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 September 30,
2009





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 100Austin,
      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 xNoo





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 o                    Accelerated
filer o Non-accelerated
filer x                      Smaller
Reporting Company o




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





As of
September 30, 2009, the Registrant had 15,142,808 shares of Common Stock, no par
value, outstanding.
 Table of Contents
 
 Table of
Contents
 
 PagePART
      I   Financial InformationItem
      1.
              Financial
      Statements
              3Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              13Item
      3.
              Quantitative and
      Qualitative Disclosures About Market Risk
              15Item
      4.
              Internal Control
      and Procedures
              15Item
      4T.
              Controls and
      Procedures
              15PART
      II  Other InformationItem
      1.
              Legal
      Proceedings
              16Item
      1A.
              Risk
      Factors
              16Item
      2.
              Unregistered Sales
      of Equity Securities and Use of Proceeds
              16Item
      3.
              Defaults Upon
      Senior Securities
              16Item
      4.
              Submission of
      Matters to a Vote of Security Holders
              16Item
      5.
              Other
      Information
              16Item
      6.
              Exhibits
              17Signatures
              18
 
 Table of Contents
 
 BNL FINANCIAL CORPORATION AND
SUBSIDIARIES
 
 PART I - FINANCIAL
INFORMATION
 
 Item1. Financial
Statements
 
 
 REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To The
Board of Directors
 BNL
Financial Corporation
 
 
 We have
reviewed the accompanying Consolidated Balance Sheet of BNL Financial
Corporation and subsidiaries as of September 30, 2009 and the related
Consolidated Statements of Income and Comprehensive Income for the three-month
and nine-month periods ended September 30, 2009 and 2008 and the Consolidated
Statements of Cash Flows for the nine-month periods ended September 30, 2009 and
2008.  These interim financial statements are the responsibility of
the Corporation’s management.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying
interim consolidated financial statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
 
 We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board, the Consolidated Balance Sheet of BNL Financial
Corporation and Subsidiaries as of December 31, 2008 and the related
Consolidated Statements of Income and Comprehensive Income, Changes in
Shareholders’ Equity and Cash Flows for the year then ended (not presented
herein); and in our report dated March 30, 2009, 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, 2008 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
 November
13, 2009
 
 3
 Table of Contents
  BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  September
      30
                
                
                December
      31,ASSETS
                
                2009
                  (Unaudited)
                
                
                2008
                  (Audited)Cash
      and cash equivalents
                
                $
                7,711,331
                
                
                $
                4,989,381Investment
      in fixed maturities, at fair value Available for Sale
                    (amortized
      cost $42,000; $444,976, respectively)
                
                
                139,600
                
                
                
                543,925Investment
      in fixed maturities, at amortized cost, Held to Maturity
                    (fair
      value $18,622,722; $19,393,473, respectively)
                
                
                18,402,446
                
                
                
                19,597,008Other
      long-term investments (fair value $918,272,
$951,436)
                
                
                1,191,445
                
                
                
                1,224,609Investment
      in equity securities (cost $699,829)
                
                
                628,875
                
                
                
                429,745Total
      Investments, Including Cash and Cash Equivalents
                
                
                28,073,697
                
                
                
                26,784,668Accrued
      investment income
                
                
                180,185
                
                
                
                181,522Furniture
      and equipment, net
                
                
                887,243
                
                
                
                1,048,673Deferred
      policy acquisition costs
                
                
                269,438
                
                
                
                283,561Policy
      loans
                
                
                203,420
                
                
                
                191,010Receivable
      from reinsurer
                
                
                46,554
                
                
                
                46,554Premiums
      due and unpaid
                
                
                922,320
                
                
                
                1,113,301Income
      tax assets
                
                
                101,000
                
                
                
                97,000Intangible
      assets
                
                
                126,861
                
                
                
                131,212Other
      assets
                
                
                134,739
                
                
                
                135,282Total
      Assets
                
                $
                30,945,457
                
                
                $
                30,012,783LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Liabilities
      for future policy benefits
                
                $
                2,274,599
                
                
                $
                2,208,948Policy
      claims payable
                
                
                1,656,564
                
                
                
                1,712,140Annuity
      deposits
                
                
                2,568,635
                
                
                
                2,523,185Deferred
      annuity profits
                
                
                336,024
                
                
                
                231,263Premium
      deposit funds
                
                
                21,780
                
                
                
                21,849Supplementary
      contracts without life contingencies
                
                
                31,909
                
                
                
                2,782Advanced
      and unallocated premium
                
                
                861,144
                
                
                
                1,036,123Commissions
      payable
                
                
                592,538
                
                
                
                595,488Accrued
      taxes and expenses
                
                
                572,451
                
                
                
                566,809Bonds
      payable
                
                
                1,363,353
                
                
                
                1,443,282Other
      liabilities
                
                
                1,009,677
                
                
                
                1,062,497Total
      Liabilities
                
                
                11,288,674
                
                
                
                11,404,366Shareholders'
      Equity:Common
      stock, $.02 stated value, 45,000,000 shares authorized,
      15,463,965  shares issued and outstanding
                
                
                309,279
                
                
                
                309,279Additional
      paid-in capital
                
                
                5,729,715
                
                
                
                5,748,465Accumulated
      other comprehensive income (loss)
                
                
                5,027
                
                
                
                (160,934
                )Accumulated
      surplus
                
                
                14,015,491
                
                
                
                13,032,655Treasury
      stock, at cost; 321,157; 256,838 shares respectively
                
                
                (402,729
                )
                
                
                (321,048
                )Total
      Shareholders' Equity
                
                
                19,656,783
                
                
                
