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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to_____ .
Commission File No. 000-16880
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BNL FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1239454
(State of incorporation) (I.R.S. Employer Identification No.)
2100 W. William Cannon, Suite L
Austin, Texas 78745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 383-0220
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No____
-
As of September 30, 2004, the Registrant had 18,761,905 shares of Common Stock,
no par value, outstanding.
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors
BNL Financial Corporation
We have reviewed the accompanying Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of September 30, 2004 and the related
Consolidated Statements of Income and Comprehensive Income for the three-month
and nine-month periods ended September 30, 2004 and 2003 and the Consolidated
Statements of Cash Flows for the nine-month periods ended September 30, 2004 and
2003. These interim financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the Consolidated Balance Sheet of BNL
Financial Corporation and Subsidiaries as of December 31, 2003 and the related
Consolidated Statements of Income and Comprehensive Income, Changes in
Shareholders' Equity and Cash Flows for the year then ended (not presented
herein); and in our report dated February 9, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying Consolidated Balance Sheet as of
December 31, 2003 is fairly stated, in all material respects, in relation to the
Consolidated Balance Sheet from which it has been derived.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.
November 12, 2004
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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ASSETS
September 30 December 31,
2004 (Unaudited) 2003 (Audited)
-------------------- -------------------
Cash and cash equivalents $4,125,164 $ 3,398,661
Investment in fixed maturities, at fair value Available for Sale (amortized
cost $589,247, $1,245,558, respectively) 633,375 1,457,988
Investment in fixed maturities, at amortized cost, Held to Maturity (fair
value $15,424,628; $15,173,490, respectively) 15,494,372 15,120,096
Other long-term investments 1,557,407 1,527,407
Investment in equity securities (cost $388,874; $339,509, respectively) 383,147 373,214
-------------------- -------------------
Total Investments, Including Cash and 22,193,465
Cash Equivalents 21,877,366
Accrued investment income 212,120 183,713
Furniture and equipment, net 435,960 486,000
Deferred policy acquisition costs 339,962 220,937
Policy loans 158,356 144,122
Receivable from reinsurer 31,065 31,065
Premiums due and unpaid 800,807 1,059,950
Income tax assets 192,000 195,136
Intangible assets 158,170 162,237
Other assets 226,254 194,728
-------------------- -------------------
Total Assets $24,748,159 $24,555,254
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for future policy benefits $ 2,201,791 $ 1,577,978
Policy claims payable 2,490,414 2,578,992
Annuity deposits 2,766,886 2,777,665
Deferred annuity profits 383,634 425,980
Premium deposit funds 38,740 40,260
Supplementary contracts without life contingencies 54,426 69,596
Advanced and unallocated premium 546,872 1,127,148
Commissions payable 493,674 433,257
Accrued taxes and expenses 593,066 777,128
Bonds payable 2,568,279 3,025,499
Other liabilities 391,826 370,569
-------------------- -------------------
Total Liabilities 12,529,608 13,204,072
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
Contingent long-term liabilities 448,967 660,447
-------------------- -------------------
Total Commitments and Contingencies 448,967 660,447
-------------------- -------------------
Shareholders' Equity:
Common stock, $.02 stated value, 45,000,000 shares authorized, 20,980,760;
20,980,760 shares issued and outstanding, respectively 419,616 419,616
Additional paid-in capital 10,814,222 10,787,911
Accumulated other comprehensive income 22,381 177,768
Accumulated surplus 2,125,067 457,336
Contingent Treasury stock, 299,311; 440,298 shares respectively (448,967) (660,447)
Treasury stock, at cost; 1,920,609; 1,098,493 shares respectively (1,162,735) (491,449)
-------------------- -------------------
Total Shareholders' Equity 11,769,584 10,690,735
-------------------- -------------------
Total Liabilities and Shareholders' Equity $24,748,159 $24,555,254
==================== ===================
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(See accompanying notes and Independent Accountants' Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------- -----------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- -------------- ---------------- --------------
Income:
Premium income $10,863,281 $10,204,943 $ 32,372,886 $30,635,896
Net investment income 242,661 231,602 732,841 721,749
