-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjVzC3PeQrhcmlkEHgv15DPS196Cvs5aSsvnRB1zv94a7wfryTWNA/p2kq3JqI3U zrIlXdeGF7bRmT0UkpYJwQ== 0000832818-03-000008.txt : 20030410 0000832818-03-000008.hdr.sgml : 20030410 20030410161709 ACCESSION NUMBER: 0000832818-03-000008 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOL BANCSHARES INC CENTRAL INDEX KEY: 0000832818 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 721121561 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-16934 FILM NUMBER: 03645768 BUSINESS ADDRESS: STREET 1: 300 ST CHARLES AVE CITY: NEW ORLEANS STATE: LA ZIP: 70130 BUSINESS PHONE: 5048899400 MAIL ADDRESS: STREET 1: 300 ST CHARLES AVENUE CITY: NEW ORLEANS STATE: LA ZIP: 70130 10KSB 1 r1202.txt 10KSB 12-2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 __________________________ FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-16934 BOL BANCSHARES, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) LOUISIANA 72-1121561 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) 300 ST. CHARLES AVENUE, NEW ORLEANS, LA 70130 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (504) 889-9400 (ISSUER'S TELEPHONE NUMBER) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE Common Stock, par value $1.00 per share _____________________________ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ______ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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- KSB or any amendment to this Form 10-KSB. [X] Total Revenue for fiscal year ended December 31, 2002: $10,218,161 The aggregate market value of the voting common equity stock held by non-affiliates of the registrant was approximately $366,820 as of the close of business on February 28, 2003. For this purpose, certain executive officers and directors are considered affiliates. The number of shares of Common Stock, $1.00 par value, outstanding as of February 28, 2003 was approximately 179,145. Transitional Small Business Disclosure Format: Yes____ No X 1 Cross Reference Index Page Part I Item 1: Business 3 Item 2: Properties 5 Item 3: Legal Proceedings 6 Item 4: Submission of Matters to a Vote of Security Holders 6 Part II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6: Management's Discussion and Analysis 7 Item 7: Financial Statements and Supplementary Data 27 Item 8: Changes in and Disagreements with Accountants and Financial Disclosure 63 Part III Item 9: Directors and Executive Officers of the Registrant 63 Item 10: Executive Compensation 64 Item 11: Security Ownership of Certain Beneficial Owners and Management 66 Item 12: Certain Relationships and Related Transactions 66 Part IV Item 13: Exhibits and Reports on Form 8-K (a) Exhibits NONE (b) Reports on Form 8-K NONE Item 14: Controls and Procedures 67 Signatures 68 2 Item 1 Description of Business Here and after BOL Bancshares, Inc. shall be referred to as the Company and subsidiary Bank of Louisiana shall be referred to as the Bank. History and General Business The Company was organized as a Louisiana corporation on May 7, 1981, for the purpose of becoming a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company remained inactive until April 29, 1988, when it acquired the Bank in a three- bank merger of the Bank of Louisiana in New Orleans (the "Old Bank"), Bank of the South ("South Bank"), and Fidelity Bank & Trust Company, all Louisiana state-chartered banks. The Old Bank was the surviving bank in the merger and subsequently changed its name to the Bank's current name. The merger was originally accounted for as a "purchase", but after discussions with the Securities and Exchange Commission, the accounting treatment of the merger was changed to a manner similar to a "pooling of interests". [Since the change in accounting treatment, the Company has recast its financial statements, to reflect "pooling" accounting.] In addition, at the time of the bank's merger, the Company merged with BOS Bancshares, Inc., a Louisiana corporation, and the registered bank holding company for South Bank. The Company was the surviving entity in that merger. The Company is the sole shareholder and registered bank holding company of the Bank. Other than owning and operating the Bank, the Company may also engage, directly or through subsidiary corporations, in those activities closely related to banking that are specifically permitted under the BHC Act. See "Supervision and Regulation". The Company, after acquiring the requisite approval of the Board of Governors of the Federal Reserve System (the "FRB") and any other appropriate regulatory agency, may seek to engage de novo in such activities or to acquire companies already engaged in such activities. The Company has formed BOL Assets, LLC to engage in the permissible activity of holding real estate from loans which were in default and held past the FDIC's time limits. There can be no assurance, however, that the Company will not form or acquire any other entity in the future. If the Company attempts to form or acquire other entities and engage in activities closely related to banking, the Company will be competing with other bank holding companies and companies currently engaged in the line of business or permissible activity in which the Company might engage, many of which have far greater assets and financial resources than the Company and a greater capacity to raise additional debt and equity capital. See "Business of the Company and the Bank--Territory Served and Competition". Banking Industry The Company derives its revenues largely from dividends from the Bank when the Bank is permitted to pay dividends. As is the case with any financial institution, the profitability of the Bank is subject, among other things, to fluctuating availability of money, loan demand, changes in interest rates, actions of fiscal and monetary authorities, and economic conditions in general. See "Business of the Company and the Bank", "Supervision and Regulation", and "Management's Discussion and Analysis of the Financial Condition and Results of Operations of the Company and the Bank". Banking Products and Services The Bank is a full service commercial bank that provides a wide range of banking services for its customers. Some of the major services that it offers include checking accounts, negotiable order of withdrawal ("NOW") accounts, individual retirement accounts ("IRAs"), savings and other time deposits of various types, and business, real-estate, personal use, home improvement, automobile, and a variety of other loans, as discussed more fully below. Other services include letters of credit, safe deposit boxes, money orders, traveler's checks, credit cards, wire transfer, electronic banking, night deposit, and drive-in facilities. Prices and rates charged for services offered are competitive with the area's existing financial institutions in the Bank's primary market area. 3 The Bank offers a wide variety of fixed and variable rate loans to qualified borrowers. With regard to interest rates, the Bank continues to meet legal standards while remaining competitive with the existing financial institutions in its market area. The specific types of loans that the Bank offers include the following: Consumer Loans. The Bank's consumer loans consist of automobile, mobile home, recreational vehicle, and boat loans; home improvement and second-mortgage loans; secured and unsecured personal expense loans; and educational loans. Real Estate Loans. The Bank's real estate loans consist of residential first and second mortgage loans on one-to-four family homes; construction and development loans; multiple dwelling unit loans; housing rehabilitation loans; loans to purchase developed real property; and commercial real estate loans. Commercial Loans (Secured and Unsecured). The Bank's commercial loans consist of working capital loans, secured and unsecured lines of credit, and small equipment loans. Credit Cards. The Bank offers a variety of nationally recognized credit cards, in addition to its own Mr. Bol credit card, and private label credit cards for use at retail establishments nationwide. As of December 31, 2002, the Bank held $15,566,000 in credit card debt. Proprietary Accounts. The Bank has a number of proprietary accounts it services. The Bank's proprietary accounts consist largely of small to medium sized merchants who have issued their own private-label credit cards. The Bank acquires these credit card accounts at a discount, typically with reserves posted, and requires the merchant to repurchase accounts 180 days or more past due. As of December 31, 2002, the Bank held $1,789,000 in proprietary accounts. Mortgage Lending. The Bank offers 15- and 30-year fixed and adjustable rate conventional and jumbo home mortgages. The Bank sells all mortgage loans in the secondary market and does not retain the servicing rights thereon. Territory Served and Competition Market Area. The market area for the Bank is defined in the Bank's Community Reinvestment Act Statement as the greater New Orleans metropolitan area. This area includes all of the City of New Orleans and surrounding Parishes. The Bank has branch offices in Orleans, Jefferson, and St. Tammany Parishes. Population. The population of New Orleans remains constant with approximately 500,000 persons. The population of Jefferson and St. Tammany Parishes were approximately 650,000 as of December 31, 2002. Competition. The Bank competes with other commercial banks in New Orleans and with savings and loan associations, credit unions, and other types of financial services providers. The Bank is one of the smallest commercial banks in New Orleans in terms of assets and deposits. Economy. The economy of New Orleans is supported by the tourism, shipping, and energy industries. The Bank has no material concentration of deposits from any single customer or group of customers, nor is a significant portion of its loans concentrated in a single industry or group of related industries. There are no material seasonal factors that have any adverse effect on the Bank. The Bank does not rely on foreign sources of funds or income, and the Bank does not expend any material percentage of its income in complying with applicable environmental laws. Employees As of December 31, 2002, the Bank had approximately 158 full-time and approximately 13 part-time employees. The Bank considers its relationship with its employees to be very good. The employee benefit programs provided by the Bank include group life and health insurance, paid vacations, sick leave, and a Section 401(k) savings plan. The Company has no employees who are not employees of the Bank. See "Item 10, Executive Compensation". 4 Item 2 Description of Property In addition to its main office, the Bank has six branch locations and an operations center. Set forth below is a description of the offices of the Bank. Main Office. The main office of the Company is located at 300 St. Charles Avenue in the central business district of New Orleans, Louisiana. On September 30, 1991, the Company purchased a four-story building located at 300 St. Charles Avenue from the Resolution Trust Corporation (the "RTC") for the price of $402,500. Subsequently, on December 6, 1991, the Bank purchased the building from the Company. The original purchase was financed by a loan from former director Edward J. Soniat to the Company. As of December 31, 2002, there is a balance of $45,648 in principal and accrued but unpaid interest outstanding on the loan from Mr. Soniat to the Company. The building consists of approximately 13,100 square feet of office space, and parking is provided on the streets and commercial lots nearby. The Bank occupies the ground floor and the fourth floor. The second and third floors are leased to the LeMoyne Bienville Club. Rental income received from the club is $2,165 per month. The initial term of the club's lease is for 25 years, expiring on December 15, 2003. Carrollton Branch. The Carrollton Branch of the Bank is located in the Carrollton Shopping Center at 3846 Dublin Street, New Orleans, Louisiana. The premises consist of approximately 4,700 total square feet of office space, and parking is provided by the shopping center. The Bank leases the office space on a month-to-month basis from Carrollton Central Plaza. Monthly lease payments are $3,096 per month. Severn Branch. The Severn Branch of the Bank is located in the central business district of Metairie at 3340 Severn Avenue, Metairie, Louisiana. The premises consist of approximately 4,600 total square feet of office space on the first floor of a four-story office building, and parking is provided for approximately 100 cars. The Bank leases the office space from Severn South Partnership, an affiliate of the Bank. See "Certain Relationships and Related Transactions." Pursuant to an Amendment to Lease dated May 1, 1999, the lease commenced on June 1, 1999, and terminates on May 31, 2003. The lease payments are $12,456, plus a percentage of operating costs, per month. Oakwood Branch. The Oakwood Branch of the Bank is located in the Oakwood Shopping Center at 197 Westbank Expressway, Gretna, Louisiana. The premises consist of approximately 4,160 total square feet of office space, which includes 1,560 square feet designated for its drive-in facility. Parking is provided by the shopping center. The Bank leases the building from Oakwood Shopping Center, Ltd. The lease commenced on June 1, 2001, and terminates on May 31, 2006. The lease payments are $13,200 per month. Lapalco Branch. The Lapalco Branch of the Bank is located in the Belle Meade Plaza Shopping Center at 605 Lapalco Boulevard, Gretna, Louisiana. The premises consist of approximately 2,500 square feet of office space in a one- story building, and parking is provided by the shopping center. The Bank leases the building from Belle Meade Developers. The lease commenced on January 1, 2001, and terminates on December 31, 2005. The lease payments are $6,385 per month. Gause Branch. The Gause Branch of the Bank is located in the central business district of Slidell at 636 Gause Boulevard, Slidell, Louisiana. The building consists of approximately 13,800 total square feet of office space in a three-story office building, and parking is provided for approximately 50 cars. The Bank owns the building and underlying land upon which it is situated. The Bank occupies approximately 3,300 square feet in this building and leases the remaining space to various tenants for varying rental rates and terms. Rental income received during 2002 totaled $115,383. Tammany Mall Branch. The Tammany Mall Branch of the Bank is located at 3180 Pontchartrain, Slidell, Louisiana. The premises consist of approximately 4,000 total square feet of office space, and parking is provided for approximately 40 cars. The Bank leases the building on a month- to-month basis from Tammany Mall Partnership, an affiliate of the Bank. See Item 12, "Certain Relationships and Related Transactions". The lease payments are $6,200 per month. Operations Center. The Bank's operations center, which houses its data processing, credit card, bookkeeping, and marketing departments, is located 5 at 3340 Severn Avenue, Metairie, Louisiana. The building consists of approximately 44,500 total square feet of space in a four-story office building, and parking is provided for approximately 200 cars. The Bank leases 19,608 square feet from Severn South Partnership, an affiliate of the Bank, under two separate leases. See "Certain Relationships and Related Transactions." Pursuant