Friday, June 29, 2007

Brooke Corp: Questionable Lending Practices, Inflated Balance Sheet

Brooke Corporation (BXXX-$14.75) is engaged in franchise business with a network of 827 franchised locations (as of March 31, 2007), principally operating in the states of Texas, California, Kansas and Florida. The Company’s franchisees sell property and casualty insurance, and other services to individuals and small businesses.

The
philosophy of Brooke Corporation is outlined in the book titled "Death of an Insurance Salesman?" written by the company's founder, Robert D. Orr, who promulgates that the fundamental principle in selling insurance –and other related services—is more efficiently distributed by local businesses rather than by employees of large corporations.

In marketing campaigns, Brooke Corporation sells the idea to ‘mom and pop’ insurance agencies that signing onboard as franchisees combines the advantages of independent business ownership with the stability and resources of a larger organization.


Brooke Corporation can help its clients with the “wealth creation opportunities associated with independent business ownership,” while offering operational assistance of an insurance distribution company, including commissions accounting, financing, document management, and supplier access.

In exchange for initial franchise fees and a share of ongoing revenues, Brooke Franchise Corporation provides Brooke franchise agencies with access to the products of insurance companies, marketing assistance and administrative support.

To support its franchise business, the Company chartered Brooke Credit Corporation to lend monies to its franchisees to fund the acquisition of franchises or the start up of new franchises. In addition, Brooke Credit specializes in loaning money to professionals within the insurance and death care industries.

Other revenue generating businesses include (i) Brooke Brokerage Corporation, which serves as a wholesale insurance broker for its franchisees with respect to hard-to-place and niche insurance; (ii) Brooke Savings Bank, a federal savings bank; and (iii) Brooke Capital Corporation, a life insurance holding company, to enable franchisees to complement the property and casualty insurance products that they sell with the ability to offer bank, life insurance and annuity products and services to their customers.

Consolidated results of operations demonstrate that profitability and growth in recent years consists principally of adding new franchise locations, originating loans to franchisees, and commission-sharing arrangements (typically representing a percentage of insurance premiums paid by policyholders)

Net earnings for the three months ended March 31, 2007, totaled $6.81 million, or 48 cents per share, on revenues of $64.02 million, compared to net earnings of $3.53 million, or 27 cents per share, on revenues of $41.18 million for the same period in the prior year. Total earnings increased primarily as the result of increased initial franchise fee revenue from opening more franchise locations, increased loan interest revenues from a larger loan portfolio, and increased revenues from the sale of loans.

A total of 90 and 49 new franchise locations were added during the three month periods ended March 31, 2007 and 2006, respectively The amount of the initial franchise fees typically paid for basic services is currently $165,000.

Revenues from initial franchise fees for basic services are recognized as soon as Brooke Franchise delivers the basic services to the new franchisee, which includes access to a business model and the Company’s Internet-based management system, and use of the Company’s brand name.

As mentioned, a significant part of the Company’s growth strategy business strategy involves the success of its affiliate, Brooke Credit Corp., in financing franchisee origination activities and the continued sourcing of these loans. In the three months ended March 31, about 33% of operating revenue derived from interest income (from the foregoing loans) and initial franchise fees. It goes without saying that a reduction in lending opportunities would reduce the number of loans the Company originates, which would reduce profitability and the Company’s ability to grow its business.

Brooke’s dependency on these initial fees creates an incentive for management to extend credit to borrowers that may not meet stringent underwriting criteria. In fact, loans to franchisees are collateralized principally by intangible assets, such as customer lists (which may lose value if the local franchisees—borrowers—do not adequately serve their customers or if the products and services they offer are not competitively priced).

Expenses for write off of franchise balances increased to $3.05 million, for the three months ended March 31, 2007, from $0 for the prior year. Total write off expense increased as the result of the adverse affect on some franchisees of increased loan interest rates coupled with a reduction of commission revenues resulting from reduction of premium rates by insurance companies.

