BNL FINANCIAL CORP - FORM 10-Q

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EX-31.2 - BNL FINANCIAL CORP	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from______to_____

Commission File No. 000-16880

BNL FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)

IOWA	42-1239454
(State of incorporation)	(I.R.S. Employer Identification No.)

7010 Hwy 71 W., Ste 100
Austin, Texas	78735
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

As of June 30, 2011, the Registrant had 15,064,793 shares of Common Stock, no par value, outstanding.

Table of Contents

		Page
PART I Financial Information

Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Control and Procedures	17


PART II Other Information

Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	(Removed and Reserved)	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
Signatures		20

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors

BNL Financial Corporation

We have reviewed the accompanying Consolidated Balance Sheet of BNL Financial Corporation and Subsidiaries as of June 30, 2011 and the related Consolidated Statements of Income and Comprehensive Income for the three-month and six-month periods ended June 30, 2011 and 2010 and the Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2010. These interim financial statements are the responsibility of the Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board, the Consolidated Balance Sheet of BNL Financial Corporation and Subsidiaries as of December 31, 2010 and the related Consolidated Statements of Income and Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for the year then ended (not presented herein); and in our report dated March 31, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Consolidated Balance Sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.

/s/ Smith, Carney & Co.

Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.

August 15, 2011

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2011 (Unaudited)			2010 (Audited)
ASSETS
Cash and cash equivalents	$	7,886,706		$	8,632,371
Investment in fixed maturities, at amortized cost, Held to Maturity (fair value $16,158,541; $15,057,111, respectively)		15,668,090			14,706,439
Other long-term investments (fair value $865,970, $876,423)		1,054,418			1,054,418
Investment in equity securities (cost $879,757, $834,268)		1,000,429			909,124
Total Investments, Including Cash and Cash Equivalents		25,609,643			25,302,352

Accrued investment income		101,484			90,093
Furniture and equipment, net		740,792			784,529
Deferred policy acquisition costs		217,372			223,041
Policy loans		166,656			160,120
Receivable from reinsurer		52,015			52,015
Premiums due and unpaid		977,646			936,941
Income tax assets		486			40,274
Intangible assets		116,685			119,593
Other assets		233,868			218,211
Total Assets	$	28,216,647		$	27,927,169

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Liabilities for future policy benefits	$	1,946,086		$	2,057,715
Policy claims payable		1,411,569			1,353,770
Annuity deposits		2,291,163			2,384,264
Deferred annuity profits		165,284			175,074
Premium deposit funds		20,498			20,088
Supplementary contracts without life contingencies		50,715			41,932
Advanced and unallocated premium		809,190			1,154,715
Commissions payable		541,949			536,781
Accrued taxes and expenses		258,513			298,462
Bonds payable		1,299,088			1,300,708
Other liabilities		912,384			989,814
Total Liabilities		9,706,439			10,313,323

Shareholders' Equity:
Common stock, $.02 stated value, 45,000,000 shares authorized, 15,463,965 shares issued and outstanding		309,279			309,279
Additional paid-in capital		5,703,215			5,704,089
Accumulated other comprehensive income		88,003			45,581
Accumulated surplus		12,915,813			12,041,213
Treasury stock, at cost, 399,172; 382,030 shares, respectively		(506,102	)		(486,316	)
Total Shareholders' Equity		18,510,208			17,613,846
Total Liabilities and Shareholders' Equity	$	28,216,647		$	27,927,169

See accompanying notes and Independent Accountants’ Report

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
	2011 (Unaudited)			2010 (Unaudited)			2011 (Unaudited)			2010 (Unaudited)
Income:
Premium income	$	9,426,647		$	10,012,029		$	19,233,670		$	20,145,999
Vision insurance income		593,928			598,126			1,231,104			1,181,009
Net investment income		206,782			244,969			412,478			503,222
Realized gains on debt retirement		324			4,860			324			4,536
Realized gains (loss)		15,477			(16,552	)		12,186			(16,552	)

Total Income		10,243,158			10,843,432			20,889,762			21,818,214

Expenses:
Liability for future policy benefits expense		(61,815	)		(33,311	)		(111,628	)		(91,607	)
Policy benefits and other insurance costs		7,441,744			7,974,422			14,934,796			15,735,019
Amortization of deferred policy acquisition costs		5,730			5,079			5,670			5,273
Operating expenses		2,146,320			2,190,414			4,191,111			4,239,923
Taxes, other than income, fees and assessments		387,779			390,241			790,214			793,874

