Brooke Corporation Q2 2008 Earnings Call Transcript

Brooke Corporation (BXXX)

Q2 2008 Earnings Call

August 19, 2008 12:00 pm ET

Executives

Leland G. Orr- President and Chief Executive Officer

Robert D. Orr - Chairman

Analysts

Herb Buchbinder - Wachovia Securities

Presentation

Operator

Welcome to the second quarter 2008 Brooke Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Leland Orr, President and Chief Executive Officer.

Leland Orr

I am Leland, President and CEO of Brooke Corporation and with me today is Robb Orr Chairman of the company.

Before we get started I need to remind everyone that comments made by management today may include certain estimates, projections and other forward-looking statements. These statements speak only as of the date in which they are made and are not a guarantee of future performance. Actual results may differ materially from those expressed, implied, or forecasted in forward looking statements. These factors and uncertainties can cause actual results to differ from those indicated in the forward-looking statements which are more fully described in reports and registration statements filed by the company with the Securities and Exchange Commission.

Brooke Corporation takes on no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks. Brooke Corporation provides detailed discussion of risk factors in periodic SEC filings and you are encouraged to review those filings closely.

Brooke Corporations operations focus on banking and my day-to-day responsibilities are banking related. While Brooke Corporation owns 62% common stock investment in a Aleritas Corporation and a 66% common stock investment in Brooke Capital Corporation, my report today will focus on banking operations and Ralph will discuss the company’s investments.

As many of you are already aware, because Brooke Corporations ownership and Aleritas Capital and Brooke Capital currently exceed 50%, 100% of their revenues, expenses, assets and liabilities are consolidated with ours for financial reporting purposes.

Last quarter I reported the economic climate had an impact on Brooke Savings Bank interest margins and that we were making good progress recruiting and training new bank agents and increasing our commercial loan portfolio. I am pleased to report the same for this quarter. We recently revised a Generations trade name and continue to grow our bank agent network through our wholly owned thrift institution Generations Bank. We have also started renovation of a historic building in Phillipsburg, Kansas to house our bank operations.

Generations Bank has significantly more deposits than loans which result in more liquidity but limits bank profitability. Generations Bank reported total assets of approximately $130 million as of June 30, 2008. Although bank profitability has improved in recent months, until a larger loan portfolio is generated, the banks profitability will be limited. We believe that banker agents will become an important distribution channel for the sale of banking services. Although Brooke Corporation believes the future development of Generations Bankers bank agent network will increasingly contribute to its profit, these activities are not expected to significantly impact overall financial results for Brooke Corporation in the near future.

Before closing my remarks I would like to remind investors that the consolidated total equity of Brooke Corporation, including minority interest, was approximately $65 million on June 30, 2008.

With that I would like to turn the call over to Rob Orr.

Robert Orr

As Leland noted, Brooke Corporation also owns investments in Aleritas Capital a finance company, and Brooke Capital an insurance agency franchiser. Sometime later in 2008 we expect Brooke Corporations 62% ownership interest in Aleritas capital and 66 ownership percentage in Brooke Capital to each be reduced to less than 50% which will eliminate the accounting requirement Leland referred to, to consolidate the revenues, expenses, assets, and liabilities of Aleritas Capital and Brooke Capital with Brooke Corporation.

Brooke Corporation incurred a net loss of approximately $10 million in the second quarter of 2008 which entirely resulted from recording its 66% share of losses incurred by Brooke Capital as a result of Brooke Capital establishing reserves for shrinking the number of Brooke locations. More details about Brooke Capital were made available during the Brooke Capital earnings call; however of most significance is the reserve set aside by Brooke Capital for the shrinking of franchise locations as a part of expense reduction measures.

Brooke Corporations share of Aleritas Capitals second quarter 2008 net profit was approximately $700,000.00. Aleritas Capital was profitable in the second quarter despite the origination of few if any new loans because of current market conditions. Much of my time during the second quarter was spend working with Aleritas Capital. Now that Aleritas has returned to profitability, I have redirected much of my attention to Brooke Capital with expectations of returning it to profitability later in the third quarter.

Difficult credit markets have had significant adverse effects on the sale of new franchises by Brooke Capital. Without revenues from the sale of new franchises, Brooke Capital has been forced to reduce expenses significantly and establish reserves for personnel lay offs, facility closings, and write off’s as producer development investments.

As I mentioned in the conference call earlier today, the changes that Brooke Capital underwent during the second quarter were very difficult, very painful. Kyle Gars [ph] and Dane Devlin are to be congratulated, no I don’t know if congratulated is the right word, but certainly their efforts are appreciated for what they did, they did a lot of difficult things.

I also want to note our appreciation for franchisees, employees, vendors, and everyone else that helped us work through the second quarter, which again was very, very difficult for everyone and Brooke Capital has had to live in a world where there is not much credit available for franchisees to acquire new franchises and as a result they have had to learn to live on their recurring revenues basically, their royalties and servicing fees. In that regard, and this is indicative of the pain that they went through to get to the point that they are where they can project third quarter profits payroll annualized payroll has gone from something like $20 million at the first of the year to something like $8 million annualized now, so it has been a very difficult transition, difficult on our employees, difficult on managers, but it is something that had to be done.

Much like Aleritas took their medicine in the first quarter by establishing significant reserves; Brooke Capital has done the same thing in the second quarter. They have taken their medicine and they have established the reserves to down size their organization and now they are ready to move on,

Additional information is provided in the quarterly report on Form 10-Q filed with the Securities and Exchange Commission by Brooke Corporation.

I want to apologize for the inconvenience, but as a result of reviewing Form 10-Qs for three companies, I am afraid that I caused some printer delays which resulted in the filing of an omitted Form 10-Q this morning, so again I apologize for whatever inconvenience that you incur as a result.

With that we will open up the call for general questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Herb Buchbinder - Wachovia Securities.

Herb Buchbinder - Wachovia Securities

How do you propose to reduce those commitments below 50% given the market conditions? Do you have a prearranged buyer, or you are not going to sell stock in the open market I assume. Just give us an idea of how you are going to try to do that.

Robert Orr

Herb, we are not going to sell stock in the open market. Currently we have retained an investment banker. We believe that we do need to increase equity at Aleritas Capital. Among other things we think that even though we have turned profitable in Aleritas it still will help build confidence in the investment community, so we continue to pursue that alternative and I believe that that will result in us getting below 50% in and of itself. It won’t be through the sale of our stock in the open market, it will be through the issuance of new shares.

Now Herb, as both you and I are investors here, today is a terrible environment to be issuing shares and so we are going to be judicious about how we do that and we might not issue as many shares as we might in another environment. Still, I do think that, particularly when it comes to Aleritas that we need to continue down this path of raising additional equity because of the signal that it sends to the investment community.

Leland Orr

Thank you everyone for participating in our call and once again, I want to emphasize how much we appreciate our franchisees, vendors and employees. With that, have a good day everyone.

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Comments

[fmatnez:]

The Company is A Scam. They would like to thank their Franchisees, BullShit. The only thing they have done is rip off and take every last nickel from the franchisees. This company is done. I hope they don't do the Banking industry what they did to the insurance and ruined many good careers and agencies.

2008 Aug 21 12:21 PM