BXXX Brooke Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

TABLE OF CONTENTS

		Page No.
PART I
ITEM 1 FINANCIAL STATEMENTS			3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS			4
CONSOLIDATED STATEMENTS OF OPERATIONS			5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY			6
CONSOLIDATED STATEMENTS OF CASH FLOWS			7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			8
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			45
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			81
ITEM 4 CONTROLS AND PROCEDURES			81
PART II
ITEM 1 LEGAL PROCEEDINGS			82
ITEM 6 EXHIBITS			82
SIGNATURES			83
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Brooke Corporation

Consolidated Balance Sheets

UNAUDITED

(in thousands, except share amounts)

ASSETS

		March 31,				December 31,
		2008				2007
Current Assets
Cash		$	11,763			$	5,158
Restricted cash			453				454
Investments			124,642				50,887
Accounts and notes receivable, net			233,252				196,188
Income tax receivable			11,485				1,998
Other receivables			9,340				5,660
Securities			86,347				89,634
Interest-only strip receivable			7,820				7,749
Security deposits			221				221
Prepaid expenses			3,199				1,694
Advertising supply inventory			680				929
Total Current Assets			489,202				360,572
Investment in Businesses			5,655				9,413
Property and Equipment
Cost			28,195				27,366
Less: Accumulated depreciation			(8,658	)			(8,087	)
Net Property and Equipment			19,537				19,279
Other Assets
Amortizable intangible assets			12,766				9,709
Less: Accumulated amortization			(2,215	)			(2,031	)
Goodwill			2,841				3,022
Servicing asset			5,727				6,025
Deferred charges			8,143				11,310
Deferred tax asset			2,160				—
Other assets			5,564				5,078
Net Other Assets			34,986				33,113
Total Assets		$	549,380			$	422,377

See accompanying summary of accounting policies and notes to financial statements.

Brooke Corporation
Consolidated Balance Sheets
UNAUDITED
(in thousands, except share amounts)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		March 31,				December 31,
		2008				2007
Current Liabilities
Accounts payable		$	58,829			$	18,942
Premiums payable to insurance companies			7,646				7,621
Deposits			121,911				22,951
Federal funds purchased			—				9,522
Policy and contract liabilities			26,635				25,996
Payable under participation agreements			54,263				39,452
Accrued commission refunds			516				570
IBNR loss reserve			6,877				8,440
Unearned insurance premiums			3,629				3,110
Income tax payable			—				826
Deferred income tax payable			1,911				1,715
Warrant liability			900				900
Short-term debt			8,237				43,536
Current maturities of long-term debt			127,066				52,465
Total Current Liabilities			418,420				236,046
Non-current Liabilities
Warrant liability			2,354				2,354
Deferred income tax payable			—				6,402
Servicing liability			14				16
Long-term debt less current maturities			47,747				61,012
Total Liabilities			468,535				305,830
Minority Interest in subsidiary			35,090				45,899
Stockholders’ Equity
Common stock, $0.01 par value, 99,500,000 shares authorized, 14,224,021 and 14,224,021 shares issued and outstanding			142				142
Preferred stock series 2002 and 2002A, $25 par value, 110,000 shares authorized, 49,667 shares issued outstanding			1,242				1,242
Preferred stock series 2002B, $32 par value, 34,375 authorized, 24,331 shares issued and outstanding			779				779
Preferred stock series 2006, $1 par value, 20,000 authorized, 20,000 shares issued and outstanding			20				20
Additional paid-in capital on preferred stock series 2006			18,576				18,576
Discount on preferred stock series 2006			(1,350	)			(2,025	)
Additional paid-in capital			55,424				55,424
Accumulated deficit			(28,707	)			(6,889	)
Accumulated other comprehensive income (loss)			(371	)			3,379
Total Stockholders’ Equity			45,755				70,648
Total Liabilities and Stockholders’ Equity		$	549,380			$	422,377

See accompanying summary of accounting policies and notes to financial statements.

Brooke Corporation

Consolidated Statements of Operations

UNAUDITED

(in thousands, except per share data)

		For three months				For three months
		Ended March 31,				Ended March 31,
		2008				2007
Operating Revenues
Insurance commissions		$	34,314			$	32,736
Interest income (net)			8,533				7,697
Consulting fees			253				315
Gain (loss) on sale of businesses			(846	)			681
Initial franchise fees for basic services			1,320				12,870
Initial franchise fees for buyer assistance plans			—				385
Gain on sale of notes receivable			99				6,923
Insurance premiums earned			3,770				1,148
Policy fee income			113				102
Impairment loss			(11,763	)			—
Other income			440				296
Total Operating Revenues			36,233				63,153
Operating Expenses
Commissions expense			25,295				23,372
Payroll expense			9,634				7,890
Depreciation and amortization			1,574				989
Insurance loss and loss expense incurred			1,082				978
Provision for loan losses			12,537				—
Other operating expenses			18,950				14,488
Other operating interest expense			761				1,815
Total Operating Expenses			69,833				49,532
Income (loss) from Operations			(33,600	)			13,621
Other Expenses
Interest expense			3,071				2,660
Loss on extinguishment of debt			8,210				—
Minority interest in subsidiaries			(9,581	)			(36	)
Total Other Expenses			1,770				2,624
Income Before Income Taxes			(35,300	)			10,997
Income tax expense			(16,766	)			4,188
Net Income (loss)		$	(18,534	)		$	6,809
Net Income (loss) per Share:
Basic		$	(1.38	)		$	0.48
Diluted		$	(1.38	)		$	0.48

See accompanying summary of accounting policies and notes to financial statements.

Brooke Corporation

Consolidated Statements of Changes in Stockholders’ Equity

UNAUDITED

(in thousands, except common shares)

		Common				Common				Preferred				Preferred Add’l				Preferred Stock				Add’l Paid-In				Retained				Accumulated Other Comprehensive
		Shares				Stock				Stock				Capital				Discount				Capital				Earnings				Income				Total
Balances, December 31, 2006			12,553,726			$	126			$	2,041			$	18,576			$	(4,725	)		$	36,139			$	4,077			$	294			$	56,528
Dividends paid																			2,700								(12,561	)							(9,861	)
Equity issuance from plan awards			170,810				1																425												426
Equity issuance			1,500,000				15																18,860												18,875
Comprehensive income:
Interest-only strip receivable, change in fair market value, net of income taxes																															2,885				2,885
Currency translation adjustment, net of income taxes																															200				200
Net income																											1,595								1,595
Total comprehensive income																																			4,680
Balances, December 31, 2007			14,224,536			$	142			$	2,041			$	18,576			$	(2,025	)		$	55,424			$	(6,889	)		$	3,379			$	70,648
Balances, December 31, 2007			14,224,536			$	142			$	2,041			$	18,576			$	(2,025	)		$	55,424			$	(6,889	)		$	3,379			$	70,648
Dividends paid																			675								(3,284	)							(2,609	)
Equity issuance from plan awards
Equity issuance
Comprehensive income:
Interest-only strip receivable, change in fair market value, net of income taxes																															(3,676	)			(3,676	)
Currency translation adjustment, net of income taxes																															(74	)			(74	)
Net income																											(18,534	)							(18,534	)
Total comprehensive income																																			(22,284	)
Balances, March 31, 2008			14,224,536				142				2,041				18,576				(1,350	)			55,424				(28,707	)			(371	)			45,755

See accompanying summary of accounting policies and notes to financial statements

Brooke Corporation

Consolidated Statements of Cash Flows

UNAUDITED

(in thousands)

