10-Q 1 secondq04.txt BNL FINANCIAL CORPORATION 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, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______to_____ . Commission File No. 000-16880 ------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION (Exact name of Registrant as specified in its charter) IOWA 42-1239454 (State of incorporation) (I.R.S. Employer Identification No.) 2100 W. William Cannon, Suite L Austin, Texas 78745 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 383-0220 ------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No____ As of June 30, 2004, the Registrant had 19,417,554 shares of Common Stock, no par value, outstanding. ------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements INDEPENDENT ACCOUNTANTS' REPORT To The Board of Directors BNL Financial Corporation We have reviewed the accompanying Consolidated Balance Sheet of BNL Financial Corporation and Subsidiaries as of June 30, 2004 and the related Consolidated Statements of Income and Comprehensive Income for the three-month and six-month periods ended June 30, 2004 and 2003 and the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the Consolidated Balance Sheet of BNL Financial Corporation and Subsidiaries as of December 31, 2003 and the related Consolidated Statements of Income and Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for the year then ended (not presented herein); and in our report dated February 9, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived. Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c. August 13, 2004 /s/ Smith Carney & Co. 1
----------------------------------------------------------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ---------------------------------------------------------------------------------------------------------------------------------- ASSETS June 30 December 31, 2004 (Unaudited) 2003 (Audited) -------------------- ------------------- Cash and cash equivalents $4,090,229 $ 3,398,661 Investment in fixed maturities, at fair value Available for Sale (amortized cost $886,446, $1,245,558, respectively) 953,625 1,457,988 Investment in fixed maturities, at amortized cost, Held to Maturity (fair value $15,393,179; $15,173,490, respectively) 15,535,915 15,120,096 Other long-term investments 1,557,407 1,527,407 Investment in equity securities (cost $362,058; $339,509, respectively) 420,796 373,214 -------------------- ------------------- Total Investments, Including Cash and Cash Equivalents 22,557,972 21,877,366 Accrued investment income 207,578 183,713 Furniture and equipment, net 496,067 486,000 Deferred policy acquisition costs 289,680 220,937 Policy loans 153,219 144,122 Receivable from reinsurer 31,065 31,065 Premiums due and unpaid 754,067 1,059,950 Income tax assets 227,000 195,136 Intangible assets 158,170 162,237 Other assets 179,832 194,728 -------------------- ------------------- Total Assets $25,054,650 $24,555,254 ==================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Liabilities for future policy benefits $ 2,008,483 $ 1,577,978 Policy claims payable 2,331,661 2,578,992 Annuity deposits 2,761,491 2,777,665 Deferred annuity profits 401,117 425,980 Premium deposit funds 39,054 40,260 Supplementary contracts without life contingencies 56,841 69,596 Advanced and unallocated premium 966,023 1,127,148 Commissions payable 557,937 433,257 Accrued taxes and expenses 686,474 777,128 Bonds payable 2,759,155 3,025,499 Other liabilities 387,303 370,569 -------------------- ------------------- Total Liabilities 12,955,539 13,204,072 -------------------- ------------------- COMMITMENTS AND CONTINGENCIES Contingent long-term liabilities 480,428 660,447 -------------------- ------------------- Total Commitments and Contingencies 480,428 660,447 -------------------- ------------------- Shareholders' Equity: Common stock, $.02 stated value, 45,000,000 shares authorized, 20,980,760; 20,980,760 shares issued and outstanding, respectively 419,616 419,616 Additional paid-in capital 10,790,730 10,787,911 Accumulated other comprehensive income 81,536 177,768 Accumulated surplus 1,465,853 457,336 Contingent Treasury stock, 320,285; 440,298 shares respectively (480,428) (660,447) Treasury stock, at cost; 1,242,921; 1,098,493 shares respectively (658,624) (491,449) -------------------- ------------------- Total Shareholders' Equity 11,618,683 10,690,735 -------------------- ------------------- Total Liabilities and Shareholders' Equity $25,054,650 $24,555,254 ==================== =================== --------------------------------------------------------------------------------------------------------------------------------- (See accompanying notes and Independent Accountants' Report)
