Our consolidated results of operations have been significantly impacted by expansion of franchise locations in recent years and the acquisition of a bank and insurance companies. The following table shows
Brooke Savings Bank entered into a purchase and assumption agreement with Bank of the West to purchase a network of 42 Kansas-based banker agents who refer deposit and loan business to Brooke Savings Bank. The Office of Thrift Supervision approved the transaction on December 13, 2007 and the transaction became effective as of the close of business on January 18, 2008 As a result, Brooke Savings Bank reported total assets of approximately $141 million, total deposits of $125 million and total stockholders equity of $15.4 million as of January 31, 2008.
Franchise Commission Revenues Brooke Capital generates revenues primarily from sales commissions on policies sold by its franchisees that are written, or issued, by third-party insurance companies. Commission revenues typically represent a percentage of insurance premiums paid by policyholders. Premium amounts and commission percentage rates are established by independent insurance companies, so Brooke Capital has little or no control over the commission amount
Company owned stores expense is incurred primarily for the purpose of providing collateral preservation assistance. Operating expenses for company-owned stores increased $5,562,000, or 86%, to $12,056,000 in 2007 from $6,494,000 in 2006. Although operating expenses from company-owned stores represented a significant part of the overall increase in other operating expenses, these expenses were mostly offset by commission revenues generated by company-owned stores totaling $8,546,000 and $6,151,000, respectively, for the years ended December 31, 2007 and 2006. Company-owned stores revenues and expenses for years prior to 2005 are not available.
Interest Income Aleritas typically sells most of the loans it originates to funding institutions as loan participations and to accredited investors as asset-backed securities. Prior to either type of sale transaction, Aleritas typically holds these loans on its balance sheet and earns interest income during that time. After the loans are sold, Aleritas continues to earn interest income from the retained interests in these off-balance sheet loans. Interest income increased primarily as a result of growth in Aleritas’ on and off-balance sheet loan balances in 2007 and 2006.
Income Before Income Taxes Aleritas’ income before income taxes decreased for the year ended December 31, 2007 compared to 2006 primarily because of prepayment rates exceeding assumptions and an impairment loss was recorded.
Our cash and cash equivalents were $5,158,000, $21,203,000 and $12,321,000 as of December 31, 2007, 2006 and 2005, respectively. Our current ratios (current assets to current liabilities) were 1.53, 1.44 and 2.08, respectively, at December 31, 2007, 2006 and 2005, respectively. Current assets exceeded current liabilities by substantially more in 2006 than in 2005; however, the corresponding current ratio decreased because the amounts of total current assets and total current liabilities increased.
As of December 31, 2007 and 2006, as a result of the above mentioned increased payment speeds and reduction in collateral value, the fair value of the retained interests declined resulting in the impairment losses noted above. No impairment was recognized in 2005. The total impairment losses above represented 1.0%, 0.1% and 0.0% of the off-balance sheet loans as of December 31, 2007, 2006 and 2005, respectively.
See footnote 19 to our consolidated financial statements for a discussion of the effects of the adoption of new accounting standards.
The DB Group, Ltd. was incorporated under the laws of Bermuda and is licensed as a Class 3 insurer under the Insurance Act 1978 of Bermuda and related regulations. In 2006 and 2007, The DB Group, Ltd. self-insured a portion of the professional insurance agent’s liability exposure of Brooke Capital Corporation, its affiliated companies and its franchisees. There were no premiums written by this subsidiary in 2005.
Subsidiaries have also been established for regulatory, licensing, security or other purposes and they typically conduct limited operations and do not own any assets. These subsidiaries include Brooke Funeral Services Company, LLC and Brooke Agency Services Company of Nevada, LLC.
Brooke Savings Bank’s provision for loan losses on loans and accrued interest are charged to earnings when it is determined by management to be required. Management’s monthly evaluation of the adequacy of allowance accounts is based on past loss experience, known and inherent risks related to the assets, adverse situations that may affect a borrower’s ability to repay, estimated value of the underlying collateral, and current and prospective economic conditions.
A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Homogeneous loans are evaluated collectively for impairment.
The activity in the Brooke Savings Bank allowance for loan losses is summarized below:
The acquisition of renewal rights by the Company or by its subsidiaries for businesses the Company plans to own and operate for less than one year are not classified as Amortizable Intangible Assets (see footnote 1(j)). Recent acquisitions and divestitures of Amortizable Intangible Assets are discussed in footnote 11.
