competitive pricing for our clients. Presently, PSMI has approximately 20 offices around the country.

On April 14, 2006, we entered into a renewable license agreement with NWBO, a Texas based company engaged in the business of marketing real estate property for sale by owners and others. In the course of its business, NWBO operates a proprietary system which produces a database of sales leads containing home buyer and home seller information for persons seeking financing on the purchase or refinancing of real property. The license agreement permits us exclusive use of the database which we use to generate leads for the origination of mortgage applications for submission to us. The agreement with NWBO renewed for an additional five years on April 14, 2011, is automatically renewable for two successive three-year periods and thereafter for successive one-year terms, unless either party notifies the other of its intent not to renew the agreement prior to the third automatic renewal term.

We are one of ten 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. PSMI's office in Tulsa, Oklahoma, began providing mortgage services on December 1, 2011 to Costco members. Initially, PSMI serviced leads originated in Oklahoma, Texas, New Mexico and Missouri. Management anticipates that other states will likely be added in the future. PSMI has initially committed to take approximately 1,000 leads per month for the Costco MSP, but expects to increase this significantly in the last half of the current fiscal year. PSMI believes it can manage this level of leads with its current infrastructure. Margins on loans originated under the Costco MSP are expected to be lower than those on loans originated under the new business model.

The Company acquired four operating mortgage companies and one operating mortgage company during the fiscal years ended June 30, 2012 and 2011. The Company's loan production more than tripled during the first quarter ended September 30, 2012 as compared to the comparable quarter of prior year. PSMI earned a net income of $247,941 due to closing 1,106 loans during the quarter ended September 30, 2012 compared to 270 loans closed during the comparable quarter in 2011. The additional loans closed during the quarter September 30, 2012 represented an approximate of additional $600,000 in improvement over and above the $1,000,000 turnaround the Company experienced to its bottom line for the quarter ended June 30, 2012.

Regulatory changes from Federal and State authorities have placed a significant amount of pressure on mortgage companies across the United States. These changes have been the contributing factor towards the growth of PSMI this calendar year, as well as the planned growth in calendar 2013. The regulatory changes have applied a significant amount of operational pressure for deeper and more disciplined internal processes, changes that have made it difficult for small to mid market mortgage brokerage and/or banking firms to continue functioning as independent businesses. This regulatory effect has driven many stable and profitable companies to join more established mortgage firms which meet the regulatory requirements. Furthermore, companies who are most susceptible to these market dynamics are increasingly challenged by reduced profit margins as a result of required changes in technology, increased staffing needs to meet more complex compliance requirements, and increased net worth requirements of HUD. As a result, industry research has shown that approximately 80% of mortgage brokerage firms and 40% of mortgage lending firms across the United States have gone out of business. 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. Operating as a public company since 2005, we are fully accustomed to operating in a highly regulatory environment and therefore, many of the accounting and technology related investments were underway during the market and economic shifts of 2007. As a result, management believes the maturity, preparedness and consumer oriented public culture of our Company has become a highly attractive, viable and competitive option for mortgage professionals across the United States.

In January 2011, we further invested in an enterprise origination retail technology to govern the production, operations and regulatory needs of our Company. Since January 2011, our operational efforts have leveraged this technology to improve a more scalable business platform to report, manage and grow existing offices around the United States.

In addition to significant upgrades in technology, we have brought on board a number of nationally recognized mortgage executives to implement additional processes and systems with the intent to facilitate an increasingly aggressive acquisition and growth strategy of our Company. As a result of these additions to the Company's technology and management, we expect to continue our growth in the future. Since the beginning of calendar 2011, we have completed five acquisitions. These acquisitions began on March 15, 2011 with the acquisition of UCMC, then on July 1, 2011, the acquisitions of Founders Mortgage LLC, a Missouri corporation and Brookside Mortgage LLC, an Oklahoma corporation, then on August 1, 2011, acquisition of Fidelity Mortgage Company, a Colorado corporation, and finally on November 1, 2011, acquisition of Iowa Mortgage Professionals, Inc., an Iowa corporation. We are in preliminary discussions with further potential target companies, but have not entered into any letters of intent or definitive agreements or arrangements. The Company has brought on boarded three (3) additional operations in 2012. The first operation was Steamboat Springs in Colorado, followed by an office in Newark, New Jersey, and then most recently, 123 Mortgage in St. Louis, Missouri,

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

Quarter Ended September 30, Number of Loans Closed Dollar Production 2011 270 $50,207,783 2012 1,106 $186,094,933

As a result of the market consolidation in the mortgage banking industry, we continue to recruit and acquire new entities and work with existing offices to increase their production. With the Company's new investments in technology that are built to sustain scalable growth, it is expected that the growth in revenue will be realized at an accelerated rate over and above the costs to support it. The net result will be a larger, more efficient and profitable enterprise.