Marketing fees 40,972 37,353 124,048 103,602
Realized gains 114,716 144,455 434,620 244,914
--------------- -------------- ---------------- --------------
Total Income 11,261,630 10,618,353 33,664,395 31,706,161
--------------- -------------- ---------------- --------------
Expenses:
Liability for future policy benefits expense 193,308 (22,057) 623,814 22,208
Policy benefits and other insurance costs 8,068,403 7,333,259 24,363,720 22,519,906
Amortization of deferred policy acquisition costs 8,642 7,632 22,898 18,701
Operating expenses 1,976,981 1,951,508 5,854,708 5,678,473
Taxes, other than income, fees and assessments 349,680 353,416 964,360 1,028,826
--------------- -------------- ---------------- --------------
Total Expenses 10,597,014 9,623,758 31,829,500 29,268,114
--------------- -------------- ---------------- --------------
Income from Operations before
Income Taxes 664,616 994,595 1,834,895 2,438,047
Provision for income taxes 5,414 122,000 167,175 436,000
--------------- -------------- ---------------- --------------
Net Income $ 659,202 $ 872,595 $ 1,667,720 $2,002,047
=============== ============== ================ ==============
Net income per common share (basic and diluted) $0.03 $0.04 $0.08 $0.09
=============== ============== ================ ==============
Weighted average number of fully
paid common shares 19,063,704 20,193,332 19,282,426 20,199,625
=============== ============== ================ ==============
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising
during period $ (31,212) $(43,609) $ (29,539) $194,651
Reclassification adjustment for loss included
in net income (27,944) (36,815) (125,848) (43,971)
--------------- -------------- ---------------- --------------
Other Comprehensive Income (Loss) ( 59,156) (80,424) (155,387) 150,680
--------------- -------------- ---------------- --------------
Comprehensive Income $600,046 $792,171 $ 1,512,333 $2,152,727
=============== ============== ================ ==============
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(See accompanying notes and Independent Accountants' Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
September 30,
-------------------------------------
2004 2003
(Unaudited) (Unaudited)
----------------- ----------------
Cash flows from operating activities:
Net income $ 1,667,720 $ 2,002,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gain (437,884) (244,914)
Realized loss on furniture and fixtures 3,263 0
Decrease in deferred tax asset 35,000 43,000
Depreciation 176,353 180,585
Amortization of deferred acquisition costs,
organization costs and intangibles 22,898 23,062
Accretion of bond discount 5,656 9,998
Change in assets and liabilities:
(Increase) decrease in accrued investment income (28,407) 1,726
Decrease in premiums due and unpaid 259,142 123,266
Increase in liability for future policy benefits 623,814 22,208
Decrease in policy claims payable (88,578) (188,833)
Decrease in annuity deposits and deferred profits (53,125) (65,177)
Decrease in premium deposit funds (1,520) (2,136)
Increase (decrease) in advanced and unallocated premium (580,275) 233,519
Increase (decrease) in commissions payable 60,417 (17,937)
Other, net (355,894) 57,754
----------------- ----------------
Net Cash Provided By Operating Activities 1,308,580 2,178,168
----------------- ----------------
Cash flows from investing activities:
Proceeds from sales of furniture and equipment 23,800 7,103
Proceeds from maturity or redemption - Available for Sale Investments 793,634 2,153,553
Proceeds from maturity or redemption - Held to Maturity Investments 6,158,875 2,150,000
Proceeds from sales of equity securities 121,590 0
Purchase of furniture and equipment (153,376) (135,867)
Purchase of fixed maturity securities - Held to Maturity Investments (6,547,058) (9,256,299)
Purchase of equity securities (160,442)
(69,841)
Other investments - Line of credit advanced (30,000) (30,000)
----------------- ----------------
Net Cash Provided By (Used In) Investing Activities 207,023 (5,181,351)
----------------- ----------------
Cash flows from financing activities:
Net (payments) receipts on supplementary contracts (15,170) (16,295)
Treasury shares purchased (605,885) (73,407)
Treasury shares sold 88,791 62,550
Bonds payable purchased (281,076) (75,583)
Exercised stock options and stock bonus 24,240 17,825
----------------- ----------------
Net Cash Used In Financing Activities
(789,100) (84,910)
----------------- ----------------
Net Increase (Decrease) In Cash and Cash Equivalents 726,503 (3,088,093)
Cash And Cash Equivalents, Beginning Of Period 3,398,661 5,660,879
----------------- ----------------
Cash And Cash Equivalents, End Of Period $ 4,125,164 $ 2,572,786
================= ================
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(See accompanying notes and Independent Accountant's Report)
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note 1.
