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EX-32 - BNL FINANCIAL CORPex32.htm
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UNITED STATES
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 June 30, 2010

o 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
 

BNL FINANCIAL CORPORATION
 (Exact name of Registrant as specified in its charter) 

IOWA
42-1239454
(State of incorporation)
(I.R.S. Employer Identification No.)
   
7010 Hwy 71 W., Ste 100
 
Austin, Texas
78735
(Address of principal executive offices)
(Zip Code)
   
   

Registrant's telephone number, including area code: (512) 383-0220

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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x      Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See the definitions of  “large accelerated filer,” “accelerated filer,” and  “smaller reporting company”  in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o                               Accelerated filer o                     

Non-accelerated filer x                                Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o            No x

As of June 30, 2010, the Registrant had 15,095,743 shares of Common Stock, no par value, outstanding.

 
 
 
 

 

BNL FINANCIAL CORPORATION AND SUBSIDIARIES
 
PART I - FINANCIAL INFORMATION

 
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 June 30, 2010 and the related Consolidated Statements of Income and Comprehensive Income for the three-month and six-month  periods ended June 30, 2010 and 2009 and the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009.  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 referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

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, 2009 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 March 30, 2010, 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, 2009 is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.


        /s/ Smith, Carney & Co.
Oklahoma City,  Oklahoma                                                                                         SMITH, CARNEY & CO., p.c.
August 13, 2010

 
 
 
3


BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
ASSETS  
 
2010 (Unaudited)
   
2009 (Audited)
 
Cash and cash equivalents
  $ 9,655,382     $ 8,090,103  
Investment in fixed maturities, at fair value Available for Sale (amortized cost $42,000)
    158,000        146,720  
Investment in fixed maturities, at amortized cost, Held to Maturity (fair value $16,896,556; $18,423,612, respectively)
    16,402,594       18,358,628  
Other long-term investments (fair value $677,256, $769,663)
    1,156,829       1,180,041  
Investment in equity securities (cost $611,559, $711,915)
    485,280       674,671  
Total Investments, Including Cash and Cash Equivalents
    27,858,085       28,450,163  
                 
Accrued investment income
    114,869       128,469  
Furniture and equipment, net
    835,739       835,367  
Deferred policy acquisition costs
    247,982       253,254  
Policy loans
    151,627       162,395  
Receivable from reinsurer
    47,475       47,475  
Premiums due and unpaid
    1,000,318       967,508  
Income tax assets
    96,000       106,000  
Intangible assets
    122,500       125,408  
Other assets
    166,075       292,002  
Total Assets
  $ 30,640,670     $ 31,368,041  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Liabilities:
               
Liabilities for future policy benefits
  $ 2,051,666     $ 2,143,273  
Policy claims payable
    1,496,935       1,348,590  
Annuity deposits
    2,440,251       2,505,778  
Deferred annuity profits
    192,800       201,492  
Premium deposit funds
    20,818       20,547  
Supplementary contracts without life contingencies
    33,475       36,791  
Advanced and unallocated premium
    1,194,941       968,159  
Commissions payable
    625,935       615,455  
Accrued taxes and expenses
    230,337       406,932  
Bonds payable
    1,300,708       1,323,388  
Other liabilities
    1,028,978       1,066,525  
Total Liabilities
    10,616,844       10,636,930  
                 
Shareholders' Equity:
               
Common stock, $.02 stated value, 45,000,000 shares authorized, 15,463,965  shares issued and outstanding
    309,279       309,279  
Additional paid-in capital
    5,709,216       5,725,590  
Accumulated other comprehensive income (loss)
    (55,325 )     36,042  
Accumulated surplus
    14,526,450       15,092,975  
Treasury stock at cost, 368,222; 343,194 shares, respectively
    (465,794 )     (432,775 )
Total Shareholders' Equity
    20,023,826       20,731,111  
Total Liabilities and Shareholders' Equity
  $ 30,640,670     $ 31,368,041  
 
See accompanying notes and Independent Accountants’ Report

 
 
 
4


BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2010
(Unaudited)
   
2009
(Unaudited)
   
2010
(Unaudited)
   
2009
(Unaudited)
 
Income:
             
 
       
   Premium income
  $ 10,012,029     $ 10,395,720     $ 20,145,999     $ 20,940,846  
   Vision insurance income
    598,126       587,522       1,181,009       1,189,040  
   Net investment income
    244,969       310,613       503,222       607,345  
   Realized gains on debt retirement
    4,860       4,017       4,536       15,985  
   Realized gains (loss)
    (16,552 )     2,497       (16,552 )     2,694  
                                 
