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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 March 31, 2011
 
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 r

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer r    
 Accelerated filer r
   
 Non-accelerated filer r
 Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  r           No x

As of March 31, 2011, the Registrant had 15,078,935 shares of Common Stock, no par value, outstanding.
 
 

 
 
   
Page
PART I   Financial Information
 
     
Item 1.
3
Item 2.
14
Item 3.
16
Item 4. 
17
     
     
PART II  Other Information
 
     
Item 1.
18
Item 1A.  
18
Item 2.
18
Item 3.
18
Item 4.
18
Item 5.
18
Item 6.
19
20
 
 
 
 
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 March 31, 2011 and the related Consolidated Statements of Income and Comprehensive Income for the three-month periods ended March 31, 2011 and 2010 and the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2011 and 2010.  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 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, 2010 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 31, 2011, 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, 2010 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.
May 13, 2011

 
 
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
   
December 31,
 
ASSETS  
 
2011 (Unaudited)
   
2010 (Audited)
 
  Cash and cash equivalents
 
$
6,832,366
   
$
8,632,369
 
      Investment in fixed maturities, at amortized cost, Held to Maturity
         (fair value $17,683,996; $15,057,111, respectively)
   
17,325,642
     
14,706,439
 
  Other long-term investments (fair value $871,430, $876,423)
   
1,054,418
     
1,054,418
 
          Investment in equity securities (cost $961,882, $834,268)
   
1,052,343
     
909,124
 
     Total Investments, Including Cash and Cash Equivalents
   
26,264,769
     
25,302,352
 
                 
  Accrued investment income
   
111,793
     
 90,093
 
  Furniture and equipment, net
   
719,500
     
784,529
 
  Deferred policy acquisition costs
   
223,102
     
223,041
 
  Policy loans
   
166,064
     
160,120
 
  Receivable from reinsurer
   
52,015
     
52,015
 
  Premiums due and unpaid
   
920,539
     
936,941
 
  Income tax assets
   
46,622
     
40,274
 
  Intangible assets
   
118,139
     
119,593
 
  Other assets
   
176,420
     
218,211
 
     Total Assets
 
$
28,798,963
   
$
27,927,169
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Liabilities:
               
  Liabilities for future policy benefits
 
$
2,007,901
   
$
2,057,715
 
  Policy claims payable
   
1,411,733
     
1,353,770
 
  Annuity deposits
   
2,409,336
     
2,384,264
 
  Deferred annuity profits
   
172,069
     
175,074
 
  Premium deposit funds
   
20,146
     
20,088
 
  Supplementary contracts without life contingencies
   
40,224
     
41,932
 
  Advanced and unallocated premium
   
1,226,249
     
1,154,715
 
  Commissions payable
   
623,586
     
536,781
 
  Accrued taxes and expenses
   
318,364
     
298,462
 
  Bonds payable
   
1,300,708
     
1,300,708
 
  Other liabilities
   
1,010,292
     
  989,814
 
     Total Liabilities
   
10,540,608
     
10,313,323
 
                 
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
   
5,704,089
     
5,704,089
 
  Accumulated other comprehensive income
   
62,171
     
45,581
 
  Accumulated surplus
   
12,672,492
     
12,041,213
 
  Treasury stock, at cost, 385,030; 382,030 shares, respectively
   
(489,676
)
   
(486,316
)
     Total Shareholders' Equity
   
18,258,355
     
17,613,846
 
     Total Liabilities and Shareholders' Equity
 
$
28,798,963
   
$
27,927,169
 
 
See accompanying notes and Independent Accountants’ Report
 
 
 
 
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
Three Months Ended
March 31,
 
 
2011
(Unaudited)
   
2010
(Unaudited)
 
Income:
         
   Premium income
$
 9,807,023
   
$
10,133,970
 
   Vision insurance income
 
637,176
     
582,883
 
   Net investment income
 
205,696
     
258,253
 
   Realized gains (losses) on debt retirement
 
-
     
(324
   Realized gains (losses)
 