Total Expenses		9,919,758			10,526,845			19,810,163			20,682,482

Income from Operations before Income Taxes		323,400			316,587			1,079,599			1,135,732

Provision for income taxes		80,077			58,000			205,000			189,000

Net Income	$	243,323		$	258,587		$	874,599		$	946,732

Net income per common share (basic and diluted)	$	0.02		$	0.02		$	0.06		$	0.06

Weighted average number of fully paid common shares		15,075,399			15,113,923			15,078,200			15,116,858

Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising during period (net of tax)	$	15,730		$	(124,160	)		32,321		$	(104,930	)
Reclassification adjustment for gain included in net income		10,101			13,563			10,101			13,563

Other Comprehensive Income (Loss)		25,831			(110,597	)		42,422			(91,367	)

Comprehensive Income	$	269,154		$	147,990		$	917,021		$	855,365

See accompanying notes and Independent Accountants’ Report

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2011 (Unaudited)			2010 (Unaudited)

Cash flows from operating activities:
Net income	$	874,599		$	946,732
Adjustments to reconcile net income to net cash provided by operating activities:
Realized (gain) loss on investments		(12,186	)		16,342
Realized (gain) on debt retirement		(324	)		(4,536	)
Decrease (increase) in deferred tax asset		32,000			(4,000	)
Depreciation		150,814			141,833
Amortization of deferred acquisition costs, and intangibles		8,577			8,180
Accretion of bond discount		9,292			12,446
Change in assets and liabilities:
(Increase) decrease in accrued investment income		(11,391	)		13,599
Increase in premiums due and unpaid		(40,705	)		(32,811	)
Decrease in liability for future policy benefits		(111,629	)		(91,607	)
Increase in policy claims payable		57,799			148,345
Decrease in annuity deposits and deferred profits		(102,891	)		(74,219	)
Increase in premium deposit funds		410			271
Increase (decrease) in advanced and unallocated premium		(345,525	)		226,782
Increase in commissions payable		5,168			10,479
Other, decrease		(103,537	)		(86,069	)
Net Cash Provided By Operating Activities		410,471			1,231,767

Cash flows from investing activities:
Proceeds from maturity or redemption - Held to Maturity Investments		3,271,129			4,288,011
Proceeds from sale of equity securities		76,573			63,014
Proceeds from sale of furniture and equipment		-			(210	)
Purchase of furniture and equipment		(107,077	)		(142,236	)
Purchase of fixed maturity securities - Held to Maturity Investments		(4,222,136	)		(2,337,192	)
Purchase of equity securities		(130,664	)		-
Other investments – Line of credit payments received		-			23,212
Net Cash Provided By (Used In) Investing Activities		(1,112,175	)		1,894,599

Cash flows from financing activities:
Net change on supplementary contracts		8,783			(3,316	)
Purchase of treasury stock		(22,536	)		(64,894	)
Dividends to shareholders		-			(1,513,257	)
Bonds payable purchased		(32,083	)		(27,871	)
Exercised stock options		1,875			48,251
Net Cash Used In Financing Activities		(43,961	)		(1,561,087	)
Net Increase (Decrease) in Cash and Cash Equivalents		(745,665	)		1,565,279
Cash And Cash Equivalents, Beginning Of Period		8,632,371			8,090,103
Cash And Cash Equivalents, End Of Period	$	7,886,706		$	9,655,382

See accompanying notes and Independent Accountant’s Report

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) as of June 30, 2011 have been reviewed by independent certified public accountants. In the opinion of management, the aforementioned financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2011, and the results of operations and cash flows for the period ended June 30, 2011. All such adjustments are of a normal and recurring nature.

The statements have been prepared to conform to the requirements of Form 10-Q and do not necessarily include all disclosures required by generally accepted accounting principles (GAAP). The reader should refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, previously filed with the Commission, for financial statements for the year ended December 31, 2010, prepared in accordance with GAAP. Net income per share of common stock is based on the weighted average number of outstanding common shares.