to that certain Amendment to Lease dated May 1, 1999, amending both leases the current lease terms for both leases commenced on June 1, 1999, and terminate on May 31, 2003. The lease payments total $26,222, plus a percentage of operating costs, per month. Item 3 Legal Proceedings Because of the nature of the banking industry in general, the Company and the Bank are each parties from time to time to litigation and other proceedings in the ordinary course of business, none of which (other than those described below), either individually or in the aggregate, have a material effect on the Company's and/or the Bank's financial condition. Reserves for such litigation, if the Company deems such litigation to have sufficient merit or which may subject the Company to significant exposure, have been posted and are reflected in the Company's consolidated financial statements. The following actions, however, have been brought against the Bank and, if the claimants were wholly successful on the merits, could result in significant exposure to the Bank: 1. The Company and the Bank are defendants in a lawsuit filed in 1991 in Civil District Court for the Parish of Orleans by another bank alleging that the Bank was responsible and played an active part in a check-kiting scheme involving a customer of both the Bank and the plaintiff. The plaintiff is currently seeking to recover in excess of $979,000, plus judicial interest from approximately August 7, 1991. The Bank has brought a counterclaim for approximately $152,000 with respect to losses it incurred as a result of the plaintiff's role in such check-kiting scheme. The former president of the plaintiff and two former employees of the Bank were convicted of crimes arising out of such check-kiting scheme. The president has finished serving a prison sentence for such crime, while the two former employees of the Bank were placed on probation. Plaintiff has already recovered all but $120,000 on its claim from the liquidating of the customer's assets. The Bank has also brought counterclaims against the plaintiff for its interference and involvement in luring the Bank's former employees into the check-kiting scheme made the basis of this litigation. Counsel for the Bank believes that it is unlikely that the plaintiff will receive anything from its claims, and that it is reasonable likely that the Bank will realize a recovery against the plaintiff on its counterclaims. The trial is set in May 2003. 2. A case is pending in the United States District Court which began in 2001 in connection with a Deferred Compensation Agreement at Bank of the South which it terminated prior to the merger with the Bank. A former officer is claiming entitlement to $20,000 per year for ten years based on the Agreement, as opposed to the Bank's position that he is entitled to only 25% of the $20,000 yearly benefit. The total exposure would be $200,000. This case is set for trial in April 2003. 3. The Bank has a suit in the United States District Court which began in 2002 against an insurance company arising from the insurance company drafting the Bank for $273,000 in payments under a previously-existing employee's health plan. The Bank has amended its complaint to seek penalties and damages in excess of the $273,000. Should the Bank be unsuccessful, it will suffer a loss of $273,000. Item 4 Submission of Matters to a Vote of Security Holders There were no matters submitted, during the fourth quarter of fiscal year 2002 to a vote of security holders, through the solicitation of proxies. 6 Item 5 Market for Registrant's Common Equity and Related Stockholder Matters There is no established trading market in the shares of Bank Stock, as the Company owns 100% of the issued and outstanding shares of Bank Stock. There is no established trading market in the shares of Company Common Stock. The Company Common Stock is not listed or quoted on any stock exchange or automated quotation system. Management is aware, however, that Dorsey & Company, New Orleans, Louisiana does make a market in the Company Common Stock. The following table sets forth the range of high and low sales prices of Company Common Stock since 2001, as determined by the Company based on trading records of Dorsey & Company. The following table does not purport to be a listing of all trades in Company Common Stock during the time periods indicated, but only those trades of which Dorsey and Company has informed the Company. The prices indicated below do not reflect mark-ups, mark-downs, or commissions, but do represent actual transactions. Finally, the prices listed below are not necessarily indicative of the prices at which shares of Company Stock would trade. As of December 31, 2002, the Company had approximately 633 shareholders of record. There were no dividends declared on common stock for the years ended 2002 or 2001. 2002 High Low First Quarter $5.00 $5.00 Second Quarter 5.00 5.00 Third Quarter 5.00 5.00 Fourth Quarter 5.00 5.00 2001 First Quarter $5.00 $5.00 Second Quarter 5.00 5.00 Third Quarter 5.00 5.00 Fourth Quarter 5.00 5.00 No dividends were paid on shares of Company Common stock in 2002 or 2001. Annual Shareholders Meeting The Annual Meeting of the shareholders of Registrant will be held at 300 St. Charles Avenue, 4th Floor, New Orleans, Louisiana, on Tuesday April 8, 2003 at 3:30 p.m. Independent Auditors Laporte, Sehrt, Romig & Hand, 110 Veterans Memorial Blvd., Suite 200, Metairie, LA 70005-4958 Item 6 MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of BOL Bancshares, Inc. (the "Company") and its bank subsidiary, (the "Bank") for the years ending December 31, 2002, and 2001. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes, and selected financial data appearing elsewhere in this report. This discussion may contain certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities 7 Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated. Readers are cautioned not to place undue reliance on these forward-looking statements. Overview Since its inception, the Company has pursued a strategy of maintaining its present size by providing a full range of quality financial services in selected market areas. As of December 31, 2002, the Company's total assets were $100,728,000 as opposed to $100,891,000 at December 31, 2001. The Company currently operates through seven locations, five in the metropolitan New Orleans area and two in St. Tammany Parish. Loans comprise the largest single component of the Bank's interest- earning assets and provide a far more favorable return than other categories of earnings assets. The Bank's loans totaled $57,083,000 and $57,397,000 net of unearned discount and Allowance for Loan Losses at December 31, 2002 and 2001, respectively. The Bank's net interest margin was 7.91% for the year ended December 31, 2002. Historically, credit card loans have been an important part of the Bank's total loan portfolio. At December 31, 2002, credit card loans were $15,566,000 and represented 26.44% of the Bank's loan portfolio of $58,883,000. At December 31, 2001, credit card loans were $16,871,000 and represented 28.50% of the Bank's loan portfolio of $59,197,000. The decrease in the Bank's credit card loans during 2002 was largely attributable to (i) competition from other banks and non-traditional credit card issuers; (ii) the Bank's loss of proprietary business; (iii) tightening of the Bank's underwriting standards; and (iv) normal attrition. The Bank's current strategy is to continue to grow its traditional banking operations primarily in the metropolitan New Orleans area and to expand its credit card lending and proprietary accounts, so long as it can maintain the minimum required Tier 1 leverage ratio required by the FDIC. The Company has initiated an aggressive marketing campaign to acquire several Visa and MasterCard portfolios. During 2002, the Company purchased credit card portfolios totaling $472,000. The Company focuses on providing its customers with the financial sophistication and breadth of products of a regional bank while successfully retaining the local appeal and level of service of a community bank. Results of Operations Net Income The Company's net loss for 2002 was $36,000 or ($.20) per share, a decrease of $372,000 from the Company's total net income of $336,000 in 2001. This was caused by a reduction in interest rates of federal funds, a reduction in interest rate spreads and a reduction in the credit card outstanding. In addition, during the year 2001, the Bank had non-recurring net income generated from the sale of ORE in the amount of $661,000. As of December 31, 2002 non-accrual loans were $2,138,000. Net Interest Income/Margin Taxable-equivalent income on loans decreased $306,000 or 4.02%, from $7,605,000 in 2001 to $7,299,000 in 2002. This decrease primarily resulted from the Federal Reserve Bank's reduction in interest rates which lowered the rates earned on loans from 13.08% in 2001 as compared to 12.38% in 2002. The interest income on federal funds sold also decreased $695,000 due to the Federal Reserve Bank's rate reductions from $986,000 earning 3.99% in 2001 to $291,000 earning 1.61% in 2002. In addition, the federal funds average balance decreased from $24,698,000 in 2001 to $18,090,000 in 2002. The 3.08% decline in the yields on loans and federal funds sold was partially offset by lower rates paid on interest-bearing liabilities, which declined 1.42% from an average of 2.84% in 2001 to 1.42% in 2002. The average balance of noninterest demand deposits increased 6.15% or $2,073,000 from $33,719,000 in 2001 to $35,792,000 in 2002. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table: 8 TABLE 1 Average Balances, Interests and Yields 2002 2001 Average Average (Dollars in Thousands) Balance Interest Rate Balance Interest Rate ASSETS INTEREST-EARNING ASSETS: Loans, net of unearned income (1)(2) Taxable 58,974 7,299 12.38% 58,156 7,605 13.08% Tax-exempt 0 0 Investment securities Taxable 16,004 584 3.65% 6,935 327 4.72% Tax-exempt 0 0 Interest-bearing deposits 0 0 0 0 Federal funds sold 18,090 291 1.61% 24,698 986 3.99% Total Interest-Earning Assets 93,068 8,174 8.78% 89,789 8,918 9.93% Cash and due from banks 5,315 5,354 Allowance for loan Losses (1,802) (1,799) Premises and equipment 1,718 1,983 Other Real Estate 81 478 Other assets 1,972 1,630 TOTAL ASSETS 100,352 97,435 LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING LIABILITIES: Deposits: Demand Deposits 17,380 53 0.30% 17,676 244 1.38% Savings deposits 28,702 295 1.03% 26,661 721 2.70% Time deposits 8,958 257 2.87% 9,888 433 4.37% Total Interest-Bearing Deposits 55,040 605 1.10% 54,225 1,398 2.58% Federal Funds Purchased Securities sold under agreements to repurchase Other Short-term borrowings 0 0 Long-Term debt 2,214 206 9.29% 2,222 207 9.33% Total Int-Bearing Liabilities 57,254 811 1.42% 56,447 1,605 2.84% Noninterest-bearing deposits 35,792 33,719 Other liabilities 1,007 1,051 Shareholders' equity 6,299 6,218 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 100,352 97,435 Net Interest Income 7,363 7,313 Net Interest Spread 7.37% 7.09% Net Interest Margin 7.91% 8.14% (1) Fee income relating to loans of $553,000 in 2002 and $615,000 in 2001 is included in interest income. (2) Nonaccrual loans are included in average balances and income on such loans, if recognized, is recognized on the cash basis. (3) Interest income does not include the effects of taxable-equivalent adjustments for the two years ended December 31, 2002, and 2001 using a federal tax rate of 34%. 9 TABLE 2 Rate/Volume Analyses (1) 2002 Compared to 2001 Change in Interest Due to Total (Dollars in Thousands) Volume Rate Change Net Loans: Taxable (413) 107 (306) Tax-Exempt (2) - - - Investment Securities Taxable (171) 428 257 Tax-Exempt (2) - - - Interest-Bearing Deposits - - - Federal Funds Sold (431) (264) (695) Total Interest Income (1,015) 271 (744) Deposits: Demand Deposits (187) (4) (191) Savings Deposits (481) 55 (426) Time Deposits (134) (41) (176) Total Interest-Bearing Deposits (802) 10 (793) Federal Funds Purchased - - - Securities Sold under Agreements to Repurchase - - - Other Short-Term Borrowings - - - Long-Term Debt (1) (1) (1) Total Interest Expense (803) 9 (794) (1) The change in interest due to both rate and volume has been allocated to the components in proportion to the relationship of the dollar amounts of the change in each. (2) Reflects fully taxable equivalent adjustments using a federal tax rate of 34%. Provision for Loan Losses Management's policy is to maintain the allowance for possible loan losses at a level sufficient to absorb estimated losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. Management's evaluation process to determine potential losses includes consideration of the industry, specific conditions of individual borrowers, historical loan loss experience, and the general economic environment. As these factors change, the level of loan loss provision changes. At December 31, 2002, the allowance for possible loan losses was $1,800,000 and was virtually that same amount at December 31, 2001. In 2002, the provision for loan losses was $400,000 compared to $556,000 in 2001. Net charge-offs were $400,000 for 2002 compared to net charge-offs of $556,000 in 2001. Based on the volume of credit card charges and payments, the credit ard portfolio turns over every eight to nine months, requiring a provision to loan loss allowance less than annual charge-offs due to recoveries being contemporaneously made. 10 TABLE 3 Allowance for Loan Losses December 31, 2002 2001 (Dollars in Thousands) Balance at beginning of period $1,800 $1,800 Charge-Offs: Commercial 14 9 Real estate 0 4 Installment 42 55 Credit Cards 852 1,010 Total Charge-offs 908 1,078 Recoveries: Commercial 4 2 Real estate 72 2 Installment 9 5 Credit Cards 423 513 Total Recoveries 508 522 Net charge-offs 400 556 Provision for (recovery of) 400 556 loan losses Balance at end of period $1,800 $1,800 Ratio of net charge-offs during period to average loans outstanding 0.68% 0.96% Allowance for possible loan losses as a percentage of loans 3.05% 3.14% 11 Noninterest Income An important source of the Company's revenue is derived from noninterest income. Noninterest income for 2002 was $2,044,000 compared to $3,201,000 in 2001 for a decrease of $1,157,000 or 36.14%. The decrease from 2001 is attributable to ORE income. During 2001 the Bank sold 2 parcels of ORE totaling $391,000. In addition a parcel was sold in 1998, however the regulators advised that the Company incorrectly applied the full accrual method of accounting. Due to this the Company restated all financials. The Company recognized a gain of $686,000 in 2001 as the purchaser's payments had reached certain levels outlined by the regulators. The following table sets forth the major components of noninterest income for the last two years. TABLE 4 Noninterest Income $ Change December 31, From Prior 2002 2001 Year (Dollars in Thousands) Service Charges 451 529 (78) NSF Charges 604 587 17 Gain on Sale of Securities 0 0 0 Cardholder & Other Cr Card Inc 616 597 19 Membership Fees 121 103 18 Other Comm. & Fees 88 86 2 ORE Income 1 1 0 Gain on Sale of ORE 27 1,195 (1,168) Rev of Litigation Settlement 0 0 0 Other Income 136 103 33 Total Noninterest Income $2,044 $3,201 ($1,157) Noninterest Expense The major categories of noninterest expense include salaries and employee benefits, occupancy and equipment expenses and other operating costs associated with the day-to-day operations of the Company. Noninterest