UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-K







(Mark
      One)x
                            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
    1934For the
      Fiscal Year Ended December 31,
      2008orr
                            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. 0-16880





BNL
FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)




IOWA
              42-1239454(State
      of incorporation)
              (IRS
      Employer Identification No.)7010
      Hwy 71 W., Suite 100Austin,
      TX
              78735(Address
      of principal executive offices)
              (Zip
      Code)Registrant's telephone number, including area
      code: (512)
      383-0220





Securities
registered pursuant to Section 12(b) of the Act:  None


Securities
registered pursuant to Section 12(g) of the Act:





Common
Stock, No Par Value


(Title of
Class)





Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of Securities Act.  Yes r  No x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act . Yes r  No 
x





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No r





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller
reporting.  See definition of  “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.  (check
one):




Large
accelerated filer r          
            
Accelerated filer r


Non-accelerated
filer x     
Smaller reporting company r





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




The estimated aggregate
market value of the voting stock held by non-affiliates of the Registrant as of
December 31, 2008 cannot be determined due to the limited trading in the
Company’s stock throughout the year (see also Item 5 of Form 10-K regarding the
limited trading market for the Company's shares).





As of
December 31, 2008, the Registrant had outstanding 15,207,127 shares (excluding
treasury shares) of Common Stock, no par value (which includes10,892,053 shares
owned by affiliates of the Registrant).





DOCUMENTS
INCORPORATED BY REFERENCE




Selected
portions of the Proxy Statement for the Annual Meeting of Shareholders,
scheduled for May 27, 2009 have been incorporated by reference into Part
III of this Form 10-K


Table of Contents




Tableof Contents




Part
      I
                                                
                                                PageITEM
      1.
                                                Business
                                                3ITEM
      1A.
                                                Risk Factors
                                                88ITEM
      1B.
                                                Unresolved Staff Comments
                                                8ITEM
      2.
                                                Properties
                                                8ITEM
      3.
                                                Legal Proceedings
                                                9ITEM
      4.
                                                Submission of Matters to a Vote of Security
      Holders
                                                9Part
      IIITEM
      5.
                                                Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchase of Equity Securities
                                                10ITEM
      6.
                                                Selected Financial Data
                                                11ITEM
      7.
                                                Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                                12ITEM
      7A.
                                                Quantitative and Qualitative Disclosures About Market
      Risk.
                                                20ITEM
      8.
                                                Financial Statements and Supplementary Data
                                                20ITEM
      9.
                                                Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                                                20ITEM
      9A(T).
                                                Internal Controls and Procedures
                                                20ITEM
      9B.
                                                Other Information
                                                21Part
      IIIITEM
      10.
                                                Directors, Executive Officers and Corporate Governance of the
      Registrant
                                                22ITEM
      11.
                                                Executive Compensation
                                                24ITEM
      12.
                                                Security Ownership of Certain Beneficial Owners and
      Management
                                                24ITEM
      13.
                                                Certain Relationships and Related Transactions and Directors
      Independence
                                                26ITEM
      14.
                                                Principal Accountant Fees and Services
                                                26Part
      IVITEM
      15.
                                                Exhibits, Financial Statement Schedules
                                                27SIGNATURES
                                                
                                                29


Table of Contents







PART 1




ITEM1.
Business




General


BNL
Financial Corporation (the "Company" or "Registrant" or “BNLF”) is an insurance
holding company incorporated in Iowa in January 1984.  The Company's
administrative offices are located at 7010 Hwy. 71 West, Suite 100, Austin,
Texas 78735; its telephone number is (512) 383-0220.





In March
2004, BNL Equity Corporation (“BNLE”), the immediate subsidiary of the Company
was dissolved and its assets, including the stock of Brokers National Life
Assurance Company (“BNLAC”), were distributed to BNLF.  All
outstanding shares of BNLAC are now owned directly by BNLF.





The
Company has three wholly owned subsidiaries, Brokers National Life Assurance
Company, BNL Brokerage Corporation and Consumers Protective Association
(formerly National Dental Benefit Association, Inc.).  Consumers
Protective Association is an inactive association that was purchased for the
purpose of marketing services, including insurance products to
members.





BNL
      Financial Corporation
                ___________
                Consumer's
      Protective Association(Inactive
      Association)|Brokers
      National Life Assurance Company|BNL
      Brokerage Corporation





Industry
Segments


The
operations of the Company are conducted through BNLAC, which in 2008 marketed
life and accident and health insurance.  In 1987 BNLAC began selling
insurance in Iowa.  In 1992, BNLAC redomesticated to Arkansas and
expanded its sales to other states through the acquisition of Statesman Life
Insurance Company.  The Company has no foreign
operations.




In 2008,
BNLAC was granted a certificate of authority in Connecticut, Hawaii,
Massachusetts, and New Jersey.  This makes 48 states and the District
of Columbia the Company is able to offer life and accident and health insurance
on an individual and group basis.





The
Company conducts business in the “life, accident and health insurers” industry
segment.  Most of BNLAC’s premium revenues are from sales of group
dental insurance sold primarily on a payroll deduction basis. BNLAC also markets
group and individual vision insurance products that are underwritten by other
insurance companies, on which BNLAC does not have any exposure to underwriting
(claims) losses.  Financial information relating thereto is contained
in the Selected Financial Data below and the Financial Statements included as
Exhibits to this Report.





Sales and
Marketing


The
Company markets its products through independent agents and
brokers.  BNLAC emphasizes the marketing of specialized or "niche"
life and health insurance products including: individual and group term life
insurance, hospital indemnity insurance, group and individual dental insurance,
short term disability insurance, accidental death and dismemberment insurance
and cancer insurance.  Most of these products are designed to be sold
on a group or payroll deduction basis.





BNLAC
also markets group vision insurance products that are underwritten (issued) by
other insurance companies.  BNLAC "co-brands" these products with its
name and logo and markets them through its sales force.BNLAC collects overwrite
commissions and/or administrative fees on these products and does not have any
exposure to underwriting (claims) losses.





3
 Table of Contents




Statistics
by line of business are as follows (gross before reinsurance):





I. Annualized Premiums and
      Annuity Deposits In Force:
                        
                        2008
                        
                        
                        2007Ordinary
      Life Insurance
                        
                        $
                        260,000
                        
                        
                        $
                        292,000Individual
      Annuities(1)
                        
                        
                        69,000
                        
                        
                        
                        70,000Group
      Dental Insurance
                        
                        
                        40,845,000
                        
                        
                        
                        42,299,000Miscellaneous
      A&H insurance
                        
                        
                        2,139,000
                        
                        
                        
                        2,356,000Total
                        
                        $
                        43,313,000
                        
                        
                        $
                        45,017,000





II. Collected Premiums and
      Annuity Deposits:Ordinary
      Life Insurance
                        
                        $
                        266,000
                        
                        
                        $
                        284,000Individual
      Annuities(1)
                        
                        
                        65,000
                        
                        
                        
                        61,000Group
      Dental Insurance
                        
                        
                        41,382,000
                        
                        
                        
                        41,926,000Miscellaneous
      A&H insurance
                        
                        
                        2,311,000
                        
                        
                        
                        2,069,000Total
                        
                        $
                        44,024,000
                        
                        
                        $
                        44,340,000
  III. Face Value of
      Insurance:Ordinary
      Life Insurance
                      
                      $
                      33,696,000
                      
                      
                      $
                      43,879,000Accidental
      Death Insurance
                      
                      
                      120,625,000
                      
                      
                      
                      120,655,000Total
                      
                      $
                      154,321,000
                      
                      
                      $
                      164,534,000





(1)
Classified as a deposit liability on the financial
statements.




Premiums
collected by state are reflected in the following table:




State
              
              Life
      Premiums
              
              
              Annuity
              
              
              Accident
      and
                Health
              
              
              TotalGeorgia
              
              $
              18,000
              
              
              $
              -
              
              
              $
              3,522,000
              
              
              $
              3,540,000Louisiana
              
              
              20,000
              
              
              
              -
              
              
              
              3,220,000
              
              
              
              3,240,000Oregon
              
              
              1,000
              
              
              
              -
              
              
              
              2,794,000
              
              
              
              2,795,000Arkansas
              
              
              27,000
              
              
              
              -
              
              
              
              2,693,000
              
              
              
              2,720,000Indiana
              
              
              9,000
              
              
              
              -
              
              
              
              2,496,000
              
              
              
              2,505,000Ohio
              
              
              2,000
              
              
              
              -
              
              
              
              2,459,000
              
              
              
              2,461,000Michigan
              
              
              9,000
              
              
              
              -
              
              
              
              2,203,000
              
              
              
              2,212,000Indiana
              
              
              3,000
              
              
              
              -
              
              
              
              2,226,000
              
              
              
              2,229,000Idaho
              
              
              3,000
              
              
              
              -
              
              
              
              2,203,000
              
              
              
              2,206,000All
      Other States
              
              
              174,000
              
              
              
              65,000
              
              
              
              19,877,000
              
              
              
              20,116,000Total
              
              $
              266,000
              
              
              $
              65,000
              
              
              $
              43,693,000
              
              
              $
              44,024,000






4
 Table of Contents





The
following chart shows group and individual dental insurance premiums collected
for each of the past five years ended December 31.





Group
      DentalGrossPremiumsCollected
                        
                        
                        IndividualDental
      GrossPremiumsCollected2008
                        
                        $
                        41,382,000
                        
                        
                        $
                        1,602,0002007
                        
                        
                        41,926,000
                        
                        
                        
                        1,785,0002006
                        
                        
                        42,132,000
                        
                        
                        
                        1,988,0002005
                        
                        
                        41,629,000
                        
                        
                        
                        2,033,0002004
                        
                        
                        40,681,000
                        
                        
                        
                        1,594,104





The
following chart shows group dental insurance claims paid and incurred claims
ratios for each of the five years ended December 31.  The incurred
claims loss ratio represents the ratio of incurred claims to premiums
earned.




IncurredGross
                  
                  
                  ClaimsGroup Dental
      Insurance
                  
                  Claims
      Paid
                  
                  
                  Ratio2008
                  
                  $
                  26,290,000
                  
                  
                  
                  61.9
                  %2007
                  
                  
                  26,340,000
                  
                  
                  
                  61.8
                  %2006
                  
                  
                  27,127,000
                  
                  
                  
                  64.1
                  %2005
                  
                  
                  26,046,000
                  
                  
                  
                  63.1
                  %2004
                  
                  
                  25,044,000
                  
                  
                  
                  62.3
                  %




Agents'
Commissions


On
December 31, 2008, BNLAC had 4,681 general agents and brokers that market its
policies in 41 states compared to 4,478 agents and brokers on December 31,
2007





On all of
its products BNLAC believes it pays competitive commissions to agents. There is
considerable competition for insurance agents and BNLAC competes with larger,
well-established life insurance companies for the services of agents. BNLAC
believes it is able to attract competent agents by offering competitive
compensation, efficient service to agents and customers and by developing
products to fill special needs within the marketplace.





Reinsurance


BNLAC
reinsures with other insurance companies portions of the risks it underwrites on
sales of life and accident and health insurance.  Reinsurance enables
BNLAC, as the “ceding company,” to reduce the amount of its risk on any
particular policy and to write policies in amounts larger than it could without
such agreements.





The
reinsurer receives a portion of the premium on the reinsured
policies.  BNLAC remains directly liable to policyholders to perform
all policy obligations, and bears the contingent risk of the reinsurer’s
insolvency. Before submitting an application for a policy to the reinsurer,
BNLAC determines whether the applicant is insurable, but BNLAC rejects any
application which is not accepted by the reinsurer.





BNLAC
reinsures its life insurance under agreements which are classified as either
"automatic" or "facultative." Under an "automatic" treaty, the reinsurer agrees
that it will assume liability automatically for the excess over the ceding
company’s retention limits on any application acceptable to the ceding company.
Under a "facultative" treaty, the reinsurer retains the right to accept or
reject any reinsurance submitted after reviewing each application.





In 2008,
BNLAC’s accidental death benefit riders were reinsured 100% through a Bulk ADB
reinsurance agreement with Optimum Re.  Optimum Re was rated
“A-“(Excellent) by AM Best Company for 2008.





In 2008,
BNLAC’s individual life insurance products in excess of $35,000 were reinsured
with Optimum Re under an automatic treaty up to $175,000 and under a facultative
treaty for amounts over $175,000.  Optimum Re was rated
“A-“(Excellent) by AM Best Company for 2008.





BNLAC
entered into a quota share reinsurance agreement with Hannover Life Reassurance
Company of America for its group life, group accidental death and dismemberment
and accidental death and dismemberment without group life plans effective
January 1, 2008 whereby Hannover accepts 90% of the risk up to a maximum of
$100,000 per life.  This reinsurance replaced Hartford Life and
Accident Insurance Company.  Hannover was rated “A” (Excellent) by AM
Best Company for 2008.





5
 Table of Contents




Reinsurance
(continued)


BNLAC
entered into a quota share reinsurance agreement with Hannover Life Reassurance
Company of America for its accidental death and dismemberment plan including
common carrier effective January 1, 2007. The Company retains a 10% quota share
up to a maximum of $25,000 for AD&D and Common Carrier
combined.  Hannover will accept, on an automatic basis, 90% to 100%
quota share up to a maximum of $250,000 per life depending on the Company’s
retention.  This reinsurance replaced Hartford Life and Accident
Insurance Company.  Hannover was rated “A (Excellent) by AM Best
Company for 2008





BNLAC’s
Short Term Disability insurance is reinsured under a quota share reinsurance
agreement with Union Security Insurance Company, Des Moines, Iowa, (formerly
Fortis Benefits Insurance Company of Kansas City, Missouri).  The
reinsurer is liable for 75% of the risk on each policy.  Union
Security Insurance Company was rated “A” (Excellent) by AM Best Company for
2008.





Group and
individual dental is not reinsured due to the economics of the dental business
and the small annual maximum liability per policy.





The
following chart shows life insurance and accidental death insurance in force net
of reinsurance for each of the five past years ended December 31.





Gross
                  
                  
                  
                  
                  
                  
                  
                  
                  NetInsurance
                  
                  
                  Reinsurance
                  
                  
                  Reinsurance
                  
                  
                  InsuranceIn
      Force
                  
                  
                  Ceded
                  
                  
                  Assumed
                  
                  
                  In
      ForceLife
      Insurance2008
                  
                  $
                  33,696,000
                  
                  
                  $
                  11,111,000
                  
                  
                  $
                  0
                  
                  
                  $
                  22,585,0002007
                  
                  
                  43,879,000
                  
                  
                  
                  14,074,000
                  
                  
                  
                  0
                  
                  
                  
                  29,805,0002006
                  
                  
                  43,645,000
                  
                  
                  
                  15,333,000
                  
                  
                  
                  0
                  
                  
                  
                  28,312,0002005
                  
                  
                  39,992,000
                  
                  
                  
                  14,531,000
                  
                  
                  
                  0
                  
                  
                  
                  25,461,0002004
                  
                  
                  37,207,000
                  
                  
                  
                  11,752,000
                  
                  
                  
                  0
                  
                  
                  
                  25,455,000Accidental Death
      Insurance2008
                  
                  $
                  120,625,000
                  
                  
                  $
                  108,562,000
                  
                  
                  $
                  0
                  
                  
                  $
                  12,063,0002007
                  
                  
                  120,655,000
                  
                  
                  
                  108,590,000
                  
                  
                  
                  0
                  
                  
                  
                  12,065,0002006
                  
                  
                  112,085,000
                  
                  
                  
                  100,877,000
                  
                  
                  
                  0
                  
                  
                  
                  11,208,0002005
                  
                  
                  79,643,000
                  
                  
                  
                  71,834,000
                  
                  
                  
                  0
                  
                  
                  
                  7,809,0002004
                  
                  
                  65,629,000
                  
                  
                  
                  59,238,000
                  
                  
                  
                  0
                  
                  
                  
                  6,391,000





Investments


BNLAC
invests its available funds in certificates of deposit, U.S. Treasury Bills,
short term government agency notes, U.S. government and agency bonds and
corporate bonds and common stocks.  The earnings from such investments
represent a substantial part of BNLAC's income. For each of the five years ended
December 31, BNLAC's statutory net investment income and ratio of net return on
mean invested assets were as follows:





Year
                
                BNLAC
      Statutory Net Investment Income
                
                Net
      Return on Mean Invested Assets2008
                
                $
                960,753
                
                
                3.8
                %2007
                
                
                1,123,716
                
                
                4.8
                %2006
                
                
                1,005,774
                
                
                4.6
                %2005
                
                
                853,563
                
                
                4.0
                %2004
                
                
                879,351
                
                
                4.4
                %





For
information concerning realized and unrealized gains and losses on securities
see Note 4 of the Notes to Consolidated Financial Statements on page F-11 and
the table on page 16.






6
 Table of Contents





Special Factors Relating to
Accounting and Regulatory Reporting of Insurance Companies


State
insurance laws and regulations govern the accounting practices and the form of
financial reports of insurance companies filed with state insurance regulatory
agencies.  Most states have adopted the uniform rules established by
the National Association of Insurance Commissioners ("NAIC").  Reports
prepared in accordance with statutory accounting practices reflect primarily the
ability of an insurance company to meet its obligations to
policyholders.  Certain statutory accounting practices differ from
generally accepted accounting principles as applied to the Company’s audited
financial statements.





Life
insurance company revenues are generated primarily from premiums and investment
income.  Commissions and other sales cost may exceed the amount of
first year life premiums but are generally less in later policy
years.  Life insurance lapses and surrenders tend to occur more
frequently in the earlier years after a policy is sold.  Statutory
accounting rules for life insurance companies require all life insurance policy
acquisition costs be expensed immediately and not spread over the expected
duration of the policies.  Health insurance premiums are recorded the
same for both Statutory and GAAP.





Statutory
accounting practices also require that a relatively large portion of life
premiums be held as reserves for the protection of policyholders.  The
amount of such reserves is based upon actuarial calculations and the annual
increase in reserves is treated as an expense.  Such calculations are
based upon conservative assumptions concerning mortality costs and
earnings.  Life premiums are earnings only to the extent that they
exceed reserve requirements and commissions.  BNLAC calculates
reserves using the Commissioner's Reserve Valuation Method.  This
method provides a lower reserve in the early years of a policy to partially
offset the higher first-year costs of the policy.  Although such
reserves are treated as liabilities and are not available for use in operations,
a company is free to invest such reserves in accordance with applicable state
laws.  Interest earned on invested reserves is operating income to the
life insurance company to the extent that it exceeds the interest required to be
added to the reserves.





The
Company’s consolidated financial statements are required to be prepared in
conformity with generally accepted accounting principles. The objective of these
financial statements is to provide reliable financial information about economic
resources and obligations of a business enterprise and changes in net resources
resulting from its business activities, measured as a going concern. To the
extent that the accounting practices prescribed or permitted by state regulatory
authorities differ from generally accepted accounting principles, appropriate
adjustments will be made to bring such financial statements into accordance with
generally accepted accounting principles, including (but not limited to) the
following:




a)
Premiums are reported as earned over the premium paying
period.  Benefits and expenses are associated with earned premiums so
as to result in the matching of expenses with the related premiums over the life
of the contracts.  This is accomplished through the provision for
liabilities for future policy benefits and the deferral and amortization of
acquisition costs;




b)
Certain assets designated as "non-admitted assets" for statutory purposes are
reinstated to the accounts;




c) The
asset valuation reserve is reclassified as retained earnings rather than as a
liability.  The interest maintenance reserve is reclassified from a
liability to investment income;




d)
Premium payments received on annuities are not reported as revenue but are
recorded as increases to a deposit liability account. The profits are then
deferred over the life of the policy instead of being realized when the payments
are received;




e)
Realized gains and losses from the sale of investments are reclassified to a
separate component of summary of operations.  Taxes thereon are
included in the tax provision; and




f)
Investments in fixed maturity securities that are available for sale are carried
at fair value with the unrealized appreciation (depreciation) recorded to
shareholders’ equity.





The
ability of BNLAC to pay dividends to the Company is restricted under Arkansas
insurance laws and must be approved by the insurance commissioner of the State
of Arkansas, if it exceeds the lesser of 10% of surplus or net gain from
operations for the year.





Insurance
Regulations


BNLAC is
subject to regulation and supervision by the states in which it is admitted to
transact business.  Each state has an insurance department which has
broad administrative and supervisory powers to grant and revoke licenses to
transact business, regulate trade practices, establish guaranty associations,
license agents, approve policy forms, regulate premium rates for some lines of
business, establish reserve requirements, regulate competitive matters,
prescribe the form and content of required financial statements and reports,
determine the reasonableness and adequacy of statutory capital and surplus, and
regulate the type and amount of investments permitted.





Most
states have also enacted legislation which regulates insurance holding company
activities, including acquisitions, extraordinary dividends, the terms of
surplus notes, the terms of affiliate transactions and other related
matters.  The Company and BNLAC are registered as a holding company
group pursuant to such legislation in Arkansas and BNLAC routinely reports to
other jurisdictions as well.





The NAIC,
through the member regulatory staffs, attempts to coordinate the state
regulatory process and continually re-examines existing laws and regulations and
their application to insurance companies.  Recently, this
re-examination has focused on insurance interpretations of existing law, the
development of new laws and the implementation of non-statutory
guidelines.  The NAIC has formed committees and appointed advisory
groups to study and formulate regulatory proposals on such diverse issues as the
use of surplus debentures, accounting for reinsurance transactions and the
adoption of risk-based capital (“RBC”) rules.  In addition, in
connection with its accreditation of states to conduct periodic company
examinations, the NAIC has encouraged states to adopt model NAIC laws on
specific topics, such as holding company regulations and the definition of
extraordinary dividends.  It is not possible to predict the future
impact of changing state and federal regulation on the operations of
BNLAC.





The NAIC
has adopted model RBC requirements to evaluate the adequacy of statutory capital
and surplus in relation to investment and insurance risks associated with: (i)
asset quality; (ii) mortality and morbidity; (iii) asset and liability matching;
and (iv) other business factors.  The RBC formula is designed to be
used by the states as an early warning tool to identify possible weakly
capitalized companies for the purpose of initiating regulatory
action.  In addition, the formula defines a new minimum capital
standard which will supplement the prevailing system of low fixed minimum
capital and surplus requirements on a state-by-state basis.





7
 Table of Contents




The RBC
requirements provide for four different levels of regulatory attention depending
on the ratio of a company’s total adjusted capital (defined as the total of its
statutory capital, surplus, asset valuation reserve and 50% of apportioned
dividends) to its RBC.  The “Company Action Level” is triggered if a
company’s total adjusted capital is less than 100% but greater than or equal to
75% of its RBC, or if total adjusted capital is less than 125% of RBC and a
negative trend has occurred.  The trend test calculates the greater of
any decreases in the margin (i.e., the amount in dollars by which a company’s
total adjusted capital exceeds its RBC) between the current year and the prior
year and between the current year and the average of the past three years, and
assumes that the decrease could occur again in the coming year.  If a
similar decrease in the margin in the coming year would result in an RBC of less
than 95%, then the Company Action Level would be triggered.  At the
Company Action Level, a company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions to improve its
capital position.  The “Regulatory Action Level” is triggered if a
company’s total adjusted capital is less than 75% but greater than or equal to
50% of its RBC.  At the Regulatory Action Level the regulatory
authority will perform a special examination of the company and issue an order
specifying corrective actions that must be followed.  The “Authorized
Control Level” is triggered if a company’s total adjusted capital is less than
50% but greater than or equal to 35% of its RBC, and the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control.  The “Mandatory Control Level” is triggered if a
company’s total adjusted capital is less than 35% of its RBC, and the regulatory
authority is mandated to place the company under its
control.  Calculations using the NAIC formula at December 31, 2008
indicated that the ratios of total adjusted capital to RBC for BNLAC would have
been in excess of 1,322% and, therefore, significantly above the Company Action
Level.