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----------------------------------------------------------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 -------------------------------- ----------------------------------- 2004 2003 2004 2003 (Unaudited) (Unaudited) (Unaudited) (Unaudited) --------------- -------------- ---------------- -------------- Income: Premium income $10,720,870 $10,079,609 $ 21,509,605 $20,430,953 Net investment income 255,333 247,274 490,180 490,147 Marketing fees 41,409 33,915 83,076 66,249 Realized gains 320,398 101,754 319,904 100,459 --------------- -------------- ---------------- -------------- Total Income 11,338,010 10,462,552 22,402,765 21,087,808 --------------- -------------- ---------------- -------------- Expenses: Liability for future policy benefits expense 6,605 (9,862) 430,505 44,265 Policy benefits and other insurance costs 8,240,679 7,628,475 16,295,317 15,186,647 Amortization of deferred policy acquisition costs 9,202 6,362 14,256 11,069 Operating expenses 2,070,437 1,886,627 3,877,727 3,726,965 Taxes, other than income, fees and assessments 234,095 298,638 614,681 675,410 --------------- -------------- ---------------- -------------- Total Expenses 10,561,018 9,810,240 21,232,486 19,644,356 --------------- -------------- ---------------- -------------- Income from Operations before Income Taxes 776,992 652,312 1,170,279 1,443,452 Provision for income taxes 103,982 111,750 161,761 314,000 --------------- -------------- ---------------- -------------- Net Income $ 673,010 $ 540,562 $ 1,008,518 $1,129,452 =============== ============== ================ ============== Net income per common share (basic and diluted) $0.03 $0.02 $0.05 $0.05 =============== ============== ================ ============== Weighted average number of fully paid common shares 19,415,273 20,250,423 19,426,714 20,252,734 =============== ============== ================ ============== Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gain (loss) arising during period $ (13,315) $174,464 $ 1,673 $238,260 Reclassification adjustment for loss included in net income (93,346) (8,452) (97,905) (7,156) --------------- -------------- ---------------- -------------- Other Comprehensive Income (Loss) (106,661) 166,012 (96,232) 231,104 --------------- -------------- ---------------- -------------- Comprehensive Income $566,349 $706,574 $ 912,286 $1,360,556 =============== ============== ================ ============== ----------------------------------------------------------------------------------------------------------------------------------- (See accompanying notes and Independent Accountants' Report)
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----------------------------------------------------------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, ------------------------------------- 2004 2003 (Unaudited) (Unaudited) ----------------- ---------------- Cash flows from operating activities: Net income $ 1,008,518 $ 1,129,452 Adjustments to reconcile net income to net cash provided by operating activities: Realized gain on investments (310,167) (100,459) Realized loss on furniture and fixtures 3,263 0 Decrease (increase) in deferred tax asset (11,000) 25,998 Depreciation 104,400 110,642 Amortization of deferred acquisition costs, organization costs and intangibles 14,256 13,977 Accretion of bond discount 4,844 4,949 Change in assets and liabilities: (Increase) decrease in accrued investment income (13,151) 22,654 Decrease in premiums due and unpaid 305,343 96,224 Increase in liability for future policy benefits 430,505 44,265 Decrease in policy claims payable (247,331) (149,994) Decrease in annuity deposits and deferred profits (41,037) (15,957) Decrease in premium deposit funds (1,206) (1,513) Decrease in advanced and unallocated premium (161,125) (361,035) (Increase) decrease in commissions payable 124,680 (28,420) Other, decrease (76,008) (48,446) ----------------- ---------------- Net Cash Provided By Operating Activities 1,134,784 742,337 ----------------- ---------------- Cash flows from investing activities: Proceeds from sales of furniture and equipment 23,800 3,791 Proceeds from maturity or redemption - Available for Sale Investments 1,620,060 1,638,306 Proceeds from maturity or redemption - Held to Maturity Investments 3,316,080 1,950,000 Proceeds from sales of equity securities 86,628 0 Purchase of furniture and equipment (141,530) (90,024) Purchase of fixed maturity securities - Held to Maturity Investments (4,905,679) (5,256,299) Purchase of equity securities (109,629) (47,971) Other investments - Line of credit advanced 0 (30,000) ----------------- ---------------- Net Cash Used In Investing Activities (110,270) (1,832,197) ----------------- ---------------- Cash flows from financing activities: Net (payments) receipts on supplementary contracts (12,755) (13,510) Treasury shares purchased (162,224) (67,227) Treasury shares sold 14,289 0 Bonds payable purchased (191,498) (35,096) Exercised stock options and stock bonus 19,242 19,892 ----------------- ---------------- Net Cash Used In Financing Activities (332,946) (95,941) ----------------- ---------------- Net Increase In Cash and Cash Equivalents 691,568 (1,185,801) Cash And Cash Equivalents, Beginning Of Period 3,398,661 5,660,879 ----------------- ---------------- Cash And Cash Equivalents, End Of Period $ 4,090,229 $ 4,475,078 ================= ================ ----------------------------------------------------------------------------------------------------------------------------------- (See accompanying notes and Independent Accountant's Report)