expense decreased $411,000 or 4.34% in 2002 to $9,059,000 from $9,470,000 in 2001. This decrease was primarily due to the writedown of 6 ORE properties totaling $683,000 in 2001 which were offset by an increase in Loan and Credit Card expenses of $128,000 and an increase in Advertising expenses of $109,000. The following table sets forth the major components of noninterest expense for the last two years: TABLE 5 Noninterest Expense $ Change December 31, From Prior 2002 2001 Year (Dollars in Thousands) Salaries & Benefits 4,281 4,324 (43) Occupancy Expense 1,702 1,756 (54) Advertising Expense 179 71 108 Communications 197 179 18 Postage 235 229 6 Loan & Credit Card Expense 1,120 993 127 Professional Fees 186 172 14 Legal Fees 257 214 43 Insurance & Assessments 104 96 8 Stationery, Forms & Supply 240 227 13 Promotional Expenses 141 139 2 ORE Expenses 6 698 (692) Misc. Losses 33 20 13 Other Operating Expense 378 352 26 Total Noninterest Expense $9,059 $9,470 ($411) 12 Provision for Income Taxes Income tax benefit was $16,000 in 2002, compared to income tax expense of $152,000 in 2001. The income tax paid was for federal income taxes only, as Louisiana does not have an income tax for banks. The Company's effective tax rate approximated statutory rates. Financial Condition The Bank manages its assets and liabilities to maximize long-term earnings opportunities while maintaining the integrity of its financial position and the quality of earnings. To accomplish this objective, management strives to effect efficient management of interest rate risk and liquidity needs. The primary objectives of interest-sensitivity management are to minimize the effect of interest rate changes on the net interest margin and to manage the exposure to risk while maintaining net interest income at acceptable levels. Liquidity is provided by carefully structuring the balance sheet. The Bank's asset liability committee meets regularly to review both the interest rate sensitivity position and liquidity. Interest Rate Sensitivity The major elements used to manage interest rate risk include the mix of fixed and variable rate assets and liabilities and the maturity pattern of assets and liabilities. It is the Bank's policy not to invest in derivatives in the ordinary course of business. The Bank performs a monthly review of assets and liabilities that reprice and the time bands within which the repricing occurs. Balances are reported in the time band that corresponds to the instruments next repricing date or contractual maturity, whichever occurs first. Through such analysis, the Bank monitors and manages its interest sensitivity gap to minimize the effects of changing interest rates. The interest rate sensitivity structure within the Company's balance sheet at December 31, 2002, has a net interest sensitive asset gap of 12.38% when projecting out one year. In the near term, defined as 90 days, the Company currently has a net interest sensitive asset gap of 8.70%. The information represents a general indication of repricing characteristics over time; however, the sensitivity of certain deposit products may vary during extreme swings in the interest rate cycle. Since all interest rates and yields do not adjust at the same velocity, the interest rate sensitivity gap is only a general indicator of the potential effects of interest rate changes on net interest income. The following table illustrates the Company's interest rate sensitivity analysis at December 31, 2002, as well as the cumulative position at December 31, 2002: 13 TABLE 6 Interest Rate Sensitivity Analysis December 31, 2002 Over 30 60 90 120 180 One One Days Days Days Days Days Year Year (Dollars in Thousands) Total Earning Assets Securities-HTM - 4,995 5,994 - 5,078 1,508 - Securities - AFS - - - - - - 425 Loans 10,223 1,684 1,697 1,496 6,569 11,023 26,396 Loans held for sale - - - - - - - Federal funds sold 16,465 - - - - - - Total Earning Assets26,688 6,679 7,691 1,496 11,647 12,531 26,821 Non Earning Assets - - - - - - 7,175 TOTAL ASSETS 26,688 6,679 7,691 1,496 11,647 12,531 33,996 Interest-Bearing Liabilities Savings & Now accounts 42,435 - - - - - - Money market 4,773 - - - - - - CD's < $100,000 915 116 324 985 1,472 1,433 1,183 CD's > $100,000 - 638 - - 208 100 - Federal Funds - - - - - - - purchased Repurchase agreements - - - - - - - Other short-term - - - - - - - borrowings Notes payable - - - - 1,753 - 456 Total Interest-Bearing Liabilities 48,123 754 324 985 3,433 1,533 1,639 Non Costing Liabilities - - - - - - 43,937 TOTAL LIABILITIES 48,123 754 324 985 3,433 1,533 45,576 Interest Sensitivity Gap (21,435) 5,925 7,367 511 8,214 10,998(11,580) Cumulative Gap (21,435)(15,510) (8,143) (7,632) 582 11,580 - Cumulative Gap/Total Interest- Earning Assets -22.91% -16.58% -8.70% -8.16% 0.62% 12.38% 0.00% Liquidity The purpose of liquidity management is to ensure that there is sufficient cash flow to satisfy demands for credit, deposit withdrawals, and other corporate needs. Traditional sources of liquidity include asset maturities and growth in core deposits. These are sources of liquidity that the Bank has not fully utilized. The Bank, nevertheless, has maintained adequate liquidity through the sale of federal funds, and anticipates that this will continue until loan demand increases. Traditionally, liquidity 14 sources for the Bank were generated from operating activities and financing activities. Net cash from operating activities primarily results from net income adjusted for the following non-cash items: the provision for loan losses; depreciation and amortization; fair value adjustments on foreclosed property; and deferred income taxes or benefits. These activities did not measurably increase the Bank's liquidity in 2002, but rather the reduction in loans had the greatest impact. Significant financing activities generally include growth in core deposits, securities sold under agreements to repurchase, and long-term debt. The Bank anticipates capital needs will be met from the growth in retained earnings. Financing activity cash flows from deposits, which decreased 0.23% to $91,403,000 in 2002 from $91,612,000 in 2001, or $209,000, was the primary reason for the decrease in loans and investment securities at the Bank in 2002 from 2001. The Bank had unused sources of liquidity in the form of unused federal funds lines of $1,000,000 from a correspondent bank, and borrowing availability from the FRB discount window equal to the Bank's principal amount of unpledged investment securities. The Bank manages asset and liability growth through pricing strategies within regulatory capital constraints. Management believes that its core deposit strength minimizes the risk of deposit runoff. There are no known trends, events, regulatory authority recommendations, or uncertainties that the Company is aware of that will have, or that are likely to have a material adverse effect on the Company's liquidity, capital resources, or operations. Loans The loan portfolio is the largest category of the Bank's earning assets. The following table summarizes the composition of the loan portfolio for the last two years: TABLE 7 Loans Net by Category December 31, 2002 2001 (Dollars in Thousands) Commercial, financial, & 3,220 3,632 agricultural Real estate-mortgage 35,966 34,472 Mortgage Loan Held for Resale 0 0 Personal Loans 4,160 3,987 Credit cards-Visa, MasterCard 13,777 15,389 Credit cards-Proprietary 1,789 1,482 Overdrafts 176 440 Loans 59,088 59,402 Less: Unearned income 205 205 Deferred loan fees (costs), net 0 0 Allowance for possible loan losses 1,800 1,800 Loans, net $57,083 $57,397 In 2002 the Bank experienced a decrease in commercial loans, which decreased by $412,000 and credit card loans, which decreased $1,305,000. However, the Bank experienced an increase of $1,494,000 in real estate loans from $34,472,000 in 2001 to $35,966,000 in 2002. At December 31, 2002, total loans outstanding were $57,083,000, compared to $57,397,000 at year-end 2001, a 0.55% decrease. Average total loans during 2002 increased $818,000 or 1.41%, to $58,974,000. 15 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 2002: TABLE 8 Loan Maturity and Interest Rate Sensitivity December 31, 2002 Maturing Within One To Over One Year 5 Years 5 Years Total (Dollars in Thousands) Loan Maturity by Type Commercial, financial and Agricultural 2,312 891 18 3,221 Real estate construction, land and land development 17,238 17,497 1,231 35,966 All other loans 2,921 16,920 60 19,901 Total $22,471 $35,308 $1,309 $59,088 Rate Sensitivity of Loans Loans: Fixed rate loans 18,184 35,308 1,309 54,801 Variable rate loans 2,149 0 0 2,149 Non-Accrual Loans 2,138 0 0 2,138 Total $22,471 $35,308 $1,309 $59,088 As of December 31, 2002 and 2001, there was no recorded investment in loans that are considered impaired under SFAS 114 and 118. Non-performing Assets Non-performing assets consist of non-accrual and restructured loans and other real estate owned. Non-accrual loans are loans on which the interest accruals have been discontinued when it appears that future collection of principal or interest according to the contractual terms may be doubtful. Interest on these loans is reported on the cash basis as received when the full recovery of principal is anticipated or after full principal has been recovered when collection of interest is in question. Restructured loans are those loans whose terms have been modified, because of economic or legal reasons related to the debtors' financial difficulties, to provide for a reduction in principal, change in terms, or fixing of interest rates at below market levels. Other real estate owned is real property acquired by foreclosure or directly by title or deed transfer in settlement of debt. Non-performing assets at December 31, 2002, were $2,347,000, an increase of $1,344,000, or 134.00% from the $1,003,000 non-performing assets at December 31, 2001. During 2002, non-accrual loans increased by $1,135,000 and other real estate owned increased $209,0000. At December 31, 2002 and 2001, there were no restructured loans. Since December 31, 2001, the ratio of past due loans to total loans has decreased from 0.83% to 0.67% at December 31, 2002. During that time, the Bank increased its ratio of non-performing assets to loans and other real estate owned from a low of 1.75% at December 31, 2001, to a high of 4.10% at December 31, 2002. The allowance for possible loan losses as a percent of period-end loans increased to 3.06% at December 31, 2002, compared to 3.04% at December 31, 2001. Management believes the allowance for possible loan losses is adequate to provide for losses inherent in the loan portfolio. When a loan is classified as non-accrual, previously accrued interest is reversed and interest income is decreased to the extent of all interest 16 accrued in the current year. If any portion of the accrued interest had been accrued in the previous years, accrued interest is decreased and a charge for that amount is made to the allowance for possible loan losses. For 2002, the gross amount of interest income that would have been recorded on non-accrual and restructured loans at December 31, 2002, if all such loans had been accruing interest at the original contract rate, was $39,000. Interest income recognized on non-accrual loans totaled $52,000. TABLE 9 Non-performing Assets December 31, 2002 2001 (Dollars in Thousands) Non-accrual Loans 2,138 1,003 Restructured Loans 0 0 Other Real Estate Owned 209 0 Total Non-performing Assets $2,347 $1,003 Loans past due 90 days or more 382 478 Ratio of past due loans to loans 0.67% 0.83% Ratio of non-performing assets to loans and other real estate owned 4.10% 1.75% Management is not aware of any potential problem loans other than those disclosed in the table above, which includes all loans recommended for classification by regulators, which would have a material impact on asset quality. Allocation of Allowance for Possible Loan Losses Allocation of the allowance for loan losses is based primarily on previous credit loss experience, adjusted for changes in the risk haracteristics of each category. Additional amounts are allocated based on the evaluation of the loss potential of individual troubled loans and the anticipated effect of economic conditions on both individual loans and loan categories. Since the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts of loan categories in which losses may ultimately occur. Approved credit card accounts are reviewed on a monthly basis to assure compliance with the Bank's credit policy. Review procedures include determination that the appropriate verification process has been completed, recalculation of the borrower's debt ratio, and analyses of the borrower's credit history to determine if it meets established Bank criteria. Policy exceptions are carefully analyzed monthly. Delinquent accounts are monitored daily and charged off before 180 days, which is the industry standard. Prior to charge-off, interest on credit card loans continue to accrue. A monthly provision for credit card losses is included in the Bank's overall provision for loan losses. 17 Table 10 Allocation of Allowance for Possible Loan Losses December 31, 2002 December 31, 2001 Allowance % * Allowance % * (Dollars in Thousands) Commercial, financial and agricultural 756 61.92% 351 64.90% Real Estate-Construction - - - - Real Estate-Mortgage - - - - Consumer Installment 69 11.66% 120 6.70% Credit Cards 975 26.42% 1,329 28.40% Unallocated - - - - Total 1,800 1,800 * Percentage of respective loan type to total loans. Investment Securities The Bank's investment portfolio policy is to maximize income consistent with liquidity, asset quality, regulatory constraints, and asset/liability objectives. The Bank's Board of Directors reviews such policy not less than annually. The levels of taxable and tax-exempt securities and short-term investments reflect the Bank's strategy of maximizing portfolio yields while providing for liquidity needs. The investment securities totaled $18,000,000 at December 31, 2002 and $15,908,000 at December 31, 2001. The majority of the holdings are backed by U.S. Government or federal agency guarantees limiting the credit risks associated with these securities. The average maturity of the Bank's securities portfolio was one year or more at December 31, 2002. At year-end 2002, approximately $425,000 of the Bank's investment securities were classified as available-for-sale, compared to $393,000 at December 31, 2001. The gross unrealized holding gains on these securities at December 31, 2002, were $133,000 after taxes compared to gross unrealized holding gains of $102,000 after taxes at December 31, 2001. There were no investments and no obligations of any one state or municipality at December 31, 2002, or 2001. At December 31, 2002, the Bank had no U.S. Treasury securities or obligations of U. S. government corporations or federal agencies, as available for sale. The Bank has approximately $6,600,000 of its held to maturity securities in one-year or less maturities to fund possible liquidity needs required by loan production and credit card activities. The following table sets forth the carrying and approximate market values of investment securities for the last two years: TABLE 11 Investment Securities December 31, 2002 2001 Amortized Fair Amortized Fair Cost Value Cost Value (Dollars in Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies 17,575 17,686 15,515 15,498 Other investments 291 425 291 393 Total $17,866 $18,111 $15,806 $15,891 18 TABLE 12 Securities Maturities and Yields December 31, 2002 Amortized Fair Average Cost Value Yield (2) (Dollars in Thousands) Available-for-Sale U.S. Treasury securities and obligations of U.S. government corporations and agencies Due in 1 year or less - - Due 1-5 years - - Total - - - Held-to-Maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies Due in 1 year or less 6,586 6,655 2.65% Due 1-5 years 10,989 11,031 3.54% Total $17,575 $17,686 3.21% (1) This table excludes equity investments, which have no maturity date. (2) Weighted average yields are calculated on the basis of the carrying value of the security. The weighted average yields on tax-exempt obligations are compounded on a fully taxable-equivalent basis assuming a federal tax rate of 34%. Included in Investment Securities are equity securities acquired through foreclosure, which have no maturity date. Below is a table of these securities at December 31,2002 (dollars in thousands): TABLE 13 Other Securities Mississippi River Bank 319 Liberty Financial Services, Inc. 86 Business Resource Capital 20 Total Other Securities $425 Deposits Total deposits at December 31, 2002 were $91,403,000 which represented a decrease of $209,000 or 0.23% from $91,612,000 at December 31, 2001. During 2002, interest bearing deposits decreased by $776,000. Core deposits, the Bank's largest source of funding, consist of all interest bearing and noninterest bearing deposits except certificates of deposits over $100,000. Core deposits are obtained from a broad range of customers. Average nterest- bearing core deposits grew 3.62% to reach $89,717,000 in 2002. Market rate core deposits, primarily CD's of less than $100,000 and money market ccounts, decreased $664,000 in 2002. This decrease is attributable to the Bank's strategy to maintain the asset size of the Bank. Noninterest bearing deposits are comprised of business accounts, including correspondent bank accounts, escrow deposits, as well as individual accounts. Average noninterest bearing demand deposits represented 39.89% of average core deposits in 2002 compared to 38.94% in 2001. 