Total Income
    10,843,432       11,300,369       21,818,214       22,755,910  
                                 
Expenses:
                               
   Liability for future policy benefits expense
    (33,311 )     83,432       (91,607 )     40,168  
   Policy benefits and other insurance costs
    7,974,422       8,073,895       15,735,019       16,127,308  
  Amortization of deferred policy acquisition  costs
    5,079       9,116       5,273       5,134  
  Operating expenses
    2,190,414       2,241,346       4,239,923       4,339,500  
  Taxes, other than income, fees and assessments
    390,241       399,284       793,874       821,371  
                                 
Total Expenses
    10,526,845       10,807,073       20,682,482       21,333,481  
                                 
Income from Operations before
      Income Taxes
    316,587       493,296       1,135,732       1,422,429  
                                 
   Provision for income taxes
    58,000       81,566       189,000       245,005  
                                 
       Net Income
  $ 258,587     $ 411,730     $ 946,732     $ 1,177,424  
                                 
   Net income per common share (basic and
       diluted)
  $ 0.02     $ 0.03     $ 0.06     $ 0.08  
                                 
   Weighted average number of fully paid
       common shares
    15,113,923       15,120,897       15,116,858       15,161,277  
                                 
Other comprehensive income (loss), net of tax:
                               
   Unrealized gains (losses) on securities:
                               
Unrealized holding gain (loss) arising
     during period (net of tax)
  $ (124,160 )   $ 57,265     $ (104,930 )   75,160  
Reclassification adjustment for loss
     included in net income
    13,563       (2,073 )     13,563       (2,235 )
                                 
Other Comprehensive Income (loss)
    (110,597 )     55,192       (91,367 )     72,925  
                                 
Comprehensive Income
  $ 147,990     $ 466,922     $ 855,365     $ 1,250,348  
 
See accompanying notes and Independent Accountants’ Report

 
 
 
5


BNL FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended
June 30,
 
Cash flows from operating activities:
 
2010
(Unaudited)
   
2009
(Unaudited)
 
Net income
  $ 946,732     $ 1,177,424  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Realized (gain) loss on investments
    16,342       (2,694 )
Realized gain on debt retirement
    (4,536 )     (15,985 )
Decrease in deferred tax asset
    (4,000 )     (29,000 )
Depreciation
    141,833       147,038  
Amortization of deferred acquisition costs, and intangibles
    8,180       8,041  
Accretion of bond discount
    12,446       1,522  
Change in assets and liabilities:
               
Decrease in accrued investment income
    13,599       7,854  
(Increase) decrease in premiums due and unpaid
    (32,811 )     64,317  
Increase (decrease) in liability for future policy benefits
    (91,607       40,168  
Increase (decrease) in policy claims payable
    148,345       (73,772 )
Increase (decrease) in annuity deposits and deferred profits
    (74,219 )     114,630  
Increase (decrease) in premium deposit funds
    271       (653 )
Increase in advanced and unallocated premium
    226,782       325,067  
Increase in commissions payable
    10,479       (6,263 )
Other, decrease
    (86,069 )     (178,242 )
Net Cash Provided By Operating Activities
    1,231,767       1,579,452  
                 
Cash flows from investing activities:
               
Proceeds from maturity or redemption - Held to Maturity Investments     
    4,288,011       6,979,475  
Proceeds from sale of equity securities
    63,014       -  
Proceeds from sale of furniture and equipment
    (210 )     -  
Purchase of furniture and equipment
    (142,236 )     (32,571 )
Purchase of fixed maturity securities - Held to Maturity Investments
    (2,337,192 )     (5,512,934 )
Other investments – Line of credit payments received
    23,212       (2,033 )
Net Cash Provided By In Investing Activities
    1,894,599       1,456,003  
                 
Cash flows from financing activities:
               
Net payments on supplementary contracts
    (3,316 )     (1,533 )
Purchase of treasury stock
    (64,894 )     (109,679 )
Dividends to shareholders
    (1,513,257 )     -  
Bonds payable purchased
    (27,871 )     (16,422 )
Exercised stock options
    48,251       -  
Net Cash Used In Financing Activities
    (1,561,087 )     (127,634 )
Net Increase in Cash and Cash Equivalents
    1,565,279       2,907,821  
Cash And Cash Equivalents, Beginning Of Period
    8,090,103       4,989,381  
Cash And Cash Equivalents, End Of Period
  $ 9,655,382     $ 7,897,202  
 
See accompanying notes and Independent Accountant’s Report
 
 
 
 
6


BNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.  Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) as of June 30, 2010 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 June 30, 2010, and the results of operations and cash flows for the period ended June 30, 2010.  All such adjustments are of a normal and recurring nature.