		For three months				For three months
		Ended March 31,				Ended March 31,
		2008				2007
Cash flows from operating activities:
Net income		$	(18,534	)		$	6,809
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation			641				425
Amortization			933				564
(Gain) loss on sale of businesses			846				(681	)
Deferred income tax expense			—				584
Gain on sale of notes receivable			(99	)			(7,123	)
Loss on extinguishment of debt			8,210				—
Impairment loss			11,763				—
Provisions for stock awards			782				—
Minority interest			(10,809	)			—
(Increase) decrease in assets:
Accounts and notes receivable			(37,064	)			91,606
Other receivables			(5,840	)			(5,602	)
Prepaid expenses and other assets			(10,743	)			518
Business inventory			3,758				(3,632	)
Purchase of business inventory provided by sellers			105				6,121
Payments on seller notes for business inventory			(1,412	)			(1,519	)
Increase (decrease) in liabilities:
Accounts and expenses payable			39,887				6,130
Other liabilities			96,783				(2,307	)
Net cash provided by operating activities			79,207				91,893
Cash flows from investing activities:
Cash payments for securities			(12,252	)			(21,941	)
(Purchase) sale of investments			(73,755	)			—
Cash payments for property and equipment			(899	)			(1,745	)
Purchase of subsidiary and business assets			(8,291	)			(18,548	)
Sale of subsidiary and business assets			—				7,518
Net cash used in investing activities			(95,197	)			(34,716	)
Cash flows from financing activities:
Dividends paid			(2,609	)			(2,314	)
Cash proceeds from common stock issuance			—				324
Loan proceeds on debt			41,250				39,647
Payments on bond maturities			(45	)			(40	)
Advances (payments) on short-term borrowing			40,522				(10,537	)
Payments on long-term debt			(56,523	)			(86,192	)
Net cash provided by (used in) financing activities			22,595				(59,112	)
Net increase (decrease) in cash and cash equivalents			6,605				(1,935	)
Cash and cash equivalents, beginning of period			5,158				21,203
Cash and cash equivalents, end of period		$	11,763			$	19,268

See accompanying summary of accounting policies and notes to financial statements.

Brooke Corporation

Notes to Consolidated Financial Statements

UNAUDITED

1. Summary of Significant Accounting Policies

(a) Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries, except for the following qualifying special purpose entities formed for the purpose of acquiring loans from Aleritas Capital Corp. (a d/b/a of Brooke Credit Corporation “Aleritas”): Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC, Brooke Capital Company, LLC, Brooke Securitization Company 2004A, LLC, Brooke Securitization Company V, LLC, Brooke Securitization 2006-1, LLC, all of which have issued asset-backed securities in which the Company is not obligated to repay, and Brooke Master Trust, LLC, a wholly-owned subsidiary of Brooke Warehouse Funding, LLC, which has secured senior debt in which the Company is not obligated to repay. Each is treated as its own separate and distinct entity. Qualifying special purpose entities are specifically excluded from consolidation under FIN 46(R), “ Consolidation of Variable Interest Entities .”

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements and as such, should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2007. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at March 31, 2008 and the results of its operations for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the Company’s operating results for a full year.

Significant intercompany accounts and transactions have been eliminated in the consolidation of the financial statements.

A complete summary of significant accounting policies is included in footnote 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

(b) Cash Equivalents

For purposes of the statements of cash flows, the Company considers all cash on hand, cash in banks, amounts due from banks, short-term investments purchased with a maturity of three months or less, interest-bearing deposits with other banks due within three months, federal funds sold and overnight investments to be cash and cash equivalents. Restricted cash is not included in cash equivalents.

(c) Use of Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities and disclosures.

Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the year in which such adjustments are determined.

It is at least reasonably possible these estimates will change in the near term.

(d) Allowance for Doubtful Accounts

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.

The allowance for loan losses is maintained at a level believed to be appropriate by management to provide for probable loan losses inherent in the portfolio as of the balance sheet date. While management uses available information to recognize probable losses on loans in the portfolio, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require Brooke Savings Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

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:

(in thousands)		2008
Balance at December 31, 2007		$	190
Provision for loan losses			—
Losses charged off			(2	)
Recoveries			—
Balance at March 31, 2008		$	188

Impaired and nonaccruing loans at March 31, 2008 aggregated approximately $182,000 for Brooke Savings Bank for which an allowance of $5,000 has been established.

The Company estimates that a certain level of accounts receivable, primarily franchisee account balances, will be uncollectible; therefore, allowances of $1,200,000 and $1,114,000 at March 31, 2008 and December 31, 2007, respectively, have been established. The Company’s franchise subsidiary regularly assists its franchisees by providing commission advances during months when commissions are less than expected, but expects repayment of all such advances within four months. At March 31, 2008, the amount of allowance was determined after analysis of several specific factors, including franchise advances classified as “watch” status.

Aleritas’ credit loss exposure is limited to on-balance sheet loans (other than loans sold to warehouse special purpose entities which are classified as on-balance sheet) and the retained interest in loans which have been sold to qualifying special purpose entities that have issued asset-backed securities or off-balance sheet bank debt. A credit loss assumption is inherent in the calculations of retained interest-only strip receivables resulting from loans that are sold. Prior to 2007, no reserve for credit losses has been made for on-balance sheet loans held in inventory for eventual sale for two reasons. First, these loans were typically held for six to nine months before being sold to investors and, therefore, had a short-term exposure to loss. Second, commissions received by Brooke Capital Corporation, an affiliate of the Company (“Brooke Capital”), are typically distributed to Aleritas for loan payments prior to distribution of commissions to the franchisee borrower and most other creditors thereby reducing loan losses. Losses were written off to loan loss expense as they were identified.

However, given the rapid growth that Aleritas had experienced over the past two years, the seasoning of the loan portfolio, increased delinquencies of on-balance sheet loans and management’s expectation that loans will be held longer than previously (for nine to twelve months) before being sold, Aleritas established a reserve for potential loan losses on the on-balance sheet loans in the third quarter of 2007. The reserve for credit losses includes two key components: (1) loans that are impaired under SFAS No. 114, “ Accounting by Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5 and 15, ” and (2) reserves for estimated losses inherent in the rest of the portfolio based upon historical and projected credit risk. In March 2008, Brooke Capital Corporation, an affiliate of the Company, and the sole collateral preservation provider for Franchise loans provided an analysis of credit loss exposure per agency based upon their estimates regarding liquidation value of each agency.

This analysis followed a decision and disclosure by Brooke Capital in November 2007 that they would place less emphasis on rehabilitating poorly performing franchisees and more emphasis on terminating or liquidating poorly performing franchisees. Based on this plan and action, the loan loss reserve for on balance sheet loans was increased by $12,537,000 in the first quarter 2008 to reflect the increased potential losses resulting from the liquidation of several agencies as well as potential losses on other loans in the portfolio. A reserve of $14,101,000 and $1,655,000 was held at March 31, 2008, and December 31, 2007, respectively. Management will evaluate the adequacy of the reserve on an ongoing basis in the future utilizing the credit metrics underlying the reserve and input from its collateral preservation providers.

The following schedule entitled “Valuation and Qualifying Accounts” summarizes the Allowance for Doubtful Accounts activity for the periods ended March 31, 2008 and December 31, 2007. Additions to the allowance for doubtful accounts are charged to expense.