                18,608,417Total
      Liabilities and Shareholders' Equity
                
                $
                30,945,457
                
                
                $
                30,012,783
 
 See
accompanying notes and Independent Accountants’ Report
 
 4
 Table of Contents
 
 BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
  Three
      Months Ended
                  September
      30
                
                
                Nine
      Months Ended
                  September
      302009
                  (Unaudited)
                
                
                2008
                  (Unaudited)
                
                
                2009
                  (Unaudited)
                
                
                2008
                  (Unaudited)Income:Premium
      income
                
                $
                10,266,460
                
                
                $
                10,737,738
                
                
                $
                31,207,306
                
                
                $
                32,863,588Vision
      insurance income
                
                
                600,993
                
                
                
                550,992
                
                
                
                1,790,034
                
                
                
                1,701,266Net
      investment income
                
                
                244,311
                
                
                
                276,786
                
                
                
                851,657
                
                
                
                846,391Realized
      gains on debt retirement
                
                
                3,198
                
                
                
                -
                
                
                
                19,183
                
                
                
                13,187Realized
      gains (loss)
                
                
                38,625
                
                
                
                (104,212
                )
                
                
                41,319
                
                
                
                (298,103
                )Total
      Income
                
                
                11,153,587
                
                
                
                11,461,304
                
                
                
                33,909,499
                
                
                
                35,126,329Expenses:Liability
      for future policy benefits expense
                
                
                25,483
                
                
                
                16,349
                
                
                
                65,651
                
                
                
                47,464Policy
      benefits and other insurance costs
                
                
                8,048,352
                
                
                
                8,452,594
                
                
                
                24,175,659
                
                
                
                25,208,769Amortization
      of deferred policy acquisition  costs
                
                
                8,990
                
                
                
                8,634
                
                
                
                14,124
                
                
                
                14,469Operating
      expenses
                
                
                2,139,365
                
                
                
                2,236,227
                
                
                
                6,478,868
                
                
                
                6,741,571Taxes,
      other than income, fees andassessments
                
                
                227,481
                
                
                
                281,321
                
                
                
                1,048,852
                
                
                
                1,103,311Total
      Expenses
                
                
                10,449,671
                
                
                
                10,995,125
                
                
                
                31,783,154
                
                
                
                33,115,583Income
      from Operations beforeIncome
      Taxes
                
                
                703,916
                
                
                
                466,179
                
                
                
                2,126,345
                
                
                
                2,010,746Provision
      for income taxes
                
                
                140,980
                
                
                
                97,800
                
                
                
                385,985
                
                
                
                421,624Net
      Income
                
                $
                562,936
                
                
                $
                368,379
                
                
                $
                1,740,360
                
                
                $
                1,589,122Net
      income per common share (basic anddiluted)
                
                $
                0.04
                
                
                $
                0.02
                
                
                $
                0.12
                
                
                $
                0.10Weighted
      average number of fully paidcommon
      shares
                
                
                15,165,012
                
                
                
                15,216,861
                
                
                
                15,126,010
                
                
                
                15,212,412Other
      comprehensive income (loss), net of tax:Unrealized
      gains (losses) on securities:Unrealized
      holding gain (loss) arisingduring
      period (net of tax)
                
                $
                125,095
                
                
                $
                (202,989
                )
                
                $
                200,256
                
                
                $
                (368,292
                )Reclassification
      adjustment for lossincluded
      in net income
                
                
                (32,058
                )
                
                
                90,408
                
                
                
                (34,294
                )
                
                
                82,492Other
      Comprehensive Income (loss)
                
                
                93,037
                
                
                
                (112,581
                )
                
                
                165,962
                
                
                
                (285,800
                )Comprehensive
      Income
                
                $
                655,973
                
                
                $
                255,798
                
                
                $
                1,906,322
                
                
                $
                1,303,322
  See
accompanying notes and Independent Accountants’ Report
 
 5
 Table of Contents
  BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Nine
      Months Ended
                    September
      30,2009
                    (Unaudited)
                  
                  
                  2008
                    (Unaudited)Cash flows from operating
      activities:Net
      income
                  
                  $
                  1,740,360
                  
                  
                  $
                  1,589,122Adjustments
      to reconcile net income to net cash provided by operating
      activities:Realized
      (gain) loss on investments
                  
                  
                  (41,319
                  )
                  
                  
                  300,523Realized
      loss on furniture and fixtures
                  
                  
                  -
                  
                  
                  
                  2,420Realized
      gain on debt retirement
                  
                  
                  (19,183
                  )
                  
                  
                  (13,187
                  )Decrease
      in deferred tax asset
                  
                  
                  (38,000
                  )
                  
                  
                  (15,602
                  )Depreciation
                  
                  
                  225,808
                  
                  
                  
                  239,988Amortization
      of deferred acquisition costs, and intangibles
                  
                  
                  18,485
                  
                  
                  
                  18,830Accretion
      of bond discount
                  
                  
                  8,763
                  
                  
                  
                  (6,413
                  )Change
      in assets and liabilities:Decrease
      in accrued investment income
                  
                  
                  1,337
                  
                  
                  
                  23,416Decrease
      in premiums due and unpaid
                  
                  
                  190,981
                  
                  
                  
                  390,215Increase
      in liability for future policy benefits
                  
                  
                  65,651
                  
                  
                  
                  47,465Decrease
      in policy claims payable
                  
                  
                  (55,576
                  )
                  
                  
                  (336,992
                  )Increase
      in annuity deposits and deferred profits
                  
                  
                  150,212
                  
                  
                  
                  28,420Decrease
      in premium deposit funds
                  
                  
                  (69
                  )
                  
                  
                  (2,806
                  )Decrease
      in advanced and unallocated premium
                  
                  
                  (174,980
                  )
                  