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, 2009, previously filed with the Commission, for financial statements for the year ended December 31, 2009, prepared in accordance with GAAP. Net income per share of common stock is based on the weighted average number of outstanding common shares.
 
2.  Change in Accounting Estimate

The group dental claims loss ratio was 63.9% during the first six months of 2010 compared to 62.8% for the same period in 2009.  The claims liability at December 31, 2009 was over estimated by approximately $34,000, which had the effect of decreasing claims expense in 2010 in accordance with the ASC 250-10 requirements regarding accounting for a change in estimate.  The over estimation of claims liability at December 31, 2009 resulted in an increase in net income of approximately $28,200, net of tax, for the six months ended June 30, 2010.   Due to the monthly fluctuation in claims incurred this accrual is difficult to estimate.

3.  Investments

The amortized cost and estimated market value of investments in fixed maturity securities are as follows:
 
Portfolio Designated “Held to Maturity”
 
 
June 30, 2010
 
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
 
US Treasury securities and obligations of
   US government corporations and agencies
  $ 4,700,156     $ 76,378     $ -     $ 4,776,534  
Canadian government
    478,623       -       3,226       475,397  
Corporate securities
    3,743,824       184,845       119,169       3,809,500  
Mortgage-backed securities
   GNMA and FNMA CMO
    7,479,991        369,497       14,363       7,835,125  
                                 
Totals
  $ 16,402,594     $ 630,720     $ 136,758     $ 16,896,556  
 
Portfolio Designated “Available for Sale”
 
June 30, 2010
                               
Corporate securities
  $ 42,000     $ 116,000     $ -     $ 158,000  
                                 
Totals
  $ 42,000     $ 116,000     $ -     $ 158,000  
 
The amortized cost and estimated fair value of investments in fixed maturity securities at June 30, 2010 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their life.


 
    Held to Maturity     Available for Sale  
    June 30, 2010     June 30, 2010  
   
Amortized Cost
   
Estimated
 Market Value
   
Amortized Cost
   
Estimated
 Market Value
 
                         
Due in one year or less
  $ 1,293,324     $ 1,298,402     $ -     $ -  
Due after one year through five years
    4,611,086       4,689,152       -       -  
Due after five years through ten years
    1,218,194       1,260,060       -       -  
Due after ten years
    1,800,000       1,813,818       42,000       158,000  
      8,922,604       9,061,432       42,000       158,000  
                                 
Mortgage-backed securities
    7,479,990       7,835,124       -       -  
                                 
    $ 16,402,594     $ 16,896,556     $ 42,000     $ 158,000  

Proceeds from sales and maturities of investments in fixed maturity securities, and equity securities for the six month periods ended June 30, 2010 and 2009 were $4,351,025 and $6,979,475, respectively.  Gross gains were $14,717 and $2,694 and gross losses were $31,059 and $0 as of June 30, 2010 and 2009, respectively.

Investment in equity securities at June 30, 2010 represents common stock investments as follows:

   
2010
 
   
Cost
   
Market
Value
 
             
Banks, trusts and
    Insurance companies
  $ 81,183     $ 12,680  
Industrial and other
    530,376       472,600  
                 
    $ 611,559     $ 485,280  
 
 
Other long-term investments of $1,156,829 consist of, in part, a $1,152,825 convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc. (“EBI”).  The original loan, dated July 25, 2001, was $1,357,407 at 14% interest.  Monthly principal payments were scheduled to begin on September 15, 2008 with a maturity date of August 15, 2015.  On July 14, 2008, the Company and EBI amended the Debenture whereby the monthly principal payments will start on September 15, 2013 with the maturity date extended to August 15, 2020.

Because of the extension of the commencement of principal payments and maturity of the Debenture, the Company analyzed discounted expected future cash flows in accordance with applicable generally accepted accounting principles and established an allowance for credit losses in the amount of $204,582 resulting in a net book value of $1,152,825.  Interest on the debentures is and has been current.