4 ------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------------------------------- Note 1. The accompanying Consolidated Financial Statements (unaudited) as of June 30, 2004 and June 30, 2003 have been reviewed by independent certified public accountants. In the opinion of management, the aforementioned financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2004, and the results of operations for the three and six month periods ended June 30, 2004 and June 30, 2003, and the cash flows for the six month periods ended June 30, 2004 and June 30, 2003. All such adjustments are of a normal recurring nature except as described in Note 2 below. The statements have been prepared to conform to the requirements of Form 10-Q and do not necessarily include all disclosures required by generally accepted accounting principles (GAAP). The reader should refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, previously filed with the Commission, for financial statements for the year ended December 31, 2003, prepared in accordance with GAAP. Net income per share of common stock is based on the weighted average number of outstanding common shares. Note 2. The liability for future policy benefits includes a benefit reserve of approximately $411,000 for the individual dental policies in force at June 30, 2004. The Company has marketed this product since 2001 and was notified by its actuary in the first quarter of 2004, that new reserve rules prescribed by most state insurance departments now require additional reserves be established to more properly match premiums and benefits for this product. The effect of this change in reserve estimate on the net income in the period ended June 30, 2004 is approximately $265,000 ($.01 per share) after considering the tax effect and a related increase in deferred acquisition costs. 5 ------------------------------------------------------------------------------- BNL FINANCIAL CORPORATION AND SUBSIDIARIES ------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations In this section, we review the consolidated results of operations for the six months ended June 30, 2004 and 2003 and significant changes in the consolidated financial condition of the Company. This discussion should be read in conjunction with the accompanying consolidated financial statements, notes and selected financial data. Forward-Looking Statements All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies; (ii) world conflict, including but not limited to the war in Iraq, which may affect consumers spending trends and priorities; (iii) customer response to new products and marketing initiatives: (iv) mortality, morbidity and other factors which may affect the profitability of our products; (v) changes in the federal income tax laws and regulations which may affect the relative income tax advantages of our products; (vi) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and (vii) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission. Liquidity and Capital Resources At June 30, 2004, we had liquid assets of $4,090,229 in cash, money market savings accounts, U.S. Treasury Bills and short-term certificates of deposit. All of the non-cash liquid assets can readily be converted to cash. The major components of operating cash flows are premium income and investment income while policy benefits are the most significant cash outflow. In the first half of 2004, BNLAC collected $21,853,643 of premiums and annuity deposits (gross before reinsurance) and we had consolidated investment income of $490,180. Other sources of cash flow in 2004 were overwrite commissions of $254,385 on vision products and marketing fees from EPSI Benefits Inc. of $83,076. The Company paid $13,472,519 of policy benefits in the first half of 2004. The Company's investments are primarily in U.S. Government, Government Agency and other investment grade bonds. We do not hedge our investment income through the use of derivatives. Other long term investments of $1,557,407 consists of, in part, a convertible debenture loan in the amount of $1,357,407 from BNL Financial Corporation (BNLF), to EPSI Benefits, Inc. (EBI), a Texas Corporation. The loan bears interest at an annual rate of 14%, payable monthly, with principal payments commencing September 15, 2008 and a maturity date of August 15, 2015. To protect its interest, BNLF may convert the debenture into 51% of the outstanding common stock of EBI, subject to regulatory approval. The note is one of several agreements entered into by the Company's subsidiaries which expand the business relationship with EBI and its subsidiary, Employer Plan Services, Inc. (EPSI), which provides substantially all of the A&H claims processing and adjudication for the Company's insurance subsidiary, Brokers National Life Assurance Company ("BNLAC"). BNLF receives a marketing fee from EBI under a related marketing agreement Other long-term investments include an operating line of credit agreement with an advance amount of $200,000. On October 15, 2002 BNLAC and EPSI entered into a loan agreement whereby BNLAC will provide EPSI with a $200,000 line of credit maturing October 15, 2004. The line of credit is at prime, 4.75%, with interest payable monthly to BNLAC. 