The accompanying Consolidated Financial Statements (unaudited) as of September
30, 2004 and September 30, 2003 have been reviewed by independent certified
public accountants. In the opinion of management, the aforementioned financial
statements contain all adjustments necessary to present fairly the financial
position as of September 30, 2004, and the results of operations for the three
and nine month periods ended September 30, 2004 and September 30, 2003, and the
cash flows for the nine month periods ended September 30, 2004 and September 30,
2003. All such adjustments are of a normal recurring nature except as described
in Note 2 below.
The statements have been prepared to conform to the requirements of Form 10-Q
and do not necessarily include all disclosures required by generally accepted
accounting principles (GAAP). The reader should refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, previously filed with
the Commission, for financial statements for the year ended December 31, 2003,
prepared in accordance with GAAP. Net income per share of common stock is based
on the weighted average number of outstanding common shares.
Note 2.
The liability for future policy benefits includes a benefit reserve of
approximately $551,000 for the individual dental policies in force at September
30, 2004. The Company has marketed this product since 2001 and was notified by
its actuary in the first quarter of 2004, that new reserve rules prescribed by
most state insurance departments now require additional reserves be established
to more properly match premiums and benefits for this product. The effect of
this change in reserve estimate on the net income in the nine month period ended
September 30, 2004 is approximately $327,000 ($.02 per share) after considering
the tax effect and a related increase in deferred acquisition costs.
Note 3.
In the third quarter of 2004, BNLAC received notification from the Arkansas
Insurance Department that its bond portfolio exceeded the 20% investment
limitation for certain federal agencies as they relate to its investment in
Federal Home Loan Bank bonds. The Company immediately sold $600,000, par value,
of its Federal Home Loan Bank bonds to initiate compliance with the Arkansas
statute. For GAAP purposes the bonds were classified as hold to maturity.
Further discussions with the Arkansas Insurance Department revealed the
Department's intent was not to have the Company dispose of any of its block of
Federal Home Loan Bank bonds, but instead request permission to exceed the 20%
investment limitation. The Company then requested and was granted permission by
the Arkansas Insurance Department to exceed the 20% investment limitation. The
Company has determined its hold to maturity fixed securities portfolio was not
tainted since the bond sales were due to an unusual and isolated occurrence that
could not be reasonably foreseen.
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BNL FINANCIAL CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In this section, we review the consolidated results of operations for the nine
months ended September 30, 2004 and 2003 and significant changes in the
consolidated financial condition of the Company. This discussion should be read
in conjunction with the accompanying consolidated financial statements, notes
and selected financial data.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this report
and elsewhere (such as in filings by us with the Securities and Exchange
Commission, press releases, presentations by us or our management or oral
statements) relative to markets for our products and trends in our operations or
financial results, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things: (i)
general economic conditions and other factors, including prevailing interest
rate levels and stock and credit market performance which may affect (among
other things) our ability to sell our products, our ability to access capital
resources and the costs associated therewith, the market value of our
investments and the lapse rate and profitability of policies; (ii) world
conflict, including but not limited to the war in Iraq, which may affect
consumers spending trends and priorities; (iii) customer response to new
products and marketing initiatives: (iv) mortality, morbidity and other factors
which may affect the profitability of our products; (v) changes in the federal
income tax laws and regulations which may affect the relative income tax
advantages of our products; (vi) regulatory changes or actions, including those
relating to regulation of financial services affecting (among other things) bank
sales and underwriting of insurance products and regulation of the sale,
underwriting and pricing of products; and (vii) the risk factors or
uncertainties listed from time to time in our filings with the Securities and
Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had liquid assets of $4,125,164 in cash, money market
savings accounts, U.S. Treasury Bills and short-term certificates of deposit.