2. Change in Accounting Estimate

The group dental claims loss ratio was 63.5% during the first six months of 2011 compared to 63.9% for the same period in 2010. The dental claims liability at December 31, 2010 was under estimated by approximately $54,000, which had the effect of increasing claims expense in 2011 in accordance with the ASC 250-10 requirements regarding accounting for a change in estimate. The under estimation of claims liability at December 31, 2010 resulted in a decrease in net income of approximately $44,700, net of tax, for the six months ended June 30, 2011. Due to the monthly fluctuation in claims incurred, this accrual is difficult to estimate.

3. Investments

The amortized cost and estimated market value of investments in fixed maturity securities are as follows:

Portfolio Designated “Held to Maturity” June 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
US Treasury securities and obligations of US government corporations and agencies	$	5,894,909	$	61,789	$	10,838	$	5,945,860
Canadian government		1,019,672		-		9,905		1,009,767
Corporate securities		2,750,307		142,668		54,529		2,838,446
Mortgage-backed securities GNMA and FNMA CMO		6,003,202		365,905		4,639		6,364,468

Totals	$	15,668,090	$	570,362	$	79,911	$	16,158,541

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The amortized cost and estimated fair value of investments in fixed maturity securities at June 30, 2011 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their life.

	Held to Maturity
	June 30, 2011
			Estimated
	Amortized Cost		Market Value
Due in one year or less	$	1,046,003	$	1,054,209
Due after one year through five years		3,229,741		3,323,608
Due after five years through ten years		3,385,547		3,419,880
Due after ten years		2,003,598		1,996,376
		9,664,889		9,794,073

Mortgage-backed securities		6,003,201		6,364,468

	$	15,668,090	$	16,158,541

Proceeds from sales and maturities of investments in fixed maturity securities and equity securities for the six month period ended June 30, 2011 and 2010 were $3,347,702 and $4,351,025 respectively. Gross gains were $40,170 and $14,717 and gross losses were $27,984 and $31,269 as of June 30, 2011 and 2010, respectively.

Investment in equity securities at June 30, 2011 represents common stock investments as follows:

	2011
	Cost		Market Value
Banks, trusts and insurance companies	$	30,370	$	6,200
Industrial and other		849,387		994,229

	$	879,757	$	1,000,429

Other long-term investments of $1,054,418 consist of a convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc. (“EBI”). The original loan, dated July 25, 2001, was $1,357,407 at 14% interest. Monthly principal payments were scheduled to begin on September 15, 2008 with a maturity date of August 15, 2015. On July 14, 2008, the Company and EBI amended the Debenture whereby the monthly principal payments will start on September 15, 2013 with the maturity date extended to August 15, 2020.

In accordance with applicable generally accepted accounting principles the Company analyzes discounted expected future cash flows and in prior years established an allowance for credit losses in the amount of $302,989 resulting in a net book value of $1,054,418. Interest on the debentures is and has been current.

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

The average book value on impaired investments during the period ended June 30, 2011 was $1,054,418. Interest income recognized in 2011 on the impaired investments was $87,210.

Activity in the allowance for credit losses is as follows:

	2011
Beginning Balance	$	302,989
Additions charged to operations		-
Direct write downs		-
Recoveries previously charged to operations		-

Ending Balance	$	302,989

In the first quarter of 2011 the Company recognized an other than temporary impairment on the 6,100 shares of common stock of Treaty Oak Bank and wrote the stock down to $0, for a realized loss of $3,050. The stock was purchased for $50,813 or $8.33 a share. The bank’s stock was written down to market value of $0.50 at September 30, 2010.

The Company’s conservative investment philosophies minimize market risk and risk of default by investing in high quality debt instruments with staggered maturity dates. The Company does not hedge investment risk through the use of derivative financial instruments. The market value of the Company’s investments in debt instruments varies with changes in interest rates. A significant increase in interest rates could cause decreases in the market values of investments and have a negative effect on comprehensive income and capital.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011.

