10KSB 1 rsec1204.txt REPORT 10KSB 12/04 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, 2004 [ ] 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, 2004: $9,844,599 Based upon the $13.00 per share sales as of February 28, 2005, the aggregate market value of the voting common equity stock held by non-affiliates of the registrant was approximately $981,786. 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, 2004 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 4 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 7 Stockholder Item 6: Management's Discussion and Analysis 8 Item 7: Financial Statements and Supplementary Data 28 Item 8: Changes in and Disagreements with Accountants and Financial Disclosure 63 Item 8A: Controls and Procedures 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 65 Item 12: Certain Relationships and Related Transactions 66 Item 13: Exhibits and Reports on Form 8-K (a) Exhibits 68 (b) Reports on Form 8-K 67 Item 14: Principal Accountant Fees and Services 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 Enforcement Action". 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 Bank 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 "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 "Banking Products and Services", "Supervision and Regulation Enforcement Action", and "Management's Discussion and Analysis". 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, e-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. The Bank offers a wide variety of fixed and variable rate loans to qualified borrowers. With regard to interest rates, the Bank continues to 3 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, 2004, the Bank held $14,204,000 in credit card debt. The Bank has a number of proprietary accounts it services which is included above. These 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, typically with reserves posted, and requires the merchant to repurchase accounts 180 days or more past due. As of December 31, 2004, the Bank held $1,332,000 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, 2004. 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, 2004, the Bank had 119 full-time and approximately 9 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 "Executive Compensation". 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. 4 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, 2004, there is a balance of $24,163 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 $2,543 per month. The club's lease commenced December 15, 2003 and terminates on December 15, 2018. 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, 2005. 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 $16,271 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 $6,977 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 2004 totaled $120,204. 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 leased the building from Tammany Mall Partnership, an affiliate of the Bank. On September 1, 2004 for a price of $499,058, the Subsidiary Bank purchased the building. For the year ended December 31, 2004, $49,600 was paid to Tammany Mall Partnership in rent expense before the purchase. For the years ended December 31, 2003 and 2002, $74,400 was paid to Tammany Mall Partnership in rent expense. See "Certain Relationships and Related Transactions". Operations Center. The Bank's operations center, which houses its accounting, audit, data processing, credit card, bookkeeping, and marketing departments, is located 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 16,169 square feet from Severn South Partnership, an 5 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, 2005. The lease payments total $21,909, 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 Bank is a defendant 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 until paid, for a "theoretical" exposure to the Bank of approximately $1.8 Million. 