BNL FINANCIAL CORPORATION AND
SUBSIDIARIES
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors
BNL
Financial Corporation
We have
reviewed the accompanying Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of March 31, 2005 and the related
Consolidated Statements of Income and Comprehensive Income and Consolidated
Statements of Cash Flows for the three-month periods ended March 31, 2005 and
2004. 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 of the Public Company
Accounting Oversight Board, the Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of December 31, 2004 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 7, 2005, 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, 2004 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.
May 13,
2005
BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
| |
|
March
31 |
|
December
31, |
|
| |
|
2005
(Unaudited) |
|
2004
(Audited) |
|
|
Cash
and cash equivalents |
|
$
4,019,405 |
|
$
3,809,913 |
|
|
Investment
in fixed maturities, at fair value Available for Sale (amortized cost
$589,521, $589,521, respectively) |
|
|
633,150 |
|
|
664,488 |
|
|
Investment
in fixed maturities, at amortized cost, Held to Maturity (fair value
$16,932,298; $16,957,702, respectively) |
|
|
17,161,690 |
|
|
17,005,973 |
|
|
Other
long-term investments |
|
|
1,557,407 |
|
|
1,557,407 |
|
|
Investment
in equity securities (cost $588,885; $588,885,
respectively) |
|
|
596,568 |
|
|
628,821 |
|
|
Total
Investments, Including Cash and Cash
Equivalents |
|
|
23,968,220 |
|
|
23,666,602 |
|
| |
|
|
|
|
|
|
|
|
Accrued
investment income |
|
|
200,222 |
|
|
183,197 |
|
|
Furniture
and equipment, net |
|
|
392,654 |
|
|
434,799 |
|
|
Deferred
policy acquisition costs |
|
|
370,032 |
|
|
346,373 |
|
|
Policy
loans |
|
|
156,363 |
|
|
153,470 |
|
|
Receivable
from reinsurer |
|
|
34,121 |
|
|
34,121 |
|
|
Premiums
due and unpaid |
|
|
842,209 |
|
|
855,959 |
|
|
Income
tax assets |
|
|
126,000 |
|
|
101,000 |
|
|
Intangible
assets |
|
|
153,030 |
|
|
154,483 |
|
|
Other
assets |
|
|
201,361 |
|
|
128,516 |
|
|
Total
Assets |
|
$ |
26,444,212 |
|
$ |
26,058,520 |
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Liabilities
for future policy benefits |
|
$ |
2,416,691 |
|
$ |
2,268,652 |
|
|
Policy
claims payable |
|
|
2,436,829 |
|
|
2,235,929 |
|
|
Annuity
deposits |
|
|
2,780,673 |
|
|
2,783,838 |
|
|
Deferred
annuity profits |
|
|
355,728 |
|
|
373,985 |
|
|
Premium
deposit funds |
|
|
33,711 |
|
|
36,024 |
|
|
Supplementary
contracts without life contingencies |
|
|
43,295 |
|
|
55,799 |
|
|
Advanced
and unallocated premium |
|
|
1,170,697 |
|
|
659,498 |
|
|
Commissions
payable |
|
|
547,197 |
|
|
483,655 |
|
|
Accrued
taxes and expenses |
|
|
550,474 |
|
|
810,437 |
|
|
Bonds
payable |
|
|
1,876,921 |
|
|
2,007,339 |
|
|
Payable
for Securities |
|
|
- |
|
|
650,000 |
|
|
Other
liabilities |
|
|
447,602 |
|
|
433,828 |
|
|
Total
Liabilities |
|
|
12,659,818 |
|
|
12,798,984 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
|
|
|
|
|
Common