All of the non-cash liquid assets can readily be converted to cash.
The major components of operating cash flows are premium income and investment
income while policy benefits are the most significant cash outflow. In the first
three quarters of 2004, BNLAC collected $32,356,716 of premiums and annuity
deposits (gross before reinsurance) and we had consolidated investment income of
$732,840. Other sources of cash flow in 2004 were overwrite commissions of
$509,911 on vision products and marketing fees from EPSI Benefits Inc. of
$124,046. The Company paid $20,266,051 of policy benefits in the first nine
months of 2004.
The Company's investments are primarily in U.S. Government, Government Agency
and other investment grade bonds. We do not hedge our investment income through
the use of derivatives.
Other long term investments of $1,557,407 consists of, in part, a convertible
debenture loan in the amount of $1,357,407 from BNL Financial Corporation
(BNLF), to EPSI Benefits, Inc. (EBI), a Texas Corporation. The loan bears
interest at an annual rate of 14%, payable monthly, with principal payments
commencing September 15, 2008 and a maturity date of August 15, 2015. To protect
its interest, BNLF may convert the debenture into 51% of the outstanding common
stock of EBI, subject to regulatory approval. The note is one of several
agreements entered into by the Company's subsidiaries which expand the business
relationship with EBI and its subsidiary, Employer Plan Services, Inc. (EPSI),
which provides substantially all of the A&H claims processing and adjudication
for the Company's insurance subsidiary, Brokers National Life Assurance Company
("BNLAC"). BNLF receives a marketing fee from EBI under a related marketing
agreement
Other long-term investments include an operating line of credit agreement with
an advance amount of $200,000. On October 15, 2002 BNLAC and EPSI entered into a
loan agreement whereby BNLAC will provide EPSI with a $200,000 line of credit.
The line of credit is at prime, 5.00%, with interest payable monthly to BNLAC.
The line of credit was scheduled to mature October 15, 2004, however the Company
has extended the line of credit to August 15, 2005, at which time EPSI will make
monthly principal and interest payments to pay off the line of credit in five
years.
During the third quarter of 2003, the Company became a third party indemnitor by
entering into a series of bond indemnity and guarantee agreements totaling
approximately $445,000 in conjunction with a marketing agreement with a third
party, Employer Plan Services Inc. (EPSI). The Company received personal
guarantees from the owners of EPSI to effectively limit potential liability
under the guarantee agreement. With regard to the bond indemnities, the Company
will be obligated only if EPSI, EPSI'S parent and its shareholders, who are the
primary obligors, were all to become insolvent. Management considers the
likelihood of the Company realizing a liability under these agreements to be
remote.
We believe liquid assets, along with investment income, premium income and
marketing fees will be sufficient to meet our long and short-term liquidity
needs. We do not have any current plans to borrow money for operations.
Our insurance operations are conducted through BNLAC. At September 30, 2004,
BNLAC had statutory capital and surplus of $12,883,753. BNLAC is required to
maintain minimum levels of statutory capital and surplus, which differ from
state to state, as a condition to conducting business in those states in which
it is licensed. The State of Arkansas, which is the legal domicile of BNLAC,
requires a minimum of $2,300,000 in capital and surplus. The highest requirement
in any state in which BNLAC is licensed is $5,000,000. Management monitors the
minimum capital and surplus requirements to maintain compliance in each state in
which it is licensed.