Valuation and Qualifying Accounts

		Balance at												Balance at
		Beginning of				Charges to				Write				End of
(in thousands)		the Period				Expenses				Offs				the Period
Allowance for Doubtful Accounts
Year ended December 31, 2007			1,466				8,608				7,115				2,959
Period ended March 31, 2008		$	2,959			$	12,887			$	357			$	15,489

The Company does not accrue interest on loans that are 90 days or more delinquent and payments received on all such loans are applied to principal. Loans and accounts receivables are written off when management determines that collection is unlikely. This determination is made based on management’s experience and evaluation of the debtor’s circumstances.

(e) Revenue Recognition

Commissions. The Company has estimated and accrued a liability for commission refunds of $516,000 and $570,000 at March 31, 2008 and December 31, 2007, respectively.

Interest income, net . The Company recognizes interest income when earned. A portion of the interest income that the Company receives on its loans is paid out to the holders of its participation interests and qualifying special purpose entities. A portion of the interest received on loans sold to qualifying special purpose entities is recognized as received. Payments to these holders are accounted for as participating interest expense, which is netted against gross interest income. Participating interest expense was $7,830,000 and $7,486,000, respectively, for the three-month periods ended March 31, 2008 and 2007.

(f) Amortizable Intangible Assets

Amortization was $125,000 and $105,000 for the three-month periods ended March 31, 2008 and 2007, respectively.

In connection with the Company’s acquisition of 100% of the outstanding ownership interests of CJD & Associates, L.L.C., additional payments of the purchase price have been made in the amount of $3,283,000 since the initial purchase in July of 2002 and recorded as Amortizable Intangible Assets.

As a result of the acquisition of CJD & Associates, L.L.C. on July 1, 2002, the Company recorded additional Amortizable Intangible Assets of $21,000 (net of accumulated amortization of $174,000).

(g) Investment in Businesses

The number of businesses purchased to hold in inventory for sale for the three-month periods ended March 31, 2008 and 2007 was two and seven, respectively. Correspondingly, the number of businesses sold from inventory for the three-month periods ended March 31, 2008 and 2007 was three and three, respectively. At March 31, 2008 and December 31, 2007, the “Investment in Businesses” inventory consisted of five businesses and six businesses, respectively, with fair market values totaling $5,655,000 and $9,413,000, respectively.

(h) Deferred Charges

Net of amortization, the total balance of all deferred charges for the Company at March 31, 2008 and December 31, 2007 was $8,143,000 and $11,310,000, respectively.

Net of amortization, the balance of deferred charges associated with financings for Aleritas at March 31, 2008 and December 31, 2007 was $2,051,000 and $5,354,000, respectively. During the first quarter of 2007 there was an additional $349,000 in deferred charges primarily associated with the transaction by which Aleritas merged with Oakmont Acquisition Corp. (“Oakmont”). The previously deferred charges associated with the establishment of the Fifth Third Bank line of credit in 2006 of $388,000 were expensed during the three-month period ended March 31, 2007, as closing costs associated with amending the Fifth Third facility. Deferred charges decreased during 2008 primarily due to the realization of $4.1 million of previously deferred financing costs associated with the early pay-off in March 2008 of Falcon Jordan notes issued on October 31, 2006.

Commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new business, have been deferred to the extent recoverable from future policy revenues and gross profits. The acquisition costs are being amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy reserves. Net of amortization, the balance was $5,452,000 and $5,406,000 at March 31, 2008 and December 31, 2007, respectively.

Commissions and other costs of acquiring property and casualty insurance, which vary with, and are primarily related to, the production of new business, have been deferred to the extent recoverable from future policy revenues and gross profits. The acquisition costs are being amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy reserves. Net of amortization, the balance was $640,000 and $550,000 at March 31, 2008 and December 31, 2007, respectively.

(i) Per Share Data

Basic net income per share is calculated by dividing net income, less preferred stock dividends declared in the period (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned), by the average number of shares of the Company’s common stock outstanding. Diluted net income per share is calculated by including the probable conversion of preferred stock to common stock, and then dividing net income, less preferred stock dividends declared on non-convertible stock during the period (whether or not paid) and the dividends accumulated for the period on non-convertible cumulative preferred stock (whether or not earned), by the adjusted average number of shares of the Company’s common stock outstanding. Total preferred stock dividends declared during the three-month periods ended March 31, 2008 and 2007 were $49,000 and $49,000, respectively.

(in thousands, except share and per share data)		March 31, 2008				March 31, 2007
Basic Earnings Per Share
Net Income (loss)		$	(18,534	)		$	6,809
Less: Preferred Stock Dividends			(724	)			(724	)
Income (loss) Available to Common Stockholders			(19,258	)			6,085
Average Common Stock Shares			13,966				12,560
Basic Earnings (loss) Per Share		$	(1.38	)		$	0.48

		March 31,								March 31,
		2008								2007
Diluted Earnings Per Share
Net Income (loss)						$	(18,534	)						$	6,809
Less: Preferred Stock Dividends on Non-Convertible Shares							(49	)							(49	)
Income (loss) Available to Common Stockholders							(18,583	)							6,760
Average Common Stock Shares			13,966								12,560
Plus: Assumed Exercise of 1,176,471 Preferred Stock			1,176								1,176
Plus: Assumed Exercise of 124,240 and 103,940 Stock Options			124				15,266				104				13,840
Diluted Earnings (loss) Per Share						$	(1.38	)						$	0.48

(j) Advertising

Total advertising and marketing expense for the three-month periods ended March 31, 2008 and 2007 was $4,260,000 and $3,985,000, respectively.

(k) Restricted Cash

In connection with Industrial Revenue Bonds, the amount of cash held at First National Bank of Phillipsburg at March 31, 2008 and December 31, 2007 was $42,000 and $73,000, respectively.

In connection with future loan payments of Brooke Acceptance Company LLC, Brooke Captive Credit Company 2003, LLC, Brooke Securitization Company 2004A, LLC, Brooke Capital Company, LLC, Brooke Securitization Company V, LLC and Brooke Securitization Company 2006-1, LLC, the amount of commissions held at March 31, 2008 and December 31, 2007 was $257,000 and $171,000, respectively.

The Company holds amounts in escrow in a cash account for certain borrowers for the purpose of paying debt service, property taxes and/or property insurance typically paid during the first year of the loan financing. The amount of escrowed cash held at March 31, 2008 and December 31, 2007 was $154,000 and $210,000, respectively.

(m) Accounts and Notes Receivable, Net

The net notes receivable included as part of the “Accounts and Notes Receivable, Net” asset category are available for sale and are carried at the lower of cost or market. Based on management’s experience, the carrying value approximates the fair value. Any changes in the net notes receivable balances are classified as an operating activity.

Brooke Savings Bank loan receivables are stated at unpaid principal balances, less unamortized discounts and premiums, the allowance for loan losses, and net deferred loan origination fees. Interest on loans is credited to income as earned. Interest accruals are discontinued when a loan becomes 90 days delinquent and all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Interest accrual would be resumed if the loan was brought current prior to repossession or foreclosure. Loans receivable are charged off to the extent the receivable is deemed uncollectible.

Brooke Savings Bank loan origination fees received in excess of certain direct origination costs are deferred and amortized into income over the life of the loan using the interest method or recognized when the loan is sold.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through the statements of income. Brooke Savings Bank generally has commitments to sell mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized upon delivery.

(n) Other Assets

The Company has purchased certain lottery prize cash flows, representing the assignments of the future payment rights from lottery winners at a discounted price. Payments on these cash flows will be made by state run lotteries and as such are backed by the general credit of the respective states. At March 31, 2008 and December 31, 2007, the carrying value of these other assets was approximately $3,429,000 and $3,527,000, respectively.