	Less than 12 Months				12 Months or Greater				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Investment in fixed maturities, held to maturity
US Treasury securities and obligations of US government corporations and agencies	$	1,739,163	$	10,838	$	-	$	-	$	1,739,163	$	10,838
Canadian government		771,596		6,163		238,170		3,742		1,009,766		9,905
Corporate securities		99,246		4,352		349,823		50,177		449,069		54,529
Mortgage-backed securities GNMA and FNMA CMO		124,287		2,545		60,268		2,094		184,555		4,639
Totals	$	2,734,292	$	23,898	$	648,261	$	56,013	$	3,382,553	$	79,911

Other long-term investments	$	-	$	-	$	865,970	$	188,448	$	865,970	$	188,448
Totals	$	-	$	-	$	865,970	$	188,448	$	865,970	$	188,448

Equity Securities	$	-	$	-	$	119,574	$	113,605	$	119,574	$	113,605
Totals	$	-	$	-	$	119,574	$	113,605	$	119,574	$	113,605

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U.S. Treasury and U.S. Government Agency Obligations

The unrealized losses on the Company's investments in U.S. Treasury and U. S. Government Agency obligations are all less than 12 months old. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity or until they are called, the Company does not consider those investments to be other than temporarily impaired at June 30, 2011.

Federal Agency Mortgage-Backed Securities

The unrealized losses on the Company's investment in federal agency mortgage-backed securities are not material at June 30, 2011. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to factors other than credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2011.

Corporate Bonds

The following table discloses the unrealized losses on corporate bonds with significant unrealized losses.

Corporate Bonds June 30, 2011	S&P Rating	Amortized Book Value		Gross Unrealized Loss		Estimated Market Value
American General Finance	B	$	200,000	$	9,340	$	190,660
MBIA	B		200,000		40,837		159,163

Totals		$	400,000	$	50,177	$	349,823

The corporate bonds with unrealized losses in the table are insurance corporations that have had their fair value increase in 2010 and 2011. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the debentures would not be settled at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, it does not consider the investments to be other than temporarily impaired at June 30, 2011.

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Marketable Equity Securities

The table below discloses the unrealized losses on the Company’s marketable equity securities.

Equity Securities June 30, 2011	Cost		Gross Unrealized Losses			Estimated Market Value
Garmin LTD	$	175,527	$	(76,437	)	$	99,090
Regions Financial Corporation		30,370		(24,170	)		6,200
International Assets		27,282		(12,998	)		14,284

Totals	$	233,179	$	(113,605	)	$	119,574

The Company's marketable equity securities include a variety of industries. Garmin LTD has the largest unrealized loss of $76,437, which is approximately a 44% decrease in value. Garmin manufactures communication and navigational products, and they are the leader in personal navigational devices. Garmin continues to remain profitable in 2011. Regions Financial Corporation has suffered from the recession and the reduced demand for loans. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider those investments to be other than temporarily impaired at June 30, 2011.

4. Fair Value of Financial Instruments

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

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

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

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

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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of June 30, 2011.

Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Trading Securities
Equity Securities - Banks	$	6,200	$	-	$	-	$	6,200
Equity Securities - Industrial and Other		994,229		-		-		994,229
Total Trading Securities	$	1,000,429	$	-	$	-	$	1,000,429

Fixed Maturities, Held to Maturity
US Treasury Securities and Obligations of US Government Corporations and Agencies	$	5,945,860	$	-	$	-	$	5,945,860
Canadian Government		1,009,767		-		-		1,009,767
Corporate Securities		2,679,283		-		159,163		2,838,446
Mortgage-Backed Securities GNMA and FNMA CMO		6,364,468		-		-		6,364,468
Total Fixed Maturities, Held to Maturity	$	15,999,378	$	-	$	159,163	$	16,158,541

Other Long Term Investments	$	-	$	-	$	865,970	$	865,970
Cash		2,920,756		-		-		2,920,756
Cash Equivalents		4,965,949		-		-		4,965,949
Total Other Investments	$	7,886,705	$	-	$	865,970	$	8,752,675

Total Assets	$	24,886,512	$	-	$	1,025,133	$	25,911,645

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the period January 1, 2011 to June 30, 2011, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at June 30, 2011.

	Other Long-term Investments			Fixed Maturity		Total
Beginning balance	$	876,423		$	152,520	$	1,028,943
Transfers into Level 3		-			-		-
Transfers out of Level 3		-			-		-
Total gains or losses
Included in earnings (or changes in net assets)		-			-		-
Included in other comprehensive income		-			-		-
Purchases, Issuance, sales and settlements
Purchases		-			-		-
Issuances		-			-		-
Sales		-			-		-
Settlements		-			-		-
Temporary increase (decline) in fair value		(10,453	)		6,643		(3,810	)

Ending Balance	$	865,970		$	159,163	$	1,025,133

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The following table summarizes the fair value and carrying amount of all financial assets and liabilities as of June 30, 2011.