(3,291
   
-
 
               
       Total Income
 
10,646,604
     
10,974,782
 
               
Expenses:
             
   Liability for future policy benefits expense
 
(49,814
)
   
(58,295
)
   Policy benefits and other insurance costs
 
7,493,052
     
7,760,598
 
   Amortization of deferred policy acquisition costs
 
(60
)
   
194
 
   Operating expenses
 
2,044,793
     
2,049,509
 
   Taxes, other than income, fees and assessments
 
402,434
     
403,632
 
               
       Total Expenses
 
 9,890,405
     
10,155,638
 
               
Income from Operations before Income Taxes
 
756,199
     
819,144
 
               
       Provision for income taxes
 
124,923
     
131,000
 
               
          Net Income
$
631,276
   
$
688,144
 
               
Net income per common share (basic and diluted)
$
0.04
   
$
0.05
 
               
Weighted average number of fully paid common shares
 
15,081,184
     
15,128,074
 
               
Other comprehensive income, net of tax:
             
   Unrealized gains on securities:
             
      Unrealized holding gain arising during period (net of tax)
$
16,590
   
$
19,230
 
               
         Other Comprehensive Income
 
16,590
     
19,230
 
               
         Comprehensive Income
$
647,866
   
$
707,374
 

See accompanying notes and Independent Accountants’ Report
 
 
 
 
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Three Months Ended
March 31,
 
   
2011
(Unaudited)
   
2010
(Unaudited)
 
             
Cash flows from operating activities:
               
   Net income
 
$
631,276
   
$
688,144
 
   Adjustments to reconcile net income to net cash provided by operating activities:
               
      Realized gain on investments
   
(3,291
)
   
-
 
      Realized loss on debt retirement
   
-
     
324
 
      Decrease in deferred tax asset
   
(9,000
)
   
(17,000
)
      Depreciation
   
75,157
     
63,578
 
      Amortization of deferred acquisition costs, and intangibles
   
1,393
     
1,647
 
      Accretion of bond discount
   
6,121
     
7,585
 
   Change in assets and liabilities:
               
      Increase in accrued investment income
   
(21,700
)
   
(43,401
)
      Decrease in premiums due and unpaid
   
16,402
     
18,019
 
      Decrease in liability for future policy benefits
   
(49,814
)
   
(58,295
)
      Increase in policy claims payable
   
57,963
     
52,413
 
      Increase (decrease) in annuity deposits and deferred profits
   
22,067
     
(32,879
)
      Increase (decrease) in premium deposit funds
   
58
     
(2,765
)
      Increase in advanced and unallocated premium
   
71,534
     
70,786
 
      Increase in commissions payable
   
86,805
     
35,550
 
      Other, increase
   
116,552
     
72,215
 
          Net Cash Provided By Operating Activities
   
1,001,523
     
855,921
 
                 
Cash flows from investing activities:
               
   Proceeds from maturity or redemption - Held to Maturity Investments
   
540,188
     
1,355,400
 
   Purchase of furniture and equipment
   
(10,128
)
   
(24,873
)
   Purchase of fixed maturity securities - Held to Maturity Investments
   
(3,163,449
)
   
(1,450,000
)
   Purchase of equity securities
   
(130,664
)
   
-
 
   Other investments – Line of credit payments received
   
-
     
11,638
 
         Net Cash Used In Investing Activities
   
(2,764,053
)
   
(107,835
)
                 
Cash flows from financing activities:
               
   Net payments on supplementary contracts
   
(1,708
)
   
(1,661
)
   Purchase of treasury stock
   
(3,360
)
   
(34,370
)
   Dividends to shareholders
   
-
     
(1,513,257
)
   Bonds payable purchased
   
(32,407
)
   
(32,731
)
   Exercised stock options
   
-
     
48,251
 
         Net Cash Used In Financing Activities
   
(37,475
)
   
(1,533,768
)
   Net Decrease in Cash and Cash Equivalents
   
(1,800,005
)
   
(785,682
)
   Cash And Cash Equivalents, Beginning Of Period
   
8,632,371
     
8,090,103
 
   Cash And Cash Equivalents, End Of Period
 
$
6,832,366
   
$
7,304,421
 
                 
 