19 The average amount of, and average rate paid on deposits by category for the period shown are presented below: TABLE 14 Selected Statistical Information December 31, 2002 2001 Average Average Amount Rate Amount Rate (Dollars in Thousands) Noninterest-bearing Deposits $35,792 N/A $33,719 N/A Interest-bearing Demand Deposits 17,380 0.30% 17,676 1.67% Savings Deposits 28,702 1.03% 26,661 2.94% Time Deposits 8,958 2.87% 9,888 4.49% Total Average Deposits $90,832 $87,944 The composition of average deposits for the last two years are presented below: TABLE 15 Deposit Composition December 31, 2002 2001 (Dollars in Thousands) Average % Of Average % Of Balances Deposits Balances Deposits Demand, noninterest-bearing 35,792 39.41% 33,719 38.34% NOW accounts 12,925 14.23% 13,241 15.06% Money market deposit accounts 4,455 4.90% 4,435 5.04% Savings accounts 28,702 31.60% 26,661 30.32% Other time deposits 7,843 8.63% 8,527 9.70% Total core deposits 89,717 98.77% 86,583 98.45% Certificates of deposit of $100,000 or more 1,115 1.23% 1,361 1.55% Total deposits $90,832 100.00% $87,944 100.00% The following table sets forth maturity distribution of Time Deposits of $100,000 or more for the past two years: TABLE 16 Maturity Distribution of Time Deposits $100,000 or More December 31, 2002 2001 (Dollars in Thousands) Three months or less 637 680 After three months through one year 308 603 Total $945 $1,283 Other Assets and Other Liabilities The following are summaries of other assets and other liabilities for the last two years: 20 TABLE 17 Other Assets & Other Liabilities December 31, 2002 2001 (Dollars in Thousands) Interest Receivable 228 119 Prepaid Expenses 371 420 Accounts Receivable 319 1,197 Cash Surrender Value 393 418 Other Assets 58 40 Total Other Assets $1,369 $2,194 December 31, 2002 2001 (Dollars in Thousands) Accrued Expenses Payable 192 150 Deferred Membership Fees 42 46 Blanket Bond Fund 50 50 Other Liabilities 60 14 Total Other Liabilities $344 $260 Borrowings The Company's long-term debt is comprised primarily of debentures. Each $500 debenture is secured by a pledge of 40.79 shares of the Bank's stock. The Bank has no long-term debt. It is the Bank's policy to manage its liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank maintains a Federal Funds line of credit in the amount of $1,000,000 with a correspondent bank and also has a commitment from an upstream correspondent that will increase our Federal Funds line of credit over and above the normal amount by pledging unused securities. The Bank can borrow the amount of unpledged securities at the discount window at the Federal Reserve Bank by pledging those securities. Shareholders' Equity Shareholders' equity at December 31, 2002, was $6,161,000, a decrease of $39,000 or 0.63% from $6,200,000 at December 31, 2001, and amounted to 6.12% of total assets. Realized shareholders' equity, which includes preferred and common stock, capital in excess of par, and retained earnings, decreased $60,000 or 1.00% to $5,940,000 at December 31, 2002, from $6,000,000 at December 31, 2001. During 2002, the decline in shareholder's equity was primarily attributable to a $36,000 decrease in net income and an increase in accumulated other comprehensive income, which is used to refer to revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income, in the amount of $20,000. No dividends were paid on shares of Company Common Stock in 2002 or 2001. The Company maintains an adequate capital position that exceeds all minimum regulatory capital requirements. The Company's internal capital growth rate (net income less dividends declared as a percentage of average 21 shareholders' equity) was (0.57%) in 2002, compared to 5.41% in 2001. The ratio of average shareholders' equity to average assets was 6.28% and 6.38% in 2002 and 2001, respectively. At December 31, 2002, the Company's primary capital ratio as defined by the FRB was 7.50%, compared to 7.58% in 2001. The total capital ratio (defined as primary capital plus secondary capital) was also 7.50% at December 31, 2002, and 7.58% in 2001, compared to the guidelines, which mandate a minimum primary capital ratio of 5.50% and total capital ratio of 6.00% for bank holding companies and banks. The Bank's leverage ratio (Tier 1 capital to total assets) at December 31, 2002, was 8.00% compared to 8.09% at December 31, 2001, which are compared to the minimum capital requirement of 4.00% for well-managed Banking organizations. The Bank, however, pursuant to the Memorandum, is required to maintain a Tier 1 leverage capital ratio of 7%. The Company's ratios are in excess of the FRB's requirements, as indicated in the Capital Adequacy schedule below: Capital Adequacy December 31, 2002 2001 Amount Percent Amount Percent (Dollars in Thousands) Tier I capital Actual 6,049 10.17% 6,193 9.84% Minimum 2,380 4.00% 2,520 4.00% Excess 3,669 6.17% 3,673 5.84% Total risk-based capital Actual 6,806 11.44% 6,993 11.11% Minimum 4,760 8.00% 5,035 8.00% Excess 2,046 3.44% 1,958 3.11% Tier I capital leverage ratio Actual 6,049 6.03% 6,193 6.24% Minimum 4,015 4.00% 3,970 4.00% Excess 2,034 2.03% 2,223 2.24% During 2002, no dividend income from the Bank nor any subordinated debt was received by the Company. During the year ended December 31, 2001, the Bank received approval and paid the Company dividends totaling $143,000. Dividends that may be paid by the Bank to the Company are subject to certain regulatory limitations. Under Louisiana banking law, the approval of the OFI will be required if the total of all dividends declared in any calendar year by the Bank exceed the Bank's net profits to date and retained net profits for the year in which such dividend is declared and the immediately preceding year, subject to maintenance of minimum required regulatory capital. Supervision and Regulation Enforcement Action Bank Holding Company Regulation Federal The Company is a bank holding company within the meaning of the BHC Act, and is registered with the FRB. It is required to file annual reports with the FRB and such additional information as the FRB may require pursuant to the BHC Act. The FRB may also perform periodic examinations of the Company and its subsidiaries. The following summary of the BHC Act and of the other acts described herein is qualified in its entirety by express reference to each of the particular acts. 22 The BHC Act requires every bank holding company to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank which is already not majority owned by the Company. The BHC Act prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company which is not a bank and from engaging in any business other than banking or furnishing services to or performing services for its subsidiaries. The 5% limitation is not applicable to ownership of shares in any company the activities of which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. As set forth below, however, the Gramm-Leach-Bliley Financial Modernization Act of 1999, enacted on November 12, 1999, broadens the ability of a bank holding company to own or control companies other than banks. Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the target bank's state. The Riegle-Neal Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% statewide concentration limit contained in the Riegle-Neal Act. Additionally, the federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by national and state banks, respectively, only in states that specifically allow for such branching. The Riegle-Neal Act also requires the appropriate federal banking agencies to prescribe regulations that prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. The Bank is an "affiliate" of the Company within the meaning of the Federal Reserve Act. This act places restrictions on a bank's loans or extensions of credit to purchases of or investments in the securities of, and purchases of assets from an affiliate, a bank's loans or extensions of credit to third parties collateralized by the securities or obligations of an affiliate, the issuance of guarantees, acceptances, and letters of credit on behalf of an affiliate, and certain bank transactions with an affiliate, or with respect to which an affiliate acts as agent, participates, or has a financial interest. Furthermore, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishings of services. Under FRB policy, the Company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support its subsidiary. This support may be required at times when, absent such FRB policy, the Company may not be inclined to provide it. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss 23 incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (a) the default of a commonly controlled FDIC- insured depository institution or (b) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Under FDICIA (see discussion below) a bank holding company may be required to guarantee the capital plan of an undercapitalized depository institution. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Louisiana Under the Louisiana Bank Holding Company Act of 1962, as amended (the "Louisiana BHC Act"), bank holding companies are authorized to operate in Louisiana provided the activities of the nonblank subsidiaries thereof are limited to the ownership of real estate and improvements, computer services, equipment leasing, and other directly related banking activities. In addition, a bank holding company and its subsidiaries may not engage in any insurance activity in which a bank may not engage. The Commissioner of the OFI is authorized to administer the Louisiana BHC Act by the issuance of orders and regulations. At present, prior approval of the Commissioner would not be required for the formation and operation of a nonblank subsidiary of the Company if its activities meet the requirements of the Louisiana BHC Act. Bank Regulation The Bank is a member of the FDIC and is subject to examination and regulation by that authority. The Bank is chartered under the banking laws of the State of Louisiana and is subject to the supervision of, and regular examination by, the OFI. As an affiliate of the Bank, the Company is also subject to examination by the OFI. In addition, the deposits of the Bank are insured by the Bank Insurance Fund ("BIF") thereby rendering the Bank subject to the provisions of the Federal Deposit Insurance Act ("FDIA") and, as a state nonmember bank, to supervision and examination by the FDIC. The FDIA requires the FDIC approval of any merger and/or consolidation by or with an insured bank, as well as the establishment or relocation of any bank or branch office. The FDIC also supervises compliance with the provisions of federal law and regulations that place restrictions on loans by FDIC-insured banks to their directors, executive officers and other controlling persons. In December 1991, a major banking bill entitled the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted, which substantially revises the bank regulatory and funding provisions of the FDIA and makes revisions to several other federal banking statues. Among other things, the FDICIA requires the federal banking regulators to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. The Bank has capital levels above the minimum requirements. In addition, an institution that is not well capitalized is generally prohibited form accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market and also may not be able to "pass through" insurance coverage for certain employee benefit accounts. The FDICIA also requires the holding company of any undercapitalized depository institution to guarantee, in part, certain aspects of such depository institution's capital plan for such plan to be acceptable. The FDICIA contains numerous other provisions, including new account, audit and reporting requirements, termination of the "too big to fail" doctrine except in special cases, limitations on the FDIC's payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital 24 adequacy. The FDICIA also required that a depository institution provide 90 days prior notice of the closing of any branches. Furthermore, all banks are affected by the credit policies of other monetary authorities, including the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The FRB's monetary policies have had a significant effect on the operating results of commercial banks in the past, and the Company expects this trend to continue in the future. Dividends The FRB has issued a policy statement on the payment of cash dividends by bank holding companies. In the policy statement, the FRB expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statues and regulations. Among these powers is the ability to prohibit or limit the payment of dividends by banks and bank holding companies. See "Enforcement" below. In addition to the restrictions on dividends imposed by the FRB, Louisiana law also places limitations on the Company's ability to pay dividends. For example, the Company may not pay dividends to its shareholders if, after giving effect to the dividend, the Company would not be able to pay its debts as they become due. Because a major source of the Company's revenue is dividends that it receives and expects to receive from the Bank, the Company's ability to pay dividends to its shareholders will depend on the amount of dividends paid by the Bank to the Company. The Company cannot be sure that the Bank will, in any circumstances, pay such dividends to the Company, as Louisiana banking law provides that a Louisiana bank may not pay dividends if it does not have, or will not have after the payment of such dividend, unimpaired surplus equal to 50% of the outstanding capital stock of the bank. In addition, OFI approval is required to declare or pay any dividend that would bring the total of all dividends paid in any one calendar year to an amount greater than the total of such bank's net profits for such year combined with the net profits of the immediately preceding year. Recent Developments The Gramm-Leach-Bliley Financial Modernization act of 1999 permits bank holding companies meeting certain management, capital, and community reinvestment act standards to engage in a substantially broader range of non- banking activities than permitted previously, including insurance underwriting and merchant banking activities. This act repeals sections 20 and 32 of the Glass Steagall Act, thus permitting affiliations of banks with securities firms and registered investment companies. The act authorizes financial holding companies, which permits banks to be owned by or to own securities firms, insurance companies, and merchant banking companies. Some of these affiliations are also permissible for bank subsidiaries. The act gives the FRB authority to regulate financial holding companies, but provides for functional regulation of subsidiary activities. The Gramm-Leach-Bliley Financial Modernization act also modifies financial privacy and community reinvestment laws. The new financial privacy provisions generally prohibit financial institutions such as the company from disclosing non-public personal financial information to third parties unless customers have the opportunity to opt out of the disclosure. The Act also magnifies the consequences of a bank receiving a less than a satisfactory community reinvestment act rating, by freezing new activities until the institution achieves a better community reinvestment act rating. 