(o) Securities

The carrying values of securities were $86,347,000 and $89,634,000 at March 31, 2008 and December 31, 2007, respectively, and consisted primarily of three types of securities (or retained residual assets): interest-only strip receivables in loans sold; retained over-collateralization interests in loans sold; and cash reserves. The aggregate carrying values of the retained residual assets from the sale of loans was $84,476,000 and $87,763,000 at March 31, 2008 and December 31, 2007, respectively. The carrying value 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.

In March 2007, the Company purchased 748,000 shares of Northern Capital, Inc. Class B Convertible Preferred Stock at a price of $2.50 per share for a carrying value of $1,870,000. Northern Capital, Inc. is a managing general agent that owns a Florida insurance company. In June 2007, the Company purchased 850,000 shares of Oakmont Acquisition Corp. common stock at an average price per share of $5.76 for a carrying value of $4,894,000. In July of 2007, Oakmont merged with Brooke Credit Corporation.

When the Company sells notes receivable to qualifying special purpose entities, it retains an interest-only strip receivable or retained interest. The carrying values of the interest-only strip receivable in loans sold to qualifying special purpose entities were $24,225,000 and $28,144,000 at March 31, 2008 and December 31, 2007, respectively. The amount of gain or loss recorded on the sale of notes receivable to qualifying special purpose entities depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the assets retained based on their relative fair value at the date of transfer. To initially obtain fair value of the retained interest-only strip receivable resulting from the sale of notes receivable to qualifying special purpose entities, quoted market prices are used, if available. However, quotes are generally not available for such retained residual assets. Therefore, the Company typically estimates fair value for these assets. The fair value of the interest-only strip receivables retained is based on the present value of future expected cash flows using management’s best estimates of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rates (11.00%) commensurate with the risks involved. The amount of unrealized gain (loss) on the retained residual assets was $(832,000) and $(89,000) at March 31, 2008 and December 31, 2007, respectively. The interest-only strip receivables have varying dates of maturity ranging from the fourth quarter of 2015 to the second quarter of 2021.

When the Company sells notes receivable to qualifying special purpose entities, it retains an over-collateralization interests in loans sold and cash reserves. The carrying values of retained over-collateralization interests were $59,401,000 and $63,507,000 at March 31, 2008 and December 31, 2007, respectively. The carrying values of cash reserves were $850,000 and $850,000 at March 31, 2008 and December 31, 2007, respectively. The fair value of the over-collateralization interest in the loans sold to qualifying special purpose entities that have issued asset-backed securities has been estimated at the par value of the underlying loans less the asset-backed securities sold. The fair value of the over-collateralization interest in the loans sold to qualifying special purpose entities that have secured bank debt, is based on the present value of future expected cash flows using management’s best estimates of key assumptions, credit losses (0.50% annually), prepayment speed (12.00% annually) and discount rates (11.00%) commensurate with the risks involved. The cash reserves do not represent credit enhancement reserves for benefit of the asset-backed security holders and creditors of the qualifying special purpose entities. These reserves are for the benefit of the third party trustee and servicer and if not used for excessive trustee and servicer expenses, the funds will be returned to the Company once the last note receivable held by the qualifying special purpose entity has matured. If excessive expenses are incurred by the trustee and servicer the Company will expense the reduction of the cash reserve. No excessive expenses have been incurred by the trustees and servicers to date. The fair value of the cash reserves has been estimated at the cash value of the reserve account.

The notes receivable sold in April 2003, November 2003, June 2004, March 2005, December 2005 and July 2006 involved the issuance of asset-backed securities by the following qualifying special purpose entities: Brooke Acceptance Company, LLC; Brooke Captive Credit Company 2003, LLC; Brooke Securitization Company 2004A, LLC; Brooke Capital Company, LLC; Brooke Securitization Company V, LLC; and Brooke Securitization Company 2006-1, LLC, respectively. In September 2006, Brooke Warehouse Funding, LLC entered into a receivables financing agreement with Fifth Third Bank which was classified as secured borrowings. However, in March 2007, Brooke Warehouse’s Fifth Third facility was paid off and replaced with a new off balance sheet facility through Brooke Warehouse Funding, LLC’s wholly-owned qualifying special purpose entity, Brooke Acceptance Company 2007-1, LLC. Therefore, the loans sold in March 2007 to Brooke Warehouse Funding, LLC, the Company’s special purpose entity, involved the incurrence of debt owed to Fifth Third Bank by Brooke Acceptance Company 2007-1, LLC, a wholly-owned qualifying special purpose entity subsidiary of the Brooke Warehouse Funding, LLC. Loans sold to Brooke Warehouse Funding, LLC are participated to Brooke Acceptance Company 2007-1, LLC which are then pledged to Fifth Third Bank for the off balance sheet debt. The purchase of loans by Brooke Warehouse Funding, LLC, the participation of those loans to Brooke Acceptance Company 2007-1, LLC and the pledge to Fifth Third Bank occurred simultaneously. In December 2007, Brooke Acceptance Company 2007-1, LLC was replaced by Brooke Master Trust, LLC. Loans now sold to Brooke Warehouse Funding, LLC are participated to Brooke Master Trust, LLC which are then pledged to Fifth Third Bank for the off-balance sheet debt.

Upon the sale of financial assets to qualifying special purpose entities, the unaffiliated trustees over the qualifying special purpose entities and the investors and lenders to the qualifying special purpose entities obtain full control over the assets and obtain the right to freely pledge or transfer the notes receivable. Servicing associated with the transferred assets is primarily the responsibility of unaffiliated servicing companies, which are compensated directly from cash flows generated from the transferred assets. The Company is retained as a secondary or sub-servicer. No servicing asset or servicing liability is recorded because servicing income is offset by servicing expense and represents the adequate compensation as determined by the market.

Although the Company does not provide recourse on the transferred notes and is not obligated to repay amounts due to investors and creditors of the qualifying special purpose entities, its retained assets are subject to loss, in part or in full, in the event credit losses exceed initial and ongoing management assumptions used in the fair market value calculation. Additionally, a partial loss of retained assets could occur in the event actual prepayments exceed management’s initial and ongoing assumptions used in the fair market calculation. In the first quarter of 2008, the Company wrote down the value of the securities balance by $11,763,000 due to expected credit losses on loans in its securitizations. As credit losses are realized they are expected to initiate provisions in the securitizations documents that result in the discontinuation of cash distributions from the qualifying special purpose entities until the financial ratios in the securitizations are brought back into compliance. In the fourth quarter of 2007, the Company wrote down the value of the securities balance by $5,517,000 due to expected credit losses on loans in its securitizations, actual prepayments exceeding assumed prepayments, and an increase in the prepayment assumption going forward.

Cash flows associated with the Company’s retained assets in the transferred assets are subordinate to cash flow distributions to the trustee over the transferred assets, servicer of the transferred loans, collateral preservation providers of the transferred loans, investors and creditors of the qualifying special purpose entities. Actual prepayments and credit losses will impact the amount and frequency of cash flow distributions to the Company from its retained assets. Although the Company expects to receive a certain level of cash flows over the life of the sold financial assets and the term of the asset-backed securities and senior debt secured by the qualifying special purpose entities, the Company will not receive full return of its retained assets until all obligations of the qualifying special purpose entities with respect to underlying loans are met.