                  
                  (828,007
                  )Increase
      (decrease) in commissions payable
                  
                  
                  (2,950
                  )
                  
                  
                  30,835Other,
      decrease
                  
                  
                  (114,253
                  )
                  
                  
                  (8,715
                  )Net
      Cash Provided By Operating Activities
                  
                  
                  1,955,267
                  
                  
                  
                  1,459,512Cash
      flows from investing activities:Proceeds
      from sales of furniture and equipment
                  
                  
                  -
                  
                  
                  
                  17,000Proceeds
      from maturity or redemption - Held to Maturity
      Investments
                  
                  
                  9,880,340
                  
                  
                  
                  10,489,668Proceeds
      from sales and equity securities
                  
                  
                  -
                  
                  
                  
                  4,375Purchase
      of equity securities
                  
                  
                  -
                  
                  
                  
                  (287,629
                  )Purchase
      of furniture and equipment
                  
                  
                  (64,379
                  )
                  
                  
                  (160,763
                  )Purchase
      of fixed maturity securities - Held to Maturity
      Investments
                  
                  
                  (8,246,565
                  )
                  
                  
                  (5,524,844
                  )Other
      investments – Line of credit payments received
                  
                  
                  33,164
                  
                  
                  
                  26,878Net
      Cash Provided By Investing Activities
                  
                  
                  1,602,560
                  
                  
                  
                  4,564,685Cash
      flows from financing activities:Net
      (payments) deposits on supplementary contracts
                  
                  
                  (2,195
                  )
                  
                  
                  28,949Purchase
      of treasury stock
                  
                  
                  (113,431
                  )
                  
                  
                  (9,605
                  )Bonds
      payable purchased
                  
                  
                  (13,224
                  )
                  
                  
                  (19,221
                  )Dividends
      to shareholders
                  
                  
                  (757,525
                  )
                  
                  
                  -Exercised
      stock options
                  
                  
                  50,498
                  
                  
                  
                  9,600Net
      Cash Provided By (Used In) Financing Activities
                  
                  
                  (835,877
                  )
                  
                  
                  9,723Net
      Increase In Cash and Cash Equivalents
                  
                  
                  2,721,950
                  
                  
                  
                  6,033,920Cash
      And Cash Equivalents, Beginning Of Period
                  
                  
                  4,989,381
                  
                  
                  
                  4,937,983Cash
      And Cash Equivalents, End Of Period
                  
                  $
                  7,711,331
                  
                  
                  $
                  10,971,903
 
 See
accompanying notes and Independent Accountant’s Report
 
 
 6
 Table of Contents
  BNL
FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 1.  Basis
of Presentation
 
 The
accompanying Consolidated Financial Statements (unaudited) as of September 30,
2009 have been reviewed by independent certified public accountants. In the
opinion of management, the aforementioned financial statements contain all
adjustments necessary to present fairly the financial position as of September
30, 2009, and the results of operations and cash flows for the period ended
September 30, 2009.  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, 2008, previously filed with
the Commission, for financial statements for the year ended December 31, 2008,
prepared in accordance with GAAP. Net income per share of common stock is based
on the weighted average number of outstanding common shares.
 
 In
September 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles — a replacement of FASB Statement No. 162.” This Standard
establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
entities in the preparation of financial statements in conformity with US GAAP.
This guidance is effective for financial statements issued for periods ending
after September 15, 2009. The adoption of this Standard did not have a material
impact on our financial statements.  References to GAAP in these
footnotes are to the FASB Accounting Standards Codification (ASC.)
 
 On
April 1, 2009 we adopted FSP FAS 157-4, (now ASC 820), “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”; FSP
Nos. FAS 115-2 and FAS 124-2, (now ASC 320), “Recognition and Presentation of
Other-Than-Temporary Impairments”; and FSP No. FAS 107-1 and APB 28-1, (now
ASC 825), “Interim Disclosures about Fair Value of Financial Instruments.” These
staff positions provided guidance on fair value measurements, impairments, and
disclosures. Adoption of these staff positions did not have a material impact on
our financial statements. See Note 4 for a discussion of fair value
measurements.
 
 In
May 2009, the FASB issued SFAS No. 165, (now ASC 855), “Subsequent
Events,” which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. We adopted this guidance during the
second quarter of 2009. The adoption of this Standard did not have a material
impact on our financial statements.
 
 2.  Change
in Accounting Estimate
 
 The group
dental claims loss ratio was 63.1% during the first nine months of 2009 compared
to 62.8% for the same period in 2008.  The claims liability at
December 31, 2008 was over estimated by approximately $139,000, which had the
effect of reducing claims expense in 2009 in accordance with the ASC 250-10
requirements regarding accounting for a change in estimate.  The over
estimation of claims liability at December 31, 2008 resulted in an increase in
net income of approximately $115,000, net of tax, or $.01 per share for the nine
months ended September 30, 2009.   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”
                  
                  
                  September 30, 2009
                
                Amortized
      Cost
                
                
                Gross
      Unrealized Gains
                
                
                Gross
      Unrealized Losses
                
                
                Estimated
      Market ValueUS
      Treasury securities and obligations ofUS
      government corporations and agencies
                
                $
                6,892,752
                
                
                $
                55,190
                
                
                $
                15,183
                
                
                $
                6,932,759Corporate
      securities
                
                
                4,084,662
                
                
                
                169,429
                
                
                
                168,121
                
                
                
                4,085,970Mortgage-backed
      securitiesGNMA
      and FNMA CMO
                
                
                7,425,032
                
                
                
                188,844
                
                
                
                9,883
                
                
                