As a result of the above-described business model, the Company reported its first profitable quarter ending September, 30, 2012 since going public in 2005. The increase in production and resulting revenues reflect a significant turnaround of the Company in the fourth quarter of the year ended June 30, 2012, as well as the first quarter ended September 30, 2012. Favorable market conditions supported by favorable rates and a reduction in competitive pressures, the Company laid down the foundation for unit and revenue growth in the balance of calendar 2012 and 2013.

Results of Operations

We reported a net income of $232,522 for the three months ended September 30, 2012 compared to a net loss of $1,131,498 for the same comparable prior year period. The increase in income resulted principally due to increase in loan production which resulted in increase in revenues.

Our total revenues increased by $3,746,652 or 172% to $5,928,887 for the three months ended September 30, 2012, as compared to the same comparable period in 2011. Our revenues for the three months increased due to net increase of one acquisition in our operations and as a result closing 1,106 loans during the three months ended September 30, 2012 as compared to 270 loans closed for the comparable prior year period. Some of our existing branches also increased their production during this time period as their businesses matured. Management believes that adding strong producing branches is a viable way to continue to increase revenues. Currently, our network can expect to add 3 to 5 additional on-boarded operations with no added management expense.

Operating Expenses
Our total operating expenses increased by $2,378,323 or 72% to $5,694,294 for the three months ended September 30, 2012 as compared to the comparable prior year period. Operating expenses for the three months ended September 30, 2012 included an increase in our selling, general and administrative expenses of $2,411,624 or 75% as compared to the comparable prior year period primarily due to a) an increase in payroll expense of $1,579,541 due to the increase in headcount as a result of acquisition of entities, b) an increase in rent expense of $134,047 due to additional acquisition of entities, c) increase in professional and legal fees of $186,661, and d) other administrative overhead incurred due to the acquisition of four entities compared to three entities in the comparable quarter of 2011.

Depreciation and amortization expense decreased by $33,300 or 35% to $69,970 for the three months ended September 30, 2012 as compared to the comparable prior year period, primarily due to the change in the amortization period from 5 to 8 years of identifiable intangible assets (customer lists) acquired as a result of our acquisitions.

Total operating expenses as a percentage of revenues were 96% as compared to 152% for the comparable prior year period.

Non-operating Income (Expense)
Our total non-operating income decreased by $4,308 or 195% for the three months ended September 30, 2012, as compared to the comparable prior year period primarily due to increase in interest expense of $2,736, and reduction in interest and other income of $1,583.

Liquidity and Capital Resources

Our cash and cash equivalents were $566,415 at September 30, 2012. As shown in the accompanying consolidated financial statements, we recorded a net income of $232,522 for the three months ended September 30, 2012, compared to a net loss of $1,131,498 for the comparable prior year period. Our current assets exceeded our current liabilities by $332,375 at September 30, 2012, and our net cash provided by operating activities for the three months ended September 30, 2012 was $274,067. We expect to add additional branch offices acquisitions during the current fiscal year, and brought on board three branches during the three months ended September 30, 2012. In order to expand our business we may need to sell additional shares of our common stock or borrow funds from private lenders to finance our anticipated growth.

Operating Activities
Net cash provided by operating activities for the three months ended September 30, 2012 was $274,067 resulted primarily due to a decrease in accounts receivable of $90,931, a decrease in prepaid expenses of $89,503, a decrease in other current assets of $441, a decrease in accounts payable of $276,332, an increase in accrued stock payable of $76,500, and a decrease in accrued liabilities of $468. We recorded a net income of $232,522 for the three months ended September 30, 2012 as compared to a net loss of $1,131,498 for the comparable prior period. The increase in income was primarily attributable due to an increase in revenues as a result of closing 1,106 loans for the three months ended September 30, 2012 as compared to closing 270 loans for the comparable quarter in 2011.

Investing Activities
Net cash used by investing activities for the three months ended September 30, 2012, was $13,073 as a result of net cash used to purchase property and equipment of $19,040, cash received from employees against advances of $7,641, and cash paid for security deposits of $1,674. 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 used in financing activities for the three months ended September 30, 2012 was $50,000 consisting of cash payment of $50,000 of loan received from a related party.

As a result of the above activities, we experienced a net increase in cash of $210,994 for the three months ended September 30, 2012. Our ability to continue as a going concern is still dependent on our success in acquiring profitable and stable mortgage businesses, expanding the business of our existing branches, capitalizing the leads from mortgage bankers and NWBO and closing them into mortgage loans, obtaining additional financing from mortgage bankers with increased warehouse credit lines, and from sale of our securities.

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 Branch Owner Stock Program provides for issuance of stock to branch owners for outstanding performance. 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 is recognized 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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