25 Enforcement The Bank entered into the Memorandum with the FDIC and the OFI on December 14, 1999. The Memorandum replaces the Memorandum of Understanding entered into by and among the Bank, the FDIC and the OFI dated March 12, 1996. The Memorandum was entered into as a result of the findings from the Joint Report of Examination ("Report of Examination") of the Bank as of July 23, 1999, conducted by the FDIC and the OFI. The Memorandum requires the Bank to develop or revise various internal operating plans and policies including: (1) The development and implementation of a long range planning process including the formulation of a strategic plan; (2) The engagement of an independent consulting firm to assess the Bank's management and staffing needs, and development of a management succession plan; and (3) The development and implementation of a three year written profit plan. In addition to adopting and implementing such plans and policies, the Bank is required to maintain a Tier I Leverage Capital Ratio equal to or greater than 7%. The Bank may not pay any dividends without prior regulatory approval. The Bank may loan new funds or renew existing loans for borrowers with loans classified as substandard, doubtful, or loss, only under strict guidelines as outlined in the Memorandum. The Bank is required to form a compliance committee to monitor the Bank's compliance with the Memorandum and to report that progress quarterly to the FDIC and the OFI. Effect of Governmental Policies The Company and the Bank are affected by the policies of regulatory authorities, including the FRB. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels, and inflation. The monetary policies of the Federal Reserve and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the financial markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company or whether the changing economic conditions will have a positive or negative effect on operations and earnings. Pending Legislation Bills are pending before the United States Congress and the Louisiana legislature which could affect the business of the Company and the Bank, and there are indications that other similar bills may be introduced in the future. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Company and the Bank may be affected thereby. 26 Item 7 Financial Statements To the Board of Directors BOL Bancshares, Inc. & Subsidiary Independent Auditor's Report We have audited the accompanying consolidated balance sheets of BOL BANCSHARES, INC. and its wholly-owned subsidiary, Bank of Louisiana, as of December 31, 2002 and 2001, and the related consolidated statements of income (loss), comprehensive income, changes in stockholders' equity, and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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. The Company had excluded from income in the accompanying consolidated income statement for the year ended December 31, 1999, an amount received from litigation settlement, that in our opinion, should have been included to conform with generally accepted accounting principles. This settlement has been included in the consolidated income statement for the year ended December 31, 2000. If the settlement was accounted for properly, other liabilities would be decreased by $201,292, deferred tax assets would be decreased by $68,440, retained earnings would be increased by $132,852 as of December 31, 1999, and net income would be increased by $132,852 ($.75 per share), for the year then ended. In addition, net income for the year ended December 31, 2000, would be decreased by $132,852 ($.75 per share). In our opinion, except for the effects of not including the amount received from litigation settlement, as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BOL BANCSHARES, INC. and its wholly-owned subsidiary, Bank of Louisiana, as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ LaPorte, Sehrt, Romig & Hand LaPorte, Sehrt, Romig & Hand A Professional Accounting Corporation Metairie, LA January 20, 2003 27 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, 2002 2001 Cash and Due from Banks Non-Interest Bearing Balances and Cash $5,659,233 $7,141,342 Federal Funds Sold 16,465,000 6,160,000 Investment Securities Securities Held-to-Maturity (Fair Value of $17,686,089 in 2002 and $15,498,334 in 2001) 17,575,306 15,514,924 Securities Available-for-Sale, at Fair Value 424,806 393,408 Loans - Less Allowance for Loan Losses of $1,800,000 in 2002 and 2001, and Unearned Discounts of $205,473 in 2002 and 2001 57,082,588 57,397,183 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 1,681,812 1,829,764 Other Real Estate 208,523 - Other Assets 1,368,722 2,194,002 Deferred Taxes 191,222 199,188 Letters of Credit 71,265 61,380 Total Assets $100,728,477 $100,891,191 28 LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2002 2001 LIABILITIES Deposits Non-Interest Bearing $ 36,821,228 $ 36,254,901 Interest Bearing 54,581,501 55,357,163 Notes Payable 2,209,402 2,218,165 Other Liabilities 344,183 259,570 Letters of Credit Outstanding 71,265 61,380 Accrued Interest 539,835 539,557 Total Liabilities 94,567,414 94,690,736 STOCKHOLDERS' EQUITY Preferred Stock - Par Value $1 2,239,602 Shares Issued and Outstanding in 2002 2,300,871 Shares Issued and Outstanding in 2001 2,239,602 2,300,871 Common Stock - Par Value $1 179,145 Shares Issued and Outstanding in 2002 and 2001 179,145 179,145 Accumulated Other Comprehensive Income 221,235 200,512 Capital in Excess of Par - Retired Stock 52,813 16,052 Retained Earnings 3,468,268 3,503,875 Total Stockholders' Equity 6,161,063 6,200,455 Total Liabilities and Stockholders' Equity $100,728,477 $100,891,191 The accompanying notes are an integral part of these financial statements. 29 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the Years Ended December 31, 2002 2001 2000 INTEREST INCOME $8,173,711 $8,918,085 $9,357,443 INTEREST EXPENSE 811,068 1,605,048 1,630,450 Net Interest Income 7,362,643 7,313,037 7,726,993 PROVISION FOR LOAN LOSSES 399,920 555,811 308,194 Net Interest Income After Provision for Loan Losses 6,962,723 6,757,226 7,418,799 OTHER INCOME Service Charges on Deposit Accounts 1,097,297 1,116,019 1,125,943 Other Non-Interest Income 947,153 2,085,321 847,275 Reversal of Litigation Settlement - - 150,000 Total Other Income 2,044,450 3,201,340 2,123,218 OTHER EXPENSES Salaries and Employee Benefits 4,280,844 4,324,160 4,327,373 Occupancy Expense 1,702,095 1,755,662 1,969,464 Other Non-Interest Expense 3,076,026 3,390,302 2,696,115 Total Other Expenses 9,058,965 9,470,124 8,992,952 INCOME (LOSS) BEFORE INCOME (51,792) 488,442 549,065 TAX EXPENSE INCOME TAX EXPENSE (BENEFIT) (16,185) 152,085 170,494 NET INCOME (LOSS) $ (35,607) $ 336,357 $ 378,571 EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (0.20) $ 1.88 $ 2.11 The accompanying notes are an integral part of these financial statements. 30 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended December 31, 2002 2001 2000 NET INCOME (LOSS) $ (35,607) $ 336,357 $ 378,571 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized Holding Gains on Investment Securities Available-for- Sale, Arising During the Period 20,723 3,595 14,134 Less: Reclassification Adjustment for Gains Included in Net Income - - - OTHER COMPREHENSIVE INCOME 20,723 3,595 14,134 COMPREHENSIVE INCOME (LOSS) $ (14,884) $ 339,952 $ 392,705 The accompanying notes are an integral part of these financial statements. 31 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Capital In Other Excess of Preferred Common Comprehensive Par Retained Stock Stock Income Retired Stock Earnings Total BALANCE - December 31, 1999 $2,302,811 $179,145 $182,783 $14,888 $2,788,947 $5,468,574 Other Comprehensive Income, Net of Applicable Deferred Income Taxes * - 14,134 - - 14,134 Net Income for the Year 2000 - - - - 378,571 378,571 BALANCE - December 31, 2000 2,302,811 179,145 196,917 14,888 3,167,518 5,861,279 Preferred Stock Retired (1,940) - - 1,164 - (776) Other Comprehensive Income, Net of Applicable Deferred Income Taxes - - 3,595 - - 3,595 Net Income for the Year 2001 - - - - 336,357 336,357 BALANCE - December 31, 2001 2,300,871 179,145 200,512 16,052 3,503,875 6,200,455 Preferred Stock Retired (61,269) - - 36,761 - (24,508) Other Comprehensive Income, Net of Applicable Deferred Income Taxes - - 20,723 - - 20,723 Net Loss for the Year 2002 - - - - (35,607) (35,607) BALANCE - December 31, 2002 $2,239,602 $179,145 $221,235 $52,813 $3,468,268 $6,161,063 The accompanying notes are an integral part of these financial statements. 32 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2002 2001 2000 OPERATING ACTIVITIES Net Income (Loss) $ (35,607) $ 336,357 $ 378,571 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: Provision for Loan Losses 399,920 555,811 308,194 Depreciation and Amortization Expense 287,674 362,634 510,066 Provision for Other Real Estate Losses - 683,012 - Amortization of Investment Security Premiums 97,498 2,879 3,546 Accretion of Investment Security Discounts (5,107) (10,359) (3,833) (Increase) Decrease in Deferred Income Taxes (2,709) 149,196 164,287 Gain on Sale of Other Real Estate (26,663) (1,195,026) (13,114) (Increase) Decrease in Other Assets 825,280 (1,077,668) 830,987 Increase (Decrease) in Other Liabilities and Accrued Interest 84,891 (56,154) (346,506) Net Cash Provided by (Used in) Operating Activities 1,625,177 (249,318) 1,832,198 INVESTING ACTIVITIES Proceeds from Held-to-Maturity Investment Securities Released at Maturity 16,000,000 7,989,032 5,917,843 Purchases of Held-to-Maturity Investment Securities (18,152,773) (20,514,627)(5,895,858) Proceeds from Sale of Property and Equipment 4,840 621 244 Purchases of Property and Equipment (144,562) (51,656) (89,909) Proceeds from Sale of Other Real Estate 100,000 900,000 244,500 Purchases of Loans - (1,852,239) (418,500) Net (Increase) Decrease in Loans (367,185) (174,073) 1,132,890 Net Cash Provided by (Used in) Investing Activities (2,559,680) (13,702,942) 891,210 The accompanying notes are an integral part of these financial statements. 33 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For The Years Ended December 31, 2002 2001 2000 FINANCING ACTIVITIES Net Increase (Decrease) in Non-Interest Bearing and Interest Bearing Deposits (209,335) 6,447,980 (5,391,611) Proceeds from Issuance of Long-Term Debt - - 1,753,000 Preferred Stock Retired (24,508) (776) - Principal Payments on Long-Term Debt (8,763) (7,662)(1,759,701) Net Cash Provided by (Used in) Financing Activities (242,606) 6,439,542 (5,398,312) NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,177,109) (7,512,718) (2,674,904) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 23,301,342 30,814,060 33,488,964 CASH AND CASH EQUIVALENTS - END OF YEAR $ 22,124,233 $ 23,301,342 $ 30,814,060 SUPPLEMENTAL DISCLOSURES: Additions to Other Real Estate through Foreclosure $ 281,860 $ - $ 31,385 Cash Paid During the Year for Interest $ 810,790 $ 1,589,685 $ 1,592,619 Cash (Paid) Received During the Year for Income Taxes $ (39,600) $ (9,120) $ (5,000) Market Value Adjustment for Unrealized Gain on Securities Available-for-Sale $ 31,398 $ 5,448 $ 21,415 Accounting Policies Note: Cash Equivalents Include Amounts Due from Banks and Federal Funds Sold. Generally, Federal Funds are Purchased and Sold for One Day Periods. The accompanying notes are an integral part of these financial statements. 34 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OF THE COMPANY BOL BANCSHARES, INC. was organized as a Louisiana corporation on May 7, 1981 for the purpose of becoming a registered bank holding company under the Bank Holding Company Act. The Company was inactive until April 29, 1988, when it acquired Bank of Louisiana, BOS Bancshares, Inc. and its wholly-owned subsidiary, Bank of the South, and Fidelity Bank and Trust Company of Slidell, Inc., and its wholly-owned subsidiary, Fidelity Land Co. in a business reorganization of entities under common control in a manner similar to a pooling of interest. The acquired companies are engaged in the banking industry. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Bank of Louisiana and its wholly-owned subsidiary, BOL Assets, LLC. In consolidation, significant inter-company accounts, transactions, and profits have been eliminated. INVESTMENT SECURITIES Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premium and accretion of discounts using methods approximating the interest method. Other marketable securities are classified as available-for-sale and are carried at fair value. Realized gains and losses on securities are included in net income. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in stockholders' equity. Cost of securities sold is recognized using the specific identification method. LOANS AND UNEARNED INCOME Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for loan losses. Unearned discounts on loans are recognized as income over the term of the loans on the interest method. Interest on other loans is calculated and credited to operations on a simple interest basis. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Loan origination fees and certain direct origination costs, when material, are capitalized and recognized as an adjustment of the yield on the related loan. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluation of the collectibility of loans and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Accrual of interest is discontinued and accrued interest is charged off on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. 