Of concern, too, Brooke Credit Corp. assists its franchisees by financing long-term producer development, cyclical fluctuations of commission income, receivables and payables. The Company also grants temporary extensions of due dates for franchisee statement balances owed by franchisees to the Company!

In essence, Brooke is lending money to Brooke—and booking it as interest revenue!

This extended credit, is referred to as “non-statement balances.” As of March 31, 2007, franchise statement balances totaled approximately $6.7 million, of which approximately $5.6 million was identified as “watch” balances, because the balances were not repaid in full at least once in the previous four months. Non-statement balances as of March 31, 2007 totaled $8.5 million owed to Brooke by its franchisees.

Brooke is highly leveraged, with long-term debt-to-shareholder equity of 109.1%, and this does not even include current off-balance sheet transactions (in the Lending Services segment) totaling $279.9 million!

For the three months ended March 31, insurance revenue grew 19% year-over-year to $32.7 million. A significant part of Brooke Franchise’s commission growth came from acquisitions of existing businesses that were subsequently converted into Brooke franchises.

Combined same store sales of seasoned converted franchises (twenty-four months after initial conversion) and start up franchises for twelve months ended March 31, 2007 and 2006, however, decreased .5% and 3.0%, respectively.

Management said that same store sales performance had been adversely affected by the “soft” property and casualty insurance market, which is characterized by a flattening or decreasing of premiums by insurance companies. In addition, Brooke franchisees predominately sell personal lines insurance with more than 50% of total commissions resulting from the sale of auto insurance policies and Brooke believes that the insurance market has been particularly soft with regards to premiums on personal lines insurance policies.

We believe that investors should be concerned about Brooke Corp.’s business strategy, which remains dependent on growth via its acquisition strategy. However, this roll-up strategy is founded on some questionable lending practices and a balance sheet that appears inflated (given probable reserve deficiencies).

Editor David J. Phillips does not hold a financial interest in Brooke Corp. The 10Q Detective has a Full Disclosure Policy.

20 comments:

Anonymous said...

Excellent anaylsis! I was a franchisee for 5 years and the happiest day of my life is when I left this company. Not only are their lending practice "preditory" but their accounting pactices are atrocious. Check out the various lawsuits filed in Tarrant County, TX and in Federal Court in Wichita, KS against these guys. One of the Federal cases has been amended to include RICO charges. Brooke has a long history of breaking their fudiciary responsiblities to their franchisees. The number of write-offs of franchisee balances is just beginning.

Anonymous said...

Great work! Keep digging. This is just the tip of the iceberg with this company.

Anonymous said...

Thanks for your fine analysis!!
If you begin to communicate with the franchisees, you will tap a rich vein of negative information.
The franchisees know first hand about the horrendous business practices of this predatory lender. They have much more negative information about Brooke than is revealed in the public disclosures.

Anonymous said...

Over the last few years, I've met several sellers and buyers of Brooke "franchises." Several were in litigation, and none of them were happy.

I suspect you could check the docket in any state, and find a Brooke case.

We may be watching a corporate suicide.

Anonymous said...

fyi...brooke corp is selling brooke credit to a spac

Anonymous said...

Finally! I was also a franchisee that was 'forced out'! From the very beginning of my contract Brooke misrepresnted themselves. From what I understand, more lawsuits to come - added to the others! This company is EVIL and ruins many families.

Anonymous said...

I am thinking of buying an agency through Brooke. Can you please explain your experiences.
Thank you

Arizona said...

I am a current Brooke Franchisee and I am starting to see a trend that is scary for me and my family. My intentions are pure in my business model, but the terms and the conditions in the organization are not clear and always misunderstood as well as poorly communicated to all of us Franchisees. If you bark loud enough they seem to listen or at least give you a break, but the problem of massive debt never goes away. Someone has got to take control of this growing problem with Brooke and the practices of overselling the name and the book of businesses that sell!

Anonymous said...

I am also a former Brooke owner and I cannot begin to tell you how much "hell" they have put me through. You hit the nail on the head in your article and if it stop them from screwing just one person, good for you.