The Company’s policy for recognizing interest income on impaired investments is to recognize interest under the stated loan terms.  Interest on the investment is and has been current.

The average book value on impaired investments during the period ended June 30, 2010 was $1,152,825.  Interest income recognized in 2010 on the impaired investments was $95,019.

Activity in the allowance for credit losses is as follows:
 
   
2010
 
Beginning Balance
  $ 204,582  
Additions charged to operations
    -  
Direct write downs
    -  
Recoveries previously charged to operations
    -  
         
Ending Balance
  $ 204,582  

There was no other-than-temporary impairment recognized in 2010 and therefore no other-than-temporary impairment included in accumulated other comprehensive income.
 
Other long-term investments also include an operating line of credit agreement in the amount of $4,004. On October 15, 2002 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, 2006. Thereafter EPSI pays principal and interest over 60 equal monthly installments until paid in full. The line of credit is at 6.75% and interest and principal payments are current.
 
The Company’s conservative investment philosophies minimize market risk and risk of default by investing in high quality debt instruments with staggered maturity dates.  The Company does not hedge investment risk through the use of derivative financial instruments.  The market value of the Company’s investments in debt instruments varies with changes in interest rates.  A significant increase in interest rates could cause decreases in the market values of investments and have a negative effect on comprehensive income and capital.
 
 
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2010.
 
   
Less than 12 Months
   
12 Months or Greater
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
                                     
Investment in Fixed Maturities,
  Held to Maturity:
                                   
Canadian Government
  $ 475,397     $ 3,226     $ -     $ -     $ 475,397     $ 3,226  
Corporate securities
    449,952       3,835       400,000       107,588       849,952       111,423  
Mortgage-backed securities
  GNMA and FNMA CMO
    660,359       15,364       -       -       660,359       15,364  
              Totals
  $ 1,585,708     $ 22,425     $ 400,000     $ 107,588     $ 1,985,708     $ 130,013  
                                                 
Other Long-Term Investments
  $ -     $ -     $ 673,252     $ 479,572     $ 673,252     $ 479,572  
              Totals
  $ -     $ -     $ 673,252     $ 479,572     $ 673,252     $ 479,572  
                                                 
Equity Securities
  $ 101,325     $ 1,795     $ 284,073     $ 204,536     $ 385,398     $ 206,331  
              Totals
  $ 101,325     $ 1,795     $ 284,073     $ 204,536     $ 385,398     $ 206,331  
 
Federal Agency Mortgage-Backed Securities
 
The unrealized losses on the Company's investment in federal agency mortgage-backed securities were caused by unprecedented circumstances in the economy and problems at government agencies which required a federal bailout.  The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to factors other than credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2010.
 
Corporate Bonds
 
The following table discloses the unrealized losses on corporate bonds with significant unrealized losses.
 
Corporate Bonds
 
June 30, 2010
 
S&P
Rating
   
Amortized Book Value
   
Gross Unrealized Losses
   
Estimated Market Value
 
American General Finance
    B          $ 200,000     $ 43,086     $ 156,914  
MBIA
 
BB+
      200,000       72,248       127,752  
                                 
Totals
          $ 400,000     $ 115,334     $ 284,666  
 
 
The corporate bonds with unrealized losses in the table are insurance corporations that have had their fair value reduced due to the significant economic problems world wide.  The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments.  Therefore, it is expected that the debentures would not be settled at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, it does not consider the investments to be other than temporarily impaired at June 30, 2010.
 
Marketable Equity Securities
 
The table below discloses the unrealized losses on the Company’s marketable equity securities.
 
Equity Securities
 
June 30, 2010
 
Cost
   
Gross Unrealized Gains (Losses)
   
Estimated Market Value
 
Garmin LTD
  $ 220,322     $ (118,192 )   $ 102,130  
Treaty Oak Bank
    50,813       (44,713 )     6,100  
Regions Financial Corporation
    30,370       (23,790 )     6,580  
International Assets
    27,282       (17,842 )     9,440  
Kimberly Clark
    62,125       (1,495 )     60,630  
Intel
    39,200       (300 )     38,900  
                         
Totals
  $ 430,112     $ (206,332 )   $ 223,780  
 
The Company's marketable equity securities include a variety of industries and the following information was obtained from their websites.  Garmin LTD has the largest unrealized loss of $118,192, which compares to an unrealized loss of $112,872 at December 31, 2009.  Garmin manufactures communication and navigational products, and they are the leader in personal navigational devices.  Garmin was profitable in 2009, and the decrease in the stock’s fair value was due to the challenging economic environment in 2008 and 2009.  Treaty Oak Bank is a small local bank that has not been in business long.  The bank’s stock price decreased due to problem commercial loans.  Regions Financial Corporation has suffered from the recession and the reduced demand for loans.  The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider those investments to be other than temporarily impaired at June 30, 2010.
 