As part
of their routine regulatory process, approximately once every five years,
insurance departments conduct detailed examinations of the books, records and
accounts of insurance companies domiciled in their states.   Such
examinations are generally conducted in cooperation with the departments of
other states under guidelines promulgated by the NAIC.





In
September 2005, the Arkansas Insurance Department conducted its statutory
examination for the period ended December 31, 2004.  No adjustments
were made to the financial statements of the Company as a result of the
examination.





BNLAC's
management is not aware of any failure to comply with any significant insurance
regulatory requirement to which BNLAC is subject at this time.





Competition


The life
and health insurance business is highly competitive, and BNLAC competes in many
instances with individual companies and groups of affiliated companies that have
substantially greater financial resources, larger sales forces and more
widespread agency and brokerage relationships than BNLAC.  Certain of
these companies operate on a mutual basis, which may give them an advantage over
BNLAC since their profits accrue to the policyholders rather than the
shareholders.





BNLAC
focuses its marketing efforts on sales of its products to small and medium size
groups of employees, association members and others.  These groups
range in size from three to approximately 2,033 persons.  BNLAC
also sells its products to individuals.  BNLAC is a small insurance
company which has no identifiable market share.  BNLAC is not ranked
according to its size or volume of sales.





BNLAC
competes for the services of agents and brokers in several
ways.  First, the Company’s dental insurance products are attractive
to brokers and general agents because of their popularity in the employee
benefit market.  Second, BNLAC strives to provide a high level of
service to agents by offering products that meet their clients’ needs and by
providing individualized service in the administration of such products.
Finally, BNLAC attempts to structure the levels of premiums, benefits and
commissions on insurance products to compare favorably with
competitors.





Personnel


At
December 31, 2008 BNLAC had four executive officers and 69 full-time
administrative personnel.  BNLAC’s administrative staff supervises
services for the agency force, policy underwriting, policy issuance and service,
billing and collections, life claims, accounting and bookkeeping, preparation of
reports to regulatory authorities and other matters.  The Company has
not experienced any work stoppages or strikes and considers its relations with
its employees and agents to be excellent.  The Company currently has
no employees which are represented by a labor union.  BNLAC uses a
third party administrator to process dental claims.





ITEM1A. Risk
Factors





The
Company is not aware of any risk factors which may relate to speculative or
risky circumstances to the Company’s outstanding common stock.





To the
extent which any matters presented in Item 1, Business, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, or
Item 7A, Quantitive and Qualitative Disclosures About Market Risk may be
applicable, they are incorporated herein by reference.





ITEM1B.
Unresolved Staff Comments





None.




ITEM2.
Properties





Neither
the Company, nor any of its subsidiaries own any real estate.





During
the first quarter of 2005 the Company entered into a lease for 20,337 square
feet of office space in Austin, Texas, under an eight year, triple net lease.
The base rent was $0 in the first year (June 1, 2005 to May 31, 2006), $157,612
in the second year and payments escalate to $264,384 in the final year of the
lease.  Leasehold improvements totaled approximately $872,000
($203,000 funded by landlord) on the new lease space that was occupied in
December 2005.  Leasehold improvements are being amortized over the
lease term.  The $117,000 initial rent holiday and $203,000 of
landlord-funded leasehold improvements will be amortized over the lease term and
reduce lease expense.  Deferred rent credits are included in other
liabilities and were approximately $320,000 and $355,000 for 2008 and 2007,
respectively.




BNLF
leases approximately 1,400 square feet of office space in Sherwood, Arkansas at
a rental of $18,750 per year.  BNLAC incurs 100% of the rental
expense.





In
November of 2007, BNLAC terminated its lease of 288 square feet of office space
in Des Moines, IA.  At December 31, 2008, employees of the Des Moines
office worked from their homes and there are no plans to lease additional office
space in Des Moines at this time.





The
Company and its subsidiaries own the majority of the furniture and equipment
used in the operation of its business.




8
 Table of Contents




ITEM3. Legal
Proceedings





In 2001,
the Board of Directors of the Company and BNL Equity Corporation approved a
settlement in the class action case brought by certain
shareholders.  The settlement, which was approved by the Pulaski
County Circuit Court and the Arkansas Insurance Commissioner, was subject to
various conditions, including the approvals by any other applicable regulatory
authorities and conditioned upon compliance with federal and state securities
laws.  As of December 31, 2002, all requisite approvals were received
and redemption of the stock began in 2003.





As part
of the settlement agreement, the Company issued its Bonds in the principal
amount of $1.50 in exchange for each share of common stock of BNL owned by the
members of the Class.  The balance of Bonds Payable was $1,443,282 and
$1,607,576 at December 31, 2008 and 2007, respectively.  The bonds are
for a term of twelve years, effective December 15, 2002, with principal payable
at maturity and bear interest at the rate of 6% per annum payable annually from
the previous fiscal year’s earnings of BNL. The estimated annual impact to
earnings per share is approximately $.006 per share.  If any interest
payment is not made, it will be added to the principal and paid at
maturity.  The Bonds are fully callable and redeemable at par at any
time by BNL.





The
Company has made cash offers to bond holders for the purchase of
bonds.  Bond purchases resulted in a reduction of Bonds Payable of
$164,295, and $32,408 in 2008 and 2007; respectively.  Gains from
early extinguishments of the debt were $44,370, $10,803 and $35,732 in 2008,
2007 and 2006; respectively.





ITEM4.
Submission of Matters to a Vote of  Security
Holders




No
matters were submitted for a vote during the fourth quarter of
2008.






9
 Table of Contents





PART
II




ITEM5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities





Market for
Stock


During
2008 the Company purchased 16,680 shares of its common stock at the request of
shareholders at $1.25 per share.





The
Company made an issuer tender offer effective June 8, 2007 (with a Form TO
filing with the Securities and Exchange Commission) at a purchase price of $1.25
per share ("2007 Issuer Tender Offer").  The 2007 Issuer Tender Offer
terminated on September 10, 2007, and as a result the Company purchased 420,247
shares of its Common Stock for a total amount of $525,309.  The
Company purchased an additional 183,100 shares at the request of shareholders at
$1.25 per share in 2007.





During
the fourth quarter of 2007, the Company retired 1,749,205 treasury
shares.





The stock
is not traded on any established trading market.





Purchases of Common Stock
During 2008





The
following table sets forth the shares of the Company’s outstanding Common Stock
which the Company purchased during 2008:





(a)
              
              
              (b)
              
              (c)
              (d)Period
              
              Total
      number of shares purchased
                Note
      1
              
              
              Average
      price paid per share
              
              Total
      number of shares purchased as part of publicly announced plans or
      programs
              Maximum
      number of shares that may yet be purchased under the plans or
      programsMonth
      #1, January 1 thru 31, 2008
              
              
              1,200
              
              
              $
              1.25
              
              None
              NoneMonth
      #2, February 1 thru 28, 2008
              
              
              3,000
              
              
              $
              1.25
              
              None
              NoneMonth
      #3, Mar 1 thru 31, 2008
              
              
              1,200
              
              
              $
              1.25
              
              None
              NoneMonth
      #4, April 1 thru 30, 2008
              
              None
              
              
              None
              
              None
              NoneMonth
      #5, May 1 thru 31, 2008
              
              None
              
              
              None
              
              None
              NoneMonth
      #6, June 1 thru 30, 2008
              
              None
              
              
              None
              
              None
              NoneMonth
      #7, July 1 thru 31 2008
              
              
              2,200
              
              
              $
              1.25
              
              None
              NoneMonth
      #8, Aug 1 thru 31, 2008
              
              
              2,000
              
              
              $
              1.25
              
              None
              NoneMonth
      #9 September 1 thru 30, 2008
              
              None
              
              
              None
              
              None
              NoneMonth
      #10 October 1 thru 31, 2008
              
              
              1,080
              
              
              $
              1.25
              
              None
              NoneMonth
      #11 November 1 thru 30, 2008
              
              
              6,000
              
              
              $
              1.25
              
              None
              NoneMonth
      #12 December 1 thru 31, 2008
              
              None
              
              
              $
              1.25
              
              None
              NoneTotal
              
              
              16,680
              
              
              $
              1.25





Note 1 to the above
table:  During 2008, the Company did not have any publicly announced
plan or program to repurchase its outstanding Common Stock.  From time
to time, some shareholders of the Company request the Company purchase their
stock and the Company does, from time to time, make such repurchases but only
does so in its sole and absolute discretion and the Company is under no
obligation to make any such repurchases in the future.





Holders


As of
December 31, 2008 there
were 1,998 record holders of the Company's common stock.





Dividends


In the
fourth quarter of 2008, the board of directors voted to pay a $.05 dividend per
share to its shareholders, which required approximately $760,000 of
funding.  The Company's ability to declare and pay dividends in the
future will be dependent upon its earnings and the cash needs for
expansion.  In addition, payment of dividends by BNLAC is regulated
under Arkansas insurance laws.




10
 Table of Contents





Equity Compensation Plan
Information





In 1994,
the Board of Directors and Shareholders approved the 1994 Brokers and Agents’
Nonqualified Stock Option Plan.  This plan was established as an
incentive to sales persons of BNLAC.  Initially 250,000 shares were
available under the plan.  The Board of Directors authorized options
for an additional 1.75 million shares.  The option period may not
exceed a term of five years and the duration of the plan was ten years, expiring
December 14, 2004.





Of the
options granted through December 2004, there were no stock options outstanding
at December 31, 2008.  The number of options expiring or forfeited
were 100,825 and 122,675 in 2008 and 2007, respectively.  There were
9,600 options exercised in 2008 and 12,475 options exercised in 2007. All the
remaining options expired in 2008.





In March
2002, the Board of Directors approved the 2002 Non-Director, Non-Executive
Stock Option Plan,subject to any necessary authorizations from any
regulatory authority.  The plan is intended to assist the Company in
attracting and retaining individuals of outstanding ability and to promote
concurrence of their interests with those of the Shareholders of the
Company.  The Company granted options for 116,000 shares prior to
2005.  No options were granted in 2008, 2007 and 2006.  The
fair value of any options granted is estimated using a binomial method as
prescribed in SFAS No. 123(R).  There were 93,050 options outstanding
at December 31, 2008.  The estimated weighted average remaining life
of the options is 4.4 years and weighted average exercise price is
$.63.  The options do not have a dilutive effect on earnings per share
at this time, but may have such an effect in the future.  See Note 1
of the financial statements.





The table
below sets forth the Equity Compensation Plans as of December 31,
2008.




A
              
              
              
              B
              
              
              
              CPlan
      Category
              
              Number
      of Securities to be issued upon exercise of outstanding
      options
              
              
              Weighted
      Average exercise price of outstanding options
              
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a)Not
      approved by security holdersEmployee
      Plan
              
              
              93,050
              
              
              $
              .63
              
              
              
              134,000





Transfer Agent and
Registrar


BNL
Financial Corporation is the Registrar and Transfer Agent for the Company's
common stock.




ITEM6.  Selected Financial Data





The
selected consolidated financial data presented below as of the end of and for
each of the years in the five-year period ended December 31, 2008 is derived
from the Company's consolidated financial statements.  The
consolidated financial statements as of December 31, 2008 and 2007, and for each
of the years in the three-year period ended December 31, 2008 are included
elsewhere in this Form 10-K.


2008*
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Total
      Income
              
              $
              46,455,107
              
              
              $
              48,084,920
              
              
              $
              47,646,337
              
              
              $
              46,614,276
              
              
              $
              44,906,665Net
      Income
              
              $
              2,366,472
              
              
              $
              3,449,368
              
              
              $
              2,564,243
              
              
              $
              2,303,089
              
              
              $
              2,652,503Net
      Income PerCommon
      Share
              
              $
              .16
              
              
              $
              .22
              
              
              $
              .16
              
              
              $
              .13
              
              
              $
              .14Total
      Assets
              
              $
              30,012,783
              
              
              $
              30,301,075
              
              
              $
              27,009,634
              
              
              $
              26,621,477
              
              
              $
              26,058,520Total
      Liabilities
              
              $
              11,404,366
              
              
              $
              13,004,202
              
              
              $
              12,497,130
              
              
              $
              13,498,115
              
              
              $
              12,798,984Average
      Shares Outstanding
              
              
              15,211,961
              
              
              
              15,602,725
              
              
              
              16,481,342
              
              
              
              17,495,881
              
              
              
              19,184,245





*This
      information should be read in conjunction with the disclosure concerning
      the Management's Discussion and Analysis of Financial Condition and the
      audited Financial Statements and Notes thereto set forth elsewhere in this
      Form 10-K.






11
 Table of Contents




ITEM7.  Management’s Discussion and Analysis of Financial Condition
and Results of Operations




In this
section, we review the consolidated financial condition of the Company at
December 31, 2008, 2007 and 2006 and the consolidated results of operations for
the periods ended December 31, 2008, 2007 and 2006.  Please read this
discussion in conjunction with the accompanying consolidated financial
statements and notes.





Forward-Looking
Statements





All
statement, trend analyses and other information contained in this report and
elsewhere (such as in filings by us with the Securities and Exchange Commission,
press releases, presentations by us or our management or oral statements)
relative to markets for our products and trends in our operations or financial
results, as well as other statements including words such as “anticipate,”
“believe,” “plan,” “estimate,” “expect,” “intend,” and other similar
expressions, constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995.  These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements.  Such factors include, among other things:
(i) general economic conditions and other factors, including prevailing interest
rate levels and stock and credit market performance which may affect (among
other things) our ability to sell our products, our ability to access capital
resources and the costs associated therewith, the market value of our
investments and the lapse rate and profitability of policies; (ii) world
conflict, including but not limited to the war in Iraq, which may affect
consumers spending trends and priorities (iii) customer response to new products
and marketing initiatives: (iv) mortality, morbidity and other factors which may
affect the profitability of our products (v) changes in the federal income tax
laws and regulations which may affect the relative income tax advantages of our
products (vi) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales and
underwriting of insurance products and regulation of the sale, underwriting and
pricing of products (vii) the risk factors or uncertainties listed from time to
time in our filings with the Securities and Exchange Commission.





Management
believes the Company's current critical accounting policies are comprised of the
following:





Liabilities
for unpaid policy claims are a sensitive accounting estimate unique to the
insurance industry.  Management uses an independent actuary to
formulate this estimate.  Differences in the estimates and actual
results may result in revised claims expense which is recognized in the period
in which the difference is determined.  See Note 1, 7 and 11 to our
financial statements for the effect on the year 2008.





Claim Liability
Methodology


The
Company, through its wholly owned subsidiary, BNLAC, has a single line of
business which is life and accident and health insurance.  The
Company’s SIC code is 6311 which is a standard industrial classification used by
the United States Securities and Exchange Commission (“SEC”).  Using
such SIC code, an interested person can research the internet website of the
SEC, www.sec.gov, to find
and review business and financial information of other companies which are in
the same line of business.





The
following is a summary description of the Company’s methodology for estimating
its claim liabilities for its insurance policies.  The Company and
management believe that this discussion constitutes forward-looking statements
and, therefore, this discussion is given full safe-harbor.




It should
be understood that there is no assurance that anything which the Company and its
management have done in the past regarding its claim liability methodology will
be done in the future.  The Company and its management are afforded
full and complete authority and judgment in determining and implementing its
claim liability methodology which includes any and all changes which may be made
from time to time.




The
Company’s significant insurance product types are presently dental (group and
individual), life (group and individual), and annuities.




In the
life and accident and health insurance industry, the liabilities for claims and
the related expensing of those liabilities are evaluated and recorded using
estimates of claim liabilities.  The Company estimates its claim
liabilities using the general methodology described herein.




The
liability for claims generally consists of the following:  (1) due and
unpaid claims, (2) claims in the course of settlement, and (3) claims incurred
but unreported.  The Company records the actual liability for all
claims that are due but unpaid, Item (1).  But, with regard to the
last Items (2) and (3), the Company must make estimates.  The
estimates are based on actuarial principles. The Company’s independent
consulting actuary works with Company financial personnel and management in
determining the estimates and the independent consulting actuary annually gives
the Company a certification as to the amounts of the liabilities.




The
Company calculates and maintains claim liabilities for the estimated future
payments on claims incurred before the statement date.  These
calculations are based on actuarial principles in accordance with industry
standards and applicable GAAP requirements.  Development of such
liabilities is done with Company financial personnel and management working with
the Company’s independent consulting actuary.  These liabilities
involve many considerations including but not limited to economic and social
conditions, inflation, and healthcare costs.  The claim liabilities
developed include significant estimates and assumptions based on management’s
review of historical experience in consultation with its independent
actuary.  The extent to which future payments match the claims
liabilities is dependent on how well actual future experience matches the
assumptions management makes regarding the future experience.  The
Company’s liabilities are estimates that require significant judgment and,
therefore, are inherently uncertain.





It is
common in the life and accident and health insurance industry for a consulting
actuary to give either (A) a liability certification where the liabilities are
expressed as a range of numbers for each relevant liability (the “Range
Estimate”), or (B) a liability
certification where the liabilities are expressed as a single number for each
relevant liability (the “Single Point Estimate”).





Where the
Range Estimate method is used, the management of an insurance company makes its
own choice to record an amount within the range.  The Company does not
use the Range Estimate for any of its insurance products.  Instead,
for all of its insurance products, the Company uses the Single Point
Estimate.




12
 Table of Contents




For the
Company’s group and individual dental insurance, the Company’s financial
personnel develop and make a Single Point Estimate for the claim liabilities
which results in the Company’s Single Point Estimate for the end of each fiscal
quarter and year end.  The Company’s independent consulting actuary
develops and makes its separate Single Point Estimate for such
liabilities.  The Company’s financial personnel and independent
consulting actuary compare their Single Point Estimates, reconcile any
differences and agree on a Single Point Estimate for such
liabilities.  Annually, the Company’s independent consulting actuary
gives a Single Point Estimate liability certification to the Company with the
agreed amount and the Company uses such certified amount without
change.




For the
Company’s group and individual life and annuity insurance, the Company’s
financial personnel make the Single Point Estimate for each such claim
liability.  Annually, the Company’s consulting actuary independently
reviews the Single Point Estimates.  If the independent consulting
actuary agrees with the Single Point Estimates, he gives a certification to the
Company.




The
Company’s financial personnel have significant experience and knowledge in
developing claim estimates for the Company’s insurance
products.  However, the Company’s financial personnel are not formally
trained, certified or recognized as actuaries.  The Company
continually engages independent consulting actuaries.  The Company
makes extensive use of its independent consulting actuaries which includes the
actuaries’ assistance in the development and creation of policy assumptions, the
development and modification of reserve and claim liability methodologies and
assumptions, estimations and calculations of reserves and claim liabilities, and
the annual certification of the amount of the Company’s liabilities for its
products.




While
claim liabilities are estimated as an inherent part of the insurance industry,
management of the Company believes that it follows standard industry practices
in estimating claim liabilities.





The
following discussions of claim liability methodology are separated by the
Company’s product types as indicated by the section headings.





Dental Insurance – Group and
Individual





For the
Company’s group and individual dental insurance policies, the Company and its
independent consulting actuary use a completion factor approach (sometimes
referred to as the development method) which provides best estimates of the
factors to determine claim liabilities. In
implementing the completion factor approach, a review of payment history
develops the completion factors.  These completion factors relate what
percentage of an ultimate claim is paid based upon its duration from date of
service.  Such completion factors are monitored over time and have
been relatively stable.   The completion factors are used to
estimate the liabilities for the months in which the claims are incurred where
they are deemed to be credible.





However,
with respect to claims incurred in the most recent months, the completion
factors may not be fully credible (the payment history is not
complete).  So, as is common in the industry, a review is made of
developing claims per insured by month and loss ratios by month for the most
recent months. The Company’s financial personnel and management and the
Company’s independent consulting actuary make a Single Point Estimate based upon
their determination of the loss ratios and claims per insured for the most
recent months.





Of all
the assumptions made by the Company’s financial personnel and management and the
Company’s independent consulting actuary, the loss ratio and the claims per
insured per month for the most recent months are the most sensitive ones for
liability estimation.  If the loss ratios and claims per insured per
month increase, claim liabilities will likely increase by some
amount.  If the loss ratios and claims per insured per month decrease,
claim liabilities will likely decrease by some amount.




Management
reviews trends in loss ratios and claims per insured per month in determining
its estimate for the most recent months.  Generally, while
fluctuations do occur, the Company’s loss ratio and claims per insured per month
are stable.  In estimating claim liabilities (the policy claims
payable on the Company’s balance sheet), the Company consistently uses the
assumptions of loss ratio and claims per insured per month which are based on
actual, historical data.  See, the discussion in the section herein
entitled “Trends in Completion Factors, Loss Ratio, and Claims per Insured per
Month”.




As to the
consistency of the Company’s estimation of its claim liabilities (the policy
claims payable on the Company’s balance sheet), you may reference Notes 7 and 11
to the Company’s Financial Statements.  Notes 7 and 11 present data
indicating the actual claims paid in a subsequent fiscal year for a prior fiscal
year; actual claims incurred in a subsequent year for a prior fiscal year; and
the claim liabilities for the prior fiscal year.  Notes 7 and 11 are
limited to the most recent fiscal year being reported, December 31, 2008, and
the previous fiscal years of 2007 and 2006.




Life  Insurance –
Group and Individual – and Annuities





The
Company reinsures a substantial portion of its life insurance and the associated
risks and liabilities.  See Item 1, Business, Reinsurance; and Note 8,
Reinsurance, to the Company’s financial statements.





The
Company determines its life insurance claim liabilities by recording three
items:  (1) actual claims due and unpaid; (2) the claims received
during the 30 day period following year end (this is done by taking an inventory
of claims received during the thirty day period); and (3) estimating a liability
amount for claims which have been incurred but not yet reported by the end of
the thirty day period.





The
Company’s annuity policies are simple deferred annuities.  The Company
does not explicitly establish a claim liability for its annuities since the
liability is already held in the annuity deposit liability.






13
 Table of Contents




Trends in Completion
Factors, Loss Ratio and Claims Per Insured Per Month





Claim
liabilities for the Group Dental line are the most significant part of the
Company’s claim liability.  As stated above, the Company uses the
completion factor method for calculating the liability.  Two main
assumptions are made in this approach.  First, for months the claims
are incurred where the completion factor is credible, the Company uses that
completion factor to calculate the liability associated with that month the
claim occurred.   Second, for the most recent months before the
Company’s financial statement date where it is determined that the completion
factors are not fully credible, the Company reviews loss ratios and claims per
insured per month to determine the liability for those months.





The
discussion in this paragraph relates to the months where the completion factors
are deemed to be fully credible which are typically the months prior to November
and December.    The completion factors have been relatively
stable in the recent past.  In the future, there could be changes in
the trend of completion factors.  The Company and its independent
consulting actuary review the trends in the completion factors and when
necessary make judgments as to the Single Point Estimate value for these
items.  Such estimates are based on observable trends and would also
reflect any known major changes.  Professional judgments are made
based on the experience of the actuary and Company’s financial personnel and
management.  To observe the possible sensitivity of assuming 100%
reliance on completion factors for claims incurred during the months for which
completion factors are believed to be fully credible, if the associated claim
liabilities for those months had increased by 5%, the year-end December 31,
2008, claim liabilities would have been increased by approximately
$13,000.