stock, $.02 stated value, 45,000,000 shares authorized, 20,980,760;
20,980,760 shares issued and outstanding. |
|
|
419,616 |
|
|
419,616 |
|
|
Additional
paid-in capital |
|
|
10,835,989 |
|
|
10,829,800 |
|
|
Accumulated
other comprehensive income |
|
|
40,626 |
|
|
90,165 |
|
|
Accumulated
surplus |
|
|
3,684,801 |
|
|
3,109,839 |
|
|
Treasury
stock, at cost; 1,934,656; 1,933,646 shares respectively |
|
|
(1,196,638 |
) |
|
(1,189,884 |
) |
|
Total
Shareholders' Equity |
|
|
13,784,394 |
|
|
13,259,536 |
|
|
Total
Liabilities and Shareholders' Equity |
|
$ |
26,444,212 |
|
$ |
26,058,520 |
|
| |
|
|
|
|
|
|
|
(See
accompanying notes and Independent Accountants’ Report)
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| |
|
Three
Months Ended
March
31 |
|
| |
|
2005
(Unaudited) |
|
2004
(Unaudited) |
|
Income: |
|
|
|
|
|
|
|
|
Premium
income |
|
$ |
11,129,652 |
|
$ |
10,788,735 |
|
|
Net
investment income |
|
|
249,206 |
|
|
234,847 |
|
|
Marketing
fees |
|
|
29,016 |
|
|
41,668 |
|
|
Realized
gains on debt retirement |
|
|
51,696 |
|
|
- |
|
|
Realized
gains (loss) |
|
|
73 |
|
|
(495 |
) |
| |
|
|
|
|
|
|
|
|
Total
Income |
|
|
11,459,643 |
|
|
11,064,755 |
|
| |
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Liability
for future policy benefits expense |
|
|
148,038 |
|
|
423,901 |
|
|
Policy
benefits and other insurance costs |
|
|
8,286,886 |
|
|
8,054,638 |
|
|
Amortization
of deferred policy acquisition costs |
|
|
8,050
|
|
|
5,054
|
|
|
Operating
expenses |
|
|
1,930,004 |
|
|
1,807,290 |
|
|
Taxes,
other than income, fees and assessments |
|
|
391,251 |
|
|
380,585 |
|
| |
|
|
|
|
|
|
|
|
Total
Expenses |
|
|
10,764,229 |
|
|
10,671,468 |
|
| |
|
|
|
|
|
|
|
|
Income
from Operations before
Income
Taxes |
|
|
695,414 |
|
|
393,287 |
|
| |
|
|
|
|
|
|
|
|
Provision
for income taxes |
|
|
120,452 |
|
|
57,780 |
|
| |
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
574,962 |
|
$ |
335,507 |
|
| |
|
|
|
|
|
|
|
|
Net
income per common share (basic and diluted) |
|
$ |
0.03 |
|
$ |
0.02 |
|
| |
|
|
|
|
|
|
|
|
Weighted
average number of fully
paid
common shares |
|
|
19,046,862 |
|
|
19,435,105 |
|
| |
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Unrealized
gains on securities: |
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) arising during period (net of tax) |
|
$ |
(53,043 |
) |
$ |
14,988 |
|
|
Reclassification
adjustment for gain (loss) included in net income |
|
|
3,505 |
|
|
(4,559 |
) |
| |
|
|
|
|
|
|
|
|
Other
Comprehensive Income |
|
|
(49,538 |
) |
|
10,429 |
|
| |
|
|
|
|
|
|
|
|
Comprehensive
Income |
|
$ |
525,424 |
|
$ |
345,936 |
|
(See
accompanying notes and Independent Accountants’ Report)
BNL FINANCIAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
Three
Months Ended
March
31, |
|
| |
|
2005
(Unaudited) |
|
2004
(Unaudited) |
|
Cash
flows from operating activities: |
|
|
|
|
|
Net
income |
|
$ |
574,962 |
|
$ |
335,507 |
|
Adjustments
to reconcile net income to net cash
provided
by operating activities: |
|
|
|
|
|
|
|
Realized
(gain) loss on investments |
|
|
(73 |