The holders of the Company’s 2006 convertible preferred stock are entitled to receive a cumulative dividend in cash at the rate of 13% per annum of the stated value of such stock after 2 years, if determined by the Board of Directors. The holders of 2006 convertible preferred stock do not have voting rights. In the case of liquidation or dissolution of the Company, the holders of the 2006 convertible preferred stock shall be entitled to be paid in full the stated value, $1,000 per share, after payment of full liquidation value to the holders of 2002 convertible preferred stock, 2002A convertible preferred stock and 2002B convertible preferred stock, and before the holders of common stock.
receivables in loans sold; retained over-collateralization interests in loans sold and cash reserves. These securities are classified as available for sale under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The aggregate carrying values of $87,763,000 and $50,320,000 at December 31, 2007 and 2006, respectively, for the corresponding marketable securities approximates the fair value as calculated by the Company using reasonable assumptions. The value of the Company’s retained residual assets is subject to credit and prepayment risks on the transferred financial assets.
The amortized cost and fair value of investments at December 31, 2007 and December 31, 2006 are summarized as follows:
The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors. On a regular basis, all securities are reviewed in an effort to determine each issuer’s ability to service its debts and the length of time the security has been trading below cost. This process includes an assessment of the credit quality of each investment in the entire securities portfolio. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position of the issuer, including the current and future impact of any specific events; and (3) the Company’s ability and intent to hold the security to maturity or until it recovers in value. Based on the performance of these procedures, no securities are deemed to be other-than-temporarily impaired by the Company.
Also in accordance with SFAS 150, the noteholder warrants were initially recorded as a discount to the notes based on the fair market value of the warrants at November 1, 2006, or approximately $2,737,000. The discount on the notes was to be amortized over the life of the notes using the effective interest method. During July 2007, the warrants were amended to remove the put option. The decrease in the market value of the liability from the beginning of 2007 through July 2007, $467,000, was recorded as a reduction of other interest expense. The amount of amortization resulting from discount accretion for the year ended December 31, 2006 was $41,000.
At December 31, 2007 and 2006, the Company had transferred assets with balances totaling $538,963,000 and $319,125,000, respectively, resulting in pre-tax gains for the years ended December 31, 2007, 2006 and 2005 of $13,644,000, $5,334,000 and $6,086,000, respectively.
At December 31, 2007 and December 31, 2006, the value of the servicing liability recorded by the Company was $16,000 and $24,000, respectively.
At December 31, 2007, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows:
The note payable to Falcon Mezzanine Partners II, LP, FMP II Co.-Investment, LLC and JZ Equity Partners PLC contains the following covenants: maximum prepayment rate on Brooke Credit Corporation’s loan portfolio of 20%; maximum loan loss rate of 1.5%; minimum fixed charge coverage ratio as scheduled; maximum cash leverage ratio as scheduled; and maximum total leverage ratio as scheduled. In accordance with SFAS 150, a discount to this note payable was recorded which was based on the fair market value of the noteholder warrants at November 1, 2006, or approximately $2,737,000. The discount on the notes is being amortized over the life of the notes using the effective interest method. The amount of amortization resulting from discount accretion for the year ended December 31, 2007 and 2006 was $267,000 and $41,000, respectively. At December 31, 2007 the balance of the discount was $2,428,000.
In connection with the outstanding loans and related debt agreements with Citizens Bank and Trust Company and Brooke Holdings, the Company has committed to certain covenants wherein (1) the Company, certain of the Company’s subsidiaries and/or Parent will maintain certain benchmarks with respect to their:
Short-term debt represents the DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Fifth Third Bank, and Home Federal Savings and Loan lines of credit, the lines of credit listed in the preceding table and non-cash investing transactions utilized to purchase business assets.
Traders Insurance Company has therefore, as prescribed the Missouri Insurance Department, non-admitted $0 of EDP equipment as of December 31, 2007.
Commitments, which are disbursed subject to certain limitations, extend over periods of time with the majority of executed commitments disbursed within a twelve-month period. As of December 31, 2007, the Bank had outstanding loan commitments of approximately $256,000 to originate adjustable-rate loans.
On March 11, 2008, Keith Bouchey, President and CEO of Brooke Corporation resigned and on March 12, 2008 the stock price of Brooke Credit Corporation fell below the stated value in the loan covenants on the $9,000,000 Citizens Bank and Trust Note Payable. The debt was reclassified as current on the financial statements. Citizens Bank and Trust has no intentions of accelerating the note maturity at this time. However, based on the covenants for default both of these require reclassifying the debt to current maturities of long-term debt.