The
discussion in this paragraph relates to the months where the completion factors
are deemed to be not fully credible which are typically the months of November
and December.  The choice of the loss ratio assumption or claims per
insured per month assumption for the most recent month of the claim was incurred
may also have an impact on the liability estimate. These assumptions are
monitored for trends.  The Company and its consulting actuary monitor
the loss ratio and claims per insured month and override the completion factor
approach for the most recent months before the Company’s financial statement
date where the completion factors are not fully credible, i.e. November and
December.  To observe the possible sensitivity of assuming 100%
reliance on loss ratio or claims per insured per month factors for claims
incurred during the months for which completion are believed to be not fully
credible (typically November and December of a fiscal year), if the loss ratio
or claims per insured per month had increased by 3% for those months (a multiple
of 1.03), the associated claim liabilities for those months and the year end
December 31, 2008, claim liability would have been increased by approximately
$121,000.





The
Company believes that its recorded claim liabilities are reasonable and adequate
to satisfy its ultimate claims liability.  The Company’s recorded
claim liabilities are, in accordance with industry practice, estimates of such
liabilities.





The
reader must recognize that the completion factors, loss ratios and claims per
insured per month may, and probably will, be affected by events and conditions
which are or will be unknown to the Company’s financial personnel or management
or the Company’s
consulting actuary.  The reader must also recognize that any trending
of the completion factors, loss ratios or claims per insured per month may not
be indicative of changes in the Company’s financial
condition.





While a
presentation such as described above provides some mathematical and hypothetical
numerical calculations, such calculations may or may not have any relevance to
the Company’s future financial condition, earnings or cash flow.





Deferred Tax
Asset





The
valuation allowance against deferred taxes is a sensitive accounting
estimate.  The Company follows Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes,” which prescribes the
liability method of accounting for deferred income taxes.  Under the
liability method, companies establish a deferred tax liability or asset for the
future tax effects of temporary differences between book and tax basis of assets
and liabilities.





At
December 31, 2008 and 2007, respectively, the Company had gross deferred tax
assets of $1,067,931 and $1,129,371 with corresponding valuation allowances of
$701,414 and $812,466, and gross deferred tax liabilities of $269,517 and
$346,506, resulting from net operating loss carryovers and temporary
differences primarily related to the life insurance subsidiary. The valuation
allowance is primarily due to statutory limitations on the use of net operating
losses and uncertainty as to usage of AMT credit carryover.  The
resulting net deferred tax asset at December 31, 2008 is $97,000 compared to a
deferred tax liability of $29,601 at December 31, 2007.  Realization
of the deferred tax asset is dependent on generating sufficient taxable income
prior to expiration of the loss carry forward. Although realization is not
assured, management believes it is more likely than not that all of the net
deferred tax asset will be realized. However, the amount of the deferred tax
asset considered realizable could be reduced in the near term if estimates of
future taxable income during the carry forward period are reduced.





The
provision for income tax is as follows:





2008
                    
                    
                    2007
                    
                    
                    2006Current
      tax provisions
                    
                    $
                    663,441
                    
                    
                    $
                    773,032
                    
                    
                    $
                    514,377Deferred
      tax provision
                    
                    
                    (68,602
                    )
                    
                    
                    40,602
                    
                    
                    
                    4,025Total
      income tax provision
                    
                    $
                    594,839
                    
                    
                    $
                    813,634
                    
                    
                    $
                    518,402






14
 Table of Contents




The
reconciliation of income taxes computed at the federal statutory income tax rate
to total income taxes for the years ended December 31, 2008, 2007 and 2006 is as
follows:




2008
                      
                      
                      2007
                      
                      
                      2006Book
      income before tax
                      
                      $
                      2,961,311
                      
                      
                      $
                      4,263,002
                      
                      
                      $
                      3,082,645Income
      tax computed at statutory rate (34%)
                      
                      $
                      1,006,845
                      
                      
                      $
                      1,449,421
                      
                      
                      $
                      1,048,099Valuation
      allowance for AMT credit
                      
                      
                      (17,000
                      )
                      
                      
                      (85,000
                      )
                      
                      
                      110,461Revision
      of valuation allowance
                      
                      
                      94,052
                      
                      
                      
                      173,923
                      
                      
                      
                      (116,108
                      )Rate
      differential
                      
                      
                      (489,058
                      )
                      
                      
                      (724,710
                      )
                      
                      
                      (524,050
                      )Total
      income tax provision (benefit)
                      
                      $
                      594,839
                      
                      
                      $
                      813,634
                      
                      
                      $
                      518,402





The
Company has net operating loss carry forwards for income tax purposes at
December 31, 2008 as follows:




Expiring
                            
                            NOL2009
                            
                            $
                            162,0002010
                            
                            
                            186,0002011
                            
                            
                            66,0002012
                            
                            
                            193,0002018
                            
                            
                            105,0002019
                            
                            
                            32,0002020
                            
                            
                            28,0002028
                            
                            
                            128,000$
                            900,000





Financial
Condition




2008
                    
                    
                    2007
                    
                    
                    2006Income
      from Operations    before Income Taxes
                    
                    $
                    2,961,311
                    
                    
                    $
                    4,263,002
                    
                    
                    $
                    3,082,645Book
      Value Per Share
                    
                    $
                    1.22
                    
                    
                    $
                    1.14
                    
                    
                    $
                    0.92Stockholders'
      Equity
                    
                    $
                    18,608,417
                    
                    
                    $
                    17,296,872
                    
                    
                    $
                    14,512,504Statutory
      Capital and Surplus of Insurance Subsidiary
                    
                    $
                    16,964,513
                    
                    
                    $
                    15,834,457
                    
                    
                    $
                    13,223,044A.M.
      Best Financial Rating
                    
                    
                    B
                    +
                    
                    
                    B
                    +
                    
                    
                    B
                    +




The
statutory capital and surplus of the insurance subsidiary increased in 2008 and
2007 primarily due to income from operations.





Liquidity and Capital
Resources





At
December 31, 2008 the Company had liquid assets of $4,989,381 in cash, short
term government agency notes, money market savings accounts, JP Morgan Chase
Liquid Assets Fund, Regions Morgan Keegan Government Agency Fund, Goldman Sachs
Trust Financial Square Fund, Evergreen Institutional Treasury Money Market Fund,
First American Treasury Obligation Funds and short-term certificates of
deposit.  Money market funds maybe subject to withdrawal
restrictions.  No such restrictions were in place at December 31,
2008.  All of the non-cash liquid assets can readily be converted into
cash.





The major
components of operating cash flows are premiums and investment income while
policy benefits are the most significant cash outflow.  In 2008, BNLAC
collected approximately $44.0 million of premiums and annuity deposits (gross
before reinsurance) and $1,170,901 of net investment income. Another source of
cash flow in 2008 was overwrite commissions of $2,263,529 on vision products.
During the year the Company incurred $32,978,610 in policy benefits and other
insurance costs.





15
 Table of Contents




The net
cash flow for 2008 was $51,398 versus operating income of
$2,961,311.   The difference is primarily due to dividends paid
to shareholders of $760,356, the increase in fixed assets, equity securities and
fixed maturities of approximately $1.1 million and the decrease in advanced and
unallocated premium of $1.2 million.




Approximately
$544,000 of the bond portfolio is classified as Available for Sale and carried
on the Balance Sheet at market value with the unrealized gain or loss recorded
in the surplus section of the Balance Sheet. The bonds include auto industry
bonds, government agencies and U. S. Treasury Bonds that have unrealized
profits.  The Company may sell these bonds before they
mature.





Approximately
$19.6 million of the bond portfolio is classified as Held to Maturity and is
carried on the Balance Sheet at amortized cost.  This classification
reflects management's ability and intent to hold the bonds until
maturity.  No adjustments to surplus are made as bond values change
unless declines in market value are deemed to be other than
temporary.





The table
below discloses the unrealized gains and losses on the "Held to Maturity"
bonds.




Portfolio Designated “Held to
Maturity”




December 31,
      2008
                  
                  Amortized
      Cost
                  
                  
                  Gross
      Unrealized Gains
                  
                  
                  Gross
      Unrealized Losses
                  
                  
                  Estimated
      Market ValueUS
      Treasury securities and obligations ofUS
      government corporations and agencies
                  
                  $
                  11,236,009
                  
                  
                  $
                  73,390
                  
                  
                  $
                  46,229
                  
                  
                  $
                  11,263,170Corporate
      securities
                  
                  
                  4,120,927
                  
                  
                  
                  44,631
                  
                  
                  
                  388,256
                  
                  
                  
                  3,777,302Mortgage-backed
      securitiesGNMA
      & FNMA CMO
                  
                  
                  4,240,072
                  
                  
                  
                  114,955
                  
                  
                  
                  2,026
                  
                  
                  
                  4,353,001Totals
                  
                  $
                  19,597,008
                  
                  
                  $
                  232,976
                  
                  
                  $
                  436,511
                  
                  
                  $
                  19,393,473





The
Company’s investments are primarily in U.S. Government and Government Agencies
($15,879,057 amortized book value), other investment grade bonds ($3,870,427
amortized book value) and less than investment grade ($459,478 amortized book
value).





The table
below discloses the unrealized losses on the bonds that are less than investment
grade.




Less Than Investment Grade
Bonds




December 31,
      2008
                      
                      S&PRating
                      
                      Amortized
      Book Value
                      
                      
                      Gross
      Unrealized Gains
                      
                      
                      Gross
      Unrealized Losses
                      
                      
                      Estimated
      Market ValueFord
      Motor Company
                      
                      CCC+
                      
                      $
                      42,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      42,000General
      Motors Acceptance Corporation
                      
                      BB+
                      
                      
                      80,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      80,000Provident
      Companies Inc.
                      
                      BB+
                      
                      
                      137,478
                      
                      
                      
                      -
                      
                      
                      
                      36,978
                      
                      
                      
                      100,500American
      General Finance
                      
                      BBB
                      
                      
                      200,000
                      
                      
                      
                      -
                      
                      
                      
                      130,000
                      
                      
                      
                      70,000Totals
                      
                      
                      
                      $
                      459,478
                      
                      
                      $
                      -
                      
                      
                      $
                      166,978
                      
                      
                      $
                      292,500





In 2008
the Company wrote down Washington Mutual bonds from $126,000 to $0 to reflect
their status as worthless.  Management determined Ford Motor Company
and General Motors Acceptance Corporation bonds  are other than
temporarily impaired and wrote down Ford Motor Company from $187,864 to $42,000
and General Motors Acceptance Corporation from $100,000 to
$80,000.  The aggregate realized loss on the bonds was
$291,864.





The
Company does not hedge its investment income through the use of
derivatives.





The
Company has a convertible debenture loan investment (“Debenture”) to EPSI
Benefits, Inc. (“EBI”), originally dated July 25, 2001 (Exhibit
10.3).  The loan bears interest at a rate of 14% and the maturity of
the Debenture was August 15, 2015. Monthly principal payments were scheduled to
begin on September 15, 2008, and the total principal amount is
$1,357,407.





On July
14, 2008, the Company and EBI, amended the Debenture (Exhibit 10.9) whereby the
monthly principal payments will start on September 15, 2013 with the maturity
date extended to August 15, 2020.  For various business reasons
management of both companies deemed the amendment to be advantageous. Under the
agreement, BNL has the right to convert the Debenture into a 51% ownership in
EBI.  Such conversion right will continue during the extended maturity
of the Debenture.





16
 Table of Contents




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 at the time
the agreement was amended, resulting in a net book value of
$1,152,825. Interest on the debentures is and has been
current.





Other
long-term investments also include an operating line of credit agreement in the
amount of $71,784 and $112,647 in 2008 and 2007 respectively.  The
agreement provided EPSI with a $200,000 line of credit maturing August,
2011.  The line of credit is at 8.00% with interest and principal
payable monthly to BNLAC.





On
November 5, 2001 the Company’s Board of Directors approved a settlement of the
class action lawsuit (see "Legal Proceedings").  One term of the
settlement was the issuance of Company bonds in the principal amount of $1.50 in
exchange for each share of the Company’s common stock owned by the members of
the class.  The bonds have a 12-year term and bear interest at the
rate of 6% per annum, effective December 15, 2002 payable annually from the
previous fiscal year’s earnings.  The total principal amount of bonds
payable at December 31, 2008 is $1,443,282 compared to $1,607,576 at December
31, 2007.  Bond interest expense was $93,536, and $112,322 in 2008 and
2007; respectively.  BNLAC will pay dividends to BNL Financial
Corporation for the payment of interest to the bondholders. The maximum amount
of dividends, which can be paid by Arkansas domiciled insurance companies to
shareholders without prior approval of the insurance commissioner, is subject to
restrictions relating to statutory surplus.  The Arkansas Insurance
Commissioner has reviewed and approved the settlement.  The Company
does not expect the dividend restrictions to impact its ability to meet its cash
needs.  The Company has no plan to start a sinking fund for payment of
the principal at maturity.




In 2008,
BNLAC paid dividends totaling $1,300,000 to BNLF for the payment of dividends to
the Company’s shareholders and for other general operating funds compared to
$1,000,000 dividends paid in 2007 for operating funds and to purchase common
stock.





The
following table reflects all long-term contractual obligations of the Company as
of December 31, 2008.


Long-Term Contractual Obligations
      *
              
              Total
              
              
              < 1 Year
              
              
              1-3 Years
              
              
              3-5 Years
              
              
              > 5 YearsBonds
      and Related Future Interest Payable**
              
              $
              2,037,000
              
              
              $
              87,000
              
              
              $
              174,000
              
              
              $
              174,000
              
              
              $
              1,062,000Operating
      Lease Obligations
              
              $
              1,636,000
              
              
              $
              358,000
              
              
              $
              684,000
              
              
              $
              594,000
              
              
              $
              -Liability
      for Future Policy Benefits(Note
      A.)
              
              $
              9,218,352
              
              
              $
              1,284,565
              
              
              $
              1,989,647
              
              
              $
              1,388,628
              
              
              $
              4,555,512Policy
      Claims Payable (Note B.)
              
              $
              1,712,140
              
              
              $
              1,712,140
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Liability
      for Annuity Deposits (Note C.)
              
              $
              5,397,256
              
              
              $
              94,188
              
              
              $
              133,592
              
              
              $
              202,811
              
              
              $
              4,966,665Supplementary
      Contracts (Note D.)
              
              $
              32,601
              
              
              $
              1,495
              
              
              $
              2,955
              
              
              $
              2,901
              
              
              $
              25,250





* The
notes to this long-term contractual obligations table are part of the table and
are important.




**  Interest
payments are made only if the Company is profitable.






17
 Table of Contents




Notes to Long-Term
Contractual Obligations Table:




Special
Note  Relating to Notes A, B, C and D and the information and
presentation for liabilities for future policy benefits, policy claims payable,
annuity deposits and supplementary contracts.




The data,
information and presentation in this Long-term Contractual Obligations Table
relating to the Company’s Liabilities for Future Policy Benefits, Policy Claims
Payable, Annuity Deposits and Supplementary Contracts are all, separately and
collectively, forward looking statements and are given full safe harbor
protection.




NOTE
A, Liabilities for Future Policy Benefits.




In
calculating the payments above, BNLAC used models of the business created for
statutory asset adequacy analysis.  The modeled life block was assumed
to surrender for its reserve at the end of 20 years.  Health blocks
tested were projected using approximate means beyond 20
years.  Payments on blocks not initially modeled were projected on an
approximate basis.  The total estimated future payments to be made relating
to the Liability for Future Policy Benefits is stated as $9,218,352 which does
not match the balance sheet liability total of $2,208,948 and the difference is
$7,009,404.  This is primarily due to the fact that the estimated
future payments presented in the long term contractual obligations table for
Future Policy Benefits includes consideration for future premiums, investment
income and maintenance expenses and such assumptions, and perhaps other
assumptions, may differ from the assumptions initially used to establish the
balance sheet liability.  The estimated future payments presented in
the long term contractual obligations table are based on current assumptions
while the balance sheet liability is based on assumptions locked in at the date
the policy was approved for issue. Assumptions for estimating future payments
are made regarding such items as interest earnings, mortality, morbidity, and
persistency. It is likely that the actual experience will deviate from these
assumptions – sometimes materially. A number of factors can have an effect such
as economic conditions, changes in policyholder actions regarding premium
payments and withdrawals, mortality and morbidity improvement or deterioration,
and inflation.  Random fluctuation in experience could also have an
effect.   The determination of the amount of the future payments
is based upon estimates and the timing and amount of future payments is not
always reasonably fixed and determinable. Because of the above considerations,
the amounts and timing of future payments will likely vary from that presented
in the above table.





Future
payments related to short duration contracts such as group dental are not
included in the above table in the line item Liabilities for Future Policy
Benefits.





NOTE
B, Policy Claims Payable.




The total
estimated future payments to be made relating to Policy Claims Payable do match
the balance sheet liability total.  The estimated future payments are
estimates of future occurrences based on many significant assumptions and are
forward looking statements which are to be given the full protection of safe
harbor.  In developing the Policy Claims Payable, assumptions are made
regarding such items as loss ratios, claims per insured or certificate holder
per month, completion factors, morbidity trends, speed at which incurred claims
are submitted, and speed at which they are processed. It is likely that the
actual experience will deviate from these assumptions – sometimes materially.
Random fluctuation is likely.  The determination of the liability
amounts is based upon estimates and the timing of payments is not always
reasonably fixed and determinable. Because of the above considerations, the
amounts and timing of payments will likely vary from that presented in the above
table.




NOTE
C, Annuity Deposits.




In
calculating the payments above, BNLAC used models of the business created for
statutory asset adequacy analysis.  The modeled annuity block was
assumed to surrender for its reserve at the end of 20 years.  The
total estimated future payments to be made relating to the Annuity Deposits
liability is stated as $5,397,256 which does not match the balance sheet
liability total of $2,523,185 and the difference is
$2,874,071.   The balance sheet Annuity Deposit liability
represents such items as deposits, premiums, investment income, expenses, and
withdrawals which have already occurred while the total estimated future
payments presented in this long term contractual obligations table are estimated
using assumptions for future occurrences of such factors and other
factors.  The estimated future payments are based on many significant
assumptions regarding future occurrences such as future premium payments,
interest earnings, mortality, and persistency. It is likely that the actual
experience will deviate from these assumptions – sometimes materially. A number
of factors can have an effect such as economic conditions, changes in
policyholder actions regarding annuity deposits and withdrawals, mortality
improvement or deterioration, and inflation.  Random fluctuation in
experience could also have an effect. The determination of the Annuity Deposit
estimated future payments is based upon estimates and the timing and amount of
estimated future payments is not always reasonably fixed and determinable.
Because of the above considerations, the amounts and timing of estimated future
payments will likely vary from that presented in the above table.





NOTE
D, Supplementary Contracts.




The total
estimated future payments to be made relating to the Supplementary Contracts
without life contingencies liability is stated as $32,601 which does not match
the balance sheet liability total of $2,782 and the difference is $29,819. This
is primarily due to the fact that the estimated future payments in this long
term contractual obligations table for Supplementary Contracts includes
consideration of future investment income, withdrawals (if permitted) and
maintenance expenses and such assumptions, and perhaps other assumptions, may
differ from the assumptions initially used to establish the balance sheet
liability.  The estimated future payments presented in the long term
contractual obligations table are based on current assumptions while the balance
sheet liability is based on assumptions locked in at the date the policy was
approved for issue. The estimated future payments are based on many significant
assumptions regarding future occurrences such as interest earnings, mortality,
and persistency. It is likely that the actual experience will deviate from these
assumptions – sometimes materially. A number of factors can have an effect such
as economic conditions, changes in policyholder actions regarding withdrawals
(if allowed), and mortality improvement or deterioration.  Random
fluctuation in experience could also have an effect. The Supplementary Contracts
estimated future payments are based upon estimates and the timing and amount of
future payments is not always reasonably fixed and determinable. Because of the
above considerations, the amounts and timing of estimated future payments will
likely vary from that presented in the above table.


We
believe liquid assets, along with investment income, premium income and
marketing fees will be sufficient to meet our long and short-term liquidity
needs.  We do not have any current plans to borrow money for
operations.




BNLAC
reports to state regulatory authorities on a statutory accounting basis that
differs from the basis used herein.  Due to an Arkansas regulatory
requirement associated with the redomestication in 1994, BNLAC must maintain a
minimum of $2,300,000 in capital and surplus.  Additionally, each
state in which BNLAC is licensed has statutory minimum capital requirements
required for maintaining its license to sell.  Minimum capital and
surplus requirements vary from $300,000 to as much as $5,000,000 in the states
in which BNLAC is licensed.





18
 Table of Contents




Results of
Operations


Premium
income was $43,456,024 in 2008, $44,564,173 in 2007 and $44,646,393 in
2006.  The decrease in 2008 was due to a decrease in group and
individual insurance premiums.  New sales of dental insurance were
down in 2008 and 2007 primarily due to increased competition from additional
companies marketing dental insurance and the turbulent economic climate that
reduced consumers spending.  This is reflected in the $650,000
decrease in first year group dental premium in 2008 and a decrease of $352,674
in 2007.





Net
investment income was $1,170,901 in 2008, $1,320,614 in 2007 and $1,191,583 in
2006, an increase of 11% in 2007, and a decrease of 11% in 2008.  The
increase in 2007 was due to an increase in investment in fixed maturities and an
increase in interest rates.  The decrease in 2008 was primarily due to
the sharp decline in interest rates throughout 2008 and an increase in short
term investments with lower yields. The decrease in interest rates and the
challenged financial markets has made it difficult to purchase investment grade
bonds with yields equivalent to bonds purchased over the last few
years.





The
Company receives marketing fees from EBI per the marketing agreement mentioned
above.  The Company received marketing fees of $0 in 2008, $198,843 in
2007 and $143,315 in 2006.  By mutual agreement, EPSI ceased paying the
Company marketing fees in 2008 due to the termination of one of its largest
customers.The increase in marketing fees in
2007 was due to additional funds available at EPSI from higher profits during
the year.





BNLAC
markets group and individual vision insurance products that are underwritten by
other insurance companies, on which BNLAC does not have any exposure to
underwriting (claims) losses.  The Company had vision insurance income
of $2,263,529, $1,979,359 and $1,603,767 in 2008, 2007 and 2006,
respectively.  The vision income increased by 14% and 23% in 2008 and
2007, respectively, primarily due to the addition of group voluntary vision
plans that require lower participation rates.





The
Company had a realized gain on debt extinguishments of $44,370 in 2008, $10,803
in 2007 and $35,732 in 2006 due to the purchase of debentures payable at less
than par value.  The Company purchased fewer debentures in 2007 than
it did in 2008 and 2006, which resulted in less realized gain in debt
extinguishments.





Realized
capital gains and (losses) on investments were ($479,717) in 2008, $11,128 in
2007 and $25,547 in 2006.  In 2008 the Company wrote down Washington
Mutual bonds from $126,000 to $0 to reflect their status as
worthless.  Management determined Ford Motor Company and General
Motors Acceptance Corporation bonds were other than temporarily impaired and
wrote down Ford Motor Company from $187,864 to $42,000 and General Motors
Corporation from $100,000 to $80,000.  The aggregate realized loss on
the bonds was $291,864.