4.  Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted ASC 820, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value.  ASC 820 establishes a hierarchal disclosure framework associated with the level of observable pricing to be utilized in measuring assets and liabilities at fair value.  The three broad levels defined by ASC 820 hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.  These generally provide the most reliable evidence and are used to measure fair value whenever available.  The Company’s Level 1 assets and liabilities primarily include equity securities that are traded in an active exchange market.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.  Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.  The Company’s Level 2 assets and liabilities include: fixed maturities short-term investments and cash equivalents (primarily money market funds).  Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 – Fair value is based on significant unobservable inputs for the asset or liability.  These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability.  The Company’s Level 3 assets and liabilities primarily include certain private fixed maturities.  Valuations are determined using valuation methodologies such as discounted cash flow models, other similar techniques and consultation with investment brokers.

 
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2010.

 
 
Description 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
 
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
 
 
 
Total
 
                         
Trading Securities
                       
   Equity Securities – Banks
  $ 12,680     $ -     $ -     $ 12,680  
   Equity Securities - Industrial
        and Other
    472,600       -       -       472,600  
           Total Trading Securities
  $ 485,280     $ -     $ -     $ 485,280  
                                 
Fixed Maturity, Available for
     Sale – Corporate
  $ -     $ 158,000     $ -     $ 158,000  
            Total Fixed Maturity,
               Available for Sale
  $ -     $ 158,000     $ -     $ 158,000  
                                 
Fixed Maturities , Held to
     Maturity
                               
US Treasury Securities and
    Obligations of  US Government
    Corporations and Agencies
  $ 4,776,534     $ -     $ -     $ 4,776,534  
Canadian Government Securities
    475,397       -       -       475,397  
Corporate Securities
    3,456,835       224,913       127,752       3,809,500  
Mortgage-Backed Securities
   GNMA and FNMA CMO
    7,835,125       -       -       7,835,125  
          Total Fixed Maturities,
             Held to Maturity
  $ 16,543,891     $ 224,913     $ 127,752     $ 16,896,556  
                                 
Other Long Term Investments
  -     -     677,256     677,256  
Cash
    4,443,312       -       -       4,443,312  
Cash Equivalents
    -       5,212,070       -       5,212,070  
          Total Other Investments
  $ 4,443,312     $ 5,212,070     $ 677,256     $ 10,332,638  
                                 
                 Total Assets
  $ 21,472,483     $ 5,594,983     $ 805,008     $ 27,872,474  

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the period January 1, 2010 to June 30, 2010, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at June 30, 2010.

   
Other Long-term Investments
   
Fixed
Maturity
   
 
Total
 
Fair value, beginning of period
  $ 769,663     $ 90,000     $ 859,663  
Other-than-temporary decline in fair value:
                       
     Included in net income
    -       -       -  
     Included in other comprehensive income
    -       -       -  
Purchases, sales, issuances and settlements
    (23,211 )     -       (23,211 )
Investment reclassified
    -       -       -  
Temporary increase (decline) in fair value
    (69,196 )     37,752       (31,444 )
                         
     Total
  $ 677,256 )   $ 127,752     $ 805,008  

 
The following table summarizes the fair value and carrying amount of all financial asset and liabilities as of June 30, 2010.

   
2010
   
   
Carrying
   
Fair
   
Assets
 
Amount
   
Value
   
               
Cash and Cash Equivalents
  $ 9,655,382     $ 9,655,382  
(a)
Investments-fixed maturity, available for sale
    158,000       158,000  
(b)
Investments-fixed maturity, held to maturity
    16,402,594       16,896,556  
(b)
Investments-equity securities
    485,280       485,280  
(b)
Other long term investments
    1,156,829       677,256  
(b)
Other financial instruments-Assets
    323,885       323,885  
(a)
                   
Total financial instruments-Assets
  $ 28,181,970     $ 28,196,359    
                   
Liabilities
                 
                   
Premium deposit funds
  $ 20,818     $ 20,818  
(a)
Bonds payable
    1,300,708       1,300,708  
(a)
Supplementary contracts without life contingencies
    33,475       33,475  
(a)
Annuity deposits
    2,440,251       2,440,251  
(a)
                   
Total financial instruments-Liabilities
  $ 3,795,252     $ 3,795,252    

(a) The indicated assets and liabilities are carried at book value, which approximates fair value.
(b) Fair value of investments is based on methods prescribed in ASC 820 as described herein.