See accompanying notes and Independent Accountant’s Report

 

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

The accompanying Consolidated Financial Statements (unaudited) as of March 31, 2011 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, 2011, and the results of operations and cash flows for the period ended March 31, 2011.  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, 2010, previously filed with the Commission, for financial statements for the year ended December 31, 2010, 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 62.17% during the first three months of 2011 compared to 62.41% for the same period in 2010.  The claims liability at December 31, 2010 was over estimated by approximately $12,000, which had the effect of decreasing claims expense in 2011 in accordance with the ASC 250-10 requirements regarding accounting for a change in estimate.  The over estimation of claims liability at December 31, 2010 resulted in an increase in net income of approximately $9,960, net of tax, for the three months ended March 31, 2011.   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”
 
 
March 31, 2011
 
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
 
US Treasury securities and obligations of US government
     corporations and agencies
 
$
7,544,080
   
$
62,454
   
$
78,119
   
$
7,528,415
 
Canadian government
   
997,697
     
356
     
3,942
     
994,111
 
Corporate securities
   
2,750,660
     
192,410
     
 72,734
     
2,870,336
 
Mortgage-backed securities GNMA and FNMA CMO
   
6,033,205
     
 265,813
     
 7,884
     
6,291,134
 
                                 
Totals
 
$
17,325,642
   
$
521,033
   
$
162,679
   
$
17,683,996
 

 
 
 
The amortized cost and estimated fair value of investments in fixed maturity securities at March 31, 2011 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  
 
    March 31, 2011  
         
Estimated
 
   
Amortized Cost
   
 Market Value
 
Due in one year or less
 
$
1,580,346
   
$
1,585,224
 
Due after one year through five years
   
3,422,643
     
3,553,609
 
Due after five years through ten years
   
3,236,679
     
3,220,774
 
Due after ten years
   
3,052,769
     
3,033,256
 
     
11,292,437
     
11,392,863
 
                 
Mortgage-backed securities
   
6,033,205
     
6,291,133
 
                 
   
$
17,325,642
   
$
17,683,996
 
 
Proceeds from sales and maturities of investments in fixed maturity securities, and equity securities for the three month period ended March 31, 2011 and 2010 were $540,188 and $1,355,400 respectively.  Gross gains were $11 and $0 and gross losses were $253 and $0 as of March 31, 2011 and 2010, respectively.

Investment in equity securities at March 31, 2011 represents common stock investments as follows:

   
2011
 
   
Cost
   
Market
Value
 
Banks, trusts and insurance companies
 
$
30,370
   
$
7,260
 
Industrial and other
   
931,512
     
1,045,083
 
                 
   
$
961,882
   
$
1,052,343
 

Other long-term investments of $1,054,418 consist of a 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.

In accordance with applicable generally accepted accounting principles the Company analyzes discounted expected future cash flows and in prior years established an allowance for credit losses in the amount of $302,989 resulting in a net book value of $1,054,418.  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 March 31, 2011 was $1,054,418.  Interest income recognized in 2011 on the impaired investments was $47,508.

Activity in the allowance for credit losses is as follows:
 
   
2011
 
Beginning Balance
 
$
302,989
 
Additions charged to operations
   
-
 
Direct write downs
   
-
 
Recoveries previously charged to operations
   
-
 
         
Ending Balance
 
$
302,989
 
 
In the first quarter of 2011 the Company recognized an other than temporary impairment on the 6,100 shares of common stock of Treaty Oak Bank and wrote the stock down to $0, for a realized loss of $3,050.  The stock was purchased for $50,813 or $8.33 a share.  The bank’s stock was written down to market value of $0.50 at September 30, 2010.
 
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 March 31, 2011.
 