                7,603,993Totals
                
                $
                18,402,446
                
                
                $
                413,463
                
                
                $
                193,187
                
                
                $
                18,622,722Portfolio
      Designated “Available for Sale”
                  
                  September 30, 2009Corporate
      securities
                
                $
                42,000
                
                
                $
                97,600
                
                
                
                -
                
                
                
                139,600Totals
                
                $
                42,000
                
                
                $
                97,600
                
                
                $
                -
                
                
                $
                139,600
  7
 Table of Contents
  The
amortized cost and estimated fair value of investments in fixed maturity
securities at September 30, 2009 by contractual maturity are shown
below.  Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties and because most mortgage-backed securities
provide for periodic payments throughout their life.
 Held
      to Maturity
                  
                  
                  Available
      for SaleSeptember
      30, 2009
                  
                  
                  September
      30, 2009Amortized
      Cost
                  
                  
                  Estimated
                    Market
      Value
                  
                  
                  Amortized
      Cost
                  
                  
                  Estimated
                    Market
      ValueDue
      in one year or less
                  
                  $
                  328,312
                  
                  
                  $
                  351,300
                  
                  
                  $
                  -
                  
                  
                  $
                  -Due
      after one year through five years
                  
                  
                  3,923,086
                  
                  
                  
                  4,011,920
                  
                  
                  
                  -
                  
                  
                  
                  -Due
      after five years through ten years
                  
                  
                  3,039,719
                  
                  
                  
                  2,956,583
                  
                  
                  
                  -
                  
                  
                  
                  -Due
      after ten years
                  
                  
                  3,686,297
                  
                  
                  
                  3,698,925
                  
                  
                  
                  42,000
                  
                  
                  
                  139,60010,977,414
                  
                  
                  
                  11,018,728
                  
                  
                  
                  42,000
                  
                  
                  
                  139,600Mortgage-backed
      securities
                  
                  
                  7,425,032
                  
                  
                  
                  7,603,994
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  18,402,446
                  
                  
                  $
                  18,622,722
                  
                  
                  $
                  42,000
                  
                  
                  $
                  139,600
 
 Proceeds
from sales and maturities of investments in fixed maturity securities, and
equity securities for the nine month period ended September 30, 2009 and 2008
were $9,880,340 and $10,489,668 respectively.  Gross gains were
$83,599 and $14,308 and gross losses were $0 and $0 as of September 30, 2009 and
2008, respectively.
 
 Investment
in equity securities at September 30, 2009 represents common stock investments
as follows:
 
 2009Cost
                
                
                Market
                  ValueBanks,
      trusts andinsurance
      companies
                
                $
                81,183
                
                
                $
                36,710Industrial,
      savingsand
      loans and other
                
                
                618,646
                
                
                
                592,165$
                699,829
                
                
                $
                628,875
 
 Other
long-term investments of $1,191,445 consist of, in part, a $1,152,825
convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc.
(“EBI”).  The original loan, dated July 25, 2001, was $1,357,407 at
14% interest.  Monthly principal payments were scheduled to begin on
September 15, 2008 with a maturity date of August 15, 2015.  On July
14, 2008, the Company and EBI amended the Debenture whereby the monthly
principal payments will start on September 15, 2013 with the maturity date
extended to August 15, 2020.
 
 Because
of the extension of the commencement of principal payments and maturity of the
Debenture, the Company analyzed discounted expected future cash flows in
accordance with applicable generally accepted accounting principles and
established an allowance for credit losses in the amount of $204,582 resulting
in a net book value of $1,152,825.  Interest on the debentures is and
has been current
  In the
third quarter of 2009 the Company recognized an other than temporary impairment
on its $100,000 Cit Group Inc. bond, for a realized loss of
$42,280.  Cit Group Inc. filed for chapter 11 bankruptcy on November
1, 2009.
 
 The
Company’s policy for recognizing interest income on the impaired investments is
to recognize interest under the stated loan terms.  Interest on the
investments is and has been current.
  8
 Table of Contents
 The
average book value on impaired investments during the period ended September 30,
2009 was $1,153,924.  Interest income recognized in 2009 on the
impaired investments was $145,018.
 
 Activity
in the allowance for credit losses is as follows:
  2009Beginning
      Balance
                
                $
                204,582Additions
      charged to operations
                
                
                42,280Direct
      write downs
                
                
                -Recoveries
      previously charged to operations
                
                
                -Ending
      Balance
                
                $
                246,862
 
 There was
no other than temporary impairment recognized in 2009 other than the credit
losses recognized above and therefore no other than temporary impairment
included in accumulated other comprehensive income.
 
 Other
long-term investments also include an operating line of credit agreement in the
amount of $38,620. On October 15, 2002 BNLAC and EPSI entered into a loan
agreement whereby BNLAC will provide EPSI with a $200,000 line of credit
maturing October 15, 2004. The line of credit was renewed and extended with
interest only payments to August 1, 2006. Thereafter EPSI pays principal and
interest over 60 equal monthly installments until paid in full. The line of
credit is at 6.75% and interest and principal payments are
current.
  The
Company’s conservative investment philosophies minimize market risk and risk of
default by investing in high quality debt instruments with staggered maturity
dates.  The Company does not hedge investment risk through the use of
derivative financial instruments.  The market value of the Company’s
investments in debt instruments varies with changes in interest
rates.  A significant increase in interest rates could cause decreases
in the market values of investments and have a negative effect on comprehensive
income and capital.
  The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses that are not deemed to be other
than temporarily impaired, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position at
September 30, 2009.
   Less
      than 12 Months
                  
                  
                  12
      Months or Greater
                  
                  
                  TotalDescription
      of Securities
                  
                  Fair
                    Value
                  
                  
                  Unrealized
      Losses
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
      Losses
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
      LossesInvestment
      in Fixed Maturities,Held
      to MaturityUS
      Treasury securities and
                    obligations of US government
                    corporations and agencies
                  