) |
|
495 |
|
Realized
(gain) on debt retirement |
|
|
(51,696 |
) |
|
- |
|
Increase
in deferred tax asset |
|
|
(16,000 |
) |
|
(16,864 |
) |
Depreciation |
|
|
47,313 |
|
|
46,370 |
|
Amortization
of deferred acquisition costs,
and
intangibles |
|
|
9,504 |
|
|
6,508 |
|
Accretion
of bond discount |
|
|
699 |
|
|
(118 |
) |
Change
in assets and liabilities: |
|
|
|
|
|
|
|
(Increase)
decrease in accrued investment income |
|
|
(17,025 |
) |
|
46,353 |
|
Decrease
in premiums due and unpaid |
|
|
13,750 |
|
|
300,877 |
|
Increase
in liability for future policy benefits |
|
|
148,038 |
|
|
423,901 |
|
Increase
(decrease) in policy claims payable |
|
|
200,900 |
|
|
(224,086 |
) |
Increase
(decrease) in annuity deposits and deferred profits |
|
|
(21,421 |
) |
|
1,010 |
|
Decrease
in premium deposit funds |
|
|
(2,313 |
) |
|
(485 |
) |
Increase
(decrease) in advanced and unallocated premium |
|
|
511,199 |
|
|
(21,757 |
) |
Increase
in commissions payable |
|
|
63,541 |
|
|
139,244 |
|
|
Other,
(decrease) increase |
|
|
(500,478 |
) |
|
(120,208 |
) |
|
Net
Cash Provided By Operating Activities |
|
|
960,900 |
|
|
916,747 |
|
| |
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
Proceeds
from sales of furniture and equipment |
|
|
- |
|
|
51,917 |
|
Proceeds
from maturity or redemption - Available for Sale
Investments |
|
|
- |
|
|
961,866 |
|
Proceeds
from maturity or redemption - Held to Maturity Investments |
|
|
1,997,065 |
|
|
3,055,101 |
|
Proceeds
from sales of equity securities |
|
|
- |
|
|
47,338 |
|
Purchase
of furniture and equipment |
|
|
(5,168 |
) |
|
(149,235 |
) |
Purchase
of fixed maturity securities - Held to Maturity
Investments |
|
|
(2,649,375 |
) |
|
(1,749,531 |
) |
Purchase
of equity securities |
|
|
- |
|
|
(76,800 |
) |
|
Other
investments - Line of credit advanced |
|
|
- |
|
|
(30,000 |
) |
|
Net
Cash Provided (Used) By Investing Activities |
|
|
(657,478 |
) |
|
2,110,656 |
|
| |
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
Net
(payments) receipts on supplementary contracts |
|
|
(12,504 |
) |
|
(11,866 |
) |
Treasury
shares purchased |
|
|
(11,516 |
) |
|
(34,148 |
) |
Treasury
shares sold |
|
|
- |
|
|
14,289 |
|
Bonds
payable purchased |
|
|
(76,292 |
) |
|
(4,050 |
) |
|
Exercised
stock options and stock bonus |
|
|
6,382 |
|
|
3,199 |
|
|
Net
Cash Used In Financing Activities |
|
|
(93,930 |
) |
|
(32,576 |
) |
Net
Increase In Cash and Cash Equivalents |
|
|
209,492 |
|
|
2,994,827 |
|
|
Cash
And Cash Equivalents, Beginning Of Period |
|
|
3,809,913 |
|
|
3,398,661 |
|
|
Cash
And Cash Equivalents, End Of Period |
|
$ |
4,019,405 |
|
$ |
6,393,488 |
|
| |
|
|
|
|
|
|
|
(See
accompanying notes and Independent Accountant’s Report)
BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note
1.
The
accompanying Consolidated Financial Statements (unaudited) as of March 31, 2005
and March 31, 2004 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 March 31, 2005, and the results of operations and cash flows for
the periods ended March 31, 2005 and March 31, 2004.