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. In addition to seeking recovery of these losses, the Bank claims that the plaintiff interfered with its employee relations regarding two officers. Since the litigation began, the plaintiff has merged into another bank. Unbeknownst to the Bank, a separate entity purchased the litigation against the Bank, together with a basket of notes, for $1,250,000. This entity then filed bankruptcy. On December 8, 2004, the Bank tendered payment of $9,315 pursuant to the provisions of Article 2652 of the Louisiana Civil Code which controls the rights of litigious redemption. The Trustee has rejected the tender and intends to proceed against the Bank in bankruptcy court on the initial $979,000 claim. The bank that merged with the original plaintiff bank has asked the bankruptcy court to have that claim decided in bankruptcy court as opposed to Civil District Court. It is highly likely that all of these matters will be resolved in the bankruptcy within the next six to nine months. 2. The Company is a defendant in a lawsuit filed by a proprietary merchant alleging that the Company mishandled the Plaintiff's proprietary credit card portfolio. A judgment was obtained against the Bank in the United States Bankruptcy Court for the Southern District of Texas for approximately $450,000. In 2000 the District Court for the Southern District of Texas rendered its judgment which dismissed Adversary No. 96-4354 for lack of jurisdiction. The Bankruptcy Court declined to act on the motion pending the outcome of the plaintiff's appeal to the Fifth Circuit Court of Appeals. In 2001, the Fifth Circuit affirmed the District Court's dismissal of Adversary No. 96-4354. As a result, the Bank renewed its motion to release the funds in the Registry of the court in Adversary No. 96-4541. The Bankruptcy court denied the Bank's motion to release the funds. From that order the Bank has appealed to the District Court for the Southern District of Texas. That appeal resulted in an order for the District Court to pay over the funds to the Bank. The Plaintiff has appealed that order to the Fifth Circuit Court of Appeals and the matter is pending. It is anticipated that the Bank will ultimately recover approximately $350,000 in the registry. 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. The trial was set for January 2004 but was abruptly canceled by the court, which ordered mediation. Mediation did not 6 result in settlement and the matter was retried. The Bank was unsuccessful and the loss of $273,000 is reflected in the financial statements. This case is now on appeal to the Fifth Circuit. Item 4 Submission of Matters to a Vote of Security Holders There were no matters submitted, during the fourth quarter of fiscal year 2004 to a vote of security holders, through the solicitation of proxies. 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 2003, 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, 2004, the Company had approximately 618 shareholders of record. There were no dividends declared on common stock for the years ended 2004 or 2003. 2004 High Low First Quarter $13.00 $13.00 Second Quarter - - Third Quarter - - Fourth Quarter - - 2003 First Quarter $7.00 $6.49 Second Quarter - - Third Quarter 8.00 8.00 Fourth Quarter - - No dividends were paid on shares of Company Common stock in 2004 or 2003. 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 12, 2005 at 3:30 p.m. Independent Auditors Laporte, Sehrt, Romig & Hand, 110 Veterans Memorial Blvd., Suite 200, Metairie, LA 70005-4958. 7 Item 6 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, 2004, and 2003. 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 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, 2004, the Company's total assets were $93,227,000 as opposed to $98,810,000 at December 31, 2003. 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 $63,294,000 and $60,800,000 net of unearned discount and Allowance for Loan Losses at December 31, 2004 and 2003, respectively. The Bank's net interest margin was 8.32% for the year ended December 31, 2004. Historically, credit card loans have been an important part of the Bank's total loan portfolio. However, the Bank has been diversifying its earning assets into commercial and installment loans. At December 31, 2004, credit card loans were $14,204,000 and represented 22.44% of the Bank's loan portfolio of $63,294,000. At December 31, 2003, credit card loans were $17,034,000 and represented 28.02% of the Bank's loan portfolio of $60,800,000. 