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PSMH.OB: Fundamental Transformation Powers EPS Growth and Outperform Rating

We expect PSMH Holdings, Inc. (OTCPK:PSMH), a mortgage banking operation headquartered in Roswell, New Mexico, to generate strong earnings growth within the next few years as the Company is transforming itself from a small regional brokerage company into a mortgage banking operation that will be operating in over 30 states by the end of this year.

Growth is being driven by a series of acquisitions and a new vendor relationship, both of which will lead to substantial revenue gains and positive growth in earnings per share. The primary reasons for this are fourfold.

First, PSMH, with $200 million in monthly warehouse lending capacity, expects to dramatically expand loan production volume at the acquired companies, whose loan production has been limited by the small size of their warehouse lines of credit, as well as due to the hiring of additional loan production officers.

Second, PSMH will be able to attract top-talent, high-production loan officers with a compensation package that includes a good salary as well as bonus payments in publicly traded stock that other privately held mortgage bankers are unable to offer.

Third, gross profit margins of acquired companies will jump to 3-4% of loan volume originated from 2-3% prior to acquisition as these companies migrate to PSMH’s higher margin lending platform and originate a larger proportion of higher margin FHA loans.

Fourth, the new vendor relationship could add about $20-48 million of monthly loan production, though margins on this business will be lower than those expected for loans originated under the new business model.

While we expect costs to increase significantly as well, we believe that expenses will advance at a proportionately lower rate than revenues, thereby enhancing bottom-line profits.

We are estimating diluted earnings per share of $0.25 in fiscal 2012 (June 30), up from a $0.15 loss per share in fiscal in 2011, and of $0.50 in fiscal 2013, though these could prove wide of the mark, given that the Company’s situation is changing so rapidly.

 We note that there are risks to our projections: 

Ø      PSMH is in the initial stages of its new business model, and no solid data has yet been released. In fact, the first quarter for which initial financial data is available is for the 2012 fiscal first quarter ending September 30, 2011 when the Company posted a $0.05 loss per share. Moreover, it will be several more quarters until there is sufficient data to gauge the success of PSMH’s new business model.


Ø      The weak state of the US economy in general and the real estate market in particular could hurt operations at some point in the future, though this has not occurred to date.


Ø      A significant jump in interest rates, currently at rock-bottom lows, could have a material negative impact mortgage loan demand for future residential real estate sales and refinancings.


In addition, we should note that PSMH shares are designated as “penny stock” under SEC Rule 3a51-1, and subject to the restrictions imposed upon broker-dealers for trading in these shares, including the duty to disclose to investors the risks inherent in penny stocks and to determine that the investment is suitable for the purchaser. These restrictions reduce liquidity in PSMH shares.


Based upon our EPS estimates, we believe the shares will outperform the market and have established a twelve-month price target of $3.00, which compares to its current price of $0.74.

PSM Holdings, Inc. is engaged in the businesses of mortgage banking, in which PSMH both originates and funds mortgage loans through its own warehouse lines of credit and currently accounts for about 90% of closed loans, as well as mortgage brokerage, in which PSMH originates mortgage loans funded by over 50 third-party lenders. PSMH immediately sells these loans to its third-party lenders or into the secondary mortgage market. The Company offers a full range of mortgage loan products, including adjustable rate mortgages, fifteen, twenty, and thirty-year fixed rate loans, and balloon loans with a variety of maturities, as well as refinancing, construction loans, second mortgages, debt consolidation, and home equity loans.

PSMH had total assets of $5.1 million at the 2011 fiscal yearend on June 30, 2011, total revenues of $3.9 million for the 2011 fiscal year, and closed 845 mortgage loans, worth $144 million, during this period. Operations are carried out by the company’s two wholly owned subsidiaries, PrimeSource Mortgage, Inc. (NASDAQ:PSMI) and United Community Mortgage Corp. (UCMC). Through its subsidiaries, PSMH operates and is licensed in the following 17 states:  Arkansas, California, Colorado, Georgia, Idaho, Iowa, Kentucky, Louisiana, Montana, Nebraska, New Jersey, New Mexico, New York, Oklahoma, Texas, Washington, and Wyoming. State license applications are pending in an additional 17 states, with the majority expected to be approved by June 30, 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.