CONSOLIDATED RESULTS OF OPERATIONS
Premium income for the third quarter of 2004 was $10,863,281 compared to
$10,204,943 for the same period in 2003. The increase of 6% for the quarter was
due to an increase in group and individual dental business. Premium income for
the first nine months of 2004 was $32,372,886 compared to $30,635,896 for the
same period in 2003. The increase of 6% was due to an increase in group and
individual dental premium in the first nine months of 2004 due to new sales
and increased renewal premiums from a reduction in the lapse rate on existing
business.
Net investment income was $242,661 for the third quarter of 2004 compared to
$231,602 for the third quarter of 2003. Net investment income for the first nine
months of 2004 was $732,841 compared to $721,749 for the same period in 2003.
The 5% increase for the quarter was due to an increase in fixed maturities in
2004 compared to 2003.
The Company received $40,972 of marketing fees from EPSI Benefits Inc. in the
third quarter of 2004 compared to $37,353 for the same period last year. For the
first nine months of 2004 marketing fees were $124,048 compared to $103,602 for
the same period of 2003. The increase in marketing fees in 2004 is due to an
increase in the number of clients serviced by EPSI Benefits Inc.
Realized gains on investments were $114,716 for the third quarter of 2004
compared to a gain of $144,455 for the same period in 2003. For the first nine
months of 2004 realized gains were $434,620 compared to $244,914 for the same
period in 2003. The realized gains in 2004 and 2003 are primarily due to the
purchase of a portion of the Company's outstanding debentures at less than face
value and in the second quarter of 2004 the Company had a realized gain of
approximately $103,000 on disposal of MCI bonds.
For the third quarter of 2004, liability for future policy benefits expense was
$193,308 compared to $(22,057) for the same period in 2003. For the nine-month
period ended September 30, 2004, liability for future policy benefits expense
was $623,814 compared to $22,208 for the same period in 2003. The increase for
the first nine months of 2004 and third quarter of 2004 was due to a $551,000
increase in benefit expense reserve for individual dental insurance.
Approximately $300,000 of the benefit expense reserve is attributable to
policies issued in previous years. See Note 2 to the financial statements.
Policy benefits and other insurance costs were $8,068,043 in the third quarter
of 2004 compared to $7,333,259 for the same period in 2003. In the first nine
months of 2004 policy benefits and other insurance costs were $24,363,720
compared to $22,519,906 for the same period in 2003. The increase was primarily
due to an increase in policy benefits from an increase in the claims ratio and
additional commissions on group and individual premium collected as well as
commissions paid on a recruiting bonus program. The claims ratio on group dental
insurance, which represents the ratio of claims incurred to premium earned, was
64.49% for the first nine months of 2004 compared to 63.29% for the first nine
months of 2003.
Amortization of deferred policy acquisition costs was $8,462 and $7,632 for the
third quarter and $22,898 and $18,701 for the first nine months of 2004 and
2003, respectively. Amortization of deferred policy acquisition costs vary in
relation to lapses or surrenders of existing policies.
For the third quarter of 2004 operating expenses were $1,976,981 compared to
$1,951,509 for the same period in 2003. Operating expenses were $5,854,708 in
the first nine months of 2004 compared to $5,678,473 for the same period in
2003. The increase for both periods was primarily due to an increase in payroll
expense, group insurance expense and actuarial expense for new product
development and product modifications.
Taxes, other than on income, fees and assessments, were $349,680 for the third
quarter of 2004 compared to $353,416 for the third quarter of 2003. Taxes, other
than on income, fees and assessments, were $964,360 for the first nine months of
2004 compared to $1,028,826 for the same period in 2003. The decrease for the
year was primarily due to the refund of premium taxes in 2004, which is due to
overpayment of quarterly estimated tax payments in 2003.
The provision for income taxes in the third quarter of 2004 includes ($29,586)
current tax credit and $35,000 deferred tax expense compared to $112,000 current
tax expense and $10,000 deferred tax expense in the third quarter of 2003. The
provision for income taxes in the first nine months of 2004 was $164,039 current
tax expense and $3,136 deferred tax expense compared to $393,000 current expense
and $43,000 deferred tax expense for the same period in 2003. The current tax
expense decreased for the first nine months of 2004 compared to 2003 due to the
decrease in operating profits and the 2003 federal tax accrual was over stated
by $82,000.