   
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
                                   
US Treasury securities and
    obligations of US government
    corporations and agencies
 
$
4,422,053
   
$
78,119
   
$
 
 
-
   
$
-
   
$
4,422,053
   
$
78,119
 
Canadian government
   
754,102
     
3,942
                     
754,102
     
3,942
 
Corporate securities
   
347,429
     
9,954
     
337,220
     
62,780
     
684,649
     
 72,734
 
Mortgage-backed securities
    GNMA and FNMA CMO
   
  585,811
     
6,463
     
 64,899
     
1,421
     
  650,710
     
 7,884
 
              Totals
 
$
6,109,395
   
$
98,478
   
$
  402,119
   
$
 64,201
   
$
6,511,514
   
$
162,679
 
                                                 
Other Long-Term Investments
 
$
-
   
$
-
   
$
871,430
   
$
182,988
   
$
871,430
   
$
182,988
 
              Totals
 
$
-
   
$
-
   
$
871,430
   
$
182,988
   
$
871,430
   
$
182,988
 
                                                 
Equity Securities
 
$
59,250
   
$
2,157
   
$
140,768
   
$
137,206
   
$
200,018
   
$
139,363
 
              Totals
 
$
59,250
   
$
2,157
   
$
140,768
   
$
137,206
   
$
200,018
   
$
139,363
 

 

 
U.S. Treasury and U.S. Government Agency Obligations
 
The unrealized losses on the Company's investments in U.S. Treasury and U. S. Government Agency obligations are all less than 12 months old.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.  Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity or until they are called, the Company does not consider those investments to be other than temporarily impaired at March 31, 2011.
 
Federal Agency Mortgage-Backed Securities
 
The unrealized losses on the Company's investment in federal agency mortgage-backed securities are not material at December 31, 2010.  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 March 31, 2011.

Corporate Bonds
 
The following table discloses the unrealized losses on corporate bonds with significant unrealized losses.
 
Corporate Bonds
 
March 31, 2011
S&P
Rating
 
 
Amortized
Book Value
   
Gross
Unrealized
Gains
   
 
Estimated
Market Value
 
American General Finance
B
 
$
200,000
   
$
16,100
   
$
183,900
 
MBIA
B
   
200,000
     
46,680
     
153,320
 
                           
Totals
   
$
400,000
   
$
 62,780
   
$
337,220
 
 
The corporate bonds with unrealized losses in the table are insurance corporations that have had their fair value increase significantly in 2010 and in the first quarter of 2011.  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 March 31, 2011.
 
Marketable Equity Securities
 
The table below discloses the unrealized losses on the Company’s marketable equity securities.

        Equity Securities
 
March 31, 2011
 
 
 
Cost
   
Gross
Unrealized
Losses
   
Estimated
Market Value
 
Garmin LTD
 
$
220,322
   
$
(101,812
)
 
$
118,510
 
Regions Financial Corporation
   
30,370
     
(23,110
)
   
7,260
 
International Assets
   
27,282
     
(12,284
)
   
14,998
 
                         
Totals
 
$
277,974
   
$
(137,206
)
 
$
140,768
 

 
 
 
The Company's marketable equity securities include a variety of industries.  Garmin LTD has the largest unrealized loss of $101,812, which is approximately a 46% decrease in value. Garmin manufactures communication and navigational products, and they are the leader in personal navigational devices.  Garmin was profitable in 2010.  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 March 31, 2011.
 
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 (corporate public, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities, 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 March 31, 2011.

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
  $ 7,260     $ -     $ -     $ 7,260  
   Equity Securities - Industrial and Other
    1,045,083       -       -       1,045,083  
         Total Trading Securities
  $ 1,052,343     $ -     $ -     $ 1,052,343  
                                 
Fixed Maturities, Held to Maturity
                               
US Treasury Securities and
    Obligations of  US Government Corporations and Agencies
  $ 7,528,415     $ -     $ -     $ 7,528,415  
Canadian Government
    994,111       -       -       994,111  
Corporate Securities
    2,717,016       -       153,320       2,870,336  
Mortgage-Backed Securities GNMA and FNMA CMO
    6,291,134       -       -       6,291,134  
         Total Fixed Maturities, Held to Maturity
  $ 17,530,676     $ -     $ 153,320     $ 17,683,996  
                                 
Other Long Term Investments
    -       -       871,430       871,430  
Cash
    2,152,466       -       -       2,152,466  
Cash Equivalents
    4,679,900       -       -       4,679,900  
         Total Other Investments
  $ 6,832,366     $ -     $ 871,430     $ 7,703,796  
                                 
               Total Assets
  $ 25,415,385     $ -     $ 1,024,750     $ 26,440,135  

 

 
The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the period January 1, 2011 to March 31, 2011, 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 March 31, 2011.