The
Company has a $1,357,407 convertible debenture loan investment (“Debenture”) at
14% to EPSI Benefits, Inc. (“EBI”) that was scheduled to mature August 15, 2015.
Monthly principal payments were scheduled to begin on September 15, 2008,
however 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
was required to establish an allowance for credit losses in the amount of
$204,582, which is part of the realized losses for the year.





The
realized gain in 2007 and 2006 was primarily from the sale of equity
securities.





Decreases
in liability for future policy benefits were ($39,268), ($213,867) and
($123,066) in 2008, 2007 and 2006, respectively.The increase in 2008 was
primarily due to a decrease in the amount of life policies
surrendered.  The decrease in 2007 was primarily due to a decrease in
additional contract reserves on individual dental policies. The number of
individual dental policies in force decreased in 2008 and 2007.





Policy
benefits and other insurance costs decreased from $34,374,507 in 2006, to
$33,496,995 in 2007 and to $32,978,610 in 2008.  The decrease in 2008
was primarily due to an approximately $454,000 decrease in claims expense,
$390,000 of which resulted from an overestimation of claims payable at December
31, 2007.  The decrease in 2007 was primarily due to an approximately
$1.2 million decrease in claims expense, $450,000 of which resulted from an
overestimation of claims payable at December 31, 2006. The claims ratio on group
dental insurance, which represents the ratio of claims incurred to premium
earned, was 61.9% in 2008, 61.8% in 2007 and 64.1% in 2006.





Amortization
of deferred policy acquisition costs was $40,564 in 2008, $16,060 in 2007 and
$26,219 in 2006. Amortization of deferred policy acquisition costs are
primarily costs associated with a seasoned block of business written between
1988 and 1990.  Amortization expense per year may vary in relation to
lapses or surrenders of the existing block of business.





Operating
expenses were $9,055,261 in 2008, $9,012,950 in 2007 and $8,759,605 in 2006. The
4.7% increase for 2008 is primarily due to increased labor and other
costs.  The increase in expenses in 2007 was due primarily to an
increase in payroll expense, executive incentive bonuses, agent recruiting
bonuses and independent accounting fees.  Payroll expense increased
due to an increase in the variety of products available and an increase in the
number of states in which we are authorized to operate.





Executive
incentive bonuses increased due to a 2% increase in the amount of the bonus and
an increase in profit.  The Company implemented agent bonus programs
in 2007 to increase the number of agents marketing its products.





Taxes
other than on income were $1,458,629 in 2008, $1,509,780 in 2007 and $1,526,427
for 2006. The decrease for 2008 is primarily due to a decrease in premium taxes
on fewer premiums collected. The decrease in 2007 was due to a decrease in
property taxes from a prior year accrual adjustment.





In 2008,
the consolidated income from operations before taxes was $2,961,311 compared to
$4,263,002 in 2007 and  $3,082,645 in 2006.  The decrease in
2008 was primarily due to the decrease in premium income and investment income
and the increase in realized losses on fixed maturities.  The increase
in income from operations for 2007 was primarily due to the decrease in the
group dental claims ratio and change in 2007 claims payable estimate, which
added approximately $1.2 million to income.





19
 Table of Contents




Earnings
per share were $.16, $.22, and $.16 in 2008, 2007 and 2006,
respectively.  The effect of the treasury shares acquired in 2008,
2007 and 2006 (see Market for Stock) increased earnings per share by $.01, $.01
and $.01, respectively.





The
provision for income taxes was $594,839 in 2008, $813,634 in 2007 and $518,402
in 2006.   For the periods ended December 31, 2008, 2007 and
2006, the Company had $663,441, $773,033 and $514,377 of current tax expense and
$68,602 of deferred tax credit in 2008 and $40,601 and $ 4,025 of deferred tax
expense for 2007 and 2006; respectively.   Fluctuations in tax
expense are primarily due to changes in taxable income, limitations on net
operating losses utilized and adjustments in estimates for income taxes in prior
years.





For the
year ended December 31, 2008, other comprehensive income (losses) was ($283,566)
compared to $54,274 in 2007 and  $57,735 or the same period in
2006.  The comprehensive loss in 2008 was due to the decrease in the
market value of equity securities.  Comprehensive income for 2007 and
2006 was primarily due to an increase in the market value of equity securities
in both years.





Future Marketing
Plans




In 2008,
BNLAC was granted a certificate of authority in Connecticut, Hawaii,
Massachusetts, and New Jersey.  This makes 48 states and the District
of Columbia the Company is able to offer life and accident and health insurance
on an individual and group basis.





ITEM7A.
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.  The Company’s conservative investment
philosophies minimize market risk and risk of default by investing in high
quality debt instruments, with staggered maturity dates.  We did not
have financial instruments to manage and reduce the impact of changes in
interest rates at December 31, 2008 and December 31, 2007. We held various
financial instruments at December 31, 2008 and 2007, consisting of financial
assets reported in our Consolidated Balance Sheets (refer to Note
4).  See page 16 for information on less than investment grade bonds
held by the Company.





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 December 31, 2008 and December 31, 2007 was
$19,937,398 and $19,627,513 respectively.





A one
percentage point increase in prevailing interest rates would result in a
decrease in the estimated fair value of fixed maturity securities held at
December 31, 2008 of approximately $410,000.  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 twelve months of 2008, 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 and because we
do not currently engage in any operations outside of the United
States.





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





Equity
Security Price Risk - Fair value of equity securities at December 31, 2008
totaled $429,745, or only 1.6% of total investments and cash on a consolidated
basis.   We do not hedge our equity price risk.  As of
December 31, 2008 a 20% adverse change in equity prices would result in an
approximate $75,592 decrease in the fair value of our equity
securities.





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.





ITEM8.
Financial Statements and Supplementary Data




The
information in response to this Item 8 is set forth on pages F-1 through F-25
attached to this Report which pages are hereby incorporated by
reference.





ITEM9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure




None




ITEM9A(T).
Internal Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





We have
carried out an evaluation under the supervision and with the participation of
our management, including our Principal Executive Officer and our Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures.  Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives.  Based upon our evaluation, these officers have concluded
that, as of December 31, 2008, the disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed in the reports we file and submit under the Securities and Exchange
Act of 1934 in recorded, processed, summarized and reported within the time
period specified in the SEC’s rules and forms.





20
 Table of Contents




Management's Annual Report
on Internal Control over Financial Reporting




Our
management, including our Principal Executive Officer and our Principal
Financial Officer, is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with
generally accepted accounting principles. This included policies and procedures
that (a) pertain to the maintenance of records in reasonable detail which
accurately and fairly reflect the transactions and dispositions of our assets;
(b) provide reasonable assurance that our transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles and our receipts and expenditures are being made
in accordance with authorizations of our management or directors, as applicable;
and (c) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets which could have a
material effect on our financial statements.  Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Management has assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008.  In making its
assessment, management has used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Management concluded that based on its assessment, our
internal control over financial reporting was effective as of December 31,
2008.  This annual report does not include an attestation report of our
independent registered public firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





In
addition, during our last fiscal quarter for 2008, no change occurred in our
internal control over financial reporting which was identified by management’s
evaluation that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




This
Management Report on Internal Control over Financial Reporting is deemed to be
“furnished” and not “filed” under Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section and it is not incorporated by
reference into any filing under the Securities Act or the Exchange
Act.




ITEM9B.
Other Information


The
Company did not file reports on Form 8-K for the fourth quarter of the year
covered by this report.




21







PART III




ITEM10.
Directors, Executive Officers and Corporate Governance of the
Registrant




The
directors and executive officers of the Company are as follows:




Name
              
              Age
              
              First
      Became Director or Executive Officer
              
              PositionWayne
      E. Ahart
              
              
              68
              
              1984
              
              Chairman
      of the Board and DirectorC.
      Donald Byrd
              
              
              67
              
              1984
              
              Vice
      Chairman of the Board and DirectorKenneth
      Tobey
              
              
              50
              
              1994
              
              President
      and DirectorBarry
      N. Shamas
              
              
              61
              
              1984
              
              Executive
      Vice President, Treasurer, Chief Operating Officer, Chief Financial
      Officer and DirectorCecil
      Alexander
              
              
              72
              
              1994
              
              DirectorRichard
      Barclay
              
              
              71
              
              1994
              
              DirectorEugene
      A. Cernan
              
              
              74
              
              1994
              
              DirectorHayden
      Fry
              
              
              79
              
              1984
              
              DirectorJohn
      Greig
              
              
              73
              
              1984
              
              DirectorRoy
      Ledbetter
              
              
              78
              
              1994
              
              DirectorJohn
      E. Miller
              
              
              79
              
              1994
              
              DirectorC.
      James McCormick
              
              
              83
              
              1984
              
              DirectorRobert
      R. Rigler
              
              
              85
              
              1989
              
              DirectorL.
      Stan Schoelerman
              
              
              83
              
              1984
              
              Director





The term
of office of each director expires at the annual meeting of shareholders upon
the election and qualification of such director's successor.  The
Company's executive officers serve at the pleasure of the Board of
Directors.  The above officers and directors serve in the same
capacity with BNLAC.





Identification of Certain
Significant Employees


Not
applicable.





22
 Table of Contents




Family
Relationships


No family
relationship exists between any director and executive officer of the
Company.





Business
Experience


The
following is a brief description of the business experience during the past five
years of the directors and executive officers of the Company.





Wayne E. Ahart has served as
Chairman of the Board of BNL since 1984 and BNLAC since 1986.  He
served as Chairman of the Board of BNLE from 1988 to 2004 and as Chairman of the
Board of United Arkansas Life from 1990 to 1994.  Prior to that time,
Mr. Ahart served as Board Chairman of:  Investors Trust, Inc. ("ITI")
and its subsidiary, Investors Trust Assurance Company ("ITAC"), both of
Indianapolis, Indiana (1973-1987); Liberty American Corporation
("LAC")(President since 1981) and its subsidiary Liberty American Assurance
Company ("LAAC"), both of Lincoln, Nebraska (1975-1987); and (President)
American Investors Corporation ("AIC") and its subsidiary, Future Security Life
Insurance Company ("FSL"), both of Austin, Texas (1980-1987).  Mr.
Ahart has been owner and Chairman of the Board of Lone Star Pizza Garden Inc.
from 1986 to the present.





C. Don Byrd has been Vice
Chairman of the Board of BNL, BNLE and BNLAC since August 1,
1994.  Mr. Byrd was President and a Director of BNL and BNLAC since
1984 and 1986, respectively.  Mr. Byrd was Agency Director of FSL from
1983 to 1984 and Regional Director of AIC 1981 to 1983.  He was an
agent and Regional Director of ITI and ITAC from 1974 to 1981.





Kenneth Tobey has been
President and Director of BNLAC and BNL since August 1, 1994.  Mr.
Tobey has served as President of BNLE since 1988 and served as President of
United Arkansas Life from 1990 to 1994.  He served as Assistant to the
President and Training Director of BNLAC from 1986 to 1988.  From 1981
to 1986, Mr. Tobey served in various capacities for AIC and FSL, including
Agent, Regional Manager, Executive Sales Director and Assistant to the
President.





Barry N. Shamas has served as
Executive Vice President, Secretary and Treasurer of BNLE since 1988 and United
Arkansas Life from 1990 to 1994.  Since 1984 and 1986, respectively,
he has served as Executive Vice President and Director of BNL and BNLAC, which
positions he presently holds. He was named Chief Financial Officer and Chief
Operating Officer of BNL and BNLAC in 2006.  He served in various
capacities for ITI and ITAC, including Executive Vice President, Senior Vice
President, Treasurer and Financial Vice President beginning in 1976 through
1987.  Mr. Shamas served as Executive Vice President,
Secretary/Treasurer and as Director of AIC and FSL from 1980 and 1983,
respectively, until 1987.  From 1978 through 1987, Mr. Shamas served
as a Director and a member of the Executive Committee of LAC and
LAAC.  Mr. Shamas has been a Director of the Arkansas  Life
and Health Insurance Guaranty Association since July 2007.





Cecil L. Alexander retired
Vice President of Public Affairs for Arkansas Power & Light Company, where
he has been employed since 1980.  Prior to joining the AP&L
Executive Staff, Mr. Alexander served for 16 years in the Arkansas General
Assembly, and during 1975-76, was Speaker of the House of
Representatives.  From 1971 – 1980 Mr. Alexander
was  involved in the real estate business as a partner in Heber
Springs Realty.  He is a past president of the Cleburne County Board
of Realtors and has served on the governmental affairs committee of the Arkansas
Association of Realtors.  Alexander is currently on the Advisory Board
of Directors of V.E. Bank of Heber Springs, the Board of Directors of the
Arkansas Tourism Development Foundation, and the Board of Directors of the
Baptist Foundation.





Richard L. Barclay, a
Certified Public Accountant, recently retired as Director of Arkansas Department
of Finance and Administration and as the state's Chief Fiscal
Officer.  He has returned to private practice with Beall, Barclay
& Co., Certified Public Accountants in Rogers, Arkansas.  He was
an advisory Director of Regions Bank of Rogers from 1998 to December
2006.  He joined United Bank, January 2007.  He serves as
past President and Board member of the Arkansas Society of Certified Public
Accountants and is a member of the American Institute of Certified Public
Accountants.  He was a member of the Arkansas House of Representatives
from 1977 until 1992.





Eugene A. Cernan has been
President and Chairman of the Board of The Cernan Corporation since
1981.  Captain Cernan retired from the U. S. Navy in 1976 after
serving 20 years as a naval aviator, 13 of which were dedicated to direct
involvement with the U. S. Space Program as a NASA Astronaut.  Captain
Cernan was the pilot on the Gemini 9 mission and the second American to walk in
space; lunar module pilot of Apollo 10; and Spacecraft Commander of Apollo 17,
which resulted in the distinction of being the last man to have left his
footprints on the surface of the moon.  In 1973, he served as a Senior
United States Negotiator in discussions with USSR on the Apollo-Soyuz
Mission.  Mr. Cernan served as Executive Consultant of Aerospace and
Government of Digital Equipment Corporation from 1986 to 1992, and he was a
Director and Vice President-International of Coral Petroleum, Inc., Houston,
Texas from 1976 to 1981.  Captain Cernan is presently a Director of
National Air and Space Museum and Smithsonian Educational Foundation. Captain
Cernan is also a member of the Board of Trustees of the U. S. Naval Aviation
Museum, NFL Alumni and Major League Baseball Players Alumni
Association.  In addition, Captain Cernan has served as a consultant
commentator to ABC News.





Hayden Fry was Head Football
Coach at the University of Iowa from 1979 to 1998, now retired.  He
was Head Football Coach at North Texas State University from 1973 to 1978 and at
Southern Methodist University from 1962 to 1972.  He was named
Football Coach of the Year in the Big Ten (1981, 1990, 1991), the Missouri
Valley Conference (1973), and the Southwest Conference (1962, 1966 and
1968).  He is on the Board of Advisors of Wilson Sporting Goods (1962
to date); the Board of Trustees of Pop Warner Football (1962 to date); and the
American Football Coaches Association (1983 to date) and was the 1993 President
of the AFCA.  He was President of Hawkeye Marketing Group from 1979 -
1984.  He is a member of the Board of Directors of the PPI Group and
Berthel Fisher Co.





John Greig has been President
of Greig and Co. from 1967 - 2007.  He is a Director of Northstar
Bank, NW., Estherville, Iowa.  He has been President of the Iowa
Cattlemen's Association (1975-1976) and a member of the Executive Committee of
the National Cattlemen's Association (1975-1976).  He was a member of
the Iowa Board of Regents from 1985 to 1991.  He was elected as an
Iowa State Representative from 1993 to 1999.





Roy E. Ledbetter is retired as
President and Chief Executive Officer of Highland Industrial Park, a division of
Highland Resources, Inc. in East Camden, Arkansas.  He holds a
Bachelor of Science Degree in Education from Southern Arkansas University at
Magnolia, a Masters Degree in Education from Henderson State University at
Arkadelphia and an AMP from Harvard Business School at Boston.  In
1966, Mr. Ledbetter joined Highland Resources, Inc. and coordinated organization
of Southern Arkansas University Technical Branch; was promoted to Division
Manager (1972), Vice President and Division Manager (1975), Senior Vice
President (1980), and President in 1984.  He is past President of the
Camden Chamber of Commerce; was 1977 Camden Jaycee's Man of the Year; was
awarded first annual Camden Area Chamber of Commerce Community Service Award in
1983; served on Education Standards Committee of the State of Arkansas; and
presently serves on the Boards of East Camden and Highland Railroad, Shumaker
Public Service Corporation, Merchants and Planters Bank of Camden, and First
United Bancshares of El Dorado.





C. James McCormick is former
Chairman of the Board of McCormick, Inc., Best Way Express, Inc., and President
of JAMAC Corporation, all of Vincennes, Indiana.  He is the owner of
CJ Leasing, LLC.  Mr. McCormick is former Chairman of the Board of
Directors and CEO of First Bancorp, Vincennes, Indiana; former Chairman of the
Vincennes University board of trustees and a Life Director of the Indiana
Chamber of Commerce; and a former member of the Young President's
Organization.  He is a former Chairman of the Board of the American
Trucking Associations.  Mr. McCormick is a Past Chairman of the
National Board of Trustees of The Fellowship of Christian Athletes.





23
 Table of Contents




John E. Miller was a member of
the State of Arkansas House of Representatives from 1959 to 2000.  He
has been self-employed in the insurance, abstract, real estate, heavy
construction and farming business for more than 20 years.  He
presently serves on the Board of Directors of Calico Rock Medical Center, Easy K
Foundation, National Conference of Christians and Jews, State Advocacy Services,
Lions World Services for the Blind, State Board of Easter Seals, Williams
Baptist College Board of Trustees and Izard County Chapter of the American Red
Cross.





Robert R. Rigler has been
Chairman of the Board of Security State Bank, New Hampton, Iowa since 1989; he
served as its President and CEO from 1968 to 1989.  Mr. Rigler was
Iowa Superintendent of Banking from 1989 to 1991.  He was a member of
the Iowa Transportation Commission from 1971 to 1986 and served as its Chairman
from 1973 to 1986.  He was a member of the Iowa State Senate from 1955
to 1971 and served as a Majority and Minority Floor Leader.





L. Stanley Schoelerman was
President and a Partner of Petersen Sheep & Cattle Co., Spencer, Iowa from
1964 to 2001.  He was a


Director
of Home Federal Savings & Loan, Spencer, Iowa, from 1969 to 1988; and
Honeybee Manufacturing, Everly, Iowa, from 1974 to 1986.  He was
President of Topsoil-Schoenewe, Everly, Iowa, from 1974 to 1986.  Mr.
Schoelerman was Commissioner of the Iowa Department of Transportation from 1974
to 1978 and was a member of the National Motor Carrier Advisory Board of the
Federal Highway Administration from 1981 to 1985.





Audit
Committee





The
Company’s audit committee consists of three members of the board of directors,
Richard Barclay, Robert Rigler and John Greig.  Mr. Barclay, a
Certified Public Accountant, is the committee’s financial expert and is
independent of management.  See description of board members for
additional information.





Compensation
Committee





The
Company’s compensation committee consists of three members of the board of
directors, C. James McCormick, Roy Ledbetter and Hayden Fry.  C. James
McCormick is Chairman of the committee.  See description of board
members for additional information.





Code of
Ethics





The
Company has a code of ethics that applies to all employees of the
Company.  To receive a copy of the Company’s code of ethics without
charge, contact:





Ms. Pam
Randolph


BNL
Financial Corporation


7530 Hwy.
107


Sherwood,
Arkansas  72120





Additional
information required by this item is incorporated by reference from the
Company’s 2009 Proxy Statement for its annual meeting of shareholders scheduled
for May 27, 2009 and the sections therein entitled “Beneficial Ownership of
Common Stock,” “Corporate Governance,” “Audit Committee Charter and Report,”
“Compensation Committee Charter,” “Purposes and Processes and Report,”
“Compensation of Executive Officers,” and “Compensation of
Directors.”




ITEM11.
Executive Compensation




The
information required by this item is incorporated by reference from the
Company’s 2009 Proxy Statement for its annual meeting of shareholders scheduled
for May 27, 2009 and the sections therein entitled “Beneficial Ownership of
Common Stock,” “Corporate Governance,” “Audit Committee Charter and Report,”
“Compensation Committee Charter,” “Purposes and Processes and Report,”
“Compensation of Executive Officers,” and “Compensation of
Directors.”







24
 Table of Contents




ITEM12.
Security Ownership of Certain Beneficial Owners and
Management


The
following table reflects the persons known to the Company to be the beneficial
owners of 5% or more of the Company's voting securities as of December 31,
2008





Title
      of Class
              
              Name
      and Address of Beneficial Owner
              
              Amount
      and Nature of Beneficial Ownership(1)
              
              
              Percent
      of Class as of
                December
      31, 2008Common
      Stock
              
              Wayne
      E. Ahart
              
              
              4,712,216
              (2)
              
              
              30.99
              %8017
      CobblestoneAustin,
      TX  78735Common
      Stock
              
              Barry
      N. Shamas
              
              
              2,801,816
              (3)
              
              
              18.42
              %1095
      Hidden Hills DrDripping
      Springs, TX 78620Common
      Stock
              
              C.
      Don Byrd
              
              
              1,852,719
              (4)
              
              
              12.18
              %1725
      S. 50th Unit 144W.
      Des Moines, IA 50265Common
      Stock
              
              Kenneth
      Tobey
              
              
              1,161,762
              
              
              
              7.64
              %23
      TennysonN.
      Little Rock, AR 72116







(1)
      To the Company's knowledge, all shares are beneficially owned by, and the
      sole voting and investment power is held by the persons named, except as
      otherwise indicated.





(2)
      This includes 133,290 shares owned directly by Wayne Ahart and Wayne
      Ahart’s indirect ownership of  1,200,000 shares which are owned
      by National Iowa Corporation and 686,037 shares which are owned by
      Arkansas National Corporation.  Wayne Ahart controls both
      National Iowa Corporation and Arkansas National Corporation and votes the
      shares of the Company’s common stock owned by both
      corporations.   LeRene Ahart, as a shareholder in National
      Iowa Corporation and Arkansas National Corporation, has an indirect
      pecuniary interest in 1,200,000 shares of the Company’s common stock owned
      by National Iowa Corporation and 649,363 shares of the Company’s common
      stock owned by Arkansas National Corporation.  Wayne Ahart has
      voting control of all 2,400,000 shares of the Company’s common stock owned
      by  National Iowa Corporation and all 2,178,926 shares of the
      Company’s common stock owned by Arkansas National Corporation plus the
      133,290 shares which are owned directly by Wayne
      Ahart.  Consequently, Wayne Ahart has voting control of
      4,712,216 (30.99%) shares of the Company’s common
  stock.




(3)
      Includes 1,400,000 shares held in the name of Life Industries of Iowa,
      Inc., and 1,335,171 shares held in the name of Arkansas
      Industries   Corporation, both of which are controlled by
      Mr. Shamas.




(4)
      All of Mr. Byrd's shares are subject to a right of first refusal of the
      Company to acquire said shares on the same terms and conditions as any
      proposed sale or other transfer by Mr.
Byrd.