Subsequent to the initial calculation of the fair value of retained interest, the Company utilizes a fair market calculation methodology (utilizing the same methodology used to establish the initial fair value) to determine the ongoing fair market value of the retained interest. Ongoing fair value is calculated using the then current outstanding principal of the transferred notes receivable and the outstanding balances due unaffiliated purchasers, which are reflective of credit losses and prepayments prior to the fair value recalculation. Additionally, the Company completes an ongoing analysis of key assumptions used in the fair market value calculation to ensure that such assumptions used in the calculation are viable, based on current and historical prepayments and credit loss trends within similar asset types. Based upon this analysis and due to recent prepayment trends, the prepayment rate assumption used in the asset valuation was increased from 10% to 12% annually in the fourth quarter of 2007. All other assumptions remained the same. Management may make necessary adjustments to key assumptions based on current and historical trends, which may result in an immediate reduction or impairment loss in the fair market value of retained interest. During 2007 and 2006, the securitized pools of loans experienced an increase in the prepayment rate, and as a result, management determined that an “other than temporary” impairment occurred. The Company recorded an impairment losses related to the prepayment rate of $778,000 for the year ended December 31, 2007. Credit losses in the near term in the securitization portfolios are expected to be significantly higher than historical levels and higher than the 0.5% credit loss assumption. Management believes that this increase is directly attributable to market conditions which are cyclical such as the soft insurance marketplace and higher interest rates than when certain of the loans were originated. The 0.5% credit loss assumption determined by management is an average rate over the life of the portfolio. Management believes that during the remaining term of this portfolio, several cycles are likely to occur which could increase or decrease actual credit loss rates; however, management continues to believe the average rate assumption used is appropriate. Summarized in footnote 2 is a sensitivity analysis or stress test on retained interests to determine the impact of a 10% and 20% variance in key assumptions currently used by management to calculate the fair value of retained interests.

Footnote 2 also contains a table summarizing the principal balances of loans managed by the Company. Included within the table are delinquency and net credit loss trends of managed receivables at March 31, 2008 and December 31, 2007.

The Company classifies the investment securities portfolios between those securities intended to be held to maturity, those securities available-for-sale, and those securities held for trading purposes.

Investment securities classified as held-to-maturity are those securities which the Company has the ability and positive intent to hold to maturity regardless of changes in market condition, liquidity needs, or changes in general economic conditions. These securities are stated at cost, adjusted for amortization of premiums and accretion of discounts, over the period to maturity using the interest method.

Investment securities classified as available-for-sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, liquidity needs, regulatory capital considerations, and other similar factors. These securities are carried at fair value with unrealized gains or losses reported as increases or decreases in accumulated other comprehensive income, net of the related deferred tax effect.

Trading securities are those securities that that may be purchased and held principally for the purpose of selling in the near term. Such securities are carried at fair value with unrealized gains or losses included in earnings. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Unrealized losses for securities classified as held to maturity and available for sale judged to be other than temporary are charged to operations. As of March 31, 2008 and December 31, 2007, all investment securities within the Company’s portfolio were classified as available-for-sale.

(p) Insurance Losses and Loss Expenses

Insurance losses to be incurred and loss expenses to be paid by DB Indemnity, Ltd. and Delta Plus Holdings, Inc. are estimated and recorded when advised by the insured. Outstanding losses and loss expense adjustments represent the amounts needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred before the balance sheet date. These amounts are based upon estimates of losses reported by the insureds plus an estimate for losses incurred but not reported.

Management believes that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred to the balance sheet date, but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that management will revise this estimate significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

The Company has established an allowance of $6,277,000 at March 31, 2008 and $7,840,000 at December 31, 2007, respectively, for losses on property and casualty insurance policies issued by Traders Insurance Company. Reserves of $600,000 and $600,000 at March 31, 2008 and December 31, 2007, respectively, were established for claims on financial guaranty policies issued by DB Indemnity, Ltd. on loans originated by the Company’s finance subsidiary.

(q) Other Operating Interest Expense

Operating interest expense includes interest paid by the Company’s finance subsidiary to DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Fifth Third Bank, and Home Federal Savings and Loan Association of Nebraska on line of credit loans for the purpose of originating insurance agency loans, originating funeral home loans and financing the over-collateralization portion of loans funded with the other lines of credit, and is, therefore, an operating expense. The interest paid and accrued for the three-month periods ending March 31, 2008 and 2007 was $761,000 and $1,815,000, respectively.

(r) Interest-only Strip Receivable

The aggregate carrying values of interest-only-strip receivables were $7,820,000 and $7,749,000 at March 31, 2008 and December 31, 2007, respectively. The amount of unrealized gain on the interest-only strip receivable was $279,000 at March 31, 2008 and $273,000 at December 31, 2007. The interest-only strip receivables have varying dates of maturities ranging from the third quarter of 2011 to the first quarter of 2027. The interest-only strip receivables have varying maturities ranging from the second quarter of 2010 to the fourth quarter of 2026.

(s) Investments

At March 31, 2008 and December 31, 2007, the Company classified all of its fixed maturity and equity investments as available-for-sale securities and carried them at fair value with unrealized gains and losses, net of applicable income taxes, reported in other comprehensive income. Available-for-sale securities are those that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, liquidity needs, regulatory capital considerations and other similar factors.

Available-for-sale securities at March 31, 2008 and December 31, 2007 are summarized as follows:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(in thousands)		Cost				Gains				Losses				Value
March 31, 2008:
U.S. Treasury		$	1,781			$	87			$	0			$	1,868
U.S. Government Agency			65,476				204				347				65,333
Corporate bonds			21,670				209				1,259				20,620
Total		$	88,927			$	500			$	1,606			$	87,821
Equity securities		$	828			$	84			$	117			$	795

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(in thousands)		Cost				Gains				Losses				Value
December 31, 2007:
U.S. Treasury		$	1,729			$	30			$	—			$	1,759
U.S. Government Agency			28,267				51				105				28,213
Corporate bonds			20,678				144				750				20,072
Total		$	50,674			$	225			$	855			$	50,044
Equity securities		$	829			$	119			$	105			$	843

The amortized cost and fair value of fixed maturities at March 31, 2008, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations.

		March 31, 2008
(in thousands)		Amortized Cost				Fair Value
Due in one year or less		$	1,921			$	1,913
Due after one year through five years			8,112				8,006
Due after five years through ten years			9,649				9,221
Due after ten years			11,133				10,708
Mortgage-backed bonds			58,112				57,973
		$	88,927			$	87,821

The fair values for investments in fixed maturities are based on quoted market prices.

Brooke Savings Bank has a blanket collateral agreement with the Federal Home Loan Bank in order to obtain advances. At March 31, 2008, no overnight advances were outstanding. However, the Bank has pledged qualifying mortgage-backed securities, with fair values of approximately $12,824,000 in connection with this advance agreement.

Included in investments are securities pledged to various state insurance departments. The fair value of these securities were $4,620,000 and $4,842,000 at March 31, 2008 and December 31, 2007, respectively.

Also included in investments at March 31, 2008 are certain interest bearing deposits and other short-term investments totaling $36,026,000. The carrying values of these investments approximate their fair values.

Interest earned on investments is included in investment income as earned. Realized gains or losses on the sales of investments are recognized in operations on the specific identification basis. Impairments that are judged to be other than temporary are recognized as realized losses.

(t) Policy and Contract Liabilities

Annuity contract liabilities (future annuity benefits) are computed using the retrospective deposit method and consist of policy account balances before deduction of surrender charges, which accrue to the benefit of policyholders. Premiums received on annuity contracts are recognized as an increase in a liability rather than premium income. Interest credited on annuity contracts is recognized as an expense.

Traditional life insurance policy benefit liabilities (future policy benefits) are computed on a net level premium method using assumptions with respect to current yield, mortality, withdrawal rates, and other assumptions deemed appropriate by the Company.