6 During the third quarter of 2003, the Company became a third party indemnitor by entering into a series of bond indemnity and guarantee agreements totaling approximately $445,000 in conjunction with a marketing agreement with a third party, Employer Plan Services Inc. (EPSI). The Company received personal guarantees from the owners of EPSI to effectively limit potential liability under the guarantee agreement. With regard to the bond indemnities, the Company will be obligated only if EPSI, EPSI'S parent and its shareholders, who are the primary obligors, were all to become insolvent. Management considers the likelihood of the Company realizing a liability under these agreements to be remote. We believe liquid assets, along with investment income, premium income and marketing fees will be sufficient to meet our long and short-term liquidity needs. We do not have any current plans to borrow money for operations. Our insurance operations are conducted through BNLAC. At June 30, 2004, BNLAC had statutory capital and surplus of $12,869,255. 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 2004 was $10,720,870 compared to $10,079,609 for the same period in 2003. The increase of 6% for the quarter was due to an increase in group and individual dental business. Premium income for the first half of 2004 was $21,509,605 compared to $20,430,953 for the same period in 2003. The increase of 5% was due to an increase in group and individual dental premium in the first half of 2004. Net investment income was $255,333 for the second quarter of 2004 compared to $247,274 for the second quarter of 2003. Net investment income for the first half of 2004 was $490,180 compared to $490,147 for the same period in 2003. The 3% increase for the quarter was due to an increase in fixed maturities in 2004 compared to 2003. The Company received $41,409 of marketing fees from EPSI Benefits Inc. in the second quarter of 2004 compared to $33,915 for the same period last year. For the first half of 2004 marketing fees were $83,076 compared to $66,249 for the same period of 2003. The increase in marketing fees in 2004 is due to an increase in the number of insureds serviced by EPSI Benefits Inc. Realized gains on investments were $320,398 for the second quarter of 2004 compared to a gain of $101,754 for the same period in 2003. For the first half of 2004 realized gains were $319,904 compared to $100,459 for the same period in 2003. The realized gains in 2004 and 2003 are primarily due to the purchase of a portion of the Company's outstanding debentures at less than face value and in the second quarter of 2004 the Company had a realized gain of approximately $103,000 on disposal of MCI bonds. For the second quarter of 2004, liability for future policy benefits expense was $6,605 compared to $(9,862) for the same period in 2003. For the six-month period ended June 30, 2004, liability for future policy benefits expense was $430,505 compared to $44,265 for the same period in 2003. The increase for the first half of 2004 and second quarter of 2004 were due to a $411,000 increase in benefit expense reserve for individual dental insurance. See Note 2 to the financial statements. Policy benefits and other insurance costs were $8,260,679 in the second quarter of 2004 compared to $7,628,475 for the same period in 2003. In the first six months of 2004 policy benefits and other insurance costs were $16,295,317 compared to $15,186,647 for the same period in 2003. The increase was primarily due to an increase in policy benefits and commissions on group and individual dental insurance. The claims ratio on group dental insurance, which represents the ratio of claims incurred to premium earned, was 64.56% for the first half of 2004 compared to 63.75% for the first half of 2003. 7 Amortization of deferred policy acquisition costs was $9,202 and $6,362 for the second quarter and $14,256 and $11,069 for the first half of 2004 and 2003, respectively. Amortization of deferred policy acquisition costs vary in relation to lapses or surrenders of existing policies. For the second quarter of 2004 operating expenses were $2,070,437 compared to $1,886,627 for the same period in 2003. Operating expenses were $3,877,727 in the first six months of 2004 compared to $3,726,965 for the same period in 2003. The increase for both periods was primarily due to an increase in payroll expense, actuary expense and postage expense due to additional insurance plans offered, an actuary review of individual dental rates and an increase in policies and promotional material mailed. Taxes, other than on