5. Dividends Paid.

Dividends in the amount of $1,513,257 were paid on February 26, 2010.

6.  Subsequent Events

In the second quarter of 2009 management adopted ASC 855 and has evaluated subsequent events through August 13, 2010, the date of issuance of the 10-Q.  There are no subsequent events to report.

 
BNL FINANCIAL CORPORATION AND SUBSIDIARIES


In this section, we review the consolidated results of operations for the six months ended June 30, 2010 and 2009 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 June 30, 2010, we had liquid assets of $9,655,382 in cash, money market savings accounts, money market funds, 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. During the first six months of 2010, BNLAC collected $20,121,328 of premiums and annuity deposits (gross before reinsurance) and we had consolidated investment income of $503,222. Other sources of cash flow in the first six months of 2010 were override commissions of $1,181,009 on vision products. The Company paid $12,902,133 of policy benefits in the first six months of 2010.

The Company's investments are primarily in U.S. Government, U.S. Government Agency, Canadian Government and other investment grade bonds. We do not hedge our investment income through the use of derivatives.

Other long term investments of $1,156,829 consist of, in part, a convertible debenture (“debenture”) loan in the amount of $1,152,825 to EPSI Benefits, Inc. (“EBI”).  On July 14, 2008, the Company and EBI, amended the Debenture whereby the monthly principal payments and the maturity date were extended five years.  For various business reasons, management of both companies deemed the amendment as advantageous.  Because of the amendment to the debenture, the Company analyzed discounted expected future cash flows and estimated an adjustment in the book value of the Debenture of ($204,582), from $1,357,407 down to $1,152,825 in 2008.  The note is one of several agreements entered into by the Company's subsidiary 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").

Other long-term investments also include an operating line of credit agreement to EPSI in the amount of $4,004. On October 15, 2002 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, 2006. Thereafter EPSI will pay principal and interest over 60 equal monthly installments until paid in full. The line of credit is at 6.75% and interest and principal payments are current.

In prior years 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, 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 and premium income 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 June 30, 2010, BNLAC had statutory capital and surplus of $18,611,446. 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 second quarter of 2010 was $10,012,029 compared to $10,395,720 for the same period in 2009. Premium income for the first half of 2010 was $20,145,999 compared to $20,940,846 for the same period in 2009. The decrease for the quarter and first half of the year was primarily due to a 16% decrease in new sales of group dental insurance as a result of the impact of the recession on voluntary employee benefits.
 
BNLAC markets group vision insurance products that are underwritten by other insurance companies (BNLAC does not have any exposure to underwriting (claims) losses on these products.)  Vision insurance income for the second quarter of 2010 was $598,126 compared to $587,522 in the second quarter of 2009.  In the first half of 2010 vision income was $1,181,009 compared to $1,189,040 for the same period in 2009.  Vision insurance sales decreased 4.7% and lapses were 3.2% lower in 2010 compared to 2009 resulting in earned vision income being comparable between periods.

Net investment income was $244,969 for the second quarter of 2010 compared to $310,613 for the second quarter of 2009.  Net investment income for the first half of 2010 was $503,222 compared to $607,345 for the same period in 2009.  The decrease in the first half and second quarter was due to the decrease in interest rates on short term investments and fixed securities and a decrease in investments due to dividends paid to shareholders.

Realized gains on debt retirement were $4,860 for the second quarter of 2010 compared to a $4,017 gain for the same period in 2009.  For the first half of 2010 realized gains were $4,536 compared to $15,985 for the same period in 2009.  The realized gains are due to the purchase of a portion of the Company’s outstanding debentures at less than face value.  Realized gains on debt retirement are directly proportional to the number of bonds purchased.

Realized losses on the sale of investments were ($16,552) for the second quarter and first half of 2010 compared to a gain of $2,497 for the second quarter and $2,694 for the first half of 2009.  The realized loss in 2010 was primarily due to the sale of BP Corporation stock owned by the Company.