                  
                  2,733,005
                  
                  
                  
                  15,183
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,733,005
                  
                  
                  
                  15,183Corporate
      securities
                  
                  
                  497,900
                  
                  
                  
                  9,971
                  
                  
                  
                  449,570
                  
                  
                  
                  158,150
                  
                  
                  
                  947,470
                  
                  
                  
                  168,121Mortgage-backed
      securities
                    GNMA and FNMA CMO
                  
                  
                  1,587,827
                  
                  
                  
                  9,883
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,587,827
                  
                  
                  
                  9,883Totals
                  
                  
                  4,818,732
                  
                  
                  
                  35,037
                  
                  
                  
                  449,570
                  
                  
                  
                  158,150
                  
                  
                  
                  5,268,302
                  
                  
                  
                  193,187Other
      Long-Term Investments
                  
                  
                  929,403
                  
                  
                  
                  273,173
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  929,403
                  
                  
                  
                  273,173Totals
                  
                  
                  929,403
                  
                  
                  
                  273,173
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  929,403
                  
                  
                  
                  273,173Equity
      Securities
                  
                  
                  178,965
                  
                  
                  
                  49,525
                  
                  
                  
                  199,120
                  
                  
                  
                  112,642
                  
                  
                  
                  378,085
                  
                  
                  
                  162,167Totals
                  
                  
                  178,965
                  
                  
                  
                  49,525
                  
                  
                  
                  199,120
                  
                  
                  
                  112,642
                  
                  
                  
                  378,085
                  
                  
                  
                  162,167
  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 were caused by unprecedented circumstances in the
economy and problems at government agencies which required a federal bailout.
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 September 30, 2009.
  9
 Table of Contents
  Federal
Agency Mortgage-Backed Securities
  The
unrealized losses on the Company's investment in federal agency mortgage-backed
securities were caused by unprecedented circumstances in the economy and
problems at government agencies which required a federal bailout.  The
contractual cash flows of those investments are guaranteed by an agency of the
U.S. government. Accordingly, it is expected that the securities would not be
settled at a price less than the amortized cost of the Company's investment.
Because the decline in market value is attributable to factors other than credit
quality, and because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
September 30, 2009.
  Corporate Bonds
  The table
below discloses the unrealized losses on corporate bonds with significant
unrealized losses.
 
 Corporate
      Bonds
                  
                  September 30, 2009
                
                S&P
                  Rating
                
                
                Amortized
      Book Value
                
                
                Gross
      Unrealized Losses
                
                
                Estimated
      Market ValueAmerican
      General Finance
                
                BB+
                
                
                $
                200,000
                
                
                $
                64,000
                
                
                $
                136,000MBIA
                
                BBB
                
                
                
                200,000
                
                
                
                85,600
                
                
                
                114,400Prudential
                
                
                A-
                
                
                
                150,000
                
                
                
                8,550
                
                
                
                141,450Bank
      of America
                
                
                A-
                
                
                
                200,000
                
                
                
                9,000
                
                
                
                191,000Totals
                
                
                
                
                
                $
                750,000
                
                
                $
                167,150
                
                
                $
                582,850
  The
corporate bonds with unrealized losses in the table are primarily insurance and
financial corporations that have had their fair value reduced due to the
significant economic problems world wide.  The Company currently does
not believe it is probable that it will be unable to collect all amounts due
according to the contractual terms of the investments.  Therefore, it
is expected that the debentures would not be settled at a price less than the
amortized cost of the investment. Because the Company has the ability and intent
to hold these investments until a recovery of fair value, which may be maturity,
it does not consider the investments to be other than temporarily impaired at
September 30, 2009.
  In the
third quarter of 2009 the Company wrote down its $100,000 Cit Group Inc. bond to
$57,720, for a realized loss of $42,280.  Cit Group Inc filed for
chapter 11 bankruptcy on November 1, 2009.
  Marketable
Equity Securities
  The table
below discloses the unrealized gain and losses on the Company’s entire
marketable equity securities.
 
 Equity
      Securities
                  
                  September 30, 2009
                
                Cost
                
                
                Gross
      Unrealized Gains (Losses)
                
                
                Estimated
      Market ValueGarmin
      LTD
                
                $
                220,322
                
                
                $
                (88,232
                )
                
                $
                132,090Treaty
      Oak Bank
                
                
                50,813
                
                
                
                (20,313
                )
                
                
                30,500Regions
      Financial Corporation
                
                
                30,370
                
                
                
                (24,160
                )
                
                
                6,210FCstone
      Group
                
                
                27,282
                
                
                
                (17,642
                )
                
                
                9,640British
      Petroleum
                
                
                88,270
                
                
                
                (8,425
                )
                
                
                79,845Powershare
      QQQ
                
                
                116,605
                
                
                
                31,270
                
                
                
                147,875Intel
      Corporation
                
                
                39,200
                
                
                
                (60
                )
                
                
                39,140Kimberly
      Clark Corporation
                
                
                62,125
                
                
                
                (3,145
                )
                
                
                58,980Freeport
      McMoRan Copper & Gold Inc.
                
                
                42,972
                
                
                
                59,943
                
                
                
                102,915Conagra
      Foods
                
                
                21,870
                
                
                
                (190
                )
                
                
                21,680Totals
                
                $
                699,829
                
                
                $
                (70,954
                )
                
                $
                628,875
  10
 Table of Contents
  The
Company's marketable equity securities include a variety of
industries.  Garmin LTD has the largest unrealized loss of
$88,232.  Garmin manufactures communication and navigational products
and it is the leader in personal navigational devices.  Garmin remains
profitable in 2009 and the decrease in the stock’s fair value was due to the
challenging economic environment in 2008 and 2009.  The remaining fair
value and unrealized losses are distributed in seven companies. The severity of
the impairment (aggregate fair value is approximately 23% less than cost)
reflects the overall performance of the stock market in 2008.  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 September
30, 2009.
  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 September 30, 2009.
 
 Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalFixed
      Maturities , held to maturity
                
                $
                -
                
                
                $
                18,508,322
                
                
                $
                114,400
                
                
                $
                18,622,722Fixed
      maturities, available for sale
                
                
                -
                
                
                
                139,600
                
                
                
                -
                
                
                
                139,600Equity
      securities, available for sale
                
                
                628,875
                
                
                
                -
                
                
                
                -
                
                
                
                628,875Other
      long term investments
                
                
                -
                
                
                
                -
                
                
                
                918,272
                
                
                
                918,272Cash
      and cash equivalents
                
                
                4,067,482
                
                
                
                3,643,849
                
                
                
                -
                
                
                
                7,711,331Total
      assets
                
                $
                4,696,357
                
                
                $
                22,291,771
                
                
                $
                1,032,672
                
                
                $
                28,020,800
 
 The
following table provides a summary of the changes in fair value of Level 3
assets and liabilities for the period January 1, 2009 to September 30, 2009, 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
September 30, 2009.
 
 Other
      Long-term Investments
                
                
                Fixed
                  MaturitiesFair
      value, beginning of period
                
                $
                951,436
                
                
                $
                -Purchases,
      sales, issuances and settlements
                
                
                (33,164
                )
                
                
                -Reclassify
      from level 2 to level 3
                
                
                -
                
                
                
                110,000Unrealized
      gain
                
                
                -
                
                
                
                4,400Total
                
                $
                918,272
                
                
                $
                114,400
  11
 Table of Contents
  The
following table summarizes the fair value and carrying amount of all financial
asset and liabilities as of September 30, 2009.
 
 2009Carrying
                
                
                FairAssets
                
                Amount
                
                
                ValueCash
      and Cash Equivalents
                
                $
                7,711,331
                
                
                $
                7,711,331
                
                (a)Investments-fixed
      maturity, available for sale
                
                
                139,600
                
                
                
                139,600
                
                (b)Investments-fixed
      maturity, held to maturity
                
                
                18,402,446
                
                
                
                18,622,722
                
                (b)Investments
      –equity securities
                
                
                628,875
                
                
                
                628,875
                
                (b)Other
      long term investments
                
                
                1,191,445
                
                
                
                918,272
                
                (b)Other
      financial instruments-Assets
                
                
                434,275
                
                
                
                434,275
                
                (a)Total
      financial instruments-Assets
                
                
                28,507,972
                
                
                
                28,455,075LiabilitiesPremium
      deposit funds
                
                $
                21,780
                
                
                $
                21,780
                
                (a)Bonds
      payable
                
                
                1,363,353
                
                
                
                1,363,353
                
                (a)Supplementary
      contracts without life contingencies
                
                
                31,909
                
                
                
                31,909
                
                (a)Annuity
      deposits
                
                
                2,568,635
                
                
                
                2,568,635
                
                (a)Total
      financial instruments-Liabilities
                
                $
                3,985,677
                
                
                $
                3,985,677
  (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
here-in.
 
 5.
Dividends Paid
 
 Dividends
of $.05 per share were declared on July 27, 2009.  Dividends totaling
$757,525 were paid on August 26, 2009.
 
 6.  Subsequent
Events
  In the
second quarter of 2009 management adopted ASC 855 and has evaluated subsequent
events through November 13, 2009, the date of issuance of the
10-Q.  There are no subsequent events to report.
 
 12
 Table of Contents
 
 BNL FINANCIAL CORPORATION AND
SUBSIDIARIES
 
 Item 2. Management’sDiscussion and
Analysis of Financial Condition and Results of Operations
 
 In this
section, we review the consolidated results of operations for the nine months
ended September 30, 2009 and 2008 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 and 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.
 
 Liquidity and Capital
Resources
 
 At
September 30, 2009, we had liquid assets of $7,711,331 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
nine months of 2009, BNLAC collected $31,936,647 of premiums and annuity
deposits (gross before reinsurance) and we had consolidated investment income of
$851,657. Other sources of cash flow in the first nine months of 2009 were
override commissions of $1,790,034 on vision products. The Company paid
$19,658,702 of policy benefits in the first nine months of 2009.
 
 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 $1,191,445 consist of, in part, a $1,152,825
convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc.
(“EBI”).  The original loan, dated July 25, 2001, was $1,357,407 at
14% interest.  Monthly principal payments were scheduled to begin on
September 15, 2008 with a maturity date of August 15, 2015.  On July
14, 2008, the Company and EBI amended the Debenture whereby the monthly
principal payments will start on September 15, 2013 with the maturity date
extended to August 15, 2020.
 
 Because
of the extension of the commencement of principal payments and maturity of the
Debenture, the Company analyzed discounted expected future cash flows in
accordance with applicable generally accepted accounting principles and
established an allowance for credit losses in the amount of $204,582 resulting
in a net book value of $1,152,825.  Interest on the debentures is and
has been current
 
 The note
is one of several agreements entered into by the Company's subsidiary which
expand the business relationship with EBI and its subsidiary, Employer Plan
Services, Inc. (EPSI), which provides substantially all of the A&H claims
processing and adjudication for the Company's insurance subsidiary, Brokers
National Life Assurance Company ("BNLAC").
 