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 proprietary accounts, so long as it can maintain the minimum required Tier 1 leverage ratio required by the FDIC. The Bank 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 2004 was $39,000 or $(.21) per share, a decrease of $451,000 from the Company's net income of $412,000 in 2003. The most significant factor contributing to this $451,000 decrease in income is a decrease of $322,000 in OREO income due to the sale of an OREO parcel in 2003. During the year 2004, the Bank had non-recurring net income generated from the sale of two ORE properties in the amount of $98,000. Non-interest expense decreased $60,000 from $8,982,000 in 2003 to $8,922,000 in 2004. In 2004, the Bank incurred a loss of $271,000 from a lawsuit that the Bank is appealing. Management exerted a concentrated effort to reduce noninterest expense. A study concluded that outsourcing the credit card operations should prove beneficial in reducing expenses, therefore in the third quarter of 2004, the Bank outsourced its credit card operations. The Company's net income for 2003 was $412,000 or $2.30 per share, an increase of $448,000 from the Company's net loss of $36,000 in 2002. During the year 2003, the Bank had non-recurring net income generated from the sale of ORE in the amount of $420,000. The Company's net loss for 2002 was $36,000 or $(.20) per share, a decrease of $372,000 from the Company's net income of $336,000 in 2001. This was due to a reduction in interest rates of federal funds, a reduction in 8 interest rate spreads and a reduction in the credit card outstanding. During the year 2001, the Bank had non-recurring net income generated from the sale of ORE in the amount of $661,000. Net Interest Income/Margin Taxable-equivalent income on loans increased $18,000 or .25%, from $7,233,000 in 2003 to $7,251,000 in 2004. The interest income on federal funds sold decreased $91,000. This was due to the decrease in the federal funds average balance from $13,267,000 in 2003 to $5,004,000 in 2004. The interest income on investment securities decreased $30,000 from $447,000 earning 2.42% in 2003 to $417,000 earning 2.13% in 2004. The .26% increase in the yields on interest earning assets was offset by lower rates paid on interest-bearing liabilities, which declined .22% from an average of .94% in 2003 to .72% in 2004. The average balance of noninterest demand deposits decreased 4.02% or $1,485,000 from $36,901,000 in 2003 to $35,416,000 in 2004. 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: 9 TABLE 1 Average Balances, Interests and Yields 2004 2003 Average Average (Dollars in Thousands) Balance Interest Rate Balance Interest Rate ASSETS INTEREST-EARNING ASSETS: Loans, net of unearned income (1)(2) Taxable 63,742 7,251 11.38% 60,464 7,233 11.96% Tax-exempt 0 0 Investment securities Taxable 19,580 417 2.13% 18,487 447 2.42% Tax-exempt 0 0 Interest-bearing deposits 0 0 Federal funds sold 5,004 53 1.05% 13,267 144 1.09% Total Interest-Earning Assets 88,326 7,721 8.74% 92,218 7,824 8.48% Cash and due from banks 5,165 5,351 Allowance for loan Losses (1,796) (1,800) Premises and equipment 1,821 1,640 Other Real Estate 177 750 Other assets 1,281 2,263 TOTAL ASSETS 94,974 100,422 LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING LIABILITIES: Deposits: Demand Deposits 15,669 32 0.20% 16,678 36 0.22% Savings deposits 27,991 96 0.34% 29,558 158 0.53% Time deposits 5,964 76 1.27% 7,178 142 1.98% Total Interest-Bearing Deposits 49,624 204 0.41% 53,414 336 0.63% Federal Funds Purchased 38 1 2.63% 0 0 0 Securities sold under agreements to repurchase 0 0 Other Short-term borrowings 0 0 Long-Term debt 2,193 169 7.71% 2,204 188 8.54% Total Int-Bearing Liabilities 51,855 374 0.72% 55,618 524 0.94% Noninterest-bearing deposits 35,416 36,901 Other liabilities 945 1,510 Shareholders' equity 6,758 6,393 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 94,974 100,422 Net Interest Income 7,347 7,300 Net Interest Spread 8.02% 7.54% Net Interest Margin 8.32% 7.92% (1) Fee income relating to loans of $929,000 in 2004 and $801,000 in 2003 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, 2004, and 2003 using a federal tax rate of 34%. 10 TABLE 2 Rate/Volume Analyses (1) 2004 Compared to 2003 Change in Interest Due to Total (Dollars in Thousands) Rate Volume Change Net Loans: Taxable (374) 392 18 Tax-Exempt (2) - - - Investment Securities Taxable (56) 26 (30) Tax-Exempt (2) - - - Interest-Bearing Deposits - - - Federal Funds Sold (2) (89) (91) Total Interest Income (432) 329 (103) Deposits: Demand Deposits (2) (2) (4) Savings Deposits (54) (8) (62) Time Deposits (42) (24) (66) Total Interest-Bearing Deposits (98) (34) (132) Federal Funds Purchased 1 - 1 Securities Sold under Agreements to Repurchase - - - Other Short-Term Borrowings - - - Long-Term Debt (18) (1) (19) Total Interest Expense (115) (35) (150) (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, 2004, the allowance for possible loan losses was $1,800,000 and was the same amount at December 31, 2003. In 2004, the provision or loan losses was $624,000 compared to $198,000 in 2003. Net charge-offs were $624,000 for 2004 compared to net charge-offs of $198,000 in 2003. Based on the volume of credit card charges and payments, the credit card 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. 