For the second quarter of 2010, liability for future policy benefits expense was ($33,311) compared to $83,432 for the same period in 2009.  For the six-month period ended June 30, 2010, liability for future policy benefits expense was ($91,607) compared to $40,168 for the same period in 2009.  The decrease in future policy benefits expense in 2010 was primarily due an increase in surrendered policies in 2010 compared to 2009.

Policy benefits and other insurance costs were $7,974,422 in the second quarter of 2010 compared to $8,073,895 for the same period in 2009.  In the first six months of 2010 policy benefits and other insurance costs were $15,735,019 compared to $16,127,308 for the same period in 2009.  The decrease for the quarter and first half of 2010 was primarily due to a decrease in group and individual dental premium income.  Group dental claims were $274,000 less for the first half of 2010 compared to the same period last year.  The claims ratio on group dental insurance, which represents the ratio of claims expensed to premium earned, was 63.9% for the first half of 2010 compared to 62.8% for the first half of 2009.   The liability for unpaid claims is difficult to calculate and group dental claims at December, 2009, were $34,000 less than estimated and they were $139,000 less than estimated at December 31, 2008.

Amortization of deferred policy acquisition costs was $5,079 and $9,116 for the second quarter and $5,273 and $5,134 for the first half of 2010 and 2009, respectively.  Amortization of deferred policy acquisition costs vary in relation to lapses or surrenders of existing policies.

For the second quarter of 2010 operating expenses were $2,190,414 compared to $2,241,346 for the same period in 2009. Operating expenses were $4,239,923 in the first six months of 2010 compared to $4,339,500 for the same period in 2009.  The decrease for 2010 is primarily due to a decrease in payroll expense and incentive bonuses.

Taxes, other than on income, fees and assessments, were $390,241 for the second quarter of 2010 compared to $399,284 for the second quarter of 2009.  Taxes, other than on income, fees and assessments, were $793,874 for the first half of 2010 compared to $821,371 for the same period in 2009.  The decrease for the second quarter and year to date is primarily due to the decrease in premium taxes which are based on premium collected.
 
 
The provision for income taxes in the second quarter of 2010 includes $45,000 current tax expense and $13,000 deferred tax expense compared to $103,566 current tax expense and $22,000 deferred tax credit in the second quarter of 2009.  The provision for income taxes in the first half of 2010 was $193,000 current tax expense and $4,000 deferred tax credit compared to $274,005 current expense and $29,000 deferred tax credit for the same period in 2009.  The decrease for the year in 2010 is primarily due to the decrease in net income.  Deferred tax expense is based on the estimated change in book versus tax assets and liabilities.

Income from operations before income taxes for the second quarter of 2010 was $316,587 compared to $493,296 for the same period in 2009.  For the first half of 2010 income from operations before income taxes was $1,135,732 compared to $1,422,429 for the same period in 2009.  The decrease for the second quarter and first half of 2010 was primarily due to the decrease in premium income, investment income and the increase in the loss ratio on group dental business.


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 June 30, 2010 and December 31, 2009, however we held various financial instruments at June 30, 2010 and December 31, 2009, 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 June 30, 2010 and December 31, 2009 was $17,054,556 and $18,570,332, respectively.

Based on testing at December 31, 2009, a one-percentage point increase in interest rates would result in a decrease in the estimated fair value of fixed maturity securities of $422,000.  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 six months of 2010 resulting from a one percentage point increase in interest rates would be immaterial, holding other variables constant.

Foreign-Exchange Rate Risk – The Company is exposed to foreign exchange risk as a result of the Company’s purchase of $478,623 of Canadian Government bonds.  The Company does not use derivative instruments to hedge against foreign exchange risk.

Commodity Price Risk - We have no financial instruments subject to commodity price risk.

Equity Security Price Risk - Equity securities at June 30, 2010 totaled $485,280, or 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.


Not applicable

 
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


The Company was not a part of any new legal proceedings during the second quarter of 2010.


No material changes from the Company’s response in its 2009 10-K to Item 1A, Part I.


The following table reports the purchases by the Company of its Common Stock during the first half of 2010.