 Other
long-term investments also include an operating line of credit agreement in the
amount of $38,620. On October 15, 2002 BNLAC and EPSI entered into a loan
agreement whereby BNLAC will provide EPSI with a $200,000 line of credit
maturing October 15, 2004. The line of credit was renewed and extended with
interest only payments to August 1, 2006. Thereafter EPSI pays principal and
interest over 60 equal monthly installments until paid in full. The line of
credit is at 6.75% and interest and principal payments are current.
  In prior
years the Company became a third party indemnitor by entering into a series of
bond indemnity and guarantee agreements totaling approximately $545,000 in
conjunction with a marketing agreement with, EPSI Benefits Inc. and Employer
Plan Services Inc. (EPSI). The purpose of these agreements is to assist EPSI to
become licensed in additional states. The Company received personal guarantees
from the owners of EPSI to effectively limit potential liability under the
guarantee agreement. With regard to the bond indemnities, the Company will be
obligated only if EPSI, EPSI’S parent and its shareholders, who are the primary
obligors, were all to become insolvent. Management considers the likelihood of
the Company realizing a liability under these agreements to be
remote.
  13
 Table of Contents
  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 September 30, 2009, BNLAC
had statutory capital and surplus of $18,290,301. BNLAC is required to maintain
minimum levels of statutory capital and surplus, which differ from state to
state, as a condition to conducting business in those states in which it is
licensed. The State of Arkansas, which is the legal domicile of BNLAC, requires
a minimum of $2,300,000 in capital and surplus. The highest requirement in any
state in which BNLAC is licensed is $5,000,000. Management monitors the minimum
capital and surplus requirements to maintain compliance in each state in which
it is licensed.
 
 Consolidated Results of
Operations
 
 Premium
income for the third quarter of 2009 was $10,266,460 compared to $10,737,738 for
the same period in 2008. Premium income for the first nine months of 2009
was $31,207,306 compared to $32,863,588 for the same period in 2008. The
decrease for the quarter and first nine months of the year was primarily due to
a 4.4% decrease in group dental premium as a result of the impact of the
recession on voluntary employee benefits.
  BNLAC
markets group vision insurance products that are underwritten by other insurance
companies, and BNLAC does not have any exposure to underwriting (claims)
losses.  Vision insurance income for the third quarter of 2009 was
$600,993 compared to $550,992 in the third quarter of 2008.  In the
first half of 2009 vision income was $1,790,034 compared to $1,701,266 for the
same period in 2008.  Vision income increased 5% in 2009, compared to
an increase of 15% for the same period in 2008.  Although vision
revenues are up the growth has decreased due to the impact of the recession on
voluntary employee benefits.
 
 Net
investment income was $244,311 for the third quarter of 2009 compared to
$276,786 for the third quarter of 2008.  Net investment income for the
first nine months of 2009 was $851,657 compared to $846,391 for the same period
in 2008.  The decrease in the third quarter was due to an increase in
short term investments with yields that have been reduced significantly compared
to the third quarter of 2008.  The increase for the first nine months
was a result of an average investment in more fixed securities in 2009 compared
to 2008.
 
 Realized
gains on debt retirement were $3,198 for the third quarter of 2009 compared to a
$0 gain for the same period in 2008.  For the first nine months of
2009 realized gains were $19,183 compared to $13,187 for the same period in
2008.  The realized gains are primarily due to the purchase of a
portion of the Company’s outstanding debentures at less than face
value.  The Company purchased more debentures in 2009 which resulted
in more realized gain in debt extinguishments.
 
 Realized
gains were $38,625 for the third quarter and $41,319 for the first nine months
of 2009 compared to a loss of ($104,212) for the third quarter and ($298,103)
for the first nine months of 2008.  The realized loss in 2008 was
primarily due to the $204,582 write down of the EBI debenture. The realized gain
in 2009 was due to gains from bonds called and from the sale of a U.S. Treasury
bond.  Gains recognized exceeded the realized losses on other than
temporary impairments.
 
 For the
third quarter of 2009, liability for future policy benefits expense was $25,483
compared to $16,349 for the same period in 2008.  For the nine-month
period ended September 30, 2009, liability for future policy benefits expense
was $65,651 compared to $47,464 for the same period in 2008.  The
increase in the liability for future policy benefits in 2009 was primarily due a
reduction in surrendered policies in 2009 compared to 2008.
 
 Policy
benefits and other insurance costs were $8,048,352 in the third quarter of 2009
compared to $8,452,594 for the same period in 2008.  In the first nine
months of 2009 policy benefits and other insurance costs were $24,175,659
compared to $25,208,769 for the same period in 2008.  The decrease for
the quarter and first nine months of 2009 was primarily due to a decrease in
group dental premium income.  Individual dental claims decreased
$101,000 and group dental claims were $783,000 less than the same period last
year.  The claims ratio on group dental insurance, which represents
the ratio of claims expensed to premium earned, was 63.1% for the first nine
months of 2009 compared to 62.8% for the first nine months of
2008.   The liability for unpaid claims is difficult to calculate
and group dental claims at December, 2008, were $139,000 less than estimated and
they were $316,000 less than estimated at December 31, 2007.
 
 Amortization
of deferred policy acquisition costs was $8,990 and $8,634 for the third quarter
and $14,124 and $14,469 for the first nine months of 2009 and 2008,
respectively.  Amortization of deferred policy acquisition costs vary
in relation to lapses or surrenders of existing policies.
 
 For the
third quarter of 2009 operating expenses were $2,139,365 compared to $2,236,227
for the same period in 2008. Operating expenses were $6,478,868 in the
first nine months of 2009 compared to $6,741,571 for the same period in
2008.  The decrease for 2009 is primarily due to a decrease in legal
fees and expenses directly related to a decrease in collected
premium.
 