Anonymous said...

I bought a brooke agency and was growing well, then purchased additonal locations only to find that the numbers were so far off it was unreal. Then the modela and committee meeting we go throught were just a game, they change the rules daily and hide your commissions then tell you that you owe them. I have asked for an audit repeatedly and get told that they are working on it. Well the real story appears to be comming out by the look of these posts and it only takes 100 agents to file a class action that should not be a problem out of the 900 they report they currently have. The big question is whay is comming in August?

Anonymous said...

David Phillips
YOU ARE GENIUS - I WISH I WOULD HAVE READ YOUR ANALYSIS OF BROOKE FRANCHISE REPORT EARLIER.
YOU WROTE THIS ARTICLE WHEN BROOKE STOCK WAS CLOSE TO $14 AND TODAY IT IS LESS THAN 90 CENTS AND LOT OF FRANCHHISEES ARE ON VERGE OF BANKRUPTCY DUE TO FAULTY BROOKE MODEL.
LET ME ASK YOU A NEXT QUESTION
HOW DO YOU PROCEED TO STOP THIS KIND OF COMPANIES WHO COMES UP WITH A SCHEME TO SHOW A COMMON MAN THAT THEY CAN BE MILLIONERS SELLING INSURANCE WITH FINANCIAL HELP FROM BROOKE?
THIS IS A PONZY SCHEME AND MODEL AND I AM SURPRISED THA SEC HAS NOT YET TAKEN ANY STEP TO PREVENT OTHER PEOPLE JOINING IN AND GETTING RUINED.
THANKS AGAIN FOR ACCURATE ANALYSIS.

David J. Phillips said...

Thank you for the kind words. Too often I come under attack from bullish investors unwilling to get a 'second' opinion. I am always accused of being a front for some Trilateral Commission Conspiracy. If I shorted the number of stocks I'm accused of selling--I'd be a rich, rich man by now :)

I can only point out that the king has no clothes on. If the SEC chooses not to see, nothing more I can do!

Anonymous said...

I purchased a Brooke Franchise in 2004 and 8 months later sold it back to them. I raised so much hell about the schemes and fraud that they took it back. They trap you through bogus bookkeeping, shorting you on commissions, and then loan you more money saying they are working on correcting it. The hole you dig gets deeper and deeper, all the time they are changing the accounting rules to cover their x?xc'es! This is a RICO case and jail time is coming for these mobsters.

STEFAN said...

I bought a conversion franchise several months ago, I thought because it had a large existing book of business things would be ok. Guess what Brooke's Mgmt would not verify the numbers, they kept telling me they are working on it but I am still waiting. Their accounting practices are terrible and it only benefits them. They will not disclose any information to the franchisee's regarding commissions or balances. In the coming months I am sure they will be filing bankruptcy and we will be screwed again...

Anonymous said...

