1325823--3/13/2008--Brooke_Credit

related topics

{loss, insurance, financial}

{loan, real, estate}

{debt, indebtedness, cash}

{stock, price, share}

{stock, price, operating}

{provision, law, control}

{competitive, industry, competition}

{capital, credit, financial}

{cost, operation, labor}

{system, service, information}

{control, financial, internal}

Risks Related to Brooke Credit Corporation s Business BCC s borrowers financial performance (which may be affected by, among other conditions, a softening insurance market and rising interest rates) may adversely affect their ability to repay amounts due which could result in increased credit losses. These increased credit losses, where the Company has retained credit exposure, could decrease the Company s assets, net income and cash available. The value of the collateral securing BCC s loans to borrowers may be adversely affected by the borrowers actions, which could inhibit the Company s ability to recover the full amount of its loans in the event of borrowers default and subsequent collateral liquidation. The ability of the Company s borrowers to repay their loans may be adversely affected by an increase in market interest rates which could result in increased credit losses. These increased credit losses, where BCC has retained credit exposure, could decrease the Company s assets, net income and cash available. BCC s financial condition could be adversely affected if it is unable to fund loans through sales to third parties. As a finance company, BCC secures money to lend to borrowers from third parties. If funding sources are no longer willing to loan the Company money, it will be unable to make additional loans which will reduce revenues and net income. The Company s credit loss reserve is based upon various assumptions. If these assumptions are incorrect, and realized credit losses exceed the amount of the reserve or delinquencies increase, requiring an increase in the reserve, then BCC s financial condition and results of operations may be adversely affected. The Company makes certain assumptions regarding the profitability of the securitizations, participations, warehouse lines and other funding vehicles which may not prove to be accurate. If these assumptions are wrong, BCC could experience a decrease in its assets, net income and cash available. Brooke Franchise fulfilled Brooke Capital s key role before it was merged into Brooke Capital in November 2007. Brooke Franchise was a wholly-owned subsidiary of Brooke Corporation, whereas Brooke Corporation owns approximately 81% of the merged company. Although BCC and Brooke Capital are controlled by Brooke Corporation, the merger has resulted in further separation of the two, and BCC s relationship with Brooke Capital has been and may continue to be adversely affected. Another significant part of BCC s business strategy involves the success of its related party, Brooke Capital Advisors, Inc. ( BCA ), in sourcing managing general agencies ( MGA ). A reduction in lending opportunities could reduce the number of loans originated which could reduce profitability and the ability to grow. The insurance agency borrowers businesses are dependent on the pricing of property and casualty insurance, which is cyclical. In the event the price of this insurance is reduced, the insurance agency borrowers revenues available to repay their loans will be reduced. The inability of borrowers to repay loans could result in increased credit losses. Such credit losses in connection with loans where BCC has retained credit exposure could decrease its assets, net income and cash available. BCC may be required to repurchase loans sold with recourse or make payments on guarantees. In the event the repurchased loans are of low quality or go into default and BCC is unable to recover the full amount of the loan, the Company may experience credit losses which could decrease corporate assets, net income and cash available. The Company will be adversely affected if it does not have alternative sources of funds to repay obligations as they mature. Quarterly operating revenues and results of operations are difficult to forecast and may fluctuate substantially. The Company is dependent on key personnel, particularly the services of the Chief Executive Officer ( CEO ). If the CEO were to separate from service with the Company for any reason, funding sources, rating agencies and collateral preservation providers could become uncertain as to the Company s prospects and could take adverse actions. BCC s method of funding loans may cause its leverage to increase. The Company s network may be vulnerable to security breaches and inappropriate use by Internet users, which could disrupt or deter future use of BCC s services. The Company s management, facilities and labor force may be insufficient to accommodate expected growth. If this happens, BCC could be required to limit its growth or risk originating loans of lower quality. If BCC fails to effectively manage growth, financial results could be adversely affected. BCC may not achieve the same levels of growth in revenues and profits in the future as in the past. The Company expects to face increased competition that may negatively impact revenue, profitability and market position. BCC s debt instruments contain restrictive covenants and other requirements that may limit business flexibility by imposing operating and financial restrictions on operations. The cash flows received from the interests retained in securitizations and credit facilities could be delayed or reduced due to the requirements of the agreements entered into, which could impair BCC s ability to operate. Brooke Credit Corporation has transferred a significant amount of assets and liabilities off-balance sheet in reliance on SFAS 140. In the event transfer of such assets and liabilities is subsequently determined to be inappropriate under SFAS 140, or if SFAS 140 is amended, current off-balance sheet assets and liabilities could be required to be consolidated in the financial statements. When the Company sells loans classified as a true sale pursuant to the criteria established by SFAS 140, a retained interest and/or servicing asset is recorded on the balance sheet. The amount recorded is determined based upon certain assumptions made by management. If these assumptions are materially inaccurate, BCC may be required to write down these assets. Most of the loans made are to privately-owned small and medium-sized companies, which present a greater risk of loss than loans to larger companies. The collateral securing a loan may not be sufficient to protect the Company from a partial or complete loss if the loan becomes non-performing and requires foreclosure. Some of BCC s borrowers require licenses, permits and other governmental authorizations to operate their businesses. Any revocation or modification of these could impair the borrower s ability to conduct business, generate cash flows necessary to repay obligations, and reduce the value of collateral securing the Company s loan which could result in a credit loss for BCC which could reduce its revenues, cash flow and net income. Because a significant part of BCC s loans and insurance-related revenues derive from operations located in five states, business may be adversely affected by conditions in these states. Many of the Company s borrowers are captive insurance agents, and therefore, are dependent on the continued success, competitiveness, credit quality and financial condition of the captive carrier they represent. If the captive carrier s success, competitiveness, credit quality or financial condition deteriorates, it may inhibit the captive borrowers ability to sell policies and earn commissions, which could affect their ability to repay their obligations. The Company may incur lender liability as a result of lending activities which could result in significant defense costs and possible judgments against the Company. Loans to foreign borrowers may involve significant risks in addition to the risks inherent in loans to U.S. borrowers. Risks Related to Brooke Credit Corporation s Common Stock Insufficient internal controls may negatively impact BCC s financial integrity, operations, financial reporting and, ultimately, have a material adverse effect on its stock price. Brooke Corporation owns a controlling interest in BCC, will be able to exert significant control over BCC and may act in a manner that is adverse to other stockholders interests. BCC s relatively low trading volume may limit stockholders ability to sell their shares. The price of the Company s common stock may fluctuate significantly, which may make it difficult for stockholders to resell common stock when they want or at a price they find attractive.

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1325823--3/13/2008--Brooke_Credit_CORP