11 TABLE 3 Allowance for Loan Losses December 31, 2004 2003 (Dollars in Thousands) Balance at beginning of period $1,800 $1,800 Charge-Offs: Commercial 5 29 Real estate 10 0 Installment 31 87 Credit Cards 888 733 Total Charge-offs 934 849 Recoveries: Commercial 0 3 Real estate 16 281 Installment 6 6 Credit Cards 288 361 Total Recoveries 310 651 Net charge-offs 624 198 Provision for loan losses 624 198 Balance at end of period $1,800 $1,800 Ratio of net charge-offs during period to average loans outstanding 0.98% 0.33% Allowance for possible loan losses as a percentage of loans 2.77% 2.88% Noninterest Income An important source of the Company's revenue is derived from noninterest income. Noninterest income for 2004 was $2,123,000 compared to $2,524,000 in 2003 for a decrease of $401,000 or 15.89%. The decrease from 2003 is attributable to the sale of 1 parcel of Ore for a gain of $420,000 in 2003. During 2004 the Bank sold 2 parcels of ORE for a gain of $98,000. 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 2004 2003 Year (Dollars in Thousands) Service Charges 463 517 (54) NSF Charges 634 609 25 Gain on Sale of Securities 0 0 0 Cardholder & Other Cr Card Inc 595 641 (46) Membership Fees 88 105 (17) Other Comm. & Fees 78 87 (9) ORE Income 14 0 14 Gain on Sale of ORE 98 420 (322) Rev of Litigation Settlement 0 0 0 Other Income 153 145 8 Total Noninterest Income $2,123 $2,524 ($401) 12 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 $60,000 or .67% in 2004 to $8,922,000 from $8,982,000 in 2003. This decrease was primarily due to a decrease in Salaries & Benefits of $100,000, a decrease in Occupancy expenses of $90,000, and a decrease in Loan and Credit Card expenses of $221,000, These decreases are directly attributable to outsourcing the Bank's credit card processing. The offset to this reduction is payment to the third party vendor providing the service as reflected in "Outsourcing Fees" of $307,000. An increase in Misc. Losses of $205,000 occurred due to a loss of $271,000 from a lawsuit that the Bank is appealing. 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 2004 2003 Year (Dollars in Thousands) Salaries & Benefits 4,043 4,145 (102) Occupancy Expense 1,584 1,672 (88) Advertising Expense 7 54 (47) Communications 164 187 (23) Postage 168 236 (68) Outsourcing Fees 307 0 307 Loan & Credit Card Expense 1,020 1,241 (221) Professional Fees 169 122 47 Legal Fees 260 221 39 Insurance & Assessments 120 101 19 Stationery, Forms & Supply 227 264 (37) Promotional Expenses 124 120 4 ORE Expenses 31 102 (71) Misc. Losses 352 147 205 Other Operating Expense 346 370 (24) Total Noninterest Expense $8,922 $8,982 ($60) Provision for Income Taxes Income tax benefit was $37,000 in 2004, compared to income tax expense of $233,000 in 2003. 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. 13 Interest Rate Sensitivity The major elements management utilizes monthly 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 quarterly 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, 2004, has a net interest sensitive asset gap of 32.46% when projecting out one year. In the near term, defined as 90 days, the Company currently has a net interest sensitive asset gap of 8.07%. 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, 2004, as well as the cumulative position at December 31, 2004: 14 TABLE 6 Interest Rate Sensitivity Analysis December 31, 2004 Over 30 60 90 120 180 One One Days Days Days Days Days Year Year (Dollars in Thousands) Total Earning Assets Securities-HTM - - 3,000 - 8,000 5,000 3,000 Securities - AFS - - - - - - 534 Loans 13,603 2,857 3,955 3,267 5,947 29,698 5,766 Federal funds sold - - - - - - - Total Earning Assets 13,603 2,857 6,955 3,267 13,947 34,698 9,300 Non Earning Assets - - - - - - 8,600 TOTAL ASSETS 13,603 2,857 6,955 3,267 13,947 34,698 17,900 Interest-Bearing Liabilities Savings & Now accounts 11,293 - - 27,432 - - - Money market 