25
 Table of Contents




Security Ownership of
Management


The
following table sets forth, as of December 31, 2008, certain information
concerning the beneficial ownership of the Company's Common Stock by each
director of the Company and by all directors and officers as a
group:





Title
      of Class
                                            
                                            Name
      of Beneficial Owner
                                            
                                            Amount
      and Nature of Beneficial Ownership1
                                            
                                            
                                            Percent
      of Class as of December 31, 2008Common
                                            
                                            Wayne
      E. Ahart
                                            
                                            
                                            4,712,216
                                            (2)
                                            
                                            
                                            30.99
                                            %Common
                                            
                                            Cecil
      L. Alexander
                                            
                                            
                                            37,088
                                            
                                            
                                            
                                            0.24
                                            %Common
                                            
                                            Richard
      L Barclay
                                            
                                            
                                            48,788
                                            
                                            
                                            
                                            0.32
                                            %Common
                                            
                                            Tammy
      Barr
                                            
                                            
                                            600
                                            
                                            
                                            
                                            0.00
                                            %Common
                                            
                                            C.
      Donald Byrd
                                            
                                            
                                            1,852,719
                                            (3)
                                            
                                            
                                            12.18
                                            %Common
                                            
                                            Eugene
      A. Cernan
                                            
                                            
                                            37,088
                                            
                                            
                                            
                                            0.24
                                            %Common
                                            
                                            Jeffrey
      A. Drees
                                            
                                            
                                            18,843
                                            
                                            
                                            
                                            0.12
                                            %Common
                                            
                                            Hayden
      Fry
                                            
                                            
                                            69,272
                                            
                                            
                                            
                                            0.46
                                            %Common
                                            
                                            John
      Greig
                                            
                                            
                                            50,102
                                            
                                            
                                            
                                            0.33
                                            %Common
                                            
                                            Roy
      E. Ledbetter
                                            
                                            
                                            37,088
                                            
                                            
                                            
                                            0.24
                                            %Common
                                            
                                            C.
      James McCormick
                                            
                                            
                                            13,708
                                            
                                            
                                            
                                            0.09
                                            %Common
                                            
                                            John
      E. Miller
                                            
                                            
                                            47,111
                                            
                                            
                                            
                                            0.31
                                            %Common
                                            
                                            Jerry
      Ouzts
                                            
                                            
                                            300
                                            
                                            
                                            
                                            0.00
                                            %Common
                                            
                                            Pamela
      C. Randolph
                                            
                                            
                                            2,905
                                            
                                            
                                            
                                            0.02
                                            %Common
                                            
                                            Robert
      R Rigler
                                            
                                            
                                            3,295
                                            
                                            
                                            
                                            0.02
                                            %Common
                                            
                                            Barry
      N. Shamas
                                            
                                            
                                            2,801,816
                                            (4)
                                            
                                            
                                            18.42
                                            %Common
                                            
                                            Kenneth
      Tobey
                                            
                                            
                                            1,161,762
                                            
                                            
                                            
                                            7.64
                                            %Common
                                            
                                            All
      Officers and Directors as a group (17 persons)
                                            
                                            
                                            10,894,701
                                            
                                            
                                            
                                            71.64
                                            %




(1)
      To the Company's knowledge all shares are beneficially owned by the
      persons named, except as otherwise indicated, and they hold the sole
      voting and investment power.





(2)
      This includes 133,290 shares owned directly by Wayne Ahart and Wayne
      Ahart’s indirect ownership of   1,200,000 shares which are
      owned by National Iowa Corporation and 686,037 shares which are owned by
      Arkansas National Corporation.  Wayne Ahart controls both
      National Iowa Corporation and Arkansas National Corporation and votes the
      shares of the Company’s common stock owned by both
      corporations.   LeRene Ahart, as a shareholder in National
      Iowa Corporation and Arkansas National Corporation, has an indirect
      pecuniary interest in 1,200,000 shares of the Company’s common stock owned
      by National Iowa Corporation and 649,363 shares of the Company’s common
      stock owned by Arkansas National Corporation.  Wayne Ahart has
      voting control of all 2,400,000 shares of the Company’s common stock owned
      by National Iowa Corporation and all 2,178,926 shares of the Company’s
      common stock owned by Arkansas National Corporation plus the 133,290
      shares which are owned directly by Wayne Ahart.  Consequently,
      Wayne Ahart has voting control of 4,712,216 (30.99%) shares of the
      Company’s common stock.




(3)
      All of Mr. Byrd's shares are subject to a right of first refusal of the
      Company to acquire said shares on the same terms and conditions as any
      proposed sale or other transfer by Mr.
Byrd.




(4)
      Includes 1,400,000 shares held in the name of Life Industries of Iowa,
      Inc., and 1,335,171 shares held in the name of Arkansas Industries
      Corporation, both of which are controlled by Mr.
  Shamas.




ITEM13.
Certain Relationships and Related Transactions and Directors
Independence




None




ITEM14.
Principal Accountant Fees and Services




The
information required under this item is incorporated by reference from the
Company’s 2009 Proxy Statement for its annual meeting of shareholders scheduled
for May 27, 2009.




26




PART IV




ITEM15.  Exhibits, Financial Statement Schedules





(a) 
 1.  Financial Statements




The
information required by this section is set forth on pages F-1 to F-22 of this
Report which is incorporated herein by reference.





2.  The following
financial statement schedule required to be filed by Paragraph (d) of Item 15 of
Form 10-K is submitted as a separate section of this report.





Schedule
II - Condensed Financial Information of Registrant  F-23 to
F-25





Schedules
I and IV have been omitted as all required data are included in the Notes to
Consolidated Financial Statements.





All other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.





27
 Table of Contents




3.  Exhibits




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, 2006, 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 to Exhibit 10.9 of the Company's Annual Report on 10-K for
      the period ended December 31, 2006.10.9
                                                      
                                                      Amended
      Convertible Debenture Date July 14, 2008 between BNL Financial Corporation
      and EPSI Benefits Inc.
                                                      
                                                      Incorporated
      by reference to Exhibit 1 of the Company’s periodic Report on Form 8-K
      dated July 14, 2008.11
                                                      
                                                      Statement
      Re computation of per share earnings.
                                                      
                                                      Reference
      is made to the explanation of the computation of per share earnings as
      shown in Note 1 to the Notes to Consolidated Financial Statements filed
      herewith under Item 14(a)(1) above which clearly describes the
      same.12
                                                      
                                                      Statements
      re computation of ratios.
                                                      
                                                      Not
      applicable.16
                                                      
                                                      Letter
      Re Change in Certifying Accountant.
                                                      
                                                      Incorporated
      by reference to Exhibit I of the Company's periodic Report on Form 8-K
      dated September 14, 1995.21
                                                      
                                                      Subsidiaries
      of Registrant.
                                                      
                                                      Filed
      herewith.31.1
                                                      
                                                      Certification of Chief Executive
Officer
                                                        Section 302
                                                      
                                                      Filed
      herewith – E131.2
                                                      
                                                      Certification of Chief Financial
Officer
                                                        Section 302
                                                      
                                                      Filed
      herewith – E232
                                                      
                                                      Certification of Chief Executive Officer and Chief
      Financial Officer Section 906
                                                      
                                                      Attached
      hereto –
E3








28
 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, on the 30th day of March
2009




BNL FINANCIAL CORPORATION





/s/
Wayne E.
Ahart


By: Wayne
E. Ahart, Chairman of the Board





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:





SIGNATURE
                                                                                                                                      
                                                                                                                                      TITLE
                                                                                                                                      
                                                                                                                                      DATE/S/ Wayne E.
      Ahart
                                                                                                                                        Wayne
      E. Ahart
                                                                                                                                      
                                                                                                                                      Chairman
      of the Board, Director (Principal Executive Officer)
                                                                                                                                      
                                                                                                                                      03/30/2009/S/
      C. Donald
      Byrd
                                                                                                                                        C.
      Donald Byrd
                                                                                                                                      
                                                                                                                                      Vice
      Chairman of the Board and Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Kenneth
      Tobey
                                                                                                                                        Kenneth
      Tobey
                                                                                                                                      
                                                                                                                                      President
      and Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Barry N.
      Shamas
                                                                                                                                        Barry
      N. Shamas
                                                                                                                                      
                                                                                                                                      Executive
      Vice President, Treasurer, Chief Operating Officer, Chief Financial
      Officer and Director (Principal Financial and Accounting
      Officer)
                                                                                                                                      
                                                                                                                                      03/30/2009/S/ Hayden
      Fry
                                                                                                                                        Hayden
      Fry
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      John
      Greig
                                                                                                                                        John
      Greig
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      C. James
      McCormick
                                                                                                                                        C.
      James McCormick
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Robert R.
      Rigler
                                                                                                                                        Robert
      R. Rigler
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Stanley Schoelerman
                                                                                                                                        Stanley
      Schoelerman
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Cecil
      Alexander
                                                                                                                                        Cecil
      Alexander
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Richard
      Barclay
                                                                                                                                        Richard
      Barclay
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/ Eugene A.
      Cernan
                                                                                                                                        Eugene
      A. Cernan
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      Roy
      Ledbetter
                                                                                                                                        Roy
      Ledbetter
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009/S/
      John E.
      Miller
                                                                                                                                        John
      E. Miller
                                                                                                                                      
                                                                                                                                      Director
                                                                                                                                      
                                                                                                                                      03/26/2009








29
 Table of Contents





ANNUAL
REPORT ON FORM 10-K


ITEM
15 (a) AND 15 (d)


FINANCIAL
STATEMENTS


FOR
THE YEAR ENDED DECEMBER 31, 2008


BNL
FINANCIAL CORPORATION AND SUBSIDIARIES


DES
MOINES, IOWA







Table of
Contents







Page
      Number of 2008
                  Form
      10-KItem
      15(a) Financial StatementsReport of Independent Accountants on Financial
      Statements
                
                
                F-2Consolidated Balance Sheet, December 31, 2008 and
      2007
                
                
                F-3Consolidated Statement of Operations and Comprehensive Income
      for the years ended December 31, 2008, 2007 and 2006
                
                
                F-4Consolidated Statement of Changes in Shareholders' Equity for
      the years ended December 31, 2008, 2007 and 2006
                
                
                F-5Consolidated Statement of Cash Flows for the years ended
      December 31, 2008, 2007 and 2006
                
                
                F-6Notes to Consolidated Financial Statements
                
                
                F-7Item 15(d) - Schedule II, Condensed Financial Information of
      Registrant
                
                
                F-23








Table of Contents


BNLFinancial Corporation and Subsidiaries


Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders
 BNL
Financial Corporation and Subsidiaries
 
 We have
audited the consolidated financial statements of BNL Financial Corporation and
Subsidiaries as listed in the accompanying index.  In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States.)  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BNL Financial
Corporation and Subsidiaries as of December 31, 2008 and 2007, and the
consolidated results of its operations and its consolidated cash flows for each
of the years ended December 31, 2008, 2007 and 2006 in conformity with
accounting principles generally accepted in the United States of
America.  Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be set forth therein.
 
 
 
 
 Oklahoma
City,
Oklahoma                                                                              SMITH, CARNEY & CO., p.c.
 March 30,
2009                                                                                                
/s/ Smith, Carney & Co.,
p.c.
 
 
 
 F-2
 Table of Contents
  BNL
Financial Corporation and Subsidiaries
 Consolidated
Balance Sheets
 December
31, 2008 and 2007
 
 December
      31,ASSETS
                            
                            2008
                            
                            
                            2007Cash
      and cash equivalents
                            
                            $
                            4,989,381
                            
                            
                            $
                            4,937,983Investments
      in fixed maturities at fair value, Available for
      Sale  (amortized cost $ 444,976; $590,473,
      respectively)
                            
                            
                            543,925
                            
                            
                            
                            599,600Investments
      in fixed maturities at amortized cost, Held to Maturity  (fair
      value $19,393,473; $19,027,913, respectively)
                            
                            
                            19,597,008
                            
                            
                            
                            19,087,747Other
      long-term investments - (Note 4)
                            
                            
                            1,224,609
                            
                            
                            
                            1,470,054Investment
      in equity securities, at fair value(cost
      $699,829, $373,603, respectively)
                            
                            
                            429,745
                            
                            
                            
                            534,725Total
      Investments, Including Cash and Cash Equivalents
                            
                            
                            26,784,668
                            
                            
                            
                            26,630,109Accrued
      investment income
                            
                            
                            181,522
                            
                            
                            
                            220,461Leasehold
      improvements, furniture and equipment, net
                            
                            
                            1,048,673
                            
                            
                            
                            1,147,453Deferred
      policy acquisition costs
                            
                            
                            283,561
                            
                            
                            
                            324,125Policy
      loans
                            
                            
                            191,010
                            
                            
                            
                            171,889Receivable
      from reinsurer
                            
                            
                            46,554
                            
                            
                            
                            53,383Premiums
      due and unpaid
                            
                            
                            1,113,301
                            
                            
                            
                            1,461,467Deferred
      income tax assets
                            
                            
                            97,000
                            
                            
                            
                            -Intangible
      assets
                            
                            
                            131,212
                            
                            
                            
                            137,038Other
      assets
                            
                            
                            135,282
                            
                            
                            
                            155,150Total
      Assets
                            
                            $
                            30,012,783
                            
                            
                            $
                            30,301,075LIABILITIESLiabilities
      for future policy benefits
                            
                            $
                            2,208,948
                            
                            
                            $
                            2,255,045Policy
      claims payable
                            
                            
                            1,712,140
                            
                            
                            
                            2,306,288Annuity
      deposits
                            
                            
                            2,523,185
                            
                            
                            
                            2,463,546Deferred
      annuity profits
                            
                            
                            231,263
                            
                            
                            
                            253,159Premium
      deposit funds
                            
                            
                            21,849
                            
                            
                            
                            25,318Supplementary
      contracts without life contingencies
                            
                            
                            2,782
                            
                            
                            
                            5,905Advanced
      and unallocated premium
                            
                            
                            1,036,123
                            
                            
                            
                            2,219,429Commissions
      payable
                            
                            
                            595,488
                            
                            
                            
                            514,014Accrued
      taxes and expenses
                            
                            
                            566,809
                            
                            
                            
                            356,393Bonds
      payable
                            
                            
                            1,443,282
                            
                            
                            
                            1,607,576Deferred
      income tax liability
                            
                            
                            -
                            
                            
                            
                            29,601Other
      liabilities
                            
                            
                            1,062,497
                            
                            
                            
                            967,928Total
      Liabilities
                            
                            
                            11,404,366
                            
                            
                            
                            13,004,202SHAREHOLDERS’
      EQUITYCommon
      stock, $.02 stated value, 45,000,000 shares
      authorized,  15,463,965; shares issued and
      outstanding
                            
                            
                            309,279
                            
                            
                            
                            309,279Additional
      paid-in capital
                            
                            
                            5,748,465
                            
                            
                            
                            5,751,240Accumulated
      other comprehensive income (loss)
                            
                            
                            (160,934
                            )
                            
                            
                            122,630Accumulated
      surplus
                            
                            
                            13,032,655
                            
                            
                            
                            11,426,540Treasury
      stock, at cost, 256,838; 250,252; shares, respectively
                            
                            
                            (321,048
                            )
                            
                            
                            (312,816
                            )Total
      Shareholders' Equity
                            
                            
                            18,608,417
                            
                            
                            
                            17,296,873Total
      Liabilities and Shareholders' Equity
                            
                            $
                            30,012,783
                            
                            
                            $
                            30,301,075
 
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  
 F-3
 Table of Contents
  BNL
Financial Corporation and Subsidiaries
 Consolidated
Statements of Operations and Comprehensive Income
 For
the years ended December 31, 2008, 2007 and 2006
 
 Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006IncomePremium
      income
                  
                  $
                  43,456,024
                  
                  
                  $
                  44,564,173
                  
                  
                  $
                  44,646,393Net
      investment income
                  
                  
                  1,170,901
                  
                  
                  
                  1,320,614
                  
                  
                  
                  1,191,583Marketing
      fees (Note 4)
                  
                  
                  -
                  
                  
                  
                  198,843
                  
                  
                  
                  143,315Vision
      insurance income
                  
                  
                  2,263,529
                  
                  
                  
                  1,979,359
                  
                  
                  
                  1,603,767Realized
      gain on debt retirements
                  
                  
                  44,370
                  
                  
                  
                  10,803
                  
                  
                  
                  35,732Realized
      gains (losses)
                  
                  
                  (479,717
                  )
                  
                  
                  11,128
                  
                  
                  
                  25,547Total
      Income
                  
                  
                  46,455,107
                  
                  
                  
                  48,084,920
                  
                  
                  
                  47,646,337ExpensesDecrease
      in liability for future policy benefits
                  
                  
                  (39,268
                  )
                  
                  
                  (213,867
                  )
                  
                  
                  (123,066
                  )Policy
      benefits and other insurance costs
                  
                  
                  32,978,610
                  
                  
                  
                  33,496,995
                  
                  
                  
                  34,374,507Amortization
      of deferred policy acquisition costs
                  
                  
                  40,564
                  
                  
                  
                  16,060
                  
                  
                  
                  26,219Operating
      expenses
                  
                  
                  9,055,261
                  
                  
                  
                  9,012,950
                  
                  
                  
                  8,759,605Taxes,
      other than on income
                  
                  
                  1,458,629
                  
                  
                  
                  1,509,780
                  
                  
                  
                  1,526,427Total
      Expenses
                  
                  
                  43,493,796
                  
                  
                  
                  43,821,918
                  
                  
                  
                  44,563,692Income
      from Operations beforeIncome Taxes
                  
                  
                  2,961,311
                  
                  
                  
                  4,263,002
                  
                  
                  
                  3,082,645Provision
      for income taxes
                  
                  
                  594,839
                  
                  
                  
                  813,634
                  
                  
                  
                  518,402Net
      Income
                  
                  $
                  2,366,472
                  
                  
                  $
                  3,449,368
                  
                  
                  $
                  2,564,243Net
      income per common share (basic and diluted)
                  
                  $
                  0.16
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.16Weighted
      average number of fullypaid common shares
                  
                  
                  15,211,961
                  
                  
                  
                  15,602,725
                  
                  
                  
                  16,481,342Net
      Income (as above)
                  
                  $
                  2,366,472
                  
                  
                  $
                  3,449,368
                  
                  
                  $
                  2,564,243Other
      comprehensive income (loss), net of tax:Unrealized
      gains on securities:Unrealized
      holding gain (loss) arising during period (net of ($47,777), 10,175 and
      $11,532 of deferred taxes in 2008, 2007 and 2006;
      respectively)
                  
                  
                  (516,795
                  )
                  
                  
                  65,626
                  
                  
                  
                  73,496Reclassification
      adjustment for (gain) loss included in net income
                  
                  
                  233,229
                  
                  
                  
                  (11,352
                  )
                  
                  
                  (15,761
                  )Other
      Comprehensive Income (Loss)
                  
                  
                  (283,566
                  )
                  
                  
                  54,274
                  
                  
                  
                  57,735Comprehensive
      Income
                  
                  $
                  2,082,906
                  
                  
                  $
                  3,503,642
                  
                  
                  $
                  2,621,978
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
   F-4
 Table of Contents
  BNL
Financial Corporation and Subsidiaries
 Consolidated
Statements of Changes in Shareholders’ Equity
 For the
years ended December 31, 2008, 2007 and 2006
 
 Shares
                      
                      
                      Amount
                      
                      
                      AdditionalPaid-InCapital
                      
                      
                      AccumulatedSurplus
                      
                      
                      AccumulatedOtherComprehensiveIncome
                      
                      
                      TreasuryStockBalance,
      December 31, 2005
                      
                      
                      17,213,170
                      
                      
                      $
                      344,264
                      
                      
                      $
                      7,608,519
                      
                      
                      $
                      5,412,928
                      
                      
                      $
                      10,622
                      
                      
                      $
                      (252,969
                      )Accumulated
      other  comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      57,734
                      
                      
                      
                      -Sale
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (25,936
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      90,370Purchase
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,297,871
                      )Stock
      options exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      150
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      450Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,564,243
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2006
                      
                      
                      17,213,170
                      
                      
                      $
                      344,264
                      
                      
                      $
                      7,582,733
                      
                      
                      $
                      7,977,171
                      
                      
                      $
                      68,356
                      
                      
                      $
                      (1,460,020
                      )Accumulated
      other  comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,274
                      
                      
                      
                      -Sale
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      48,325
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      102,995Purchase
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (789,184
                      )Stock
      options exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,736
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      20,494Retirement
      of treasury stock
                      
                      
                      (1,749,205
                      )
                      
                      
                      (34,985
                      )
                      
                      
                      (1,885,554
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,812,899Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,449,368
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2007
                      
                      
                      15,463,965
                      
                      
                      $
                      309,279
                      
                      
                      $
                      5,751,240
                      
                      
                      $
                      11,426,539
                      
                      
                      $
                      122,630
                      
                      
                      $
                      (312,816
                      )Accumulated
      other  comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (283,566
                      )
                      
                      
                      -Purchase
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (20,858
                      )Stock
      options exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,775
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,626Dividends
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (760,356
                      )
                      
                      
                      -
                      
                      
                      
                      -Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,366,472
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2008
                      
                      
                      15,463,965
                      
                      
                      $
                      309,279
                      
                      
                      $
                      5,748,465
                      
                      
                      $
                      13,032,655
                      
                      
                      $
                      (160,934)
                      
                      
                      $
                      (321,048
                      )
 
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-5
 Table of Contents
 
 BNL
Financial Corporation and Subsidiaries
 Consolidated
Statements of Cash Flows
 For the
years ended December 31, 2008, 2007 and 2006
 Year
      Ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Cash
      Flows from Operating ActivitiesNet
      income
                                      
                                      $
                                      2,366,472
                                      
                                      
                                      $
                                      3,449,368
                                      
                                      
                                      $
                                      2,564,243Adjustments
      to reconcile net income to net cashprovided by operating activities:Realized
      (gain) loss on investments
                                      
                                      
                                      482,137
                                      
                                      
                                      
                                      (13,677
                                      )
                                      
                                      
                                      (17,367
                                      )Realized
      (gain) loss on sale of furniture and equipment
                                      
                                      
                                      (2,420
                                      )
                                      
                                      
                                      2,549
                                      
                                      
                                      
                                      (8,180
                                      )Realized
      gain on debt extinguishments
                                      
                                      
                                      (44,370
                                      )
                                      
                                      
                                      (10,803
                                      )
                                      
                                      
                                      (35,732
                                      )Depreciation
                                      
                                      
                                      284,324
                                      
                                      
                                      
                                      381,064
                                      
                                      
                                      
                                      311,489Decrease
      (increase) in deferred tax asset
                                      
                                      
                                      (68,602
                                      )
                                      
                                      
                                      40,602
                                      
                                      
                                      
                                      4,000Increase
      in and amortization of deferred acquisition costs, and bond issuance
      cost
                                      
                                      
                                      46,379
                                      
                                      
                                      
                                      21,875
                                      
                                      
                                      
                                      (24,932
                                      )Accretion
      of bond premium (discount)
                                      
                                      
                                      (11,652
                                      )
                                      
                                      
                                      (11,528
                                      )
                                      
                                      
                                      (5,623
                                      )Change
      in assets and liabilities:(Increase)
      decrease in accrued investment income
                                      
                                      
                                      38,939
                                      
                                      
                                      
                                      2,833
                                      
                                      
                                      
                                      (38,009
                                      )(Increase)
      decrease in receivable from reinsurer
                                      