   
Other Long-term Investments
   
Fixed
Maturity
   
Total
 
Beginning balance
 
$
876,423
   
$
152,500
   
$
1,028,943
 
   Transfers into Level 3
   
-
     
-
     
-
 
   Transfers out of Level 3
   
-
     
-
     
-
 
   Total gains or losses
                       
       Included in earnings (or changes in net assets)
   
-
     
-
     
-
 
           Included in other comprehensive income
   
-
     
-
     
-
 
Purchases, Issuance, sales and settlements
                       
     Purchases
   
-
     
-
     
-
 
     Issuances
   
-
     
-
     
-
 
     Sales
   
-
     
-
     
-
 
     Settlements
   
-
     
-
     
-
 
Temporary increase (decline) in fair value
   
(4,993
)
   
800
     
(4,193
)
                         
Ending Balance
 
$
871,430
   
$
153,320
   
$
1,024,750
 
 
The following table summarizes the fair value and carrying amount of all financial assets and liabilities as of March 31, 2011.
 
      2011    
      Carrying   Fair    
Assets
 
  Amount   Value    
Cash and cash equivalents
    $ 6,832,366   $ 6,832,366  
(a)
Investments-fixed maturity, held to maturity
      17,325,642     17,683,996  
(b)
Investments-equity securities
      1,052,343     1,052,343  
(b)
Other long term investments
      1,054,418     871,430  
(b)
Other financial instruments-Assets
      320,854     320,854  
(a)
                   
Total financial instruments-Assets
    $ 26,585,623   $ 26,760,989    
                   
Liabilities
                 
Premium deposit funds
    $ 20,146   $ 20,146  
(a)
Bonds payable
      1,300,708     1,300,708  
(a)
Supplementary contracts without life contingencies
      40,224     40,224  
(a)
Annuity deposits
      2,409,336     2,409,336  
(a)
                   
Total financial instruments-Liabilities
    $ 3,770,414   $ 3,770,414    
 
(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.

There were no dividends paid during the period covered by this report.

6.  Subsequent Events

There are no subsequent events to report through May 13, 2011.



 
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, 2011 and 2010 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 Afghanistan, 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 (viii)  The Affordable Health Care for America Act passed in 2010.

Liquidity and Capital Resources
 
At March 31, 2011, the Company had liquid assets of $6,832,366 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 three months of 2011, BNLAC collected $9,903,489 of premiums and annuity deposits (gross before reinsurance) and we had consolidated investment income of $205,696. Other sources of cash flow in the first three months of 2011 were override commissions of $637,176 on vision products. The Company paid $6,069,308 of policy benefits in the first three months of 2011.

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 $1,054,418 consist of a convertible debenture (“debenture”) loan 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.  In the fourth quarter of 2010, one of the two original EBI shareholders agreed to sell her ownership in EBI to the other shareholder and pursue employment elsewhere.  Due to this change in ownership, the Company increased its allowance for credit losses in the amount of $98,407 resulting in a net book value of $1,054,418.
 
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").

 
 

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 shareholder, 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 March 31, 2011, BNLAC had statutory capital and surplus of $16,826,861. 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 2011 was $9,807,023 compared to $10,133,970 for the same period in 2010. The decrease of $326,947 for the quarter was primarily due to a 3.3% decrease in group dental premium income.

BNLAC markets group vision insurance products that are underwritten by other insurance companies, and BNLAC does not have any exposure to underwriting (claims) losses.  The Company had vision insurance income of $637,176, in 2011 compared to $582,883 in 2010.  As a result of increasing renewal vision premiums, vision income has continued to increase even though new sales have declined during this economic downturn.