Income from operations before income taxes for the third quarter of 2004 was
$664,616 compared to $994,595 for the same period in 2003. For the first nine
months of 2004 income from operations before income taxes was $1,834,895
compared to $2,438,047 for the same period in 2003. The decrease for the third
quarter was due to the increase in liability for future benefits and an increase
in policy benefits and other insurance costs. The decrease for the first nine
months of the year was primarily due to the increase in the benefit expense
reserve set up on the individual dental insurance and the increase in the claims
ratio described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential loss resulting from adverse changes in the
value of financial instruments, either derivative or non-derivative, caused by
fluctuations in interest rates, foreign exchange rates, commodity prices, and
equity security prices. We handle market risks in accordance with our
established policies. We did not hold financial instruments to specifically
manage and reduce the impact of changes in interest rates at September 30, 2004
and December 31, 2003. We did however hold various financial instruments at
September 30, 2004 and 2003, consisting of financial assets reported in our
Consolidated Balance Sheets.
Interest Rate Risk - We are subject to interest rate risk through the investment
in fixed maturity securities, such as U.S. Government and Government Agency
securities and other investment grade bonds. The fair market value of long-term,
fixed-interest rate debt is subject to interest rate risk. Generally, the fair
value of fixed-interest rate debt will increase as interest rates fall and will
decrease as interest rates rise. The estimated fair value of our fixed maturity
securities at September 30, 2004 and December 31, 2003 was $16,058,003 and
$16,631,478, respectively.
Based on testing at December 31, 2003 a one percentage point increase would
result in a decrease in the estimated fair value of fixed maturity securities of
$469,000. Initial fair values were determined using the current rates at which
we could enter into comparable financial instruments with similar remaining
maturities. The estimated earnings and cash flows impact for the first nine
months of 2004 resulting from a one percentage point increase in interest rates
would be immaterial, holding other variables constant.
Foreign-Exchange Rate Risk - We currently have no exposure to foreign-exchange
rate risk because all of our financial instruments are denominated in U.S.
dollars.
Commodity Price Risk - We have no financial instruments subject to commodity
price risk.
Equity Security Price Risk - Equity securities at September 30, 2004 totaled
$383,147, or only 1.7% of total investments and cash on a consolidated basis.
The preceding discussion of estimated fair value of our financial instruments
and the sensitivity analyses resulting from hypothetical changes in interest
rates are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect our current
expectations and involve uncertainties. These forward-looking market risk
disclosures are selective in nature and only address the potential impact from
financial instruments. They do not include other potential effects which could
impact our business as a result of changes in interest rates, foreign-exchange
rates, commodity prices, or equity security prices.
4. INTERNAL CONTROL AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
that term is defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective in timely alerting the Company's Chief Executive
Officer and Chief Financial Officer to material information required to be
disclosed in the periodic reports filed with the SEC.
In addition, the Company's Chief Executive Officer and Chief Financial Officer
have reviewed the Company's internal controls, and there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of the last
evaluation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was not a part of any new legal proceedings during the third quarter
of 2004.
In 2001, the Board of Directors of the Company approved a settlement in the
class action case brought by certain shareholders. The settlement, which was
approved by the Pulaski County Circuit Court and the Arkansas Insurance
Commissioner, was subject to various conditions, including the approvals by any
other applicable regulatory authorities and conditioned upon compliance with
federal and state securities laws. As of December 31, 2002, all requisite
approvals were received and redemption of the stock began in 2003.
As part of the settlement agreement, the Company issued its Bonds in the
principal amount of $1.50 in exchange for each share of common stock of BNL
owned by the members of the Class. The Bonds are for a term of twelve years,
effective December 15, 2002, with principal payable at maturity and bear
interest at the rate of 6% per annum payable annually from the previous fiscal
year's earnings of BNL and will impact earnings per share to the extent of
approximately $.013 per share. If any interest payment is not made, it will be
added to the principal and paid at maturity. The Bonds are fully callable and
redeemable at par at any time by BNL.