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, 2004, previously filed with
the Commission, for financial statements for the year ended December 31, 2004,
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.
During
the first quarter of 2005 the Company signed a new lease for 20,337 square feet
of new office space in Austin, Texas, under a seven year, triple net lease. The
base rent is $157,612 per year with payments commencing June 1, 2006.
Note
3.
As of
March 21, 2005, the Company entered into a conditional Stock Purchase Agreement
with Universal Guaranty Life Insurance Company (“UGL”). Wayne E. Ahart, Chairman
of the Company’s Board of Directors and the Company’s Chief Executive Officer,
is also a party to the Stock Purchase Agreement.
UGL owned
2,216,776 shares of the Company’s issued and outstanding common stock, which
represents approximately 11.6% of the Company total issued and outstanding
common stock as of December 31, 2004. Pursuant to the Stock Purchase Agreement,
the Company agreed to purchase all of the Shares for the purchase price of
$2,300,000 contingent on the receipt of certain approvals from regulatory
authorities.
Mr. Ahart
was a party to an agreement dated August 16, 1986, with Commonwealth Industries,
Inc. (“CIC”) whereby if Mr. Ahart or CIC agreed to sell their shares of the
Company to a bona fide third party purchaser, the shares of both Mr. Ahart and
CIC would be sold together to such purchaser. UGL is the successor in interest
to CIC. Upon the closing of the Company’s purchase of the Shares owned by UGL,
this agreement was terminated and the Company did not purchase any of Mr.
Ahart’s shares.
As of
April 15, 2005, all prerequisite conditions had been satisfied and the treasury
shares were purchased from UGL and placed in treasury shares.
BNL FINANCIAL CORPORATION AND
SUBSIDIARIES
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In this
section, we review the consolidated results of operations for the three months
ended March 31, 2005 and 2004 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 March
31, 2005, we had liquid assets of $4,019,405 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
quarter of 2005, BNLAC collected $11,155,744 of premiums and annuity deposits
(gross before reinsurance) and we had consolidated investment income of
$249,206. Other sources of cash flow in 2005 were overwrite commissions of
$175,480 on vision products and marketing fees from EPSI Benefits Inc. of
$29,016. The Company paid $6,872,727 of policy benefits in the first quarter of
2005.
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 the Company, 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, the Company 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"). The Company receives a marketing fee from EBI under a related
marketing agreement.
Other
long-term investments also include an operating line of credit agreement in the
amount of $200,000. On October 15, 2003 BNLAC and EPSI entered into a loan
agreement whereby BNLAC will provide EPSI with a $200,000 line of credit
maturing October 15, 2004. The line of credit was renewed and extended with
interest only payments to August 1, 2005, thereafter EPSI will pay principal and
interest over 60 equal monthly installments until paid in full. The line of
credit is at prime, 6.5%, with interest payable monthly to BNLAC.
The
Company became a third party indemnitor by entering into a series of bond
indemnity and guarantee agreements totaling approximately $545,000 in
conjunction with a marketing agreement with a third party, EPSI Benefits Inc.
and Employer Plan Services Inc. (EPSI). The purpose of these agreements is to
assist EPSI to become licensed in additional states. 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 March 31, 2005, BNLAC had
statutory capital and surplus of $13,611,262. 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 first quarter of 2005 was $11,129,652 compared to $10,788,735 for
the same period in 2004. The increase of 3% for the quarter was due to an
increase in renewal group and individual dental insurance premiums.
Net
investment income was $249,206 for the first quarter of 2005 compared to
$234,847 for the first quarter of 2004. The increase for the quarter was
primarily due to higher interest rates available on the Company’s
investments.
The
Company received $29,016 of marketing fees from EPSI Benefits Inc. in the first
quarter of 2005 compared to $41,668 for the same period last year.
The
decrease in marketing fees in 2005 is due to a reduction of $10,000 from reduced
operating results at EPSI Benefits.