Net investment income was $205,696 for the first quarter of 2011 compared to $258,253 for the first quarter of 2010.  The decrease for the quarter was due to the decrease in the amount of fixed maturity securities.

The Company had a realized loss on debt extinguishments of ($324) in 2010, compared to $0 in 2011.  The Company did not purchase any debentures payable at less than par value in 2011.

Realized losses were $3,291 for the first quarter of 2011 compared to $0 for the same period in 2010.  The realized loss in 2011 resulted primarily from the write down of Treaty Oak Bank common stock to $0, for a loss of $3,050.

For the first quarter of 2011, liability for future policy benefits expense was ($49,814) compared to ($58,295) for the same period in 2010.  The decrease in the expense for future policy benefits in 2011 was primarily due to a decrease in the amount of insurance surrendered or lapsed in 2011 compared to the same period in 2010.

Policy benefits and other insurance costs were $7,493,052 in the first quarter of 2011 compared to $7,760,598 for the same period in 2010.  The decrease was primarily due to a decrease in policies in force.  The statutory claims ratio on group dental insurance, which represents the ratio of claims expense incurred to premiums earned, was 62.2% for the first three months of 2011 compared to 62.4% for the first quarter of 2010.   The Company had a $12,000 over estimation of unpaid claims at December 31, 2010 compared to an under estimation of $10,000 at December 31, 2009.  The liability for unpaid claims is difficult to estimate and normally results in a variance from actual results.

 
 
 
Amortization of deferred policy acquisition costs was ($60) and $194 for the first quarter 2011 and 2010, respectively.  Amortization of deferred policy acquisition costs are primarily costs associated with a seasoned block of business written between 1988 and 1990.  Amortization expense per year may vary in relation to lapses or surrenders of existing policies.

For the first quarter of 2011 operating expenses were $2,044,793 compared to $2,049,509 for the same period in 2010.  The decrease for the quarter is primarily due to a decrease in expenses directly related to the lower amount of business in force.

Taxes, other than on income, fees and assessments, were $402,434 for the first quarter of 2011 compared to $403,632 for the same period in 2010.  The decrease for the current year is primarily due to a decrease in premium taxes.

The provision for income taxes in the first quarter of 2011 includes $133,923 current tax expense and $9,000 deferred tax credit compared to $148,000 current tax expense and $17,000 deferred tax credit in 2010.  Tax expense is consistent between the two periods in relation to 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 first quarter of 2011 was $756,199 compared to $819,144 for the same period in 2010.  The decrease in 2011 was primarily due to the decrease in premium income and investment income.

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, 2011 and December 31, 2010, however we held various financial instruments at March 31, 2011 and 2010, 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, 2011 and December 31, 2010 was $17,683,996 and $15,057,111, respectively.

Based on testing at December 31, 2010, 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 three months of 2011 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, 2011 totaled $1,054,418, or 4.0% 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.  Controls 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 2011.


Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table reports the purchases by the Company of its Common Stock during the first quarter of 2011.

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, 2011
   
-
   
$
-
 
None
None
Month #2, Feb 1 thru Feb 28, 2011
   
3,000
   
$
1.12
 
None
None
Month #3, Mar 1 thru Mar 31, 2011
   
-
   
$
-
 
None
None
Totals
   
3,000
             
 
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. (Removed and Reserved).
 
Item 5. Other Information.
None
 


 
Item 6. Exhibits and Reports on Form 10-Q.
 
(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, 2011, as filed with the SEC on Schedule 14A on April 20, 2011, 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
 
 
 

(b) Material Contracts - Reports on Form 8-K.
No items were reported on Form 8-K during the period covered by this report.
 
 
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: May 13, 2011
 
By: Wayne E. Ahart, Chairman of the Board
   
(Chief Executive Officer)
     
   
/s/ Barry N. Shamas                                                
Date: May 13, 2011 
 
By: Barry N. Shamas, Executive V.P.
   
(Chief Financial Officer)