35 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Buildings, office equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line and modified accelerated cost recovery methods over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. INCOME TAXES The Company and its consolidated subsidiary file a consolidated Federal income tax return. Federal income taxes are allocated between the companies, in accordance with a written agreement. MEMBERSHIP FEES Membership fees are collected in the anniversary month of the cardholder and are amortized over a twelve-month period using the straight-line method. CASH AND DUE FROM BANKS The Bank considers all amounts Due from Banks and Federal Funds Sold to be cash equivalents. The Subsidiary Bank is required to maintain non-interest bearing reserve balances to fulfill its reserve requirements. The average amount of the required reserve balance was approximately $1,715,500 and $1,352,000 for the years ended December 31, 2002 and 2001, respectively. NON-DIRECT RESPONSE ADVERTISING The Bank expenses advertising costs as incurred. USE OF ESTIMATES 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 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. ACCOUNTING STANDARDS NOT YET ADOPTED Statement of Financial Accounting Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", updates, clarifies, and simplifies existing accounting pronouncements related to extinguishment of debt, accounting requirements for the effects of transitions to the provisions of the Motor Carrier Act of 1980, and accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. The adoption of this pronouncement had no effect on the financial position and results of operations of the Company. 36 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ACCOUNTING STANDARDS NOT YET ADOPTED (Continued) Statement of Financial Accounting Standards No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities", a replacement of Emerging Issues Task Force (EITF) No. 94-3. This statement provides accounting and reporting standards for costs associated with exit or disposal activities that were previously recognized at the date a Company committed to an exit plan. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this pronouncement is not expected to have an effect on the financial position and results of operations of the Company. Statement of Financial Accounting Standards No. 147 (SFAS 147), "Acquisitions of Certain Financial Institutions" an amendment of SFAS 72 and 144, and SFAS Interpretation No. 9. This statement provides accounting and reporting standards for the application of the purchase method to all acquisitions of financial institutions (including branch acquisitions that meet the definition of a business), except transactions between two or more mutual enterprises. Previously, any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired was classified as an unidentifiable intangible asset and subsequently amortized. This statement requires that long-lived assets (including long-term customer relationship intangible assets) to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and requires a probability-weighted cash flow estimation approach, and includes a "primary- asset" approach to determine the cash flow estimation period. This statement is effective for acquisitions on or after October 1, 2002. The adoption of this pronouncement had no effect on the financial position and results of operations of the Company. Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and Disclosure" an amendment of FASB Statement No. 123, is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock- based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Adoption of this pronouncement had no effect on the financial position and results of operations of the Company. 37 NOTE B OTHER REAL ESTATE The Subsidiary Bank has acquired various parcels of real estate in connection with the default and foreclosure on certain loans. These properties, which are held for sale, are recorded on the Subsidiary Bank's records at the lower of the loan balance or net realizable value. Any difference is charged to the allowance for loan losses in the year of foreclosure. The net income (expense) from Other Real Estate totaled $22,032 in 2002, $498,589 in 2001 and ($32,309) in 2000. NOTE C LOANS Major classification of loans are as follows: December 31, 2002 2001 Real Estate Mortgages $35,966,181 $34,471,841 Commercial 3,220,346 3,632,151 Personal 4,159,863 3,987,432 Credit Cards 15,565,859 16,870,919 Overdrafts 175,812 440,313 59,088,061 59,402,656 Unearned Discounts 205,473 205,473 58,882,588 59,197,183 Allowance for Loan Losses 1,800,000 1,800,000 $57,082,588 $57,397,183 38 NOTE C LOANS (Continued) The following is a classification of loans by rate and maturity: (Dollar amounts in thousands) December 31, 2002 2001 Fixed Rate Loans: Maturing in 3 Months or Less $ 5,612 $ 8,377 Maturing Between 3 and 12 Months 12,572 11,907 Maturing Between 1 and 5 Years 35,308 33,411 Maturing After 5 Years 1,309 1,840 54,801 55,535 Variable Rate Loans: Maturing Quarterly or More Frequently 2,149 2,864 Maturing Between 3 and 12 Months - - Non-Accrual Loans 2,138 1,003 59,088 59,402 Less: Unearned Discount 205 205 Less: Allowance for Loan Losses 1,800 1,800 Net Loans $57,083 $57,397 As of December 31, 2002 and 2001, there was no recorded investment in loans that are considered impaired under SFAS 114 and 118. The Bank purchases credit card portfolios occasionally resulting in premiums or discounts. Premiums and discounts are being amortized as an adjustment to interest income over a three year period following the purchase date. Unamortized premiums at December 31, 2002 and 2001 totaled $35,798 and $65,799, respectively. NOTE D NON-PERFORMING ASSETS Non-performing assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure. These assets are included on the accompanying consolidated balance sheets under the account caption, "Other Real Estate", and amount to $208,523 at December 31, 2002 and $-0- at December 31, 2001. Loans are placed on non-accrual status when, in management's opinion, the collection of additional interest is questionable. Thereafter no interest is taken into income unless received in cash or until such time as the borrower demonstrates the ability to pay principal and interest. At December 31, 2002, $2,137,648 of loans were in the non-accrual status and $39,466 of interest was foregone in the year then ended. At December 31, 2001, $1,003,224 of loans were in the non-accrual status and $26,019 of interest was foregone in the year then ended. Interest income recognized on non-accrual loans totaled $52,151, $-0-, and $-0- during the years ended December 31, 2002, 2001 and 2000, respectively. 39 NOTE E INVESTMENT SECURITIES Carrying amounts and approximate market values of investment securities are summarized as follows: Securities held-to-maturity consisted of the following at December 31, 2002: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $17,575,306 $112,658 $ 1,875 $17,686,089 Securities available-for-sale consisted of the following at December 31, 2002: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities $ 291,400 $133,406 $ - $ 424,806 Securities held-to-maturity consisted of the following at December 31, 2001: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $15,514,924 $ 34,708 $ 51,298 $15,498,334 Securities available-for-sale consisted of the following at December 31, 2001: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities $ 291,400 $102,008 $ - $ 393,408 40 NOTE E INVESTMENT SECURITIES (Continued) The maturities of investment securities at December 31, 2002 are as follows: Securities Held-to-Maturity Securities Available-for-Sale Amortized Market Amortized Market Cost Value Cost Value Amounts maturing in: One year or less $ 6,586,085 $ 6,655,465 $ 291,400 $ 424,806 After one year through five years 10,989,221 11,030,624 - - $17,575,306 $17,686,089 $ 291,400 $ 424,806 Securities of $1,256,877 at December 31, 2002 and $1,011,581 at December 31, 2001 were pledged to secure public funds. NOTE F INCOME TAXES The components of the provision for income tax expense are: 2002 2001 2000 Current $ (13,476) $ - $ 6,207 Deferred (2,709) 152,085 164,287 Total Provision for Income Tax $ (16,185) $ 152,085 $ 170,494 A reconciliation of income tax at the statutory rate to income tax expense at the Company's effective rate is as follows: 2002 2001 2000 Computed Tax at the Expected Statutory Rate $ (17,609) $ 166,071 $ 186,682 Other Adjustments 1,424 (13,986) (16,188) Income Tax Expense (Benefit) for Operations $ (16,185) $ 152,085 $ 170,494 41 NOTE F INCOME TAXES (Continued) Certain income and expense items are accounted for differently for financial reporting purposes than for income tax purposes. Provisions for deferred taxes are made in recognition of these temporary differences and are measured using the income tax rates applicable to the period when the differences are expected to be realized or settled. There were net deferred tax assets of $191,222 and $199,188 as of December 31, 2002 and 2001, respectively. The major temporary differences, which created deferred tax assets and liabilities, are as follows: 2002 2001 Deferred Tax Assets: Other Real Estate $ 101,322 $ 101,322 Allowance for Loan Loss 195,757 195,757 Net Operating Loss and Tax Credit Carryforward 63,391 61,265 Contributions Carryforward 2,505 3,995 Securities Section 475 Adjustment 11,255 - Other - 437 Total Deferred Tax Assets 374,230 362,776 Deferred Tax Liabilities: Unrealized Gain on Securities FASB 115 Adjustment (95,055) (84,380) Accumulated Depreciation (87,953) (79,208) Total Deferred Tax Liabilities (183,008) (163,588) Deferred Tax Assets, Net of Deferred Tax Liabilities $ 191,222 $ 199,188 The net operating loss carryforwards totaling $39,634 and the tax credit carryforwards totaling $49,915 expire in various years through the year 2020. NOTE G PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS December 31, 2002 2001 Furniture and Equipment $ 1,625,572 $ 4,506,639 Bank Owned Vehicles 77,357 77,357 Leasehold Improvements 256,083 411,056 Land 468,425 468,425 Buildings 1,334,075 1,334,075 3,761,512 6,797,552 Less: Accumulated Depreciation and Amortization 2,079,700 4,967,788 $ 1,681,812 $ 1,829,764 42 NOTE G PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Continued) Depreciation and amortization expense aggregated $287,674 in 2002, $362,634 in 2001, and $510,066 in 2000. NOTE H ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows: For The Years Ended December 31, 2002 2001 2000 Balance - January 1 $ 1,800,000 $ 1,800,000 $ 1,800,000 Provision Charged to: Operations 399,920 555,811 308,194 Loans Charged Off (907,523) (1,077,956) (1,146,684) Recoveries 507,603 522,145 838,490 Balance - December 31 $ 1,800,000 $ 1,800,000 $ 1,800,000 NOTE I STOCKHOLDERS' EQUITY PREFERRED STOCK 8%, non-cumulative, non-participating, non-convertible, par value $1; 3,000,000 shares authorized, 2,239,602 shares issued and outstanding in 2002 and 2,300,871 shares issued and outstanding in 2001. Preferred stock ranks prior to common stock as to dividends and liquidation. COMMON STOCK Par value $1; 1,000,000 shares authorized, 179,145 shares issued and outstanding in 2002 and 2001. On August 10, 1999, the Company declared a dividend distribution of one purchase right for each outstanding share of common stock. Each right entitles the holder, at any time following the "Distribution Date" to purchase one share of common stock of the Company at an exercise price of $7.50 per share. A "Distribution Date" occurs either ten days following certain actions designed to acquire 20% or more of the Company's voting securities or ten days following a determination by the Board of Directors that a person having beneficial ownership of at least 10%, is an adverse person. The rights will expire on August 9, 2009. 43 NOTE J EARNINGS PER COMMON SHARE Earnings per share are computed using the weighted average number of shares outstanding, which were 179,145 in 2002, 2001 and 2000. There was no provision for dividends for the years ended December 31, 2002, 2001 or 2000. NOTE K CONTINGENT LIABILITIES AND COMMITMENTS The Subsidiary Bank's financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit. A summary of the Bank's commitments and contingent liabilities are as follows: 2002 2001 2000 Credit Card Arrangements $70,125,000 $67,828,000 $62,401,000 Commitments To Extend Credit 2,853,000 2,941,000 1,373,000 Commitments to extend credit, credit card arrangements and commercial letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank's credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded on the statements of condition. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank. The Subsidiary Bank in the course of conducting its business, becomes involved as a defendant or plaintiff in various lawsuits. In one such case, the Subsidiary Bank is a defendant in a lawsuit filed by another bank. Outside counsel for the Subsidiary Bank has advised that at this stage in the proceedings he believes the probable outcome to be favorable to Bank of Louisiana. The Subsidiary Bank has filed a counter-claim in this case and believes the suits are without merit and intends to defend vigorously its position. The Subsidiary Bank is a defendant in a lawsuit filed by one of its proprietary customers for alleged breach of contract. In 1997, a judgment was rendered against the bank, and accordingly, a provision for loss of $150,000 was charged to operations. During 2000, the subsidiary bank was successful in its appeal, resulting in a reversal of the $150,000 litigation settlement in the accompanying consolidated financial statements for 2000. 44 NOTE L RELATED PARTY TRANSACTIONS In the ordinary course of business, the Subsidiary Bank makes loans to its directors, officers and principal holders of equity securities. These loans are made on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. An analysis of loans made to directors, officers and principal holders of equity securities, including companies in which they have a significant ownership interest, is as follows: 2002 2001 Balance - January 1 $ 501,512 $ 817,717 New Loans Made 180,085 125,785 Repayments (297,574) (441,990) Balance - December 31 $ 384,023 $ 501,512 The Subsidiary Bank leases office space from Severn South Partnership and Tammany Mall Partnership. The general partners of these Partnerships are majority shareholders in BOL BANCSHARES, INC. Rent paid to Severn South Partnership for the years ended December 31, 2002, 2001 and 2000 totaled $465,633, $478,080 and $478,970, respectively. An annual rent of $74,400 was paid to Tammany Mall Partnership for the years ended December 31, 2002, 2001 and 2000. At December 31, 2002 and 2001 amounts due to Directors of the Company, including accrued interest, totaled $561,117 and $586,728, respectively. These amounts which are included in Notes Payable and Accrued Interest Payable in the accompanying consolidated balance sheets, are payable on demand and bear interest at 10% per annum. Of the debentures payable at December 31, 2002 and 2001, $90,500 and $190,500, respectively, were to Directors of the Company (see Note Q). NOTE M LEASES The Subsidiary Bank leases office space under agreements expiring in various years through December 31, 2006. Two of the leases are with related parties, as discussed in Note L. In addition, the Subsidiary Bank rents office space on a month-to-month basis from non-related groups. Various pieces of data processing equipment are also leased. 