Issuer Purchases of Equity Securities
Period
 
(a)
Total
Number of
Shares
Purchased
   
(b)
Average
Price
Paid
Per Share
 
(c)
Total number of shares purchased as part of publicly announced plans or programs
(d)
Maximum number of shares that may yet be purchased under the plans or programs
Month #1, Jan. 1 thru Jan. 31, 2010
    13,706     $ 1.25  
None
None
Month #2, Feb. 1 thru Feb. 28, 2010
    -       -  
None
None
Month #3, March 1 thru March 31, 2010
    12,582     $ 1.37  
None
None
Month #4, April 1 thru April 30, 2010
    1,860     $ 1.37  
None
None
Month #5, May 1 thru May 31, 2010
    -       -  
None
None
Month #6, June 1 thru June 30, 2010
    22,381     $ 1.25  
None
None
Totals
    50,529              
 
 
 
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.

 
 
The Company reported the results of matters voted upon at its May 27, 2010 Annual Meeting of Stockholders on Form 8-K during the period covered by this report.
 
(a)    None
 
(b)  None
 
 
 
(a) Exhibits Index
 
No.
 
Description
 
Page or Method of Filing
 
3.1
 
Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation of BNL Financial Corporation, dated November 13, 1987.
 
Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the period ending December 31, 1993.
3.2
 
By-laws of BNL Financial Corporation.
 
Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement No. 33-70318.
4.1
 
Instruments defining the rights of security holders, including indentures.
 
Incorporated by reference to Exhibit 4 of the Company's Registration Statement No. 2-94538 and Exhibits 3.5 and 4 of Post-Effective Amendment No. 3 thereto.
4.2
 
Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation on BNL Financial Corporation, dated November 13, 1987.
 
Incorporated by reference to Exhibits 4.2 of the Company's Annual Report on Form 10-KSB for the period ending December 31, 1998.
10.1
 
Form of Agreement between Commonwealth Industries Corporation, American Investors Corporation and Wayne E. Ahart regarding rights to purchase shares of the Company.
 
Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended September 30, 1994.
10.2
 
Agreement dated December 21, 1990 between Registrant and C. Donald Byrd granting Registrant right of first refusal as to future transfers of Mr. Byrd's shares of the Company's common stock.
 
Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended March 31, 1996.
10.3
 
Convertible Debenture Agreement dated July 25, 2001 between BNL Equity Corporation and EPSI Benefits Inc.
 
Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.4
 
Claims Service Agreement dated June 1, 1999 between Brokers National Life Assurance Company and Employer Plan Services Inc.
 
Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.5
 
Office lease agreement dated January 21, 2005, between Brokers National Life Assurance Company and KIMCO for premises in Austin.
 
Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.6
 
Line of Credit Agreement dated October 15, 2004 between Brokers National Life Assurance Company and Employer Plan Services Inc.
 
Incorporated by reference to Exhibit 10.7 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.7
 
Marketing Agreement dated July 25, 2001 between BNL Equity Corporation and Employer Plan Services Inc. and EPSI Benefits Inc.
 
Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.8
 
Outsourcing Agreement dated May 1, 2007 between Brokers National Life Assurance Company and Virtual Item Processing Systems, Inc.
 
Incorporated by reference as filed with the Company’s Annual Report on 10-K for the period ended December 31, 2007.
10.9
 
Amended Convertible Debenture Date July 14, 2008 between BNL Financial Corporation and EPSI Benefits Inc.
 
Incorporated by reference to Exhibit 1 of the Company’s periodic Report on Form 8-K dated July 14, 2008.
11
 
Statement Re computation of per share earnings.
 
Reference is made to the computation of per share earnings as shown page 5 herein and the explanation in Note 1 to the Notes to Consolidated Financial Statements (unaudited), page 5 herein.
18
 
Letter Re Change in accounting principles.
 
None.  Not applicable.
22
 
Published report regarding matters submitted to vote of security holders.
 
The Company’s definitive proxy statement dated May 27, 2010, as filed with the SEC on Schedule 14A on April 20, 2010, is incorporated by reference herein.
23
 
Consents of experts and counsel incorporated by reference into a previously filed Securities Act registration statement.
 
Not applicable.
31.1
   
Filed herewith - E1
31.2
   
Filed herewith – E3
32
   
Filed herewith – E5
 

 
 
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)
     
   
/s/ Wayne E. Ahart             
Date: August 13, 2010
 
By: Wayne E. Ahart, Chairman of the Board
   
(Chief Executive Officer)
     
   
/s/ Barry N. Shamas              
Date: August 13, 2010 
 
By: Barry N. Shamas, Executive V.P.
   
(Chief Financial Officer)
 
 
20