3,830 - - - - - - CD's < $100,000 343 355 302 559 691 2,073 757 CD's > $100,000 120 100 200 108 - - - Federal Funds - - - - - - - purchased Repurchase agreements - - - - - - - Other short-term - - - - - - - borrowings Notes payable - - - - - 411 1,777 Total Interest-Bearing 15,586 455 502 28,099 691 2,484 2,534 Liabilities Non Costing Liabilities 44 - - - - - 42,832 TOTAL LIABILITIES 15,630 455 502 28,099 691 2,484 45,366 Interest Sensitivity Gap (2,027) 2,402 6,453 (24,832) 13,256 32,214(27,466) Cumulative Gap (2,027) 375 6,828 (18,004) (4,748) 27,466 - Cumulative Gap/Total Interest- Earning Assets -2.40% -0.44% 8.07% -21.27% -5.61% 32.46% 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. Traditionally, liquidity sources for the Bank are generated from operating activities and financing activities. 15 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. The Bank's liquidity has decreased due to management's strategy of reducing deposits until loan demand increases and the interest rate environment improves. Significant financing activities generally include 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 6.50% to $83,089,000 in 2004 from $88,864,000 in 2003, or $5,775,000, was the primary reason for the reduction in liquidity. The Bank had unused sources of liquidity in the form of unused federal funds lines of $3,000,000 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, 2004 2003 (Dollars in Thousands) Commercial, financial, & 3,594 3,858 agricultural Real estate-mortgage 43,543 37,951 Personal Loans 3,577 3,635 Credit cards-Visa, MasterCard 12,872 14,689 Credit cards-Proprietary 1,332 2,345 Overdrafts 176 122 Loans 65,094 62,600 Less: Unearned income 0 0 Deferred loan fees (costs), net 0 0 Allowance for possible loan losses 1,800 1,800 Loans, net $63,294 $60,800 At December 31, 2004, total loans outstanding were $63,294,000, compared to $60,800,000 at year-end 2003, an increase of $2,494,000 or 4.10%. Average total loans during 2004 increased $3,278,000 or 5.42%, to $63,742,000. In 2004 the Bank experienced an increase of $5,592,000 in real estate loans from $37,951,000 in 2003 to $43,543,000 in 2004, which was offset by a decrease in credit card loans of $2,830,000, a decrease in commercial loans of $264,000, and a decrease in personal loans of $58,000. 16 The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 2003: TABLE 8 Loan Maturity and Interest Rate Sensitivity December 31, 2004 Maturing Within One To Over One Year 5 Years 5 Years Total (Dollars in Thousands) Loan Maturity by Type Commercial, financial and Agricultural 2,374 1,199 15 3,588 Real estate construction, land and land development 34,134 9,154 255 43,543 All other loans 3,486 14,477 0 17,963 Total $39,994 $24,830 $270 $65,094 Rate Sensitivity of Loans Loans: Fixed rate loans 34,326 24,830 270 59,426 Variable rate loans 5,144 0 0 5,144 Non-Accrual Loans 524 0 0 524 Total $39,994 $24,830 $270 $65,094 As of December 31, 2004 and 2003, 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, 2004, were $1,253,000, an increase of $273,000, or 27.86% from the $980,000 non-performing assets at December 31, 2003. During 2004, non-accrual loans decreased by $249,000 and other real estate owned increased $522,000. At December 31, 2004 and 2003, there were no restructured loans. Since December 31, 2003, the ratio of past due loans to total loans has decreased from 1.43% to 0.55% at December 31, 2004. During that time, the Bank increased its ratio of non-performing assets to loans and other real estate owned from a low of 1.56% at December 31, 2003, to a high of 1.90% at December 31, 2004. The allowance for possible loan losses as a percent of period-end loans decreased to 2.77% at December 31, 2004, compared to 2.88% at December 31, 2003. 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 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 17 that amount is made to the allowance for possible loan losses. For 2004, the gross amount of interest income that would have been recorded on non-accrual and restructured loans at December 31, 2004, if all such loans had been accruing interest at the original contract rate, was $3,000. TABLE 9 Non-performing Assets December 31, 2004 2003 (Dollars in Thousands) Non-accrual Loans 524 773 Restructured Loans 0 0 Other Real Estate Owned 729 207 Total Non-performing Assets $1,253 $980 Loans past due 90 days or more 356 894 Ratio of past due loans to loans 0.55% 1.43% Ratio of non-performing assets to loans and other real estate owned 1.90% 1.56% 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 characteristics 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. 