I understand that many past and failing franchisees are playing the victim instead of being proactive in their lives. I have several questions that just seem to make more sense: 1. You cite that Brooke Credit loaned to questionable candidates, low credit scores, a bankruptcy in their not so distant past etc.. yet these questionable candidates were given an opportunity, once again in their lives to go out and make a difference, in many cases their last real opportunity to build a business, and start with a clean slate. Yet the very ones doing all the blogs, law suit threats and general complaining, have a franchise agreement and loan documents that they put their John Hancock to, so why when they can't meet the requirements established before they ever signed do they persist in bashing the very hand that fee them and lets them walk away without further credit or financial responsibility? They signed the loan documents and every month they did not meet what they said they would, they continued to run and borrow more. Lieing the entire way to the lender about how close they were to meeting the goal and just needed a shot in the arm it was just a temporary cash flow issue, only they never really work hard enough to overcome the cash flow issue and rarly if ever reach the goal they stated was realistic in their business plan. Explain how that is Brookes fault? 2. Why or better yet how do you think a company listed on the Stock excahnge with over 500 carrier relationships A rated or better could get away with stealing commissions and keep their contracts with providers? Had these same people that make these ludicrious claims listened better in Academy they would maybe understand basic accounting. Brooke has a cut off date and it may not coinside with the carriers so any commission that is paid by carriers after Brookes cut off, is then held in trust. These commissions are then paid on the following months statement assuming there are not outstanding uncollecteds, or unresolved balances that in most cases are a direct result of over estimates on commissions by franchisees that needed an advance.Brookes biggest mistake was continuing to give them more chances to preform. Brooke has lost millions because of there former practice of paying advanced commissions that never materialized to maintain carrier relationships. They pay carriers when billed whether the franchisee has done his/her job and deposited the premium in the trust account or had it direct debited monthly by the carrier? Because the franchisee overestimates what they will write for the month and still has to live the way they have become so accoustomed they create deficits that if not properly collected in a timely manner can force them to close their doors. Many of these same former franchisees that blog daily and continue to do whatever they can to blacken Brookes name rarely if ever met thier stated and written goals and if they did by the time it happend they had borrowed themselves out of business and feel forced into default when the only forcing was by their own ignorance and inability to properly run a business. Goals which they determined by writing a marketing plan, and cash flow blue print during the qualification and individual underwriting process to ownership with Brooke. Many set 8 month goals that they make no effort to achieve and then they blame Brooke for their failure by saying Brooke steals their commission, yet Brooke will give them an additional 3 months to meet that original 8 month goal. I say HOGWASH had they spent the time out creating relationships and referral networks as they have blamming, threating,and raking up their debt, complaining to and about Brooke they would probably have successful agencies. The problems Brooke Corporation is currently facing is not because they fraud people. They delivered exactly what their agreement outlines that they will, access to carriers, management systems, advertising and marketing discounts, and servicing that would take them away from what they say they do best, sell not to mention local and National support. The problem in my opinion is that most go into their business not as an owner but with the mentality that they have a job and that Brooke is responsible for their bottom line. These agents need a reality check. This is their baby and Brooke is not going to go out and sell business for them. I know of no other business opportunity that provides working capital up to thirty grand and charges no interest for the first 2 years and 8 months. Yes they have a loan for the franchise that is calculating a 5.5% over prime interest rate (high credit risk equals a higher rate then the preferred risk this too is insurance 101 and common knowledge unless you have ben living in an under ground bomb shelter the last 20 years) and if they would go out and build their books they could have easily refinanced with a local lender once they built premium volume and a proven track record of getting the job done they could have used that hard earned book of viable clients as collaterial to get a lower rate. Lets not forget where most with regard to credit history came from, they were given a chance and if they had tightened their belts sacrificed for several years and really worked they would have a viable business, My final question is, Do any of these people read the paper or watch the news, we are in a tenious market at best and Brooke is a very small fish in a ocean of debt and downsizing,by major companies GM, Starbucks, Freddy Mack and Fannie Mae not to mention the Bear Stearns crisis all created in my opinion by the real frauds, the mortgage industry and the current credit crisis coupled with the Trillions we are spending in Irac have turned the financial markets on their head. Why is it that people do not take personal responsibility for not working hard enough or financially preparing to own, by having your own working capital to pull from instead of continuing to borrow more and more to the point you have borrowed yourself out of business. It is a known satistic that only a few in ownership make it 5 years. It is not easy but the model is very simple go out and sell and build equity in yourself and your agency. Sacrifice today to build for tomorrow and do not look at OWNERSHIP as an entitlement. It is the hardest thing you will ever do but the most rewarding feeling when its done. Do what you said you would do and stop blamming the very people who gave you the opportunity to dream again and helped you have a chance to build wealth through an OWNERSHIP program not a J.O.B. Get real folks we are the masters of our own ship and the real reason you were not successful is that you did not sell enough policy's to be successful. Learn from it, and move on. Noone has a complete life without some strife along the way, learn from it, accept responsibility for your part in it and don't make the same mistake twice. For as many disgruntled Brooke franchisees I bet their are more successful ones and the reason we do not hear from them is because they are busy selling policys and taking advantage of the opportunity Brooke gave them. They put on their blinders to negative input and go out and make it happen by selling policies and building referral networks, contributing to their community and the economy through hard work and their entrepreneurial spirit that will not allow them to be anything but successful. No business model is perfect for everyone all the time or for a diverse population with different and personally set goals. What I will tell you from my personal experience is that Brooke was very good to me and in the end of my tenure with them they were more then fair, they gave me a 60 day notice and then 30 days after my last day they continued to pay me, they had the state employment division in and proactivily worked to help me secure another position. This country is facing a critical economic period and rationally no company that is associated with the lending community can do anything but cut expenses, live within their means or revenues and wait it out. Its an election year and our country is overextended the highlight to all this doom and gloom is that it too shall pass because we live in a free country with opportunity and this is just another cycle in our history that I believe in the end will forever change the credit institutions by waking up America to what are parents knew so well "if you can not pay cash you can't afford it" Live within your means. I AM NO SAGE BUT THAT IS MY TWO CENTS FOR WHAT ITS WORTH. I SYMPATHIZE, I TOO HAVE FACED DIFFICULT FINANCIAL TIMES PERSONALLY, I JUST WON'T USE MY VALUABLE YET DEVESTING AT TIMES LIFE LESSONS AS AN EXCUSE TO BLAME, FRET, OR LIVE IN FEAR AND I WILL NEVER QUIT TRYING TO BE AND DO BETTER. FOR ME, IT IS ALL ABOUT ATTITUDE THE BATTLE IS NOT WITH BROOKE OR ANY OTHER COMPANY CAUGHT IN THIS CREDIT CRISIS, THE BATTLEFIELD IS IN YOUR MIND SO GET YOUR HEAD OUT OF THE SAND AND OVER THE PITY PARTY AND GO OUT AGAIN AND THIS TIME AROUND WHAT EVER IT IS GIVE IT YOUR BEST SHOT. Stay positive disassociate yourself from negative nay sayers. Remember you got an opportunity with Brooke most will never get, It is not what happens to you that makes the real difference in your life it is what you dothat will forever determine your character!