Policy claim liabilities represent the estimated liabilities for claims reported plus claims incurred but not yet reported. The liabilities are subject to the impact of actual payments and future changes in claim factors.

Policyholder premium deposits represent premiums received for the payment of future premiums on existing policyholder contracts. Premium deposits are recognized as an increase in a liability rather than premium income. Interest credited on the premium deposits is recognized as an expense.

(u) Warrant Obligation

The warrant obligation consisted of the detachable warrants for Aleritas common stock issued in connection with Aleritas’ debt offering during the fourth quarter of 2006. The detachable noteholder warrants are within the scope of SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 requires issuers to classify as liabilities (or assets under certain circumstances) free-standing financial instruments which, at inception, require or may require an issuer to settle an obligation by transferring assets.

SFAS 150 requires the detachable warrants issued to the noteholders to be classified as a liability since warrants incorporated a put option. The holders of these warrants could exercise their rights to force Aleritas to repurchase the warrants and/or warrant shares at the appraised value of the common stock, less the warrant exercise price of $0.01 per share. At each balance sheet date, any change in the calculated fair market value of the warrant obligation must be recorded as additional interest costs or financing income. Since the exercise price of the warrants is nominal, the change in the fair market value of the warrants represents the additional cost or income for the period.

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 period ended March 31, 2008 and 2007 was $2,428,000 and $63,000, respectively. The unamortized balance of the discount on the notes, $2,381,000, was written off to repurchase of debt expense during the first quarter of 2008.

(v) Deposits

Deposits as of March 31, 2008 are summarized below:

		2008
(in thousands)		Amount
Noninterest-bearing checking		$	3,666
Savings			232
Interest-bearing checking			7,633
Money market			18,327
			29,858
Certificates of deposit			82,589
IRAs			9,464
		$	121,911

As of March 31, 2008, scheduled maturities of certificates of deposit and IRA accounts are shown below:

(in thousands)		Amount
Within one year		$	83,996
One to three years			6,584
Three to five years			1,454
Over five years			19
		$	92,053

As of March 31, 2008, there were 151 certificate of deposit accounts of $100,000 or more totaling $21,710,000. These deposits are insured up to $100,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation and is backed by the full faith and credit of the U. S. government.

Regulations of the Federal Reserve System require reserves to be maintained by all banking institutions according to the types and amounts of certain deposit liabilities. These requirements restrict usage of a portion of Brooke Savings Bank’s available cash balances from everyday usage in its operations. The minimum reserve requirements as of March 31, 2008 totaled $70,000.

Interest expense on deposits totaled approximately $980,000 for the three months ended March 31, 2008.

2. Notes Receivable

At March 31, 2008 and December 31, 2007, accounts and notes receivable consisted of the following:

(in thousands)		03/31/2008				12/31/2007
Business loans		$	630,269			$	606,596
Less: Business loans sold			(512,013	)			(517,743	)
Commercial real estate loans			103,725				96,024
Less: Real estate loans sold			(63,638	)			(60,672	)
Loans with subsidiaries			16,047				19,786
Less: Subsidiary loans sold			(16,047	)			(19,786	)
Plus: Loans sold not classified as a true sale			54,263				39,452
Other Loans			1,352				681
Total notes receivable, net			213,958				164,338
Interest earned not collected on notes*			7,523				7,132
Customer receivables			27,276				27,687
Deferred loan fees			(16	)			(10	)
Allowance for doubtful accounts			(15,489	)			(2,959	)
Total accounts and notes receivable, net		$	233,252			$	196,188

Aleritas has loaned money to the Company and to other subsidiaries of the Company. These notes receivable have been eliminated in consolidation to the extent the notes receivable have not been sold to an unaffiliated third party. The sale of all or a portion of the intracompany notes receivable to an unaffiliated third party results in a notes payable, as discussed in footnote 4.

Loan participations and loan securitizations represent the transfer of notes receivable, by sale, to “participating” lenders or asset-backed security investors. The Company receives consideration from the transfer of notes receivable, through retained interest and servicing assets. These transfers are accounted for by the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

The transfers that do not meet the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are classified as secured borrowings and the balances are recorded as both a note receivable asset and participation payable liability. At March 31, 2008 and December 31, 2007, secured borrowings totaled $54,263,000 and $39,452,000, respectively.

Of the notes receivable sold, at March 31, 2008 and December 31, 2007, $521,388,000 and $538,963,000, respectively, were accounted for as sales because the transfers meet the criteria established by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”

The following provides details concerning notes receivable sold. Purchasers of these notes receivable obtained full control over the transferred assets (i.e. notes receivable) and obtained the right, free of conditions that constrain them from taking advantage of that right, to pledge or exchange the notes receivable. Furthermore, the agreements to transfer assets do not entitle, nor obligate, the Company to repurchase or redeem the notes receivable before their maturity, except in the event of an uncured breach of warranty.

		March 31,				December 31,
(in thousands)		2008				2007
Securitizations		$	119,564			$	128,711
Participations			223,409				232,144
Off-balance sheet warehouse facility			179,415				181,093
Participations on subsidiary loans			11,300				14,572
Notes receivable sold		$	533,688			$	556,520

When the Company sells notes receivable, it generally retains interest income and servicing income. Gains or losses on sales of the notes receivable depend, in part, on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold, the retained interest and the servicing assets based on their relative fair value at the date of transfer.

The Company is typically paid annual servicing fees ranging from 0.25% to 1.375% of the outstanding loan balance on loan participations. In those instances when annual service fees paid to the Company are less than the minimum cost of servicing, which is estimated at 0.25% of the outstanding balance, a servicing liability is recorded. Additionally, the Company often retains interest income. The Company’s right to interest income is not subordinate to the purchasers’ interests and Aleritas shares interest income with purchasers on a pro-rata basis. Although not subordinate to purchasers’ interests, the Company’s retained interest is subject to credit and prepayment risks on the transferred assets.

The Company is typically paid annual servicing fees ranging from 0.10% to 0.25% of the outstanding transferred loan balances on loans to qualifying special purpose entities that qualify for true sale. Additionally, the Company often retains interest income. The Company’s right to interest income is subordinate to the investor and lender’s interests. As such, the Company’s retained interest is subject to credit and prepayment risks on the transferred assets.

When the Company sells loans to a qualifying special-purpose entity an interest receivable is retained. The fair value of the difference between the loans sold and the securities issued to accredited investors, and the fair value of interest receivable is recorded as securities. A history of loans securitized follows:

(in thousands)		Apr 2003				Nov 2003				Jun 2004				Mar 2005				Dec 2005				Jul 2006
Loans sold initially		$	15,825			$	23,526			$	24,832			$	40,993			$	64,111			$	65,433
Asset-back securities			13,350				18,500				20,000				32,000				51,500				52,346
Securities retained at March 31, 2008:
Interest-only strip receivables		$	69			$	83			$	574			$	1,565			$	2,233			$	2,926
Over-collateralization interests			548				1,304				813				1,274				3,156				6,991
Cash Reserves			125				125				125				125				175				175
Total		$	742			$	1,512			$	1,512			$	2,964			$	5,564			$	10,092
Securities retained at December 31, 2007		$	1,054			$	1,263			$	2,837			$	5,902			$	9,285			$	13,977
Service income, period ended:
March 31, 2008			—				1				1				6				9				13
March 31, 2007			1				1				2				8				13				16