	2011
	Carrying		Fair
Assets	Amount		Value
Cash and cash equivalents	$	7,886,706	$	7,886,706	(a)
Investments-fixed maturity, held to maturity		15,668,090		16,158,541	(b)
Investments-equity securities		1,000,429		1,000,429	(b)
Other long term investments		1,054,418		865,970	(b)
Other financial instruments-Assets		312,336		312,336	(a)

Total financial instruments-Assets	$	25,921,979	$	26,223,982

Liabilities
Premium deposit funds	$	20,498	$	20,498	(a)
Bonds payable		1,299,088		1,299,088	(a)
Supplementary contracts without life contingencies		50,715		50,715	(a)
Annuity deposits		2,291,163		2,291,163	(a)

Total financial instruments-Liabilities	$	3,661,464	$	3,661,464

(a) The indicated assets and liabilities are carried at book value, which approximates fair value.

(b) Fair value of investments is based on methods prescribed in ASC 820 as described herein.

5. Dividends Paid.

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

6. Subsequent Events

Subsequent to June 30, 2011 certain government agency investments and U.S. Treasury Bonds held by the company were downgraded from AAA to AA+ by the rating agency Standards and Poor, which has caused increased volatility in financial markets. Management is evaluating these changes but does not believe they will have a material impact on the Company.

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BNL FINANCIAL CORPORATION AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this section, we review the consolidated results of operations for the six months ended June 30, 2011 and 2010 and significant changes in the consolidated financial condition of the Company. This discussion should be read in conjunction with the accompanying consolidated financial statements, notes and selected financial data.

Forward-Looking Statements

All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies; (ii) world conflict, including but not limited to the war in Afghanistan, which may affect consumers spending trends and priorities; (iii) customer response to new products and marketing initiatives: (iv) mortality, morbidity and other factors which may affect the profitability of our products; (v) changes in the federal income tax laws and regulations which may affect the relative income tax advantages of our products; (vi) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and (vii) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission (viii) The Affordable Health Care for America Act passed in 2010.

Liquidity and Capital Resources

At June 30, 2011, the Company had liquid assets of $7,886,707 in cash, money market savings accounts, money market funds, and treasury bills. All of the non-cash liquid assets can readily be converted to cash.

The major components of operating cash flows are premium income and investment income while policy benefits are the most significant cash outflow. During the first six months of 2011, BNLAC collected $19,226,021 of premiums and annuity deposits (gross before reinsurance) and had consolidated investment income of $412,478. Other sources of cash flow in the first six months of 2011 were override commissions of $1,231,104 on vision products. The Company paid $14,934,796 of policy benefits in the first six months of 2011.

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

Other long term investments of $1,054,418 consist of a convertible debenture (“debenture”) loan to EPSI Benefits, Inc. (“EBI”). On July 14, 2008, the Company and EBI, amended the Debenture whereby the monthly principal payments and the maturity date were extended five years. For various business reasons, management of both companies deemed the amendment as advantageous.

Because of the amendment to the debenture, the Company analyzed discounted expected future cash flows and estimated an adjustment in the book value of the Debenture of ($204,582), from $1,357,407 down to $1,152,825 in 2008. In the fourth quarter of 2010, one of the two original EBI shareholders agreed to sell her ownership in EBI to the other shareholder and pursue employment elsewhere. Due to this change in ownership, the Company increased its allowance for credit losses in the amount of $98,407 resulting in a net book value of $1,054,418.

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The note is one of several agreements entered into by the Company's subsidiary which expand the business relationship with EBI and its subsidiary, Employer Plan Services, Inc. (EPSI), which provides substantially all of the A&H claims processing and adjudication for the Company's insurance subsidiary, Brokers National Life Assurance Company ("BNLAC").