 Taxes,
other than on income, fees and assessments, were $227,481 for the third quarter
of 2009 compared to $281,321 for the third quarter of 2008.  Taxes,
other than on income, fees and assessments, were $1,048,852 for the first nine
months of 2009 compared to $1,103,311 for the same period in
2008.  The decrease for the third quarter is primarily due to a
decrease in premiums.
  The
provision for income taxes in the third quarter of 2009 includes $149,980
current tax expense and $9,000 deferred tax credit compared to $105,801 current
tax expense and $8,200 deferred tax credit in the third quarter of
2008.  The provision for income taxes in the first nine months of 2009
was $423,985 current tax expense and $38,000 deferred tax credit compared to
$437,126 current expense and $15,502 deferred tax credit for the same period in
2008.  The current tax expense for 2009 is approximately the same as
the prior year due to income from operations being approximately the same amount
for both years.  Deferred tax expense is based on the estimated change
in book versus tax assets and liabilities.
  14
 Table of Contents
  Income
from operations before income taxes for the third quarter of 2009 was $703,916
compared to $466,179 for the same period in 2008.  For the first nine
months of 2009 income from operations before income taxes was $2,126,345
compared to $2,010,746 for the same period in 2008.  The increase for
the third quarter and first nine months of 2008 was primarily due to the 2009
gross realized gains in 2009 versus realized losses in 2008 and decrease in
operating expenses and taxes other than on income, fees and
assessments.
 
 Item3.
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 September 30, 2009 and December 31,
2008. We held various financial instruments at September 30, 2009 and 2008,
consisting of financial assets reported in our Consolidated Balance
Sheets.
 
 Interest
Rate Risk - We are subject to interest rate risk through the investment in fixed
maturity securities, such as U.S. Government and Government Agency securities
and other investment grade bonds. The fair market value of long-term,
fixed-interest rate debt is subject to interest rate risk. Generally, the fair
value of fixed-interest rate debt will increase as interest rates fall and will
decrease as interest rates rise. The estimated fair value of our fixed maturity
securities at September 30, 2009 and December 31, 2008 was $18,762,322 and
$19,937,398, respectively.
 
 Based on
testing at December 31, 2008, 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 nine months of 2009 resulting from a one percentage point increase in
interest rates would be immaterial, holding other variables
constant.
 
 Foreign-Exchange
Rate Risk - We currently have no exposure to foreign exchange rate risk because
all of our financial instruments are denominated in U.S. dollars.
 
 Commodity
Price Risk - We have no financial instruments subject to commodity price
risk.
 
 Equity
Security Price Risk - Equity securities at September 30, 2009 totaled $628,875,
or 2.2% 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.
InternalControl and Procedures
 
 Not
applicable
  Item
4T.  Controlsand 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.
 
 15
 Table of Contents
  PART II -- OTHER
INFORMATION
 
 Item1. Legal
Proceedings
 
 The
Company was not a part of any new legal proceedings during the third quarter of
2009.
 
 Item1A.  Risk Factors
 
 No
material changes from the Company’s response in its 2008 10-K to Item 1A, Part
I.
 
 Item2.
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 nine months of 2009.
 
 Issuer
Purchases of Equity Securities
 
 Period
                
                (a)
                  Total
                  Number
      ofShares
                  Purchased
                
                
                (b)
                  Average
                  PricePaid
                  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
      programsMonth
      #1, Jan 1 thru Jan 31, 2009
                
                
                11,064
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #1, Feb 1 thru Feb 28, 2009
                
                
                5,880
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #3, Mar 1 thru 31, 2009
                
                
                15,284
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #4, Apr 1 thru 30, 2009
                
                
                11,700
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #5 May 1 thru 31, 2009
                
                
                14,625
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #6 June 1 thru 30, 2009
                
                
                28,162
                
                
                $
                1.28
                
                None
                
                NoneMonth
      #7 July 1 thru 31, 2009
                
                
                -
                
                
                
                -
                
                None
                
                NoneMonth
      #6 Aug 1 thru 31, 2009
                
                
                2,402
                
                
                $
                1.25
                
                None
                
                NoneMonth
      #6 Sept 1 thru 30, 2009
                
                
                2,700
                
                
                $
                1.25
                
                None
                
                NoneTotals
                
                
                91,817
 
 Item3.
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.
 
 Item4.
Submission of Matters to a Vote of Security Holders
  There
were no items submitted to a vote of security holders for the period covered by
this report.
 
 Item5. Other
Information
  None.
  16
 Table of Contents
  Item6.
Exhibits and Reports on Form 10-Q
  (a)
Exhibits Index
  No.
                
                Description
                
                Page
      or Method of Filing3.1
                
                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.
      33-703184.1
                
                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, 200710.9
                
                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 2, 2009, as filed with the
      SEC on Schedule 14A on April 28, 2009, 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
                
                Certification
      of Chief Executive OfficerSection
      302
                
                Filed
      herewith – E131.2
                
                Certification
      of Chief Financial OfficerSection
      302
                
                Filed
      herewith – E232
                
                Certification
      of Chief Executive Officer and Chief Financial OfficerSection
      906
                
                Filed
      herewith – E3
  (b) Material Contracts - Reports on
Form 8-K
  No items
were reported on Form 8-K during the period covered by this
report.
   17
 Table of Contents
 
 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)/s/
      Wayne E.
      AhartDate:
      November 13, 2009
                
                By:
      Wayne E. Ahart, Chairman of the Board(Chief
      Executive Officer)/s/
      Barry N. ShamasDate:
      November 13, 2009
                
                By:
      Barry N. Shamas, Executive V.P.(Chief
      Financial Officer)
 
  18
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