45 NOTE M LEASES (Continued) The total minimum rental commitment at December 31, 2002, under the leases is $863,865, which is due as follows: December 31, 2003 $ 397,274 2004 206,076 2005 208,515 2006 52,000 $ 863,865 For the years ended December 31, 2002, 2001 and 2000, $812,161, $811,233 and $800,947 was charged to rent expense, respectively. The Subsidiary Bank is the lessor of office space under operating leases expiring in various years through 2007. Minimum future rentals to be received on non-cancelable leases as of December 31, 2002 are: December 31, 2003 $ 118,898 2004 68,798 2005 67,316 2006 54,303 2007 13,281 $ 322,596 NOTE N LETTERS OF CREDIT Outstanding letters of credit were $71,265 and $61,380 as of December 31, 2002 and 2001, respectively. 46 NOTE O INTEREST BEARING DEPOSITS Major classifications of interest bearing deposits are as follows: December 31, 2002 2001 NOW Accounts $13,464,680 $12,805,353 Money Market Accounts 4,772,596 4,933,799 Savings Accounts 28,739,682 28,004,928 Certificates of Deposit Greater Than $100,000 945,371 1,282,719 Other Certificates of Deposit 6,659,172 8,330,364 $54,581,501 $55,357,163 The maturities of Certificates of Deposit Greater than $100,000 at December 31, 2002 and 2001 are as follows: (Dollar amounts in thousands) Three Months or Less $ 638 $ 680 After Three Months Through One Year 307 603 $ 945 $ 1,283 NOTE P FUNDS AVAILABLE FOR DIVIDENDS The Subsidiary Bank is restricted under applicable laws and regulatory authority in the payment of cash dividends. Such laws generally restrict cash dividends to the extent of the Subsidiary Bank's earnings. The Subsidiary Bank has been further restricted by regulatory authorities from paying dividends without prior regulatory approval. During the year ended December 31, 2001, the Bank received approval and paid BOL Bancshares, Inc. dividends totaling $143,000. Refer to Note W. 47 NOTE Q NOTES PAYABLE The following is a summary of notes payable at December 31, 2002 and 2001: December 31, 2002 2001 Notes payable to current and past Directors of the Company, payable on demand, interest at 10%. $ 410,754 $ 410,754 Notes payable to past Director, interest at 13.5%, maturing September 30, 2006, monthly payments of $1,298. 45,648 54,411 Debentures payable, due July 2003, interest at 9%, callable at 103%, 102% and 101% of face value during the first, second, and third years, respectively, following the closing date, interest payable semi-annually, each $500 debenture secured by 40.79 shares of the Subsidiary Bank's stock. 1,753,000 1,753,000 $2,209,402 $2,218,165 Following are maturities of long-term debt: December 31, 2003 $2,173,777 2004 11,463 2005 13,109 2006 11,053 $2,209,402 48 NOTE R INTEREST INCOME AND INTEREST EXPENSE Major categories of interest income and interest expense are as follows: December 31, 2002 2001 2000 INTEREST INCOME Interest and Fees on Loans: Real Estate Loans $ 2,988,238 $ 3,020,092 $ 2,644,013 Installment Loans 551,788 385,806 368,048 Credit Cards and Related Plans 3,537,538 3,638,687 3,870,716 Commercial and all Other Loans 221,068 560,378 520,616 Interest on Investment Securities - U.S. Treasury and Other Securities 583,738 327,301 170,477 Interest on Federal Funds Sold 291,341 985,821 1,783,573 $ 8,173,711 $ 8,918,085 $ 9,357,443 INTEREST EXPENSE Interest on Time Deposits of $100,000 or More $ 20,154 $ 54,506 $ 60,280 Interest on Other Deposits 585,249 1,343,347 1,353,433 Interest on Other Borrowed Funds - - 7,798 Interest on Notes Payable 205,665 207,195 208,939 $ 811,068 $ 1,605,048 $ 1,630,450 49 NOTE S NON-INTEREST INCOME AND NON-INTEREST EXPENSES Major categories of other non-interest income and non-interest expenses are as follows: December 31, 2002 2001 2000 OTHER NON-INTEREST INCOME Cardholder and Other Charge Card Income $ 737,031 $ 699,560 $ 639,894 Other Commission and Fees 89,761 86,096 86,248 Other Real Estate Income 27,824 1,196,286 15,702 Other Income 92,537 103,379 105,431 $ 947,153 $ 2,085,321 $ 847,275 OTHER NON-INTEREST EXPENSE Loan and Charge Card Expenses $ 1,120,444 $ 992,514 $ 932,617 Communications 431,923 407,758 447,126 Stationery, Forms and Supplies 240,054 226,617 238,946 Professional Fees 442,433 386,728 401,413 Insurance and Assessments 104,323 95,968 94,809 Advertising 179,186 70,673 108,496 Miscellaneous Losses 33,226 20,389 22,545 Promotional Expenses 140,522 138,872 166,005 Other Real Estate Expenses 5,791 697,696 48,010 Other Expenses 378,124 353,087 236,148 $ 3,076,026 $ 3,390,302 $ 2,696,115 50 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY BOL BANCSHARES, INC. CONDENSED BALANCE SHEETS December 31, 2002 2001 ASSETS Due from Banks $ 398,638 $ 449,798 Due from Subsidiary - 71,781 Securities Available-for-Sale, at Fair Value 404,806 373,408 Other Assets 58,526 29,069 Investment in Bank of Louisiana 8,131,797 8,045,917 $ 8,993,767 $ 8,969,973 LIABILITIES AND STOCKHOLDERS' EQUITY Notes Payable $ 2,209,402 $ 2,218,165 Due to Subsidiary 20,198 - Deferred Taxes 45,358 34,683 Accrued Interest 489,134 448,058 Shareholders' Equity 6,229,675 6,269,067 $ 8,993,767 $ 8,969,973 51 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF INCOME (LOSS) December 31, 2002 2001 2000 INCOME Dividend Income - Bank of Louisiana $ - $ 143,000 $ - Interest Income 1,578 7,513 8,704 Miscellaneous Income 26,882 25,520 59,972 28,460 176,033 68,676 EXPENSES Interest 205,665 207,195 208,939 Other Expenses 16,559 16,325 12,675 222,224 223,520 221,614 LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY (193,764) (47,487) (152,938) Equity in Undistributed Earnings of Subsidiary 85,879 313,006 465,237 INCOME (LOSS) BEFORE INCOME TAX BENEFIT (107,885) 265,519 312,299 INCOME TAX BENEFIT 72,278 70,839 66,272 NET INCOME (LOSS) $ (35,607) $ 336,358 $ 378,571 52 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF CASH FLOWS December 31, 2002 2001 2000 OPERATING ACTIVITIES Net Income $ (35,607) $ 336,358 $ 378,571 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities Equity in Undistributed (Earnings) of Subsidiary (85,879) (313,006) (465,237) Net (Increase) Decrease in Other Assets (29,457) 10,101 (19,858) Net Increase in Other Liabilities 41,075 29,837 52,427 Net Cash Provided by (Used in) Operating Activities (109,868) 63,290 (54,097) FINANCING ACTIVITIES Preferred Stock Retired (24,508) (776) - Decrease in Due from Subsidiary 91,979 10,111 17,744 Proceeds from Issuance of Long-Term Debt - - 1,753,000 Repayment of Long-Term Debt (8,763) (7,662) (1,759,701) Net Cash Provided by Financing Activities 58,708 1,673 11,043 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (51,160) 64,963 (43,054) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 449,798 384,835 427,889 CASH AND CASH EQUIVALENTS - END OF YEAR $ 398,638 $ 449,798 $ 384,835 53 NOTE U CONCENTRATIONS OF CREDIT All of the Bank's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank's market area. All such customers are depositors of the Bank. The concentrations of credit by type of loan are set forth in Note C. Commercial letters of credit were granted primarily to commercial borrowers. NOTE V COMPREHENSIVE INCOME Comprehensive income was comprised of changes in the Company's unrealized holding gains or losses on securities available-for-sale during 2002, 2001 and 2000. The following represents the tax effects associated with the components of comprehensive income: December 31, 2002 2001 2000 Gross Unrealized Holding Gains Arising During the Period $ 31,398 $ 5,448 $ 21,415 Tax (Expense) (10,675) (1,853) (7,281) 20,723 3,595 14,134 Reclassification Adjustment for Gains Included in Net Income - - - Tax Benefit - - - - - - Net Unrealized Holding Gains Arising During the Period $ 20,723 $ 3,595 $ 14,134 NOTE W REGULATORY MATTERS On December 14, 1999, the Bank consented to a revised Memorandum of Understanding issued by the Federal Deposit Insurance Corporation (FDIC) and the Office of Financial Institutions (OFI). The Memorandum was issued by the FDIC and OFI as a result of their examination of the Bank as of August 9, 1999 and replaces the Memorandum of Understanding dated March 12, 1996. The Memorandum of Understanding is an arrangement between the Bank and the FDIC and OFI in which the Bank agrees to perform, among other things, the following within specified time periods: a) The Bank shall maintain a Tier I leverage capital ratio equal to or greater than seven percent, including restricting dividends, pending regulatory approval, b) Eliminate from its books certain criticized assets and reduce other criticized assets to specified levels, 54 NOTE W REGULATORY MATTERS (Continued) c) Initiate and implement a marketing program to dispose of its other real estate in a timely manner, d) Formulate and implement a written strategic plan, management plan, management succession plan, and profit plan, e) Perform a quarterly review of the adequacy of the Bank's loan valuation reserve, f) Revision of the Bank's loan policy and loan review program, g) Restatement of 1998 income for accounting for a gain recognized on the sale of other real estate. While no assurance can be given, Bank management believes it has taken action toward complying with the provisions of the Memorandum of Understanding. It is not presently determinable what actions, if any, bank regulators might take if requirements of the Memorandum are not complied with in the specified time periods. As of December 31, 2002, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized "well capitalized" the Bank must maintain minimum leverage capital ratios and minimum amounts of capital to total "risk weighted" assets, as set forth in the table. Management philosophy and plans are directed to enhancing the financial stability of the Subsidiary Bank to ensure the continuity of operations. The Bank's actual capital amounts and ratios are also presented in the table. (Dollars in thousands). December 31, 2002 Required To Be Well Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Tier I Capital (to Average Assets) $8,020 8.00% $4,012 4.00% $5,014 5.00% Tier I Capital (to Risk- Weighted Assets) $8,020 13.55% $2,367 4.00% $3,551 6.00% Total Capital (to Risk-Weighted Assets) $8,773 14.82% $4,734 8.00% $5,918 10.00% 55 NOTE W REGULATORY MATTERS (Continued) December 31, 2001 Required To Be Well Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Tier I Capital (to Average Assets) $8,039 8.09% $3,973 4.00% $4,967 5.00% Tier I Capital (to Risk- Weighted Assets) $8,039 12.84% $2,504 4.00% $3,756 6.00% Total Capital (to Risk-Weighted Assets) $8,834 14.11% $5,008 8.00% $6,260 10.00% NOTE X DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value: CASH AND SHORT-TERM INVESTMENTS For cash, the carrying amount approximates fair value. For short- term investments, fair values are calculated based upon general investment market interest rates for similar maturity investments. INVESTMENT SECURITIES For securities and marketable equity securities held-for-investment purposes, fair values are based on quoted market prices. LOAN RECEIVABLES For certain homogeneous categories of loans, such as residential mortgages, credit card receivables and other consumer loans, fair value is estimated using the current U.S. treasury interest rate curve, a factor for cost of processing and a factor for historical credit risk to determine the discount rate. DEPOSIT LIABILITIES The fair value of demand deposits, savings deposits and certain money market deposits are calculated based upon general investment market interest rates for investments with similar maturities. The value of fixed maturity certificates of deposit is estimated using the U.S. treasury interest rate curve currently offered for deposits of similar remaining maturities. 56 NOTE X DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) COMMITMENTS TO EXTEND CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. The estimated fair values of the Company's financial instruments are as follows: December 31, 2002 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $22,124,233 $22,124,233 Investment Securities 18,000,112 18,110,895 Loans 58,882,588 59,047,326 Less: Allowance for Loan Losses 1,800,000 1,800,000 $97,206,933 $97,482,454 Financial Liabilities: Deposits $91,402,729 $91,472,080 Unrecognized Financial Instruments: Commitments to Extend Credit $ 2,781,268 $ 2,781,268 Commercial Letters of Credit 71,265 71,265 Credit Card Arrangements 70,125,000 70,125,000 $72,977,533 $72,977,533 57 NOTE X DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) December 31, 2001 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $23,301,342 $23,301,342 Investment Securities 15,802,884 15,886,294 Loans 59,197,183 59,451,120 Less: Allowance for Loan Losses 1,800,000 1,800,000 $96,501,409 $96,838,756 Financial Liabilities: Deposits $91,612,064 $91,762,104 Unrecognized Financial Instruments: Commitments to Extend Credit $ 2,879,197 $ 2,879,197 Commercial Letters of Credit 61,380 61,380 Credit Card Arrangements 67,828,000 67,828,000 $70,768,577 $70,768,577 NOTE Y EMPLOYEE BENEFITS Effective January 1, 2001, the Bank adopted a Section 401(k) savings plan. The Plan covers substantially all employees who are at least eighteen years old and have completed six months of continuous service and have worked at least 1,000 hours. The Bank may make discretionary contributions and is not required to match employee contributions under the plan. The Bank made no contributions to the plan during the year ended December 31, 2002 or 2001. 58 To the Board of Directors BOL Bancshares, Inc. & Subsidiary Independent Auditor's Report on Supplementary Information Our report on our audits of the basic financial statements of BOL BANCSHARES, INC. and its wholly-owned subsidiary, Bank of Louisiana, for the years ended December 31, 2002 and 2001 appears on page 1. These audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information contained in Schedules I, II and III is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ LaPorte, Sehrt, Romig & Hand LaPorte, Sehrt, Romig & Hand A Professional Accounting Corporation January 20, 2003 59 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE I BALANCE SHEETS UNCONSOLIDATED ASSETS December 31, 2002 2001 Cash and Due from Banks Non-Interest Bearing Balances and Cash $ 5,659,233 $ 7,141,342 Federal Funds Sold 16,465,000 16,160,000 Investment Securities Securities Held-to-Maturity (Fair Value of $17,686,089 in 2002 and $15,498,334 in 2001) 17,575,306 15,514,924 Securities Available-for-Sale, at Fair Value 20,000 20,000 Loans: Less Allowance for Loan Losses of $1,800,000 in 2002 and 2001 and Unearned Discount of $205,473 in 2002 and 2001 57,082,588 57,397,183 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 1,681,812 1,829,764 Other Real Estate 208,523 - Other Assets 1,312,411 2,164,934 Due from Parent 20,198 - Deferred Taxes 305,192 302,483 Letters of Credit 71,265 61,380 Total Assets $100,401,528 $100,592,010 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-Interest Bearing $ 36,821,439 $36,256,239 Interest Bearing 54,979,929 55,805,624 Other Liabilities 344,183 330,409 Letters of Credit Outstanding 71,265 61,380 Due to Parent - 942 Accrued Litigation Settlement - - Accrued Interest 50,701 91,499 Total Liabilities 92,267,517 92,546,093 STOCKHOLDERS' EQUITY Common Stock - 143,000 Shares Issued and Outstanding 1,430,000 1,430,000 Surplus 4,616,796 4,616,796 Retained Earnings 2,087,215 1,999,121 Total Stockholders' Equity 8,134,011 8,045,917 Total Liabilities and Stockholders' Equity $100,401,528 $100,592,010 See independent auditor's report on supplementary information. 