                                      
                                      6,829
                                      
                                      
                                      
                                      (563
                                      )
                                      
                                      
                                      (4,435
                                      )(Increase)
      decrease in premiums due and unpaid
                                      
                                      
                                      348,166
                                      
                                      
                                      
                                      (375,364
                                      )
                                      
                                      
                                      (58,420
                                      )Decrease
      in liability for future policy benefits
                                      
                                      
                                      (46,097
                                      )
                                      
                                      
                                      (217,804
                                      )
                                      
                                      
                                      (118,631
                                      )Decrease
      in policy claims payable
                                      
                                      
                                      (594,149
                                      )
                                      
                                      
                                      (201,837
                                      )
                                      
                                      
                                      (50,440
                                      )Increase
      (decrease) in annuity deposits and deferred profits
                                      
                                      
                                      37,743
                                      
                                      
                                      
                                      (107,909
                                      )
                                      
                                      
                                      (350,367
                                      )Decrease
      in premium deposit funds
                                      
                                      
                                      (3,469
                                      )
                                      
                                      
                                      (3,140
                                      )
                                      
                                      
                                      (3,349
                                      )Increase
      (decrease) in advanced and unallocated premium
                                      
                                      
                                      (1,183,306
                                      )
                                      
                                      
                                      1,344,340
                                      
                                      
                                      
                                      71,799Increase
      (decrease) in commissions payable
                                      
                                      
                                      81,474
                                      
                                      
                                      
                                      (41,145
                                      )
                                      
                                      
                                      53,338Other,
      (decrease) increase
                                      
                                      
                                      266,181
                                      
                                      
                                      
                                      (279,162
                                      )
                                      
                                      
                                      (138,876
                                      )Net
      Cash Provided by Operating Activities
                                      
                                      
                                      2,004,579
                                      
                                      
                                      
                                      3,979,699
                                      
                                      
                                      
                                      2,150,508Cash
      Flows from Investing ActivitiesProceeds
      from sales of investments
                                      
                                      
                                      4,375
                                      
                                      
                                      
                                      129,753
                                      
                                      
                                      
                                      150,452Proceeds
      from maturity or redemption - Held to Maturity Investments
                                      
                                      
                                      12,002,977
                                      
                                      
                                      
                                      5,623,542
                                      
                                      
                                      
                                      4,244,735Proceeds
      from sale of furniture and equipment
                                      
                                      
                                      17,000
                                      
                                      
                                      
                                      43,809
                                      
                                      
                                      
                                      12,786Purchase
      of equity securities
                                      
                                      
                                      (330,601
                                      )
                                      
                                      
                                      (47,105
                                      )
                                      
                                      
                                      (223,281
                                      )Purchase
      of furniture, equipment and leasehold improvements
                                      
                                      
                                      (200,122
                                      )
                                      
                                      
                                      (252,506
                                      )
                                      
                                      
                                      (466,286
                                      )Purchase
      of fixed maturity securities, Held to Maturity
                                      
                                      
                                      (12,631,782
                                      )
                                      
                                      
                                      (5,605,447
                                      )
                                      
                                      
                                      (3,853,309
                                      )Other
      Investments - Line of credit - receipt (advanced)
                                      
                                      
                                      40,863
                                      
                                      
                                      
                                      37,755
                                      
                                      
                                      
                                      35,632Net
      Cash Used in Investing Activities
                                      
                                      
                                      (1,097,290
                                      )
                                      
                                      
                                      (70,199
                                      )
                                      
                                      
                                      (99,271
                                      )Cash
      Flows from Financing ActivitiesSale
      of treasury stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      164,226
                                      
                                      
                                      
                                      64,550Purchase
      of treasury stock
                                      
                                      
                                      (20,858
                                      )
                                      
                                      
                                      (780,352
                                      )
                                      
                                      
                                      (1,297,948
                                      )Dividends
      to shareholders
                                      
                                      
                                      (760,358
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      change in supplementary contracts
                                      
                                      
                                      28,200
                                      
                                      
                                      
                                      (11,336
                                      )
                                      
                                      
                                      (19,740
                                      )Stock
      options exercised
                                      
                                      
                                      12,875
                                      
                                      
                                      
                                      4,492
                                      
                                      
                                      
                                      150Debt
      extinguishments
                                      
                                      
                                      (119,922
                                      )
                                      
                                      
                                      (21,605
                                      )
                                      
                                      
                                      (71,463
                                      )Net
      Cash Used in Financing Activities
                                      
                                      
                                      (855,891
                                      )
                                      
                                      
                                      (644,575
                                      )
                                      
                                      
                                      (1,324,451
                                      )Net
      Increase in Cash and Cash Equivalents
                                      
                                      
                                      51,398
                                      
                                      
                                      
                                      3,264,925
                                      
                                      
                                      
                                      726,786Cash
      and Cash Equivalents, Beginning of Period
                                      
                                      
                                      4,937,983
                                      
                                      
                                      
                                      1,673,058
                                      
                                      
                                      
                                      946,272Cash
      and Cash Equivalents, End of Period
                                      
                                      $
                                      4,989,381
                                      
                                      
                                      $
                                      4,937,983
                                      
                                      
                                      $
                                      1,673,058
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-6
 Table of Contents
  1.  Summary of Significant
Accounting Policies
 
 The
consolidated financial statements include the accounts of BNL Financial
Corporation (“BNLF”) and its wholly owned subsidiaries, Brokers National Life
Assurance Company (BNLAC), BNL Brokerage Corporation and Consumers Protective
Association, Inc.  All significant intercompany balances have been
eliminated.
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
  The
Company’s principal activity is the sale of individual and group life and
accident and health insurance within the United
States.    The most significant income component is sales of
dental insurance for which the maximum annual risk per policy is
$2,000.  See Note 10.  The Company is licensed to sell in 48
states and the District of Columbia as of December 31, 2008.  See Note
2.  Substantially all of the Company's life insurance in force is
nonparticipating business.
  Premiums from group accident
and health insurance are reported as earned when due since these policies areshort duration contracts.
  Individual dental and
individual life insurance policies are long duration
contracts.  Benefits and expenses are associated with earned
premiums so as to result in recognition over the life of the
policy.  Such recognition is accomplished by means of the provision
for future policy benefits and amortization of deferred policy acquisition
costs.
  Costs of
acquiring new business and certain expenses of policy issuance and underwriting
have been deferred; these deferred policy acquisition costs are being amortized
over the premium-paying period of the policies (maximum of 30 years) in
proportion to the ratio of annual premium revenue to total premium revenue
anticipated.
 
 Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets, including tax loss and credit carry-forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.  Deferred income tax expense represents the change during the
period in the deferred tax assets and liabilities. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  See Note 3.
  Liability
for future policy benefits for traditional and limited-payment contracts has
been determined primarily by the net level premium method using the 1975 through
1980 Select and Ultimate Mortality Table, interest assumptions starting at 7%
graded to 5% at the end of the sixteenth year and estimated future withdrawals
based upon Linton Tables B or C.
  For
annuity contracts without mortality risk, net premium deposits and benefit
payments are recorded as increases or decreases in a liability account rather
than as revenue and expense.  Expenses incurred and fees charged upon
issuance are deferred and recognized in relationship to the amount of funds
held.  This deferred annuity profit is being amortized based on lapse
and mortality assumptions (maximum of 30 years) which are revised periodically
to reflect actual experience.  Increases in the liability account for
interest credited to contracts are charged to expense.  The interest
rate assumptions ranged from 4.0% to 5.0% during 2008 and 2007.
  The
liability for policy claims payable is composed of claims reported but not paid
and claims incurred but not reported.  The Company has developed a
procedure for calculating incurred but not reported dental claims based on prior
years’ claims using dates incurred, reported to the insurance company and
subsequently paid.  Differences in estimates may result in revised
claims expense which is recognized in the period in which the difference is
determined.
 
 The
Company has divided its fixed maturity investments into two classes “available
for sale” and “held to maturity” in accordance with management’s intent in
regard to these investments. Investments available for sale may be sold prior to
maturity due to changes that might occur in market interest rates, changes in
the security’s prepayment risk, the Company’s liquidity needs, and similar
factors, including the Company’s asset/liability management
strategy.  Investments available for sale are carried at fair value.
Unrealized gains and losses resulting from changes in the valuation of fixed
maturity securities classified as available for sale are recorded as a component
of comprehensive income.
 
 
 F-7
 Table of Contents
 
 1.  Summary of Significant
Accounting Policies (continued)
 
 The “held
to maturity” classification reflects management's intent and ability to hold
this block of securities to their maturity.  Investments designated by
management as part of the held to maturity portfolio are presented on the
financial statements at amortized book value and, therefore, unlike the
available for sale portfolio, no adjustments to surplus are made as bond values
change unless declines in market value are deemed to be other than
temporary.
 
 Realized
gains or losses on sale of all investments are determined on a specific
identification basis.  Investments in equity securities are carried at
fair value.
  Cash
equivalents are carried at amortized cost, which approximates fair
value.  Cash equivalents represent other short-term
securities.  For purposes of the Statement of Cash Flows, the Company
considers all highly liquid short-term investments to be cash equivalents. Cash
equivalents include money market funds that maybe subject to withdrawal
restrictions.  No such restrictions were in place at December 31,
2008. The Company made debenture interest payments of $97,424, $78,331 and
$86,700 in 2008, 2007 and 2006; respectively.  The Company made cash
payments for income taxes of $550,000, $670,000 and $500,000 in 2008, 2007 and
2006, respectively.
  Leasehold
improvements and furniture and equipment are recorded at
cost.  Maintenance and repairs are charged to expense as
incurred.  Provision for depreciation is made on the basis of
estimated useful lives of 3 to 10 years utilizing the straight-line
method.  Leasehold improvements are amortized over the lease
term.  Accumulated depreciation and amortization totaled $1,163,242
and $1,099,706 at December 31, 2008 and 2007,
respectively.  Depreciation and amortization expense was $284,324,
$381,064, and $311,488, for the years ended December 31, 2008, 2007 and 2006,
respectively.
  Other
assets include agents’ balances of $59,005 and $49,710 at December 31, 2008 and
2007, respectively, after reduction for allowance of doubtful
accounts.  The allowance account had a credit recorded of $5,615,
$4,400 and $4,313 in 2008, 2007 and 2006, respectively.
  Intangible
assets include the cost of 26 state licenses acquired in 1991 as part of the
Statesmen Life Insurance Company acquisition and certain loan acquisition costs.
These assets must be periodically tested for impairment of their market value
and written off immediately to the extent the value is found to be
impaired.  The Company tested its intangible assets for impairment by
evaluating the future benefit of the underlying investments or rights acquired
in association with these assets.  No impairment expense was
recognized in 2008, 2007 or 2006.  Amortization expense of
approximately $5,815 was recorded for each of the years ended December 31, 2008,
2007 and 2006, respectively.
  The
Company accounts for the 1994 Brokers and Agents Stock Option Plan and the 2002
Nondirector, Nonexecutive Stock Option Plan using the fair value method as
required by SFAS No. 123(R).  Under this method the fair value of the
options granted is recorded as expense at the date of grant for fully vested
instruments.  See Note 9.
 
 In
February 2007 the FASB issued SFAS No. 159 (“SFAS 159”) “The Fair Value Option for Financial
Assets and Financial Liabilities.”  SFAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings.  SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007.  Management adopted
but did not elect to apply SFAS No. 159 treatment to its financial assets and
financial liabilities.  The adoption of SFAS 159 did not have a
material impact on the consolidated financial position, results from operations
or cash flows of the Company.
 
 In June
2007, the FASB issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for
Income Taxes,” which clarifies accounting for and disclosure of uncertainty in
tax positions. FIN No. 48 prescribes a recognition threshold and measurement
attribute for the financial recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation is effective for
fiscal years beginning after December 15, 2007. Management has evaluated the
impact of adopting FIN No. 48 on the consolidated financial statements, and the
adoption of FIN No. 48 did not have a material effect on the consolidated
financial position, cash flows and results of operations.
  Net gain
per share is based on net gain divided by the weighted average number of
shares.
 
 
 F-8
 Table of Contents
 
 2.  Shareholders'
Equity
 
 In 2008
the Company purchased 16,686 shares of stock for $20,858 from
shareholders.  During 2007 and 2006, the Company made cash offers to
shareholders for the purchase of stock.  These offerings resulted in
stock purchases amounting to $20,858 for 16,686 shares in 2008, $789,214 for
611,214 shares in 2007 and $1,297,948 for 1,248,291 shares in
2006.  In order to purchase company common stock, the Company was
required to file a Schedule TO in 2007 and 2006 with the Securities and Exchange
Commission.  Included in the cost of the Treasury Stock purchased in
2007 and 2006 is $35,000 and $43,657, respectively; which represents a portion
of the cost to complete the TO filings.  The Company retired 1,749,205
treasury shares during the fourth quarter of 2007.
 
 At
December 31, 2008 and 2007, shareholders' equity includes approximately
$18,323,659 and $17,275,172, respectively, of BNLAC net assets.  The
ability of BNLAC to pay dividends to the Company is restricted under Arkansas
insurance laws and must be approved by the insurance commissioner if it exceeds
the lesser of 10% of surplus or net gain from operations for the
year.  BNLAC paid the Company $1,300,000 of ordinary dividends in
2008, of which approximately $760,000 was used to pay dividends to the Company’s
shareholders and the balance for operating expenses.  In 2007 BNLAC
paid the Company $1,000,000 in ordinary dividends which were used to purchase
the Company’s common stock and for operating expenses.  In 2006, BNLAC
paid $1,450,000 of ordinary dividends to the Company, primarily for the purchase
of the Company’s common stock.  BNLAC paid dividends of $1,300,000,
$1,000,000 and $1,450,000 to the Company in 2008, 2007 and 2006,
respectively.
  BNLAC
reports to state regulatory authorities on a statutory accounting basis that
differs from the basis used herein.  Due to an Arkansas regulatory
requirement associated with the redomestication in 1994, BNLAC must maintain a
minimum of $2,300,000 in capital and surplus.  Additionally, each
state in which BNLAC is licensed has statutory minimum capital requirements
required for maintaining its license to sell.  Minimum capital and
surplus requirements vary from $300,000 to as much as $5,000,000 in the states
in which BNLAC is licensed.
  The
states periodically increase minimum capital requirements, often allowing
companies with existing Certificates of Authority to continue doing business in
the state under the previous existing requirements
(grandfathering).  States in which BNLAC is licensed to do business
have increased minimum requirements to as much as
$5,000,000.  Management actively monitors these developments to
maintain compliance with the requirements of each state.
 
 Capital
and surplus and net income of BNLAC as reported on a statutory basis are as
follows:
  December
      31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Capital
      and Surplus
                                      
                                      $
                                      16,964,513
                                      
                                      
                                      $
                                      15,834,458
                                      
                                      
                                      $
                                      13,223,044Net
      Income
                                      
                                      $
                                      2,630,151
                                      
                                      
                                      $
                                      3,350,129
                                      
                                      
                                      $
                                      2,490,537
 
 The
following is a reconciliation of consolidated net income and shareholders’
equity per the financial statements included herein to BNLAC unconsolidated net
income and capital and surplus on a statutory basis:
 December
      31, 2008
                                        
                                        
                                        December
      31, 2007
                                        
                                        
                                        December
      31, 2006Income
                                        
                                        
                                        Capital
      and
                                          Surplus
                                        
                                        
                                        Income
                                        
                                        
                                        Capital
      and
                                          Surplus
                                        
                                        
                                        Income
                                        
                                        
                                        Capital
      and
                                          SurplusConsolidated
      reporting undergenerally accepted accounting
    principles
                                        
                                        $
                                        2,366,472
                                        
                                        
                                        $
                                        18,608,417
                                        
                                        
                                        $
                                        3,449,368
                                        
                                        
                                        $
                                        17,296,873
                                        
                                        
                                        $
                                        2,564,243
                                        
                                        
                                        $
                                        14,512,504Attributable
      to Parent Company
                                        
                                        
                                        (267,204
                                        )
                                        
                                        
                                        284,758
                                        
                                        
                                        
                                        14,075
                                        
                                        
                                        
                                        21,701
                                        
                                        
                                        
                                        63,937
                                        
                                        
                                        
                                        (276,877
                                        )Brokers
      National Life Assurance Company
                                        
                                        
                                        2,633,676
                                        
                                        
                                        
                                        18,323,659
                                        
                                        
                                        
                                        3,435,293
                                        
                                        
                                        
                                        17,275,172
                                        
                                        
                                        
                                        2,500,306
                                        
                                        
                                        
                                        14,789,381Deferred
      acquisition costs
                                        
                                        
                                        40,564
                                        
                                        
                                        
                                        (283,561
                                        )
                                        
                                        
                                        16,062
                                        
                                        
                                        
                                        (324,125
                                        )
                                        
                                        
                                        29,620
                                        
                                        
                                        
                                        (359,491
                                        )Reserve
      and premium adjustments
                                        
                                        
                                        11,899
                                        
                                        
                                        
                                        206,302
                                        
                                        
                                        
                                        (113,047
                                        )
                                        
                                        
                                        201,923
                                        
                                        
                                        
                                        20,207
                                        
                                        
                                        
                                        28,009Interest
      maintenance reserve/AVR
                                        
                                        
                                        22,322
                                        
                                        
                                        
                                        (426,376
                                        )
                                        
                                        
                                        26,619
                                        
                                        
                                        
                                        (612,140
                                        )
                                        
                                        
                                        20,204
                                        
                                        
                                        
                                        (623,563
                                        )Unrealized
      appreciation of securities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (270,084
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        161,767
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        66,807Annuity
      deposits and related adjustments
                                        
                                        
                                        21,896
                                        
                                        
                                        
                                        231,263
                                        
                                        
                                        
                                        (35,230
                                        )
                                        
                                        
                                        253,159
                                        
                                        
                                        
                                        (51,040
                                        )
                                        
                                        
                                        560,430Income
      tax credit
                                        
                                        
                                        (59,000
                                        )
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        25,000
                                        
                                        
                                        
                                        106,000
                                        
                                        
                                        
                                        (1,000
                                        )
                                        
                                        
                                        86,000Other
                                        
                                        
                                        (41,206
                                        )
                                        
                                        
                                        (826,690
                                        )
                                        
                                        
                                        (4,568
                                        )
                                        
                                        
                                        (1,227,299
                                        )
                                        
                                        
                                        (27,760
                                        )
                                        
                                        
                                        (1,324,529
                                        )BNLAC
      Statutory Basis
                                        
                                        $
                                        2,630,151
                                        
                                        
                                        $
                                        16,964,513
                                        
                                        
                                        $
                                        3,350,129
                                        
                                        
                                        $
                                        15,834,457
                                        
                                        
                                        $
                                        2,490,537
                                        
                                        
                                        $
                                        13,223,044
   F-9
 Table of Contents
 3.  Income
Taxes
 
 The
Company follows Statement of Financial Accounting Standards (SFAS) No. 109,
“Accounting for Income Taxes,” which prescribes the liability method of
accounting for deferred income taxes.  Under the liability method,
companies establish a deferred tax liability or asset for the future tax effects
of temporary differences between book and tax basis of assets and
liabilities.  Changes in future tax rates will result in immediate
adjustments to deferred taxes.   The Company and its Subsidiaries
file consolidated income tax returns.
 
 At
December 31, 2008 and 2007, respectively, the Company had gross deferred tax
assets of $1,067,931 and $1,129,371 with corresponding valuation allowances of
$701,414 and $812,466, and gross deferred tax liabilities of $269,517 and
$346,506, resulting from net operating loss carryovers and temporary
differences primarily related to the life insurance subsidiary. The valuation
allowance is primarily due to statutory limitations on the use of net operating
losses and uncertainty as to usage of AMT credit carryover. The resulting net
deferred tax asset is $97,000 as of December 31, 2008 and a tax liability of
$29,601 at December 31, 2007. Realization of a deferred tax asset is dependent
on generating sufficient taxable income prior to expiration of the loss carry
forward. Although realization is not assured, management believes it is more
likely than not that all of the net deferred tax asset will be realized.
However, the amount of the deferred tax asset considered realizable could be
reduced in the near term if estimates of future taxable income during the carry
forward period are reduced.
 