In prior years the Company became a third party indemnitor by entering into a series of bond indemnity and guarantee agreements totaling approximately $545,000 in conjunction with a marketing agreement with EPSI Benefits Inc. and Employer Plan Services Inc. (EPSI). The purpose of these agreements is to assist EPSI to become licensed in additional states. The Company received personal guarantees from the owners of EPSI to effectively limit potential liability under the guarantee agreement. With regard to the bond indemnities, the Company will be obligated only if EPSI, EPSI’S parent and its shareholder, who are the primary obligors, were all to become insolvent. Management considers the likelihood of the Company realizing a liability under these agreements to be remote.

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

Our insurance operations are conducted through BNLAC. At June 30, 2011, BNLAC had statutory capital and surplus of $17,122,686. BNLAC is required to maintain minimum levels of statutory capital and surplus, which differ from state to state, as a condition to conducting business in those states in which it is licensed. The State of Arkansas, which is the legal domicile of BNLAC, requires a minimum of $2,300,000 in capital and surplus. The highest requirement in any state in which BNLAC is licensed is $5,000,000. Management monitors the minimum capital and surplus requirements to maintain compliance in each state in which it is licensed.

Consolidated Results of Operations

Premium income for the second quarter of 2011 was $9,426,646 compared to $10,012,029 for the same period in 2010. Premium income for the first half of 2011 was $19,233,670 compared to $20,145,999 for the same period in 2010. The decrease for the quarter (5.8%) and first half of the year (4.3%) was primarily due to a decrease in premium income as a result of the impact of the recession on voluntary employee benefits.

BNLAC markets group vision insurance products that are underwritten by other insurance companies (BNLAC does not have any exposure to underwriting (claims) losses on these products). Vision insurance income for the second quarter of 2011 was $593,928 compared to $598,126 in the second quarter of 2010. In the first half of 2011 vision income was $1,231,104 compared to $1,181,009 for the same period in 2010. Vision insurance premium in force reflected a small increase this year compared to the first half of 2010, resulting in a $50,095 (4.2%) increase in earned vision income this year.

Net investment income was $206,782 for the second quarter of 2011 compared to $244,969 for the second quarter of 2010. Net investment income for the first half of 2011 was $412,478 compared to $503,222 for the same period in 2010. The decrease in the first half and second quarter was due to the decrease in interest rates on short term investments and longer term fixed income securities.

Realized gains on debt retirement were $324 for the second quarter of 2011 compared to a $4,860 gain for the same period in 2010. For the first half of 2011 realized gains were $324 compared to $4,536 for the same period in 2010. The realized gains are due to the purchase of a portion of the Company’s outstanding debentures at less than face value. Realized gains on debt retirement are directly proportional to the number of bonds purchased.

Realized gains on the sale of investments were $15,477 for the second quarter and $12,186 for the first half of 2011 compared to a loss of ($16,552) for the second quarter and first half of 2010. The gains in 2011 were primarily due to the sale of equity securities and the realized loss in 2010 was primarily due to the sale of BP Corporation stock owned by the Company.

For the second quarter of 2011, liability for future policy benefits expense was ($61,815) compared to ($33,311) for the same period in 2010. For the six-month period ended June 30, 2011, liability for future policy benefits expense was ($111,628) compared to ($91,607) for the same period in 2010. The decrease in future policy benefits expense in 2011 was primarily due an increase in surrendered policies in 2011 compared to 2010.

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Policy benefits and other insurance costs were $7,441,744 in the second quarter of 2011 compared to $7,974,422 for the same period in 2010. In the first six months of 2011 policy benefits and other insurance costs were $14,934,796 compared to $15,735,019 for the same period in 2010. The decrease for the quarter and first half of 2011 was primarily due to a decrease in group and individual dental premium income. Group dental claims were $563,000 less for the first half of 2011 compared to the same period last year. The claims ratio on group dental insurance, which represents the ratio of claims expensed to premium earned, was 63.5% for the first half of 2011 compared to 63.9% for the first half of 2010. The liability for unpaid claims is difficult to calculate and group dental claims at December, 2010, were $54,000 more than estimated and they were $34,000 less than estimated at December 31, 2009.

Amortization of deferred policy acquisition costs was $5,730 and $5,079 for the second quarter and $5,670 and $5,273 for the first half of 2011 and 2010, respectively. Amortization of deferred policy acquisition costs vary in relation to lapses or surrenders of existing policies.