60 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE II STATEMENTS OF INCOME UNCONSOLIDATED For The Years Ended December 31, 2002 2001 2000 INTEREST INCOME $ 8,173,711 $ 8,918,085 $9,357,443 INTEREST EXPENSE 606,981 1,405,366 1,430,215 Net Interest Income 7,566,730 7,512,719 7,927,228 PROVISION FOR LOANS LOSSES 399,920 555,811 308,194 Net Interest Income After Provision For Loan Losses 7,166,810 6,956,908 7,619,034 OTHER INCOME Service Charges on Deposit Accounts 1,097,297 1,116,019 1,125,943 Other Non-Interest Income 920,271 2,059,801 787,303 Reversal of Litigation Settlement - - 150,000 2,017,568 3,175,820 2,063,246 OTHER EXPENSES Salaries and Employee Benefits 4,280,844 4,324,160 4,327,373 Occupancy Expense 1,702,095 1,755,662 1,969,464 Other Non-Interest Expense 3,057,252 3,373,976 2,683,440 9,040,191 9,453,798 8,980,277 INCOME BEFORE INCOME TAX EXPENSE 144,187 678,930 702,003 INCOME TAX EXPENSE 56,093 222,924 236,766 NET INCOME $ 88,094 $ 456,006 $ 465,237 EARNINGS PER SHARE OF COMMON STOCK $ 0.62 $ 3.19 $ 3.25 See independent auditor's report on supplementary information. 61 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE III STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNCONSOLIDATED Accumulated Other Common Comprehensive Retained Stock Income Surplus Earnings Total BALANCE - December 31, 1999 $1,430,000 $ - $4,616,796 $1,220,878 $7,267,674 Net Income for the Year 2000 - - - 465,237 465,237 BALANCE - December 31, 2000 1,430,000 - 4,616,796 1,686,115 7,732,911 Dividends Paid - $1 Per Share - - - (143,000) (143,000) Net Income for the Year 2001 - - - 456,006 456,006 BALANCE - December 31, 2001 1,430,000 - 4,616,796 1,999,121 8,045,917 Net Income for the Year 2002 - - - 88,094 88,094 BALANCE - December 31, 2002 $1,430,000 $ - $4,616,796 $2,087,215 $8,134,011 See independent auditor's report on supplementary information. 62 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9 Directors and Executive Officers of the Company Principal Occupation for Company Stock Beneficially Owned Last Five Years Common Preferred If not with the Name (Age) Position Held Number Percent Number Percent Company G. Harrison Scott Director; 60,501 33.77% (1) 127,368 5.69% None (79) Chairman of the Board of the Company and the Bank James A. Comiskey Director; 35,467 19.80% (2) 94,706 4.23% None (76) President of the Company and the Bank Douglas A. Schonacher (72) Director of the 2,740 1.53% (3) 18,537 (*) President, Company and the Bank V.I.P. Dist. and Secretary of the Company Gordon A. Burgess (69) Director of the 1,015 (*) 36,164 1.61% President, Company and the Bank Tangipahoa Parish Council Lionel J. Favret, Sr. Director of the 571 (*) 31,656 1.41% Retired (91) Company and the Bank Leland L. Landry Director of the 3,800 2.12% 2,387 (*) President, (76) Company and the Bank Landry Realty Shannon Scott Chouest Director of the 1,562 (*) - - Exec. Assistant (33) Company and the Bank Sales Edison Chouest Offshore 63 Non-Director Executive Officers Peggy L. Schaefer Treasurer of 125 (*) 2,772 (*) None (51) the Company and Senior Vice President, and Chief Financial Officer of the Bank All Directors & Executive Officers 105,781 59.05% 313,590 14.00% as a group (8 persons) (*) Represents less than 1% of the shares outstanding. (1) Includes 3,646 common shares owned by Scott Family Limited Liability Partnership. (2) Includes 47 common shares and 2,661 preferred shares owned by Director Comiskey's spouse. (3) Includes 2,525 common shares and 9,213 preferred shares owned by Director Schonacher's spouse. Directors and executive officers of the Company each serve for a term of one year. Messrs. Scott, Comiskey, and Favret have served as directors since 1981. Messrs. Burgess, Landry, and Schonacher have served as directors since 1988. Mr. Scott has served as Chairman of the Board of the Company since 1981. Mr. Schonacher has served in his capacity as Secretary of the Company since 2002. Ms. Schaefer has served in her capacity as Treasurer of the Company since 1988 and as a Bank officer since 1983. Mrs. Shannon Scott Chouest has served as director since 2002. No family relationships exist among the executive officers of the Company or the Bank. There is one family relationship that exists among the current directors, that of Mr. G. Harrison Scott and Mrs. Shannon Scott Chouest. Except for service as directors of the Company, no director of the Company is a director of any other company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(b) of that act or any company registered as an investment company under the Investment Company Act of 1940. The Company does not have standing audit, nominating, or compensation committees of the Board of Directors, or committees performing similar functions. In lieu thereof, the Board of Directors as a group performs the foregoing functions. Item 10 Executive Compensation The Company pays no salaries or other compensation to its directors and executive officers. The Bank pays each director, other than Messrs. Scott and Comiskey, an honorarium for attending each meeting of the Board of Directors, and each meeting of the Bank's Audit and Finance Committee and Executive Committee, in the amount of $400, $300, and $300, respectively. From October 1, 1990, through June 30, 1992, the director-recipients loaned these honorariums to the Company. The total amount loaned to the Company since October 1, 1990, and as of December 31, 2002, was $833,754, including accrued and unpaid interest at the rate of 10% per annum. At this time, there is no maturity date on these loans. The following table sets forth compensation for the Bank's executive officers for the calendar years 2002, 2001, and 2000: 64 Annual Compensation Long Term Compensation Awards Payouts Restricted Options/ Other Annual Stock LTIP All Other Name and Principal Year Salary Bonus Compensation Award(s) SARs Payouts Compensation Position ($) ($) ($) ($) (#) ($) ($) G. Harrison Scott, 2002 89,800 0 41,000 0 0 0 19,494 Chairman of the 2001 89,800 0 41,000 0 0 0 19,494 Board 2000 89,800 0 41,000 0 0 0 19,494 James A. Comiskey, 2002 89,800 0 41,000 0 0 0 19,000 President 2001 89,800 0 41,000 0 0 0 19,000 2000 89,800 0 41,000 0 0 0 19,000
In addition to the cash compensation shown in the foregoing table, the Bank provides an automobile and certain club memberships for Messrs. Scott and Comiskey. The Bank also provides life insurance policies for Messrs. Scott and Comiskey. Upon the death of the insured, the Bank is entitled to receive, from the death proceeds, all of the premiums it has paid for such policy, but in no event more than $150,000 per man, with the remaining death benefit being paid to the named beneficiary. The Company has also provided Messrs. Scott and Comiskey with life insurance policies in which each is entitled to name their own respective beneficiaries. The cost of these benefits borne by the Bank in 2002 were $19,494 for Mr. Scott's policy and $19,000 for Mr. Comiskey's policy as reflected in the "All Other Compensation" column in the foregoing table. Committees of the Board of Directors of the Company and the Bank During fiscal year 2002, the Board of Directors of the Company held a total of 7 meetings, and the Board of Directors of the Bank held a total of 12 meetings. Each director attended at least 75% of the aggregate of the meetings of the Board of Directors and of the committees on which such director served. Neither the Board of Directors of the Company nor the Bank has a standing compensation committee or committee performing similar functions. In lieu thereof, the Board of Directors as a group performs the foregoing function. The Board of Directors of the Bank does have an Audit and Finance Committee consisting of Messrs. Schonacher (chairman), Landry, and Burgess and two rotating members selected from Mr. Favret, and Mrs. Chouest. By its charter, this committee meets monthly on the first Tuesday of the month. The Audit and Finance Committee reviews information from management; reviews financial and delinquency reports; reviews the work performed by the Bank's internal auditor and by the independent certified public accountant firm. In addition this committee also reviews capital expenditures in excess of 5,000; analyzes the Loan Loss Reserve adequacy; and approves charge offs. The Audit and Finance Committee met 12 times in 2002. The Audit and Finance Committee discloses the following: 1. They have reviewed and discussed the audited financial statements with management, and with the independent auditors. 2. They have received a letter and written disclosure from the independent auditors, and have discussed the independence of the auditors. 3. They have recommended to the Board of Directors that the financial statements prepared by the independent auditors be included in the Annual Report. 65 The Bank also has an Executive Committee consisting of four permanent members and three rotating members. The permanent members of the Executive Committee in 2002 were Messrs. Scott (chairman), Comiskey, Favret, and Burgess, and the rotating members were selected from Messrs. Landry, Schonacher, and Mrs. Chouest. The Executive Committee formulates policy matters for determination by the Board of Directors and reviews financial reports, loan reports, new business, and other real estate owned information. The Executive Committee met 29 times in 2002. Item 11 Security Ownership Of Certain Beneficial Owners and Management As of December 31, 2002, the following persons were known to be the beneficial owners of more than 5% of the Company's stock. Title Of Class Name & Address Of Amount and Nature of Percent Beneficial Owner Beneficial Owner Of Class Common G. Harrison Scott 60,501 (1) 33.77% Preferred 55481 Hwy.433 127,368 5.69% Slidell, LA 70461 Common James A. Comiskey 35,467 (2) 19.80% Preferred 1100 City Park Ave. 94,706 4.23% New Orleans, LA 70119 Common Edward J. Soniat 10,381 5.79% Preferred 49 Oriole Street 257,326 11.49% New Orleans, LA 70124 (1) Includes 3,646 common shares owned by Scott Family Limited Liability Partnership, L.L.P. (2) Includes 47 common shares and 2,661 preferred shares owned by Director Comiskey's spouse. Item 12 Certain Relationships and Related Transactions The Bank makes loans in the ordinary course of business to its directors and executive officers, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of ollectability or present other unfavorable features. The aggregate amount borrowed by all officers, directors, and their associates totaled $384,000 at December 31, 2002 and the highest aggregate amount borrowed during 2002 totaled $1,094,000. These aggregate amounts represented 4.72% and 13.44% of the total capital of the Bank, respectively. On September 30, 1991, the Company purchased a four-story building located at 300 St. Charles Avenue from the RTC for a price of $402,500. The building serves as the Bank's main office. The purchase was financed by a loan from former director Mr. Soniat to the Company, which in turn sold the building to the Bank. As of December 31, 2002, there was a balance of $45,648 in principal and accrued but unpaid interest on the loan, which bears interest at the rate of 13.50% per annum. The loan matured on September 30, 1996, however, Mr. Soniat agreed to renew this loan at the same interest rate and repayment schedule, on a month-to-month basis, which unless changed, would fully amortize such loan on September 30, 2006. The Bank leases space for its operations center under four separate leases from Severn South Partnership, a limited partnership in which Messrs. Scott and Comiskey are the only two general partners. There are 13 limited partners, of which five also serve as directors of the Bank, namely Messrs. 66 Scott, Comiskey, Burgess, Landry and Schonacher. The Bank pays $26,222, plus a percentage of operating costs, per month for the leased premises. Management believes that the terms of the leases are no less favorable than the terms that could be obtained from an unaffiliated party for similar space. The Amendment to Lease dated May 1, 1999, with respect to this office space, expires on May 31, 2003. An appraisal has been obtained to determine fair market value. The Bank leases the facilities for its Severn Branch from Severn South Partnership. The Bank pays $12,456, plus a percentage of operating costs each month. Management of the Company believes that the terms of the lease are no less favorable than the terms that could be obtained from an unaffiliated party for similar space. The Amendment to Lease dated May 1, 1999, with respect to this office space, expires on May 31, 2003. The Bank leases its Tammany Mall Branch office on a month-to-month basis from Tammany Mall Partnership. This partnership is a limited partnership consisting of Messrs. Scott and Comiskey as the only general partners and of the 12 limited partners, five are currently directors of the Bank, namely Messrs. Scott, Comiskey, Landry, Burgess, and Schonacher. The Bank pays $6,200, per month for the leased premises. Management of the Company believes that such lease payments are comparable to what would have been paid to an unaffiliated party for similarly situated space at the time the lease was executed. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of the Company. There have been no material changes in reported market risks faced by the Company since the end of the most recent year. Item 13 Exhibits and Reports on Form 8-K None Item 14 Controls and Procedures The certifying officers of the Company have evaluated the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this report and have concluded that such controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 67 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. BOL BANCSHARES, INC. /s/ G. Harrison Scott April 8, 2003 G. Harrison Scott Date Chairman (in his capacity as a duly authorized officer of the Registrant) /s/ Peggy L. Schaefer Peggy L. Schaefer Treasurer (in her capacity as Chief Accounting Officer of the Registrant) 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 indicated on April 8, 2003. /s/Shannon Scott Chouest /s/ Gordon A. Burgess Shannon Scott Chouest - Director Gordon A. Burgess - Director /s/ Douglas A. Schonacher /s/ Lionel J. Favret, Sr. Douglas A. Schonacher - Director Lionel J. Favret, Sr. - Director 68 I, G. Harrison Scott, certify that: 1. I have reviewed this annual report on Form 10-KSB of Bol Bancshares, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have; a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal control; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 8, 2003 /s/ G. Harrison Scott Chairman 69 I, Peggy L. Schaefer, certify that: 1. I have reviewed this annual report on Form 10-KSB of Bol Bancshares, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have; a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal control; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 8, 2003 /s/ Peggy L. Schaefer Treasurer 70 CERTIFICATION (Pursuant to 18 U.S.C. Section 1350) The undersigned hereby certifies that (i) the foregoing Annual Report on Form 10-KSB filed by BOL Bancshares, Inc. (the "Registrant") for the year ended December 31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ G. Harrison Scott April 8, 2003 G. Harrison Scott Date Chairman 71 -----END PRIVACY-ENHANCED MESSAGE-----