 The
provision (benefit) for income tax is as follows:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Current
      tax provisions
                      
                      $
                      663,441
                      
                      
                      $
                      773,033
                      
                      
                      $
                      514,377Deferred
      tax provision
                      
                      
                      (68,602
                      )
                      
                      
                      40,601
                      
                      
                      
                      4,025Total
      income tax provision
                      
                      $
                      594,839
                      
                      
                      $
                      813,634
                      
                      
                      $
                      518,402
 
 The
reconciliation of income taxes computed at the federal statutory income tax rate
to total income taxes for the years ended December 31, 2008, 2007 and 2006 is as
follows:
 2008
                      
                      
                      2007
                      
                      
                      2006Book
      income before tax
                      
                      $
                      2,961,311
                      
                      
                      $
                      4,263,002
                      
                      
                      $
                      3,082,645Income
      tax computed at statutory rate (34%)
                      
                      $
                      1,006,845
                      
                      
                      $
                      1,449,421
                      
                      
                      $
                      1,048,099Valuation
      allowance for AMT credit
                      
                      
                      (17,000
                      )
                      
                      
                      (85,000
                      )
                      
                      
                      110,461Revision
      of valuation allowance
                      
                      
                      94,052
                      
                      
                      
                      173,923
                      
                      
                      
                      (116,108
                      )Rate
      differential
                      
                      
                      (489,058
                      )
                      
                      
                      (724,710
                      )
                      
                      
                      (524,050
                      )Total
      income tax provision
                      
                      $
                      594,839
                      
                      
                      $
                      813,634
                      
                      
                      $
                      518,402
 
 The
Company has net operating loss carry forwards for income tax purposes at
December 31, 2008 as follows:
 
 Expiring
                            
                            NOL2009
                            
                            $
                            162,0002010
                            
                            
                            186,0002011
                            
                            
                            66,0002012
                            
                            
                            193,0002018
                            
                            
                            105,0002019
                            
                            
                            32,0002020
                            
                            
                            28,0002028
                            
                            
                            128,000$
                            900,000
 
   F-10
 Table of Contents
  4.  Investments
 
 The
amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
 
 Portfolio
      Designated “Held to Maturity”
                          (Note
      1)
                          
                          December 31,
      2008
                        
                        Amortized
      Cost
                        
                        
                        Gross
      Unrealized Gains
                        
                        
                        Gross
      Unrealized Losses
                        
                        
                        Estimated
      Market ValueUS
      Treasury securities and obligations ofUS
      government corporations and agencies
                        
                        $
                        11,236,009
                        
                        
                        $
                        73,390
                        
                        
                        $
                        46,229
                        
                        
                        $
                        11,263,170Corporate
      securities
                        
                        
                        4,120,927
                        
                        
                        
                        44,631
                        
                        
                        
                        388,256
                        
                        
                        
                        3,777,302Mortgage-backed
      securitiesGNMA
      and FNMA CMO
                        
                        
                        4,240,072
                        
                        
                        
                        114,955
                        
                        
                        
                        2,026
                        
                        
                        
                        4,353,001Totals
                        
                        $
                        19,597,008
                        
                        
                        $
                        232,976
                        
                        
                        $
                        436,511
                        
                        
                        $
                        19,393,473Portfolio
      Designated “Available for Sale”
                          (Note
      1)
                          
                          December 31,
      2008US
      Treasury securities and obligations ofUS
      government corporations and agencies
                        
                        $
                        402,976
                        
                        
                        $
                        101,449
                        
                        
                        $
                        2,500
                        
                        
                        $
                        501,925Corporate
      securities
                        
                        
                        42,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        42,000Totals
                        
                        $
                        444,976
                        
                        
                        $
                        101,449
                        
                        
                        $
                        2,500
                        
                        
                        $
                        543,925
  Portfolio
      Designated “Held to Maturity”
                            (Note
      1)
                            
                            December 31,
      2007
                          
                          Amortized
      Cost
                          
                          
                          Gross
      Unrealized Gains
                          
                          
                          Gross
      Unrealized Losses
                          
                          
                          Estimated
      Market ValueUS
      Treasury securities and obligations ofUS
      government corporations and agencies
                          
                          $
                          13,330,227
                          
                          
                          $
                          29,588
                          
                          
                          $
                          43,188
                          
                          
                          $
                          13,316,627Corporate
      securities
                          
                          
                          3,441,590
                          
                          
                          
                          49,117
                          
                          
                          
                          71,705
                          
                          
                          
                          3,419,002Mortgage-backed
      securitiesGNMA
                          
                          
                          2,315,930
                          
                          
                          
                          4,074
                          
                          
                          
                          27,720
                          
                          
                          
                          2,292,284Totals
                          
                          $
                          19,087,747
                          
                          
                          $
                          82,779
                          
                          
                          $
                          142,613
                          
                          
                          $
                          19,027,913Portfolio
      Designated “Available for Sale”
                            (Note
      1)
                            
                            December 31,
      2007US
      Treasury securities and obligations ofUS
      government corporations and agencies
                          
                          $
                          402,881
                          
                          
                          $
                          72,844
                          
                          
                          $
                          4,125
                          
                          
                          $
                          471,600Corporate
      securities
                          
                          
                          187,592
                          
                          
                          
                          -
                          
                          
                          
                          59,592
                          
                          
                          
                          128,000Totals
                          
                          $
                          590,473
                          
                          
                          $
                          72,844
                          
                          
                          $
                          63,717
                          
                          
                          $
                          599,600
    F-11
 Table of Contents
 4.
Investments (continued)
 The
amortized cost and estimated fair value of investments in fixed maturity
securities at December 31, 2008 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

                                      December
      31, 2008
                                  
                                  
                                  Available
      for Sale

                                      December
      31, 2008Amortized
      Cost
                                  
                                  
                                  Estimated
                                    Market
      Value
                                  
                                  
                                  Amortized
      Cost
                                  
                                  
                                  Estimated
                                    Market
      ValueDue
      in one year or less
                                  
                                  $
                                  1,876,100
                                  
                                  
                                  $
                                  1,894,158
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Due
      after one year through five years
                                  
                                  
                                  5,253,654
                                  
                                  
                                  
                                  5,250,432
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Due
      after five years through ten years
                                  
                                  
                                  4,080,853
                                  
                                  
                                  
                                  3,832,411
                                  
                                  
                                  
                                  200,000
                                  
                                  
                                  
                                  197,500Due
      after ten years
                                  
                                  
                                  4,146,329
                                  
                                  
                                  
                                  4,063,471
                                  
                                  
                                  
                                  244,976
                                  
                                  
                                  
                                  346,42515,356,936
                                  
                                  
                                  
                                  15,040,472
                                  
                                  
                                  
                                  444,976
                                  
                                  
                                  
                                  543,925Mortgage-backed
      securities
                                  
                                  
                                  4,240,072
                                  
                                  
                                  
                                  4,353,001
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -$
                                  19,597,008
                                  
                                  
                                  $
                                  19,393,473
                                  
                                  
                                  $
                                  444,976
                                  
                                  
                                  $
                                  543,925
 
 Proceeds
from sales and maturities of investments in fixed maturity securities and equity
securities for the years ended December 31, 2008, 2007 and 2006 were
$12,002,977, $5,774,799, and $3,605,879 respectively.  Gross gains
were $10,863, $13,677 and $ 23,057 and gross losses were $0, $0 and $5,692 as of
December 31, 2008, 2007 and 2006, respectively.
 
 Investment
in equity securities at December 31, 2008 and 2007 represents common and
preferred stock investments as follows:
 
 2008
                      
                      
                      2007Cost
                      
                      
                      Market
                        Value
                      
                      
                      Cost
                      
                      
                      Market
                        ValueBanks,
      trusts andinsurance
      companies
                      
                      $
                      81,183
                      
                      
                      $
                      35,410
                      
                      
                      $
                      81,183
                      
                      
                      $
                      84,345Industrial,
      savingsand
      loans and other
                      
                      
                      618,646
                      
                      
                      
                      394,335
                      
                      
                      
                      292,420
                      
                      
                      
                      450,380$
                      699,829
                      
                      
                      $
                      429,745
                      
                      
                      $
                      373,603
                      
                      
                      $
                      534,725
 
 Net
investment income for the years ended December 31, 2008, 2007 and 2006 is as
follows:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Interest
      on debt securities andcash
      investments
                      
                      $
                      1,174,759
                      
                      
                      $
                      1,325,720
                      
                      
                      $
                      1,196,221Dividends
      on equity securities
                      
                      
                      11,989
                      
                      
                      
                      6,215
                      
                      
                      
                      7,6801,186,748
                      
                      
                      
                      1,331,935
                      
                      
                      
                      1,203,901Investment
      expenses
                      
                      
                      (15,847
                      )
                      
                      
                      (11,321
                      )
                      
                      
                      (12,318
                      )Net
      Investment Income
                      
                      $
                      1,170,901
                      
                      
                      $
                      1,320,614
                      
                      
                      $
                      1,191,583
   F-12
 Table of Contents
  4.
Investments (continued)
 Net
realized gains and losses are summarized below:
 
 2008
                      
                      
                      2007
                      
                      
                      2006Debt
      securities
                      
                      $
                      (482,137
                      )
                      
                      $
                      -
                      
                      
                      $
                      3,678Equity
      securities
                      
                      
                      -
                      
                      
                      
                      13,677
                      
                      
                      
                      13,689Fixed
      assets
                      
                      
                      2,420
                      
                      
                      
                      (2,549
                      )
                      
                      
                      8,180$
                      (479,717
                      )
                      
                      $
                      11,128
                      
                      
                      $
                      25,547
 
 Other
long-term investments of $1,224,609 and $1,470,054 in 2008 and 2007
respectively, consists of, in part, a convertible debenture loan investment
(“Debenture”) to EPSI Benefits, Inc. (“EBI”), originally dated July 25,
2001.  The loan bears interest at a rate of 14% and the maturity of
the Debenture was August 15, 2015. Monthly principal payments were
scheduled to begin on September 15, 2008, and the total principal amount is
$1,357,407.
 
 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.  For various business reasons management
of both companies deemed the amendment as advantageous. Under the agreement, BNL
has the right to convert the Debenture into a 51% ownership in
EBI.  Such conversion right will continue during the extended maturity
of the Debenture.
 
 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 as of
December 31, 2008, resulting in a net book value of $1,152,825.
 
 The
Company’s policy for recognizing interest income on the impaired debenture is to
recognize interest under the stated loan terms.  Interest on the
debentures is and has been current.
  The
average recorded investment on impaired debenture during the period ended
December 31, 2008 was $1,255,116.  There were no impaired loans in
2007.  Interest income recognized in 2008 on the impaired debenture
was $190,038.
 
 Activity
in the allowance for credit losses is as follows:
 2008Beginning
      Balance
                    
                    $
                    -Additions
      charged to operations
                    
                    
                    204,582Direct
      write downs
                    
                    
                    -Recoveries
      previously charged to operations
                    
                    
                    -Ending
      Balance
                    
                    $
                    204,582
 
 Other
long-term investments also include an operating line of credit agreement in the
amount of $71,784 and $112,647 in 2008 and 2007, respectively.  The
agreement provided EPSI with a $200,000 line of credit maturing August,
2011.  The line of credit is at 8.00% with interest and principal
payable monthly to BNLAC.
 
 Regulatory
authorities require certain Company investments to be deposited or pledged for
the benefits of policyholders as a condition of doing business in certain
states.  The carrying values of these investment deposits are
approximately $4,738,000 and $4,600,000 as of December 31, 2008 and 2007,
respectively.
 
 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.
  F-13
 Table of Contents
  4.
Investments (continued)
 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
December 31, 2008.
  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,Available
      for SaleU.S.
      Government Agencies
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            197,500
                                                            
                                                            
                                                            $
                                                            2,500
                                                            
                                                            
                                                            $
                                                            197,500
                                                            
                                                            
                                                            $
                                                            2,500Totals
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            197,500
                                                            
                                                            
                                                            
                                                            2,500
                                                            
                                                            
                                                            
                                                            197,500
                                                            
                                                            
                                                            
                                                            2,500
  Investment
      in Fixed Maturities,Held
      to Maturity
 US
      Treasury securities andobligations
      of USgovernmentcorporations
      and agencies
                                                          
                                                          
                                                          5,405,599
                                                          
                                                          
                                                          
                                                          43,728
                                                          
                                                          
                                                          
                                                          247,500
                                                          
                                                          
                                                          
                                                          2,500
                                                          
                                                          
                                                          
                                                          5,653,099
                                                          
                                                          
                                                          
                                                          46,228Corporate
      securities
                                                          
                                                          
                                                          890,905
                                                          
                                                          
                                                          
                                                          64,278
                                                          
                                                          
                                                          
                                                          513,500
                                                          
                                                          
                                                          
                                                          323,978
                                                          
                                                          
                                                          
                                                          1,404,405
                                                          
                                                          
                                                          
                                                          388,256Mortgage-backed
      securitiesGNMA
      and FNMA CMO
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          214,095
                                                          
                                                          
                                                          
                                                          2,026
                                                          
                                                          
                                                          
                                                          214,095
                                                          
                                                          
                                                          
                                                          2,026Totals
                                                          
                                                          
                                                          6,296,504
                                                          
                                                          
                                                          
                                                          108,006
                                                          
                                                          
                                                          
                                                          975,095
                                                          
                                                          
                                                          
                                                          328,504
                                                          
                                                          
                                                          
                                                          7,271,599
                                                          
                                                          
                                                          
                                                          436,510
 Other
      Long-Term Investments
                                  
                                  
                                  951,436
                                  
                                  
                                  
                                  273,173
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  951,436
                                  
                                  
                                  
                                  273,173Totals
                                  
                                  
                                  951,436
                                  
                                  
                                  
                                  273,173
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  951,436
                                  
                                  
                                  
                                  273,173Equity
      Securities
                                  
                                  
                                  379,825
                                  
                                  
                                  
                                  253,694
                                  
                                  
                                  
                                  7,960
                                  
                                  
                                  
                                  22,410
                                  
                                  
                                  
                                  387,785
                                  
                                  
                                  
                                  276,104Totals
                                  
                                  $
                                  379,825
                                  
                                  
                                  $
                                  253,694
                                  
                                  
                                  $
                                  7,960
                                  
                                  
                                  $
                                  22,410
                                  
                                  
                                  $
                                  387,785
                                  
                                  
                                  $
                                  276,104
  U.S.Treasury andU.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 December 31, 2008.
  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
December 31, 2008.
  Corporate Bonds
  The table
below discloses the unrealized losses on corporate bonds with material
unrealized losses.
  F-14
 Table of Contents
  4.
Investments (continued)
 Corporate
      Bonds
                                
                                December 31,
      2008
                              
                              S&PRating
                              
                              
                              Amortized
      Book Value
                              
                              
                              Gross
      Unrealized Losses
                              
                              
                              Estimated
      Market ValueAmerican
      General Finance
                              
                              BBB
                              
                              
                              $
                              200,000
                              
                              
                              $
                              130,000
                              
                              
                              $
                              70,000MBIA
                              
                              AA
                              
                              
                              
                              200,000
                              
                              
                              
                              90,000
                              
                              
                              
                              110,000Prudential
                              
                              A+
                              
                              
                              
                              150,000
                              
                              
                              
                              49,500
                              
                              
                              
                              100.500CIT
      Group
                              
                              A-
                              
                              
                              
                              100,000
                              
                              
                              
                              47,000
                              
                              
                              
                              53,000Provident
      Companies Inc.
                              
                              BB+
                              
                              
                              
                              137,478
                              
                              
                              
                              36,978
                              
                              
                              
                              100,500Bank
      of America
                              
                              A+
                              
                              
                              
                              200,000
                              
                              
                              
                              20,000
                              
                              
                              
                              180,000Principal
      Life Core
                              
                              AA
                              
                              
                              
                              100,000
                              
                              
                              
                              9,000
                              
                              
                              
                              91,000Totals
                              
                              
                              
                              
                              
                              $
                              1,087,478
                              
                              
                              $
                              382,478
                              
                              
                              $
                              705,000
  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 December 31, 2008.
  Marketable Equity
Securities.
  The table
below discloses the unrealized losses on the Company’s entire marketable equity
securities.
 
 Equity
      Securities
                        
                        December 31,
      2008
                      
                      Cost
                      
                      
                      Gross
      Unrealized Losses
                      
                      
                      Estimated
      Market ValueGarmin
      LTD
                      
                      $
                      220,322
                      
                      
                      $
                      144,267
                      
                      
                      $
                      76,055Treaty
      Oak Bank
                      
                      
                      50,813
                      
                      
                      
                      23,363
                      
                      
                      
                      27,450Regions
      Financial Corporation
                      
                      
                      30,370
                      
                      
                      
                      22,410
                      
                      
                      
                      7.960FCstone
      Group
                      
                      
                      27,282
                      
                      
                      
                      18,422
                      
                      
                      
                      8,860British
      Petroleum
                      
                      
                      88,270
                      
                      
                      
                      18,160
                      
                      
                      
                      70,110Powershare
      QQQ
                      
                      
                      116,605
                      
                      
                      
                      12,515
                      
                      
                      
                      104,090Intel
      Corporation
                      
                      
                      39,200
                      
                      
                      
                      9,880
                      
                      
                      
                      29,320Kimberly
      Clark Corporation
                      
                      
                      62,125
                      
                      
                      
                      9,385
                      
                      
                      
                      52,740Freeport
      McMoRan Copper & Gold Inc.
                      
                      
                      42,972
                      
                      
                      
                      6,312
                      
                      
                      
                      36,660Conagra
      Foods
                      
                      
                      21,870
                      
                      
                      
                      5,370
                      
                      
                      
                      16,500Totals
                      
                      $
                      699,829
                      
                      
                      $
                      270,084
                      
                      
                      $
                      429,745
  The
Company's marketable equity securities include a variety of
industries.  Garmin LTD has the largest unrealized loss of $144,267,
which is approximately a 65% decrease in value. Garmin manufactures
communication and navigational products and they are the leader in personal
navigational devices.  Garmin remains profitable in 2008 and the
decrease in the stock’s fair value was due to the challenging economic
environment in 2008.  The remaining fair value and unrealized losses
are distributed in nine companies. The severity of the impairment (aggregate
fair value is approximately 26% 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 December 31,
2008.
  F-15
 Table of Contents
 
 5.  Fair Value of Financial
Instruments
 
 Effective
January 1, 2008, the Company adopted SFAS No. 157, which, among other things,
requires enhanced disclosures about assets and liabilities carried at fair
value.  SFAS No. 157 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 SFAS No. 157 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 and other
similar techniques.
 
 The table
below presents the balances of assets measured at fair value on a recurring
basis, as of December 31, 2008.
 
 Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      TotalFixed
      Maturities, held to maturity
                      
                      $
                      -
                      
                      
                      $
                      19,393,473
                      
                      
                      $
                      -
                      
                      
                      $
                      19,393,473Fixed
      maturities, available for sale
                      
                      
                      -
                      
                      
                      
                      543,925
                      
                      
                      
                      -
                      
                      
                      
                      543,925Equity
      securities, available for sale
                      
                      
                      429,745
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      429,745Other
      long term investments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      951,436
                      
                      
                      
                      951,436Cash
      and cash equivalents
                      
                      
                      693,970
                      
                      
                      
                      4,295,411
                      
                      
                      
                      -
                      
                      
                      
                      4,989,381Total
      assets
                      
                      $
                      1,123,715
                      
                      
                      $
                      24,232,809
                      
                      
                      $
                      951,436
                      
                      
                      $
                      26,307,960
 
 The
following tables provide a summary of the changes in fair value of Level 3
assets and liabilities for the period January 1, 2008 to December 31, 2008, 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
December 31, 2008.
 
 Other
      Long-term InvestmentsFair
      value, beginning of period
                    
                    $
                    1,470,054Included
      in Earnings:
                      Other
      than temporary decline in fair value
                    
                    
                    (204,582
                    )Purchases,
      sales, issuances and settlements
                    
                    
                    (40,863
                    )Temporary
      decrease in fair value
                    
                    
                    (273,173
                    )Fair
      value, end of period
                    
                    $
                    951,436
   F-16
 Table of Contents
 5.
Fair Value of Financial Instruments (continued)
 Unrealized
losses for the period relating to those Level 3 assets that were held by the
Company at the end of the period were ($273,173).
 
 2008
                                                        
                                                        
                                                        
                                                        2007Carrying
                                                        
                                                        
                                                        Fair
                                                        
                                                        
                                                        
                                                        Carrying
                                                        
                                                        
                                                        FairAssets
                                                        
                                                        Amount
                                                        
                                                        
                                                        Value
                                                        
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        ValueCash
      and Cash Equivalents(Note
      1)
                                                        
                                                        $
                                                        4,989,381
                                                        
                                                        
                                                        $
                                                        4,989,381
                                                        
                                                        (a)
                                                        
                                                        $
                                                        4,937,983
                                                        
                                                        
                                                        $
                                                        4,937,983
                                                        
                                                        (a)Investments-fixed
      maturity available for sale
                                                          (Note
      4 & Note 1)
                                                        
                                                        
                                                        543,925
                                                        
                                                        
                                                        
                                                        543,925
                                                        
                                                        (b)
                                                        
                                                        
                                                        599,600
                                                        
                                                        
                                                        
                                                        599,600
                                                        
                                                        (b)Investments-fixed
      maturity held to maturity
                                                          (Note
      4 & Note 1)
                                                        
                                                        
                                                        19,597,008
                                                        
                                                        
                                                        
                                                        19,393,473
                                                        
                                                        (b)
                                                        
                                                        
                                                        19,087,747
                                                        
                                                        
                                                        
                                                        19,027,913
                                                        
                                                        (b)Investments
      –equity securities(Note
      4 & Note 1)
                                                        
                                                        
                                                        429,745
                                                        
                                                        
                                                        
                                                        429,745
                                                        
                                                        (b)
                                                        
                                                        
                                                        534,725
                                                        
                                                        
                                                        
                                                        534,725
                                                        
                                                        (b)Other
      long term investments (Note 4)
                                                        
                                                        
                                                        1,224,609
                                                        
                                                        
                                                        
                                                        951,436
                                                        
                                                        (b)
                                                        
                                                        
                                                        1,470,054
                                                        
                                                        
                                                        
                                                        1,470,054
                                                        
                                                        (b)Other
      financial instruments-Assets
                                                        
                                                        
                                                        431,537
                                                        
                                                        
                                                        
                                                        431,537
                                                        
                                                        (a)
                                                        
                                                        
                                                        431,430
                                                        
                                                        
                                                        
                                                        431,430
                                                        
                                                        (a)Total
      financial instruments-Assets
                                                        
                                                        $
                                                        27,216,205
                                                        
                                                        
                                                        $
                                                        26,739,497
                                                        
                                                        
                                                        
                                                        $
                                                        27,061,539
                                                        
                                                        
                                                        $
                                                        27,001,705LiabilitiesPremium
      deposit funds
                                                        
                                                        $
                                                        21,849
                                                        
                                                        
                                                        $
                                                        21,849
                                                        
                                                        (a)
                                                        
                                                        $
                                                        25,318
                                                        
                                                        
                                                        $
                                                        25,318
                                                        
                                                        (a)Bonds
      payable
                                                        
                                                        
                                                        1,443,282
                                                        
                                                        
                                                        
                                                        1,443,282
                                                        
                                                        (a)
                                                        
                                                        
                                                        1,607,576
                                                        
                                                        
                                                        
                                                        1,607,576
                                                        
                                                        (a)Supplementary
      contracts without life contingencies(Note
      1)
                                                        
                                                        
                                                        2,782
                                                        
                                                        
                                                        
                                                        2,782
                                                        
                                                        (a)
                                                        
                                                        
                                                        5,905
                                                        
                                                        
                                                        
                                                        5,905
                                                        
                                                        (a)Annuity
      deposits(Note
      1)
                                                        
                                                        
                                                        2,523,185
                                                        
                                                        
                                                        
                                                        2,523,185
                                                        
                                                        (a)
                                                        
                                                        
                                                        2,463,546
                                                        
                                                        
                                                        
                                                        2,463,546
                                                        
                                                        (a)Total
      financial instruments-Liabilities
                                                        
                                                        $
                                                        3,991,098
                                                        
                                                        
                                                        $
                                                        3,991,098
                                                        
                                                        
                                                        
                                                        $
                                                        4,102,345
                                                        
                                                        
                                                        $
                                                        4,102,345
  (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 SFAS No. 157 as described
here-in.
   F-17
 Table of Contents
  6.  Commitments and
Contingencies
 
 The
balance of Bonds Payable was $1,443,282 and $1,607,576 at December 31, 2008 and
2007 respectively.  The bonds were issued in conjunction with a
settlement with certain shareholders in 2001.  The Bonds are for a
term of twelve years, effective December 15, 2002, with principal payable at
maturity and bear interest at the rate of 6% per annum payable annually from the
previous fiscal year’s earnings of BNL.  If any interest payment is
not made, it will be added to the principal and paid at maturity.  The
Bonds are fully callable and redeemable at par at any time by BNL.
 
 In 2008,
2007 and 2006, the Company made cash offers to bond holders for the purchase of
bonds.  Bond purchases resulted in a reduction of Bonds Payable of
$164,294, $32,408 and $107,194 in 2008, 2007 and 2006;
respectively.  Gains from early extinguishments of the debt were
$44,370, $10,803 and $35,732 in 2008, 2007 and 2006; respectively.
 
 In 2003
and 2004, the Company became a third party indemnitor by entering into a series
of bond indemnity and guarantee agreements with various terms totaling
approximately $545,000 in conjunction with a marketing agreement with third
parties, EPSI Benefits Inc. (EBI) and Employer Plan Services Inc.
(EPSI).  The purpose of these agreements is to assist EPSI in becoming
licensed in additional states. The Company received personal guarantees from the
owners of EPSI to effectively limit potential liability under the guarantee
agreements.  With regard to the bond indemnity, 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.
 
 The
Company has entered into noncancelable operating leases for office space and
equipment.  Future minimum payments under the leases are as
follows:
  2009
                            
                            $
                            358,0002010
                            
                            
                            336,0002011
                            
                            
                            348,0002012
                            
                            
                            368,0002013
                            
                            
                            226,000Total
                            
                            $
                            1,636,000
 
 During
the first quarter of 2005 the Company entered into a lease for 20,337 square
feet of office space in Austin, Texas, under an eight year, triple net lease.
The base rent was $0 in the first year (June 1, 2005 to May 31, 2006), $157,612
in the second year and payments escalate to $264,384 in the final year of the
lease.  Leasehold improvements totaled approximately $872,000
($203,000 funded by landlord) on the new lease space that was occupied in
December 2005.  Leasehold improvements are being amortized over the
lease term.  The $117,000 initial rent holiday and $203,000 of
landlord-funded leasehold improvements are being amortized over the lease term
and reduce lease expense.  Deferred rent credits are included in other
liabilities and were approximately $317,000 and $355,000 for 2008 and 2007,
respectively.
 