For the second quarter of 2011 operating expenses were $2,146,320 compared to $2,190,414 for the same period in 2010. Operating expenses were $4,191,111 in the first six months of 2011 compared to $4,239,923 for the same period in 2010. The decrease for 2011 is primarily due to expenses directly related to the lower amount of business in force.

Taxes, other than on income, fees and assessments, were $387,779 for the second quarter of 2011 compared to $390,241 for the second quarter of 2010. Taxes, other than on income, fees and assessments, were $790,214 for the first half of 2011 compared to $793,874 for the same period in 2010. The decrease for the second quarter is primarily due to the decrease in premium taxes which are based on premium collected. The decrease in year to date premium taxes was primarily due to the decrease in premiums collected which was partially off set by an under accrual of premium taxes in 2010.

The provision for income taxes in the second quarter of 2011 includes $39,077 current tax expense and $41,000 deferred tax expense compared to $45,000 current tax expense and $13,000 deferred tax expense in the second quarter of 2010. The provision for income taxes in the first half of 2011 was $173,000 current tax expense and $32,000 deferred tax expense compared to $193,000 current expense and $4,000 deferred tax credit for the same period in 2010. The decrease in current tax expense in 2011 is primarily due to the decrease in net income. Deferred tax expense is based on the estimated change in book versus tax assets and liabilities.

Income from operations before income taxes for the second quarter of 2011 was $323,400 compared to $316,587 for the same period in 2010. The increase in the second quarter of 2011 was primarily due to a decrease in operating expenses. For the first half of 2011 income from operations before income taxes was $1,079,599 compared to $1,135,732 for the same period in 2010. The decrease for the first half of 2011 was primarily due to the decrease in premium income and investment income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. We handle market risks in accordance with our established policies. We did not have financial instruments to manage and reduce the impact of changes in interest rates at June 30, 2011 and December 31, 2010, however we held various financial instruments at June 30, 2011 and 2010, consisting of financial assets reported in our Consolidated Balance Sheets.

Interest Rate Risk - We are subject to interest rate risk through the investment in fixed maturity securities, such as U.S. Government and Government Agency securities and other investment grade bonds. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. The estimated fair value of our fixed maturity securities at June 30, 2011 and December 31, 2010 was $16,158,541 and $15,057,111, respectively.

Based on testing at December 31, 2010, a one-percentage point increase in interest rates would result in a decrease in the estimated fair value of fixed maturity securities of $422,000. Initial fair values were determined using the current rates at which we could enter into comparable financial instruments with similar remaining maturities. The estimated earnings and cash flows impact for the first six months of 2011 resulting from a one percentage point increase in interest rates would be immaterial, holding other variables constant.

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Foreign-Exchange Rate Risk - We currently have no exposure to foreign exchange rate risk because all of our financial instruments are denominated in U.S. dollars.

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

Equity Security Price Risk - Equity securities at June 30, 2011 totaled $1,000,429, or 3.9% of total investments and cash on a consolidated basis.

The preceding discussion of estimated fair value of our financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as that term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective in timely alerting the Company's Chief Executive Officer and Chief Financial Officer to material information required to be disclosed in the periodic reports filed with the SEC.

In addition, the Company's Chief Executive Officer and Chief Financial Officer have reviewed the Company's internal controls, and there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of the last evaluation.

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PART II -- OTHER INFORMATION

Item 1. Legal Proceedings.

The Company was not a part of any new legal proceedings during the first half of 2011.

Item 1A. Risk Factors.

Not required for smaller reporting companies.

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

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

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total number of shares purchased as part of publicly announced plans or programs	(d) Maximum number of shares that may yet be purchased under the plans or programs
Month #1, Jan 1 thru Jan 31, 2011		-	$	-	None	None
Month #2, Feb 1 thru Feb 28, 2011		3,000	$	1.12	None	None
Month #3, Mar 1 thru Mar 31, 2011		-	$	-	None	None
Month #3, April 1 thru April 301, 2011		-	$	-	None	None
Month #3, May 1 thru May 31, 2011		15,641	$	1.17	None	None
Month #3, June 1 thru June 30, 2011		-	$	-	None	None
Totals		18,641

Item 3. Defaults Upon Senior Securities.