David J. Phillips said...

Dear Anonymous:

Your pro Brooke Corp rant was so over the top I just had to post it. Get to the point! Either way, at this point in time, with the stock selling for pennies, I could care less....Anyone who followed my lead bailed out well in advance of the stock collapse!

Anonymous said...

This goes out to that long horrible writting of yours.
First off I would like to say they are a lying company who steals people innocents. Yes that's true they give you the opportunity to open your business but a lot of things they said is not true and once you questioned it you never get a response. my whole thing is how are they able to change rules through out the game and how are they able to rush you to sign a contract without meeting with you about what your numbers should be. my area rep actually called me and said if I don't sign the new contract they will close my office down by a certain date. which I was busy in the office everyday. now looking at my loan franchise fee's on top of franchise fee's they have the nerve to say make so much or you don't get paid as of august ok that's fine but it was in july when i didn't get paid. so far as they help you yes they did they help me a lot to get in debt thanks brooke.

Anonymous said...

I am a Brooke franchisee who is cash flowing. Now, that been said. I have the life of a dog or a slave. Anyone who makes a positive comment about Brooke is obviously not a victim of their predatory lending. They claim they are the Franchisee partners, instead they are the franchisee slavemasters...the only reason I have not quit has nothing to do with Brooke, so far is pure faith, not in Brooke but in God and in my own abilities.

Anonymous said...

I am an almost Brooke franchisee. In June 2007, I attended "academy" and due to my probing questions was deemed unsuitable by Brooke powers that be. My agreement was cancelled and my down payment finally refunded. Thank God---but wait. Fast forward to May 2009 and I am served a lawsuit from Heartland Bank, a Brooke financial backer who claims I owe "back" money I never received in the first place. This nightmare may never end.

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