During 2003, the Company reclassified Contingent Long Term Liabilities and
Contingent Treasury Stock in the amount of $3,637,288 to Bonds Payable and
Treasury Stock, respectively, in accordance with the character of the litigation
settlement of 2001 and the performance of all duties there under. The $3,637,288
of Treasury Stock was retired and returned to authorized but not issued status.
The remaining Contingent Long Term Liabilities and Contingent Treasury Stock in
the amount of $448,967 represents shares that may or may not have rights to
exchange under the settlement and, as such, are contingent on determination of
their status.
The settlement is reflected in the third quarter of 2004 as bonds payable of
$2,568,279, contingent long-term liabilities of $448,967 and contingent treasury
stock of same amount and had no effect on the Statement of Cash Flows other than
the purchase of bonds mentioned above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(d) Maximum Number
(a) Total (c) Total Number of Shares That May
Number of (b) Average of Shares Purchased Yet be Purchased
Shares Price Paid as Part of Publicly Under the Plans
Period Purchased Per Share Announced Plans or Programs or Programs
July 1-31, 2004 0 0 0 1,666,666
Aug 1-31, 2004 784,951 $.60 784,951 132,943 (1)
Sept 1-30, 2004 33,651 $.60 33,651 0 (2)
On June 10, 2004, the Company filed a Schedule TO for the purchase of up to
1,666,666 shares of its issued and outstanding common stock, no par value, at a
purchase price of $.60 per share in cash ("Issuer Tender Offer"), which expired
on July 30, 2004. During August and September of 2004, the Company determined
which shares were properly tendered, accepted the tendered shares and paid for
them. On September 22, 2004, the Company filed its final amendment to its
Schedule TO and reported that a total of 818,602 shares were purchased by the
Company in its Issuer Tender Offer.
(1) This is the difference between the number of shares which may have been
properly tendered and the amount actually purchased in August 2004.
(2) The Issuer Tender Offer expired on July 30, 2004, and the final
purchases were made by the Company on or before September 22, 2004, the date of
filing the Company's final amendment to its Schedule TO for the Issuer Tender
Offer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIEs.
During the period covered by this report there was no material default in the
payment of any principal, interest, sinking or purchase fund installment, or any
other material default not cured within 30 days with respect to any indebtedness
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q.
None
(b) Reports on Form 8-K.
The Company did not file a Form 8-K during the period covered by this document.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BNL FINANCIAL CORPORATION
(Registrant)
Date: November 13, 2004 /s/ Wayne E. Ahart
____________________________________
By: Wayne E. Ahart, Chairman of the Board
(Chief Executive Officer)
Date: November 13, 2004 /s/ Barry N. Shamas
____________________________________
By: Barry N. Shamas, Executive V.P.
(Chief Financial Officer)
==============================================================================
13
Exhibit 31.1
Certifications
I, Wayne E. Ahart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNL Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2004
/s/ Wayne E. Ahart
-----------------------
Wayne E. Ahart
Chairman of the Board
Exhibit 31.2
I, Barry N. Shamas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNL Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2004
/s/ Barry N. Shamas
-----------------------
Barry N. Shamas
Chief Financial Officer
15
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF BNL FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350
In connection with the accompanying report on Form 10-Q for the period ending
September 30, 2004 and filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Wayne E. Ahart, Chief Executive Officer of BNL
Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all
material respects the financial condition and results of operations of
the Company.
/s/ Wayne E. Ahart
- -----------------------
Wayne E. Ahart
Chief Executive Officer
November 13, 2004
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF BNL FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350
In connection with the accompanying report on Form 10-Q for the period ending
September 30, 2004 and filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Barry N. Shamas, Chief Financial Officer of BNL
Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all
material respects the financial condition and results of operations of
the Company.
/s/ Barry N. Shamas
- -----------------------
Barry N. Shamas
Chief Financial Officer
November 13, 2004