During the period covered by this report there was no material default in the payment of any principal, interest, sinking or purchase fund installment, or any other material default not cured within 30 days with respect to any indebtedness of the Company.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None

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Item 6. Exhibits and Reports on Form 10-Q.

(a) Exhibits Index

No.	Description	Page or Method of Filing
3.1	Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation of BNL Financial Corporation, dated November 13, 1987.	Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the period ending December 31, 1993.
3.2	By-laws of BNL Financial Corporation.	Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement No. 33-70318
4.1	Instruments defining the rights of security holders, including indentures.	Incorporated by reference to Exhibit 4 of the Company's Registration Statement No. 2-94538 and Exhibits 3.5 and 4 of Post-Effective Amendment No. 3 thereto.
4.2	Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation on BNL Financial Corporation, dated November 13, 1987.	Incorporated by reference to Exhibits 4.2 of the Company's Annual Report on Form 10-KSB for the period ending December 31, 1998.
10.1	Form of Agreement between Commonwealth Industries Corporation, American Investors Corporation and Wayne E. Ahart regarding rights to purchase shares of the Company.	Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended September 30, 1994.
10.2	Agreement dated December 21, 1990 between Registrant and C. Donald Byrd granting Registrant right of first refusal as to future transfers of Mr. Byrd's shares of the Company's common stock.	Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended March 31, 1996.
10.3	Convertible Debenture Agreement dated July 25, 2001 between BNL Equity Corporation and EPSI Benefits Inc.	Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.4	Claims Service Agreement dated June 1, 1999 between Brokers National Life Assurance Company and Employer Plan Services Inc.	Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.5	Office lease agreement dated January 21, 2005, between Brokers National Life Assurance Company and KIMCO for premises in Austin.	Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.6	Line of Credit Agreement dated October 15, 2004 between Brokers National Life Assurance Company and Employer Plan Services Inc.	Incorporated by reference to Exhibit 10.7 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.7	Marketing Agreement dated July 25, 2001 between BNL Equity Corporation and Employer Plan Services Inc. and EPSI Benefits Inc.	Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.8	Outsourcing Agreement dated May 1, 2007 between Brokers National Life Assurance Company and Virtual Item Processing Systems, Inc.	Incorporated by reference as filed with the Company’s Annual Report on 10-K for the period ended December 31, 2007
10.9	Amended Convertible Debenture Date July 14, 2008 between BNL Financial Corporation and EPSI Benefits Inc.	Incorporated by reference to Exhibit 1 of the Company’s periodic Report on Form 8-K dated July 14, 2008.
11	Statement Re computation of per share earnings.	Reference is made to the computation of per share earnings as shown page 5 herein and the explanation in Note 1 to the Notes to Consolidated Financial Statements (unaudited), page 5 herein.
18	Letter Re Change in accounting principles	None. Not applicable.
22	Published report regarding matters submitted to vote of security holders	The Company’s definitive proxy statement dated May 27, 2011, as filed with the SEC on Schedule 14A on April 20, 2011, is incorporated by reference herein.
23	Consents of experts and counsel incorporated by reference into a previously filed Securities Act registration statement	Not applicable.
31.1	Certification of Chief Executive Officer Section 302	Filed herewith - E1
31.2	Certification of Chief Financial Officer Section 302	Filed herewith - E3
32	Certification of Chief Executive Officer and Chief Financial Officer Section 906	Filed herewith - E5
101.INS	XBRL Instance Document.(1)
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

(1)

Includes the following materials contained in this Quarterly Report on Form 10-Q for the period ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balan ce Sheets, (ii) Consolidated Statemets of Income and Comprehensive Income , (iii) Consolidated Statements of Cash Flows

(b) Material Contracts - Reports on Form 8-K.

No items were reported on Form 8-K during the period covered by this report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		BNL FINANCIAL CORPORATION
		(Registrant)

		/s/ Wayne E. Ahart
Date: August 15, 2011		By: Wayne E. Ahart, Chairman of the Board
		(Chief Executive Officer)

		/s/ Barry N. Shamas
Date: August 15, 2011		By: Barry N. Shamas, Executive V.P.
		(Chief Financial Officer)

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BNL FINANCIAL CORP - FORM 10-Q - August 15, 2011

Attached files

BNL FINANCIAL CORP Reports