In March 2007, Aleritas initiated a $150,000,000 facility to sell, on a revolving basis, a pool of its loans, while retaining residuals assets such as interest-only strip receivables and a subordinated over-collateralization interest in the receivables. The eligible receivables are sold to Brooke Warehouse Funding, LLC, a wholly owned bankruptcy-remote special purpose entity, without legal recourse to Aleritas. Brooke Warehouse Funding, LLC then entered into a participation agreement with Brooke Acceptance Company 2007-1, LLC to sell an undivided senior participation interest in all of the assets of Brooke Warehouse Funding, LLC. Brooke Acceptance Company 2007-1, LLC entered into an amended and restated receivables financing agreement with Fifth Third Bank which extended a credit facility to Brooke Acceptance Company 2007-1 LLC to provide funds to acquire such participation interests with a facility line of credit of $150,000,000. The facility qualifies for true sale treatment under SFAS 140. As of March 31, 2008, the outstanding balance of sold accounts receivable held by Brooke Warehouse Funding, LLC and participated to Brooke Master Trust, LLC totaled $179,414,000 which were removed from the consolidated balance sheet at that date. The fair value of the difference between loans sold and advanced portion on the facility, or the fair value of retained residual assets, were recorded on the Company’s books as a security with balances of $62,091,000 on March 31, 2008. This retained security is comprised of retained interest-only strip receivable totaling $16,774,000 and retained over-collateralization interests in the special purpose entity totaling $45,316,000. The Company received servicing income as sub-servicer of the facility of $48,000 for the period ended March 31, 2008. The facility contains the following financial covenants: minimum stockholders’ equity for Aleritas of $80 million, positive consolidated net income for the four fiscal quarter period then ending, maximum prepayment rate on the Aleritas’ 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. The facility contains other restrictions, including but not limited to: the incurrence of indebtedness and liens; the reorganization, transfer and merger of Aleritas; the disposal of its properties other than in the ordinary course of business; entering into transactions with affiliates or into material agreements other than in the ordinary course of business; entering into pledge and negative pledge agreements; and the declaration of dividends, except in limited circumstances.

At March 31, 2008, Aleritas was not in compliance with all of the terms and conditions of this facility and had an unresolved deficiency in the facility of $12,974,000. Fifth Third has issued a notice of default with respect to the facility and is in discussions with the Company’s management to address these issues. Management believes they will be able to come to an agreement with Fifth Third that will allow the facility to be in compliance with the Agreement. The facility is not available to fund new loans and it is unlikely the Aleritas will be able to fund loans into the facility in the future. There can be no assurance that Aleritas will reach a satisfactory resolution of the non-compliance. Failure to resolve the non-compliance may have a material adverse affect on the Company’s financial condition and results of operation.

The table below summarizes certain cash flows received from and paid to qualifying special purpose entities in connection with the Company’s off-balance sheet securitizations and credit facilities:

		Three Months Ended March 31,
(in thousands)		2008				2007
Proceeds from new loan sales to qualifying special purpose entities*		$	5,826			$	105,822
Proceeds reinvested in qualifying special purpose entities (retained equity interest) **			1,469				21,941
Servicing fees received			78				41
Other cash flows received on retained interests***			3,925				3,919
Proceeds from collections reinvested in (revolving-period) securitizations			—				—

At March 31, 2008 and December 31, 2007, the Company had transferred assets with balances totaling $521,388,000 and $538,963,000, respectively, resulting in pre-tax gains for the three-month periods ended March 31, 2008 and 2007 of $251,000 and $7,123,000, respectively before consideration of related securitization fees.

To obtain fair values of retained interests, quoted market prices are used, if available. However, quotes are generally not available for retained interests, so the Company typically estimates fair value based on the present value of future expected cash flows estimated using management’s best estimates of key assumptions, credit losses, prepayment speed and discount rates commensurate with the risks involved.

The value of the servicing asset or liability is calculated by estimating the net present value of net servicing income (or expense) on loans sold using the discount rate and prepayment speeds noted in the key economic assumptions table. Subsequent to the initial recording at fair value, the servicing asset is amortized in proportion to and over the period of estimated net servicing income.

The following table provides the changes in the Company’s servicing asset and liability subsequently measured using the amortization method.

		March 31, 2008								December 31, 2007
		Servicing				Servicing				Servicing				Servicing
(in thousands)		Asset				Liability				Asset				Liability
Carrying amount, beginning of year		$	6,025			$	16			$	4,512			$	24
Additions:
Servicing obligations that result from transfer of financial assets			427				—				3,546				—
Subtractions:
Disposals			(350	)			—				(703	)			—
Accumulated amortization			(375	)			(2	)			(1,330	)			(8	)
Carrying amount, end of period		$	5,727			$	14			$	6,025			$	16
Fair value as of: Beginning of year		$	6,870			$	16			$	5,176			$	24
End of period			7,771				14				6,870				16

The dominant risk characteristics of the underlying loans of the Company’s retained interest-only strip receivables and servicing assets have been analyzed by management to identify how to stratify these assets for the purpose of evaluating and measuring impairment. The underlying loans are very similar in virtually all respects. Accordingly, the same key economic assumptions have been used when determining the fair value of retained interest and servicing assets for all loans. No valuation allowance has been established because the fair value for the adjustable-rate loan stratum is not less than the carrying amount of the servicing assets.

Although substantially all of the Company’s loans are adjustable, a discount rate has been applied to reflect the net present value of future revenue streams. As such, changes in the net present value rate, or discount rate, resulting from interest rate variations, could adversely affect the asset’s fair value. Impairment of retained interests and servicing assets are evaluated and measured annually. The impairment testing is performed by taking the current interest and servicing revenue stream and valuing the new revenue stream with the appropriate assumptions. The new revenue stream is based on the loan balances at the date the impairment test is completed, which will include all prepayments on loans and any credit losses for those loans. The new discounted revenue stream is then compared to the carrying value on the Company’s books and, if the new value is greater than the value on the books, no impairment has occurred. If the new discounted revenue stream is less than the value on the books, further analysis is performed to determine if an “other than temporary” impairment has occurred. If an “other than temporary” impairment has occurred, the Company writes the asset to the new discounted revenue stream. During 2007, the securitized pools of loans experienced increases in the prepayment rate and, as a result, management determined that an “other than temporary” impairment occurred. The Company recorded an impairment loss of $5,517,000 for the year. The Company believes that over the life of the securitizations the prepayment rate assumption used continues to be appropriate. Additional impairment of $11,763,000 was recognized for the three months ended March 31, 2008.

For the twelve months ended March 31, 2008, the Company’s loan portfolio experienced an annualized prepayment rate of 12.8%, which was higher than management’s assumption for both fixed and variable rate loans. Management believes that this increase is directly attributable to market conditions which are cyclical such as the softening insurance marketplace and the increasing interest rate environment. However, the assumed prepayment rate was increased to 12% in the fourth quarter of 2007 for both fixed and variable rate loans, from 8% and 10%, respectively, previously to reflect higher expected prepayment rates as the portfolio continues to season. The prepayment assumption is an average annual rate over the life of the Company’s portfolio. Management believes that during the remaining term of this portfolio, several cycles are likely to occur which could increase or decrease actual prepayment rates; however, management believes the revised average annual rate assumption is appropriate. Shorter term swings in prepayment rates typically occur because of cycles within a marketplace, such a softening and hardening of the insurance marketplace, changes in the death care rate for funeral homes and changes in the variable interest rate loans from key index rate changes. Longer term increases in prepayment rates typically result from long-term deterioration of the marketplace or increased lending competition.