income, fees and assessments, were $234,095 for the second quarter of 2004 compared to $298,638 for the second quarter of 2003. Taxes, other than on income, fees and assessments, were $614,681 for the first half of 2004 compared to $675,410 for the same period in 2003. The decrease for both periods was primarily due to the refund of premium taxes in 2004, which is due to overpayment of quarterly estimated tax payments in 2003. The provision for income taxes in the second quarter of 2004 includes $88,982 current tax expense and $15,000 deferred tax expense compared to $114,750 current tax expense and $(3,000) deferred tax expense in the second quarter of 2003. The provision for income taxes in the first half of 2004 was $129,897 current tax expense and $31,864 deferred tax expense compared to $281,000 current expense and $33,000 deferred tax expense for the same period in 2003. The current tax expense decreased for the first half 2004 compared to 2003 due to the decrease in operating profits. Income from operations before income taxes for the second quarter of 2004 was $776,992 compared to $652,312 for the same period in 2003. For the first half of 2004 income from operations before income taxes was $1,170,279 compared to $1,443,452 for the same period in 2003. The increase for the second quarter was due to the reduction in taxes, other than on income and gain on redemption of bonds payable as described above. The decrease for the first half of the year was primarily due to the increase in the benefit expense reserve set up on the individual dental insurance described above. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. We handle market risks in accordance with our established policies. We did not hold financial instruments to specifically manage and reduce the impact of changes in interest rates at June 30, 2004 and December 31, 2003. We did however hold various financial instruments at June 30, 2004 and 2003, consisting of financial assets reported in our Consolidated Balance Sheets. Interest Rate Risk - We are subject to interest rate risk through the investment in fixed maturity securities, such as U.S. Government and Government Agency securities and other investment grade bonds. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. The estimated fair value of our fixed maturity securities at June 30, 2004 and December 31, 2003 was $16,346,804 and $16,631,478, respectively. Based on testing at December 31, 2003 a one percentage point increase would result in a decrease in the estimated fair value of fixed maturity securities of $469,000. Initial fair values were determined using the current rates at which we could enter into comparable financial instruments with similar remaining maturities. The estimated earnings and cash flows impact for the first six months of 2004 resulting from a one percentage point increase in interest rates would be immaterial, holding other variables constant. Foreign-Exchange Rate Risk - We currently have no exposure to foreign-exchange rate risk because all of our financial instruments are denominated in U.S. dollars. Commodity Price Risk - We have no financial instruments subject to commodity price risk. 8 Equity Security Price Risk - Equity securities at June 30, 2004 totaled $420,796, or only 1.7% of total investments and cash on a consolidated basis. The preceding discussion of estimated fair value of our financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices. 4. Internal Control and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as that term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in timely alerting the Company's Chief Executive Officer and Chief Financial Officer to material information required to be disclosed in the periodic reports filed with the SEC. In addition, the Company's Chief Executive Officer and Chief Financial Officer have reviewed the Company's internal controls, and there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of the last evaluation. 9 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. The Company was not a part of any new legal proceedings during the second quarter of 2004. In 2001, the Board of Directors of the Company approved a settlement in the class action case brought by certain shareholders. The settlement, which was approved by the Pulaski County Circuit Court and the Arkansas Insurance Commissioner, was subject to various conditions, including the approvals by any other applicable regulatory authorities and conditioned upon compliance with federal and state securities laws. As of December 31, 2002, all requisite approvals were received and redemption of the stock began in 2003. As part of the settlement agreement, the Company issued its Bonds in the principal amount of $1.50 in exchange for each share of common stock of BNL owned by the members of the Class. The Bonds are for a term of twelve years, effective December 15, 2002, with principal payable at maturity and bear interest at the rate of 6% per annum payable annually from the previous fiscal year's earnings