Realized
gain on investments was $73 for the first quarter of 2005 compared to a loss of
$495 for the same period in 2004. There were very limited sales of investments
in the first quarter of 2005 or 2004.
The
realized gains on debt retirement in 2005 is due to the purchase of a portion of
the Company’s outstanding debentures at less than face value.
In the
first quarter of 2005, liability for future policy benefits expense was $148,038
compared to $423,901 for the same period in 2004. The increase for the first
quarter of 2004 was primarily due to an increase in newly established benefit
expense reserves for individual dental insurance, including $200,000 to
initially establish these reserves for policies written in previous years.
Policy
benefits and other insurance costs were $8,286,886 in the first quarter of 2005
compared to $8,054,638 for the same period in 2004. The increase was primarily
due to an increase in policy benefits on group and individual dental insurance.
The claims ratio on group dental insurance, which represents the ratio of claims
incurred to premium earned, was 64.0% for the first quarter of 2005 compared to
63.1% for the first quarter of 2004.
Amortization
of deferred policy acquisition costs was $8,050 and $5,054 for the first quarter
of 2005 and 2004, respectively. Amortization of deferred policy acquisition
costs varies in relation to lapses or surrenders of existing
policies.
For the
first quarter of 2005 operating expenses were $1,930,004 compared to $1,807,290
for the same period in 2004. The increase for the period was primarily due to an
increase in payroll expense and executive incentive bonuses resulting from
increased profits.
Taxes,
other than on income, fees and assessments, were $391,251 for the first quarter
of 2005 compared to $380,585 for the first quarter of 2004. The increase was
primarily due to an increase in premium taxes due to increased premium
collected.
The
provision for income taxes in the first quarter of 2005 includes $136,452
current tax expense (including $33,000 under accrued in 2004) and $16,000
deferred tax credit compared to $75,780 current tax expense and $18,000 deferred
tax credit in the first quarter of 2004. The current period tax expense
increased due to an increase in profits.
Income
from operations before income taxes for the first quarter of 2005 was $695,414
compared to $393,287 for the same period in 2004. The decrease for the first
quarter of 2004 was primarily due to the additional benefit expense reserves set
up on individual dental insurance as 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 have financial instruments to manage and reduce
the impact of changes in interest rates at March 31, 2005 and December 31, 2004.
We held various financial instruments at March 31, 2005 and 2004, 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 March 31, 2005 and December 31, 2004 was $17,565,448 and
$17,622,189, respectively.
Based on
testing at December 31, 2004 a one-percentage point increase would result in a
decrease in the estimated fair value of fixed maturity securities of $504,000.
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 three months of 2005
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 March 31, 2005 totaled $596,568, or
only 2.3% 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.
Item
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 first quarter of
2005.
Item
2. Changes in Securities.
None of
the rights of the holders of any of the Company's securities were materially
modified during the period covered by this report. In addition, no class of
securities of the Company was issued or modified which materially limited or
qualified any class of its registered securities.
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.
No
matters were submitted to a vote of security holders during the time period
covered by this filing.
Item
5. Other Information.
None
Item
6. Exhibits and Reports on Form 10-Q.
None
(b)
Material Contracts - Reports on Form 8-K.
The
Company filed a Form 8-K on March 23, 2005 regarding the Stock Purchase
Agreement between the Company, Wayne Ahart and Universal Guaranty Life Insurance
Company whereby the Company agrees to purchase of 2,216,776 shares of its common
stock from Universal Guaranty Life Insurance Company for $2,300,000. The
8-K filed on March 23, 2005 and exhibits thereto are incorporated by reference
into this 10-Q.
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.
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BNL
FINANCIAL CORPORATION |
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(Registrant) |
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Date:
May 13, 2005 |
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By:
Wayne E. Ahart, Chairman of the Board |
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(Chief
Executive Officer) |
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Date:
May 13, 2005 |
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By:
Barry N. Shamas, Executive V.P. |
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(Chief
Financial Officer) |