 Related
lease cost incurred for the years ended December 31, 2008, 2007 and 2006 was
$358,000, $389,000, and $393,000. respectively.
 
 The
Company's wholly owned insurance subsidiary may be subject to losses related to
guaranty fund assessments.  Such assessments result from liquidation
of troubled insurers by state regulators.  The assessment to BNLAC, if
any, is not reasonably estimable, nor expected to have a material effect on the
financial statements.
 
 Periodically
in the ordinary course of business the Company exceeds federally insured limits
in its operating accounts.  Cash deposits in excess of federally
insured limits are approximately $1,500,000 at December 31, 2008.
 
 See Note
2 for information regarding minimum capital requirements to maintain a license
to sell in various states.
 
 
 F-18
 Table of Contents
  7.  Liability for Unpaid
Claims
 
 Activity
in the liability for accident and health unpaid claims net of reinsurance is
summarized as follows.
 
 2008
                              
                              
                              2007
                              
                              
                              2006Balance
      at January 1
                              
                              $
                              2,306,594
                              
                              
                              $
                              2,517,366
                              
                              
                              $
                              2,558,565Less
      reinsurance recoverable
                              
                              
                              306
                              
                              
                              
                              9,241
                              
                              
                              
                              -Net
      Balance at January 1
                              
                              
                              2,306,288
                              
                              
                              
                              2,508,125
                              
                              
                              
                              2,558,565Incurred related to:Current
      year
                              
                              
                              27,310,819
                              
                              
                              
                              27,850,499
                              
                              
                              
                              28,361,878Prior
      years
                              
                              
                              (510,993
                              )
                              
                              
                              (571,329
                              )
                              
                              
                              (34,030
                              )Total
      Incurred
                              
                              
                              26,799,826
                              
                              
                              
                              27,279,170
                              
                              
                              
                              28,327,848Paid related to:Current
      year
                              
                              
                              25,596,254
                              
                              
                              
                              25,553,705
                              
                              
                              
                              25,844,512Prior
      years
                              
                              
                              1,795,295
                              
                              
                              
                              1,926,996
                              
                              
                              
                              2,524,535Total
      Paid
                              
                              
                              27,391,549
                              
                              
                              
                              27,480,701
                              
                              
                              
                              28,369,047Net
      Balance at December 31
                              
                              
                              1,712,140
                              
                              
                              
                              2,306,288
                              
                              
                              
                              2,508,125Plus
      reinsurance recoverable
                              
                              
                              2,425
                              
                              
                              
                              306
                              
                              
                              
                              9,241Balance
      at December 31
                              
                              $
                              1,714,565
                              
                              
                              $
                              2,306,594
                              
                              
                              $
                              2,517,366
  The
activity summary in the liability for unpaid accident and health claims net of
reinsurance shows that claims liabilities were overstated by $510,993, $ 571,329
and $34,030 for the years ended December 31, 2007, 2006 and 2005,
respectively.  Such liability adjustments, which affected current
operations during 2008, 2007 and 2006 respectively, resulted in part from
developed claims for prior years being different than were anticipated when the
liabilities for unpaid accident and health claims were originally
estimated.  These trends have been considered in establishing the
current year liability for unpaid accident and health
claims.  Included in the unpaid accident and health claims are an
estimate of claim adjustment expenses of $118,763, $121,491 and $116,854 in
2008, 2007 and 2006, respectively.  Netting out claim adjustment
expenses would make accident and health liabilities overstated in 2008 and 2007
by $392,230 and $449,838, respectively and understated by $82,824 in
2006.
 8.  Reinsurance
 
 Liability
for future policy benefits is reported before the effects of
reinsurance.  Reinsurance receivable (including amounts related to
insurance liabilities) is reported as an asset.  Estimated reinsurance
receivable is recognized in a manner consistent with the liabilities related to
the underlying reinsurance contracts.  Such amounts have been
presented in accordance with Statement of Financial Standards No. 113,
“Accounting and Reporting for Reinsurance of Short Duration and Long Duration
Contracts.”  The Company is liable if the reinsuring companies are
unable to meet their obligations under the reinsurance agreements.
  In 2008,
BNLAC’s accidental death benefit riders were reinsured 100% through a Bulk ADB
reinsurance agreement with Optimum Re.  Optimum Re was rated
“A-“(Excellent) by AM Best Company for 2008.
 
 In  2008,
BNLAC’s individual life insurance products in excess of $35,000 were reinsured
with Optimum Re under an automatic treaty up to $175,000 and under a facultative
treaty for amounts over $175,000.  Optimum Re was rated “A-“
(Excellent) by AM Best Company for 2008.
 
 BNLAC
entered into a quota share reinsurance agreement with Hannover Life Reassurance
Company of America for its group life, group accidental death and dismemberment
and accidental death and dismemberment without group life plans effective
January 1, 2008 whereby Hannover accepts 90% of the risk up to a maximum of
$100,000 per life.  This reinsurance replaced Hartford Life and
Accident Insurance Company.  Hannover was rated “A” (Excellent) by AM
Best Company for 2008.
 
 
 F-19
 Table of Contents
 
 8.  Reinsurance
(continued)
 
 BNLAC
entered into a quota share reinsurance agreement with Hannover Life Reassurance
Company of America for its accidental death and dismemberment plan including
common carrier effective January 1, 2007. The Company retains a 10% quota share
up to a maximum of $25,000 for AD&D and Common Carrier
combined.  Hannover will accept, on an automatic basis, 90% to 100%
quota share up to a maximum of $250,000 per life depending on the Company’s
retention.  This reinsurance replaced Hartford Life and Accident
Insurance Company.  Hannover was rated “A (Excellent) by AM Best
Company for 2008.
 
 BNLAC’s
Short Term Disability insurance is reinsured under a quota share reinsurance
agreement with Union Security Insurance Company, Des Moines, Iowa, (formerly
Fortis Benefits Insurance Company of Kansas City, Missouri).  The
reinsurer is liable for 75% of the risk on each policy.  Union
Security Insurance Company was rated “A” (Excellent) by AM Best Company for
2008.
 
 Group and
individual dental is not reinsured due to the economics of the dental insurance
business and the small annual maximum liability per policy.
 
 Following
is a summary of reinsurance for December 31, 2008, 2007 and 2006:
 
 December 31, 2008
                
                Gross
      Amount
                
                
                Ceded
      To Other Companies
                
                
                Assumed
      From Other Companies
                
                
                Net
      Amounts
                
                
                Percentage
      Of Amount Assumed To NetLife
      insurance in force  (in thousands)
                
                $
                33,696
                
                
                $
                11,111
                
                
                $
                -
                
                
                $
                22,585
                
                
                
                0.0
                %Premiums-life
      insurance
                
                $
                330,934
                
                
                $
                56,256
                
                
                $
                -
                
                
                $
                274,678
                
                
                
                0.0
                %Premiums-accident
      and health
                
                
                43,693,176
                
                
                
                94,706
                
                
                
                -
                
                
                
                43,598,470
                
                
                
                0.0
                %Total
      insurance premiums
                
                $
                44,024,110
                
                
                $
                150,962
                
                
                $
                -
                
                
                $
                43,873,148
                
                
                
                0.0
                %December 31,
      2007Life
      insurance in force  (in thousands)
                
                $
                43,879
                
                
                $
                14,074
                
                
                $
                -
                
                
                $
                29,805
                
                
                
                0.0
                %Premiums-life
      insurance
                
                $
                348,714
                
                
                $
                62,805
                
                
                $
                -
                
                
                $
                285,909
                
                
                
                0.0
                %Premiums-accident
      and health
                
                
                44,383,582
                
                
                
                87,334
                
                
                
                -
                
                
                
                44,296,248
                
                
                
                0.0
                %Total
      insurance premiums
                
                $
                44,732,296
                
                
                $
                150,139
                
                
                $
                -
                
                
                $
                44,582,157
                
                
                
                0.0
                %December 31,
      2006Life
      insurance in force  (in thousands)
                
                $
                43,645
                
                
                $
                15,333
                
                
                $
                -
                
                
                $
                28,312
                
                
                
                0.0
                %Premiums-life
      insurance
                
                $
                378,533
                
                
                $
                71,370
                
                
                $
                -
                
                
                $
                307,163
                
                
                
                0.0
                %Premiums-accident
      and health
                
                
                44,435,776
                
                
                
                74,521
                
                
                
                -
                
                
                
                44,361,255
                
                
                
                0.0
                %Total
      insurance premiums
                
                $
                44,814,309
                
                
                $
                145,891
                
                
                $
                -
                
                
                $
                44,668,418
                
                
                
                0.0
                %
   
 F-20
 Table of Contents
  9.
Benefit Plans for
Certain Brokers/Agents and Employees
 
 In 1994,
the Board of Directors and Shareholders approved the 1994 Brokers and Agents’
Nonqualified Stock Option Plan.  This plan was established as an
incentive to sales persons of BNLAC.  Initially 250,000 shares were
available under the plan.  The Board of Directors authorized options
for an additional 1.75 million shares.  The option period may not
exceed a term of five years and the duration of the plan was ten years, expiring
December 14, 2004.
 
 Of the
options granted through December 2004, there were no stock options outstanding
at December 31, 2008.  The number of options expiring or forfeited
were 100,825 and 122,675 in 2008 and 2007, respectively.  There were
9,600 options exercised in 2008 and 12,475 options exercised in 2007. The
remaining options expired in 2008.  The options do not have a dilutive
effect on earnings per share.
 
 In March 2002, the Board of Directors
approved the2002 Non-Director,
Non-Executive Stock Option Plan,subject to any necessaryauthorizations from any regulatory
authority.  The plan is intended to assist the Company in attracting
and retaining individuals of outstanding ability and to promote concurrence of
their interests with those of the Shareholders of the Company.  The
Company granted options for 116,000 shares prior to 2005.  No options
were granted in 2008, 2007 and 2006.  The fair value of any options
granted is estimated using a binomial method as prescribed in SFAS No.
123(R).  There were 93,050 options outstanding at December 31,
2008.  The estimated weighted average remaining life of the options is
4.4 years and weighted average exercise price is $.63.  The options do
not have a dilutive effect on earnings per share at this time, but may have such
an effect in the future.  See Note 1.
 
 In 2001,
the Board of Directors approved the 2001 Incentive Bonus Plan for
the benefit of certain Officers of the Company. The plan provides for monthly
payment of cash bonuses based on 12% of consolidated pre-tax operating income.
Bonus expense was $355,359, $511,562 and $308,266 under this plan for 2008, 2007
and 2006, respectively.
 
 The
Company had a stock bonus plan for the benefit of certain Officers of the
corporation.  The plan provided for a bonus based on consolidated
after-tax profits subject to specified limits.  The bonus amount, net
of taxes, was used to purchase stock in the Company.  Stock bonuses in
the amount of $74,866 were granted and charged to expense in
2006.  The maximum of 400,000 shares per officer was reached in
2006.
 
 The
Company has an Employee Pension Plan that is a qualified retirement plan under
the Internal Revenue Code.  All employees who have attained age 21 and
have completed one year of service are eligible to
contribute.  Employer contributions are discretionary.  The
Company contributed $65,896, $64,795 and $61,853 in 2008, 2007 and 2006,
respectively.
 
 10.  Concentrations
 
 The
majority of the Company’s premium income and gross income continues to be
generated by the dental insurance products.  This concentration makes
the Company increasingly dependent upon the success of this block of business
and any economic factors and risks unique to dental
insurance.   See Note 1.  The Company has no distinctly
reportable business segments.
 
 11.  Change in Accounting
Estimate
 
 Based on
claims experience in 2008 and 2007, the estimate of claims liability at December
31, 2007 was overstated by approximately $390,000 and overstated by $450,000 at
December 2006 as described in Note 7.  The change in estimate of this
liability has contributed a corresponding decrease in claims expense in 2008 and
2007.
 
 F-21
 Table of Contents
  12. Subsequent
Events
 
 There
have been no other events subsequent to December 31, 2008 that will have a
material impact on the financial condition of the Company.
  13.
Unaudited Quarterly
Results of Operations
 
 The
summary unaudited quarterly results of operations were as follows:
 
 Quarter EndedMarch
      31
                    
                    
                    June
      30
                    
                    
                    September
      30
                    
                    
                    December
      312008Premium
      Income
                    
                    $
                    11,142,672
                    
                    
                    $
                    10,983,178
                    
                    
                    $
                    10,737,738
                    
                    
                    $
                    10,592,435Net
      Investment Income
                    
                    
                    311,778
                    
                    
                    
                    257,827
                    
                    
                    
                    276,786
                    
                    
                    
                    324,510Vision
      Insurance Income
                    
                    
                    627,551
                    
                    
                    
                    522,722
                    
                    
                    
                    550,992
                    
                    
                    
                    562,264Realized
      Gains (Losses)
                    
                    
                    18,650
                    
                    
                    
                    (199,354
                    )
                    
                    
                    (104,212
                    )
                    
                    
                    (150,430
                    )Expenses
                    
                    
                    (11,349,162
                    )
                    
                    
                    (11,095,119
                    )
                    
                    
                    (11,092,925
                    )
                    
                    
                    (10,551,428
                    )Net
      Income
                    
                    $
                    751,489
                    
                    
                    $
                    469,254
                    
                    
                    $
                    368,379
                    
                    
                    $
                    777,351Earnings
      Per Share (Basic and Diluted)
                    
                    $
                    0.05
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.06Comprehensive
      Income
                    
                    $
                    618,237
                    
                    
                    $
                    429,286
                    
                    
                    $
                    255,798
                    
                    
                    $
                    779,585
 
 Quarter
      EndedMarch
      31
                                  
                                  
                                  June
      30
                                  
                                  
                                  September
      30
                                  
                                  
                                  December
      312007Premium
      Income
                                  
                                  $
                                  11,270,566
                                  
                                  
                                  $
                                  11,125,135
                                  
                                  
                                  $
                                  11,187,480
                                  
                                  
                                  $
                                  10,980,992Net
      Investment Income
                                  
                                  
                                  325,047
                                  
                                  
                                  
                                  300,793
                                  
                                  
                                  
                                  337,856
                                  
                                  
                                  
                                  356,918Marketing
      Fees
                                  
                                  
                                  33,874
                                  
                                  
                                  
                                  33,673
                                  
                                  
                                  
                                  100,448
                                  
                                  
                                  
                                  30,848Vision
      Insurance Income
                                  
                                  
                                  509,505
                                  
                                  
                                  
                                  487,250
                                  
                                  
                                  
                                  482,579
                                  
                                  
                                  
                                  500,025Realized
      Gains (Losses)
                                  
                                  
                                  5,403
                                  
                                  
                                  
                                  7,836
                                  
                                  
                                  
                                  5,993
                                  
                                  
                                  
                                  2,700Expenses
                                  
                                  
                                  (11,269,135
                                  )
                                  
                                  
                                  (11,281,522
                                  )
                                  
                                  
                                  (11,292,402
                                  )
                                  
                                  
                                  (10,792,491
                                  )Net
      Income
                                  
                                  $
                                  875,260
                                  
                                  
                                  $
                                  673,165
                                  
                                  
                                  $
                                  821,954
                                  
                                  
                                  $
                                  1,078,992Earnings
      Per Share (Basic and Diluted)
                                  
                                  $
                                  0.06
                                  
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.07Comprehensive
      Income
                                  
                                  $
                                  936,892
                                  
                                  
                                  $
                                  653,391
                                  
                                  
                                  $
                                  895,527
                                  
                                  
                                  $
                                  1,017,832
 
 
 
 F-22
 Table of Contents
 
 Item
15(d) - Schedule II, Condensed Financial Information of Registrant
 BNL
Financial Corporation (Parent Company)
 Balance
Sheets
  2008
                                    
                                    
                                    2007AssetsCash
      and cash equivalents
                                    
                                    $
                                    298,508
                                    
                                    
                                    $
                                    64,342Investments,
      at fair value
                                    
                                    
                                    197,500
                                    
                                    
                                    
                                    195,875Total
      Investments, Including Cash and CashEquivalents
                                    
                                    
                                    496,008
                                    
                                    
                                    
                                    260,217Accrued
      investment income
                                    
                                    
                                    10,630
                                    
                                    
                                    
                                    10,630Loan
      to EPSI
                                    
                                    
                                    1,152,825
                                    
                                    
                                    
                                    1,357,407Investment
      in Unconsolidated Subsidiaries at equity (eliminated in consolidated
      statements)
                                    
                                    
                                    18,323,660
                                    
                                    
                                    
                                    17,275,173Income
      tax asset
                                    
                                    
                                    31,000
                                    
                                    
                                    
                                    21,399Other
      assets
                                    
                                    
                                    142,608
                                    
                                    
                                    
                                    147,757Total
      Assets
                                    
                                    $
                                    20,156,731
                                    
                                    
                                    $
                                    19,072,583
 
 LiabilitiesBonds
      payable
                        
                        $
                        1,443,282
                        
                        
                        $
                        1,607,576Loan
      from Brokers National Life Assurance Co.
                        
                        
                        -
                        
                        
                        
                        50,688Other
      liabilities
                        
                        
                        105,032
                        
                        
                        
                        117,445Total
      Liabilities
                        
                        
                        1,548,314
                        
                        
                        
                        1,775,709Shareholders'
      EquityCommon
      stock, $.02 stated value, 45,000,000 shares authorized; 15,463,965 shares
      issued and outstanding
                        
                        
                        309,279
                        
                        
                        
                        309,279Additional
      paid-in capital
                        
                        
                        5,748,465
                        
                        
                        
                        5,751,240Retained
      earnings
                        
                        
                        13,032,655
                        
                        
                        
                        11,426,540Treasury
      stock, at cost, 256,839; 250,252 shares,respectively
                        
                        
                        (321,048
                        )
                        
                        
                        (312,816
                        )Unrealized
      appreciation of securities
                        
                        
                        (160,934
                        )
                        
                        
                        122,631Total
      Shareholders' Equity
                        
                        
                        18,608,417
                        
                        
                        
                        17,296,874Total
      Liabilities and Shareholders’Equity
                        
                        $
                        20,156,731
                        
                        
                        $
                        19,072,583
 
 
 F-23
 Table of Contents
  Item
15(d) - Schedule II, Condensed Financial Information of Registrant
 BNL
Financial Corporation (Parent Company)
 Statement
of Operations
  2008
                          
                          
                          2007
                          
                          
                          2006IncomeNet
      investment income
                          
                          $
                          206,082
                          
                          
                          $
                          204,656
                          
                          
                          $
                          223,021Marketing
      fees
                          
                          
                          -
                          
                          
                          
                          198,843
                          
                          
                          
                          143,315Realized
      gain on debt extinguishment
                          
                          
                          44,370
                          
                          
                          
                          10,803
                          
                          
                          
                          35,730Realized
      gains (losses)
                          
                          
                          (201,135
                          )
                          
                          
                          -
                          
                          
                          
                          (1,621
                          )Total
      Income
                          
                          
                          49,317
                          
                          
                          
                          414,302
                          
                          
                          
                          400,445ExpensesGeneral
      and administrative
                          
                          
                          232,064
                          
                          
                          
                          259,888
                          
                          
                          
                          211,236Interest
      expense
                          
                          
                          93,959
                          
                          
                          
                          124,738
                          
                          
                          
                          120,246Total
      Expenses
                          
                          
                          326,023
                          
                          
                          
                          384,626
                          
                          
                          
                          331,482Income
      from operations before income taxes
                          
                          
                          (276,706
                          )
                          
                          
                          29,676
                          
                          
                          
                          68,963Provision
      for income taxes
                          
                          
                          (9,502
                          )
                          
                          
                          15,601
                          
                          
                          
                          5,025Net
      income before equity in undistributedincome of subsidiaries
                          
                          
                          (267,204
                          )
                          
                          
                          14,075
                          
                          
                          
                          63,938Equity
      in undistributed income of subsidiaries
                          
                          
                          2,633,676
                          
                          
                          
                          3,435,293
                          
                          
                          
                          2,500,306Net
      Income
                          
                          $
                          2,366,472
                          
                          
                          $
                          3,449,368
                          
                          
                          $
                          2,564,244Net
      Income Per Common Share (Basic and Diluted)
                          
                          $
                          .16
                          
                          
                          $
                          .22
                          
                          
                          $
                          .16
  
  F-24
 Table of Contents
 
 Item
15(d) - Schedule II, Condensed Financial Information of Registrant
 BNL
Financial Corporation (Parent Company)
 Statements
of Cash Flows
  2008
                      
                      
                      2007
                      
                      
                      2006Cash
      Flows from Operating ActivitiesNet
      income
                      
                      $
                      2,366,472
                      
                      
                      $
                      3,449,368
                      
                      
                      $
                      2,564,244Adjustments
      to compute cash provided byoperating activities
                      
                      
                      (2,495,882
                      )
                      
                      
                      (3,491,331
                      )
                      
                      
                      (2,420,083
                      )Net
      Cash Provided (Used) by OperatingActivities
                      
                      
                      (129,410
                      )
                      
                      
                      (41,963
                      )
                      
                      
                      144,161Cash
      Flows from Investing ActivitiesDividend
      from subsidiary
                      
                      
                      1,300,000
                      
                      
                      
                      1,000,000
                      
                      
                      
                      1,450,000Net
      Cash Provided by Investing Activities
                      
                      
                      1,300,000
                      
                      
                      
                      1,000,000
                      
                      
                      
                      1,450,000Cash
      Flows from Financing ActivitiesPurchase
      of treasury stock
                      
                      
                      (20,858
                      )
                      
                      
                      (789,184
                      )
                      
                      
                      (1,297,948
                      )Sale
      of treasury stock
                      
                      
                      -
                      
                      
                      
                      102,995
                      
                      
                      
                      64,550Dividends
                      
                      
                      (760,356
                      )
                      
                      
                      -
                      
                      
                      
                      -Stock
      options exercised
                      
                      
                      15,401
                      
                      
                      
                      20,494
                      
                      
                      
                      150Payments
      on long term debt
                      
                      
                      (50,687
                      )
                      
                      
                      (270,094
                      )
                      
                      
                      (249,005
                      )Debt
      extinguishments
                      
                      
                      (119,924
                      )
                      
                      
                      (32,408
                      )
                      
                      
                      (107,194
                      )Net
      Cash Provided (Used) by Financing  Activities
                      
                      $
                      (936,424
                      )
                      
                      $
                      (968,197
                      )
                      
                      $
                      (1,589,447
                      )Net
      Increase (Decrease) in Cash and CashEquivalents
                      
                      
                      234,166
                      
                      
                      
                      (10,160
                      )
                      
                      
                      4,714Cash
      and Cash Equivalents, Beginning ofPeriod
                      
                      
                      64,342
                      
                      
                      
                      74,502
                      
                      
                      
                      69,788Cash
      and Cash Equivalents, End of Period
                      
                      $
                      298,508
                      
                      
                      $
                      64,342
                      
                      
                      $
                      74,502
 
 
 
 
 F-25
 Table of Contents