At March 31, 2008 and December 31, 2007, the fair value of retained interest-only strip receivables recorded by the Company was $35,975,000 and $35,893,000, respectively. Of the totals at March 31, 2008, $7,820,000 was listed as interest-only strip receivable on the Company’s balance sheet and $28,155,000 in retained interest-only strip receivable carried in the Company’s securities. Of the totals at December 31, 2007, $7,749,000 was listed as interest-only strip receivable on the Company’s balance sheet and $28,144,000 in retained interest-only strip receivables carried in the Company’s securities.

Of the business and real estate loans at March 31, 2008 and December 31, 2007, $118,000 and $130,000, respectively, in loans were sold to various participating lenders with recourse to Aleritas. Such recourse is limited to the amount of actual principal and interest loss incurred and any such loss is not due for payment to the participating lender until such time as all collateral is liquidated, all actions against the borrower are completed and all liquidation proceeds applied. However, participating lenders may be entitled to periodic advances from Aleritas against liquidation proceeds in the amount of regular loan payments. At March 31, 2008, all such recourse loans: a) had no balances more than 60 days past due; and b) had adequate collateral. No recourse loan participations were in default at March 31, 2008.

At March 31, 2008 and December 31, 2007, the value of the servicing asset recorded by the Company was $5,727,000 and $6,025,000, respectively.

At March 31, 2008 and December 31, 2007, the value of the servicing liability recorded by the Company was $14,000 and $16,000, respectively.

At March 31, 2008, key economic assumptions used in measuring the retained interest-only strip receivables and servicing assets when loans were sold during the year were as follows (rates per annum):

		Business Loans
		(Fixed & Adjustable Rate Stratum)*
Prepayment speed			12.00	%
Weighted average life (months)			143
Expected credit losses			0.50	%
Discount rate			11.00	%

At March 31, 2008, 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:

		Business Loans
(in thousands except percentages)		(Fixed & Adjustable Rate Stratum)
Prepayment speed (annual rate)**			12.00	%
Impact on fair value of 10% adverse change		$	(1,392	)
Impact on fair value of 20% adverse change		$	(2,685	)
Expected credit losses (annual rate)			0.50	%
Impact on fair value of 10% adverse change		$	(355	)
Impact on fair value of 20% adverse change		$	(708	)
Discount rate (annual)*			11.00	%
Impact on fair value of 10% adverse change		$	(1,164	)
Impact on fair value of 20% adverse change		$	(2,209	)

These sensitivities are hypothetical and should be used with caution. The effect of a variation in a particular assumption on the value of the retained interest-only strip receivables and servicing assets is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

The above adverse changes for prepayment speed and discount rate are calculated on the Company’s retained interest-only strip receivables and servicing assets on loans sold totaling $521,388,000. The above adverse changes for expected credit losses are calculated on the Company’s retained interest-only strip receivables in loans sold with recourse to participating lenders and loans sold to qualifying special purpose entities.

The following illustrate how the changes in fair values were calculated for 10% and 20% adverse changes in key economic assumptions.

Effect of Increases in Assumed Prepayment Speed on Servicing Asset

		Fixed &
		Adjustable Rate Stratum
		10%				20%
		Prepayment				Prepayment
(in thousands)		Increase				Increase
Estimated cash flows from loan servicing fees		$	10,824			$	10,533
Servicing expense			(1,901	)			(1,841	)
Discount of estimated cash flows at 11.00% rate			(3,336	)			(3,238	)
Carrying value of servicing asset after effect of increases			5,587				5,454
Carrying value of servicing asset before effect of increases			5,727				5,727
Decrease of carrying value due to increase in prepayments		$	(140	)		$	(273	)

Effect of Increases in Assumed Prepayment Speed on Retained Interest (Interest-Only Strip Receivable, including retained interest carried in Securities balance)

		Fixed &
		Adjustable Rate Stratum
		10%				20%
		Prepayment				Prepayment
(in thousands)		Increase				Increase
Estimated cash flows from interest income		$	48,131			$	45,772
Estimated credit losses			(4,609	)			(4,356	)
Discount of estimated cash flows at 11.00% rate			(12,729	)			(11,783	)
Carrying value of retained interests after effect of increases			30,793				29,633
Carrying value of retained interests before effect of increases			32,045				32,045
Decrease of carrying value due to increase in prepayments		$	(1,252	)		$	(2,412	)

Effect of Increases in Assumed Credit Loss Rate on Retained Interest (Interest-Only Strip Receivable, including retained interest carried in Securities balance)

		Fixed &
		Adjustable Rate Stratum
		10%				20%
		Credit Loss				Credit Loss
(in thousands)		Increase				Increase
Estimated cash flows from interest income		$	50,720			$	50,720
Estimated credit losses			(5,390	)			(5,889	)
Discount of estimated cash flows at 11.00% rate			(13,640	)			(13,494	)
Carrying value of retained interests after effect of increases			31,690				31,337
Carrying value of retained interests before effect of increases			32,045				32,045
Decrease of carrying value due to increase in credit losses		$	(355	)		$	(708	)

Effect of Increases in Assumed Discount Rate on Servicing Asset

		Fixed &
		Adjustable Rate Stratum
		10%				20%
		Discount Rate				Discount Rate
(in thousands)		Increase				Increase
Estimated cash flows from loan servicing fees		$	11,131			$	11,131
Servicing expense			(2,030	)			(2,030	)
Discount of estimated cash flows			(3,551	)			(3,719	)
Carrying value of servicing asset after effect of increases			5,550				5,382
Carrying value of servicing asset before effect of increases			5,727				5,727
Decrease of carrying value due to increase in discount rate		$	(177	)		$	(345	)

Effect of Increases in Assumed Discount Rate on Retained Interest (Interest-Only Strip Receivable, including retained interest carried in Securities balance)

		Fixed &
		Adjustable Rate Stratum
		10%				20%
		Discount Rate				Discount Rate
(in thousands)		Increase				Increase
Estimated cash flows from interest income		$	50,720			$	50,720
Estimated credit losses			(4,887	)			(4,887	)
Discount of estimated cash flows			(14,774	)			(15,652	)
Carrying value of retained interests after effect of increases			31,059				30,181
Carrying value of retained interests before effect of increases			32,045				32,045
Decrease of carrying value due to increase in discount rate		$	(986	)		$	(1,864	)

The following is an illustration of disclosure of static pool credit losses to the Company for loan participations sold with recourse and loans sold to qualifying special purpose entities. “Static pool credit loss” is an analytical tool that matches credit losses with the corresponding loans so that loan growth does not distort or minimize actual loss rates. The Company discloses static pool loss rates by measuring credit losses for loans originated in each of the last three years.

		Recourse & Securitized
		Loans Sold in
		2008				2007*				2006
Actual & Projected Credit Losses (%) at:
March 31, 2008			0.00	%			0.00	%			1.52	%
December 31, 2007							0.00				1.41
December 31, 2006											1.95

The following table presents quantitative information about the Company managed portfolio, including balances, delinquencies and net credit losses.

		Total Principal Amount of								Principal Amounts 60 or								Net Credit
		Loans								More Days Past Due*								Losses**
		March 31,				December 31,				March 31,				December 31,				March 31				March 31,
(in thousands)		2008				2007				2008				2007				2008				2007
Loan portfolio consists of:
Loans on balance sheet****		$	155,947			$	141,146			$	24,252			$	13,319			$	93			$	3
Loans on balance sheet held in bankruptcy-remote warehouses			57,011				20,207				—				—				—				—
Off-balance sheet warehouse facility*****			179,415				181,093				—				—				—				—
Loans participated***			223,409				232,144				13,673				7,343				318				—
Loans securitized			119,564				128,711				1,852				1,898				1,096				668
Total loans managed		$	735,346			$	703,301			$	39,777			$	22,560			$	1,507			$	671