of BNL and will impact earnings per share to the extent of approximately $.013 per share. If any interest payment is not made, it will be added to the principal and paid at maturity. The Bonds are fully callable and redeemable at par at any time by BNL. During 2003, the Company reclassified Contingent Long Term Liabilities and Contingent Treasury Stock in the amount of $3,637,288 to Bonds Payable and Treasury Stock, respectively, in accordance with the character of the litigation settlement of 2001 and the performance of all duties there under. The $3,637,288 of Treasury Stock was retired and returned to authorized but not issued status. The remaining Contingent Long Term Liabilities and Contingent Treasury Stock in the amount of $480,428 represents shares that may or may not have rights to exchange under the settlement and, as such, are contingent on determination of their status. The settlement is reflected in the first quarter of 2004 as bonds payable of $2,759,155, contingent long-term liabilities of $480,428 and contingent treasury stock of same amount and had no effect on the Statement of Cash Flows other than the purchase of bonds mentioned above. Item 2. Changes in Securities. None of the rights of the holders of any of the Company's securities were materially modified during the period covered by this report. In addition, no class of securities of the Company was issued or modified which materially limited or qualified any class of its registered securities. Item 3. Defaults Upon Senior Securities. During the period covered by this report there was no material default in the payment of any principal, interest, sinking or purchase fund installment, or any other material default not cured within 30 days with respect to any indebtedness of the Company. Item 4. Submission of Matters to a Vote of Security Holders. The Company's Annual Meeting of Shareholders was held on May 18, 2004 n Des Moines, Iowa. At the annual meeting, the following individuals were elected to the Company's Board of Directors; 13,121,096 voted in favor of Ahart, Shamas, and Schenkel; the holders of 13,119,092 voted in favor of Byrd; the holders of 13,122,296 voted in favor of Tobey, Alexander, Barclay, Keppy, Ledbetter, Mullins and Sweet; the holders of 13,121,294 voted in favor of Fry and Schoelerman; the holders of 13,122,596 voted in favor of Greig, Cernan, Miller and McCormick; and the holders of 13,121,594 voted in favor of Rigler; 66,959 shares were withheld from all nominees. 10 The shareholders also ratified the selection of Smith, Carney & Co. p.c. as the Company' independent auditor for the fiscal year 2004. 13,078,574 shares were voted in favor of ratifying such selection of independent auditor, 15,502 were voted against, and 95,479 shares abstained from voting on the matter. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 10-Q. None (b) Reports on Form 8-K. The Company did not file a Form 8-K during the period covered by this document. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BNL FINANCIAL CORPORATION (Registrant) Date: August 13, 2004 /s/ Wayne E. Ahart ----------------------- By: Wayne E. Ahart, Chairman of the Board (Chief Executive Officer) /s/ Barry N. Shameas Date: August 13, 2004 ____________________________ By: Barry N. Shamas, Executive V.P. (Chief Financial Officer) 11 =============================================================================== 13 Certifications I, Wayne E. Ahart, certify that: 1. I have reviewed this quarterly report on Form 10-Q of BNL Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2004 /s/ Wayne E. Ahart ----------------------- Wayne E. Ahart Chairman of the Board 12 I, Barry N. Shamas, certify that: 1. I have reviewed this quarterly report on Form 10-Q of BNL Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2004 /s/ Barry N. Shamas ----------------------- Barry N. Shamas Chief Financial Officer 13 Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BNL FINANCIAL CORPORATION PURSUANT TO 18 U.S.C. ss. 1350 In connection with the accompanying report on Form 10-Q for the period ending June 30, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Wayne E. Ahart, Chief Executive Officer of BNL Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in this Report fairly presents, in all material respects the financial condition and results of operations of the Company. ----------------------- Wayne E. Ahart Chief Executive Officer August 13, 2004 14 Exhibit 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BNL FINANCIAL CORPORATION PURSUANT TO 18 U.S.C. ss. 1350 In connection with the accompanying report on Form 10-Q for the period ending June 30, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry N. Shamas, Chief Financial Officer of BNL Financial Corporation, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in this Report fairly presents, in all material respects the financial condition and results of operations of the Company. /s/ Barry N. Shamas ----------------------- Barry N. Shamas Chief Financial Officer August 13, 2004 15