18 Table 10 Allocation of Allowance for Possible Loan Losses December 31, 2004 December 31, 2003 Allowance % * Allowance % * (Dollars in Thousands) Commercial, financial and agricultural 562 68.03% 571 61.09% Real Estate-Construction - - - - Real Estate-Mortgage - - - - Consumer Installment 66 10.09% 73 11.65% Credit Cards 1,172 21.88% 1,156 27.26% Unallocated - - - - Total 1,800 1,800 * Percentage of respective loan type to total loans. Investment Securities The Company'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 Company's strategy of maximizing portfolio yields while providing for liquidity needs. The investment securities totaled $19,534,000 at December 31, 2004 and $19,522,000 at December 31, 2003. 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 securities portfolio was one year or more at December 31, 2004. At year-end 2004, $534,000 of the Company's investment securities were classified as available- for-sale, compared to $522,000 at December 31, 2003. The gross unrealized holding gains on these securities at December 31, 2004, were $217,000 compared to gross unrealized holding gains of $204,000 at December 31, 2003. There were no investments and no obligations of any one state or municipality at December 31, 2004, or 2003. At December 31, 2004, the Bank had no U.S. Treasury securities or obligations of U. S. government corporations or federal agencies, as available for sale. 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, 2004 2003 Amortized Fair Amortized Fair Cost Value Cost Value (Dollars in Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies 19,000 18,774 19,000 18,853 Other investments 318 534 318 522 Total $19,318 $19,308 $19,318 $19,375 19 TABLE 12 Securities Maturities and Yields December 31, 2004 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 Due 1-5 years 19,000 18,774 2.19% Total $19,000 $18,774 2.19% (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%. Below is a table of equity securities that are included in Investment Securities at December 31,2004 (dollars in thousands): TABLE 13 Other Securities Mississippi River Bank 395 Liberty Financial Services, Inc. 93 Business Resource Capital 20 MasterCard International 26 Total Other Securities $534 Deposits Total deposits at December 31, 2004 were $83,089,000 which represented a decrease of $5,775,000 or 6.50% from $88,864,000 at December 31, 2003. During 2004, interest bearing deposits decreased by $3,722,000. 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 core deposits declined $4,937,000 or 5.51% to $84,639,000 in 2004. Market rate core deposits, primarily CD's of less than $100,000 and money market accounts, decreased $1,406,000 in 2004. 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 41.84% of average core deposits in 2004 compared to 41.20% in 2002. 20 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, 2004 2003 Average Average Amount Rate Amount Rate (Dollars in Thousands) Noninterest-bearing Deposits $35,416 N/A $36,901 N/A Interest-bearing Demand Deposits 15,669 0.20% 16,678 0.22% Savings Deposits 27,991 0.34% 29,558 0.53% Time Deposits 5,964 1.27% 7,178 1.98% Total Average Deposits $85,040 $90,315 The composition of average deposits for the last two years are presented below: TABLE 15 Deposit Composition December 31, 2004 2003 (Dollars in Thousands) Average % Of Average % Of Balances Deposits Balances Deposits Demand, noninterest-bearing 35,416 41.64% 36,901 40.85% NOW accounts 11,885 13.98% 12,362 13.69% Money market deposit accounts 3,784 4.45% 4,316 4.78% Savings accounts 27,991 32.92% 29,558 32.73% Other time deposits 5,563 6.54% 6,437 7.13% Total core deposits 84,639 99.53% 89,574 99.18% Certificates of deposit of $100,000 or more 401 0.47% 741 0.82% Total deposits $85,040 100.00% $90,315 100.00% 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, 2004 2003 (Dollars in Thousands) Three months or less 420 320 After three months through one year 108 107 Total $528 $427 21 Other Assets and Other Liabilities The following are summaries of other assets and other liabilities for the last two years: TABLE 17 Other Assets & Other Liabilities December 31, 2004 2003 (Dollars in Thousands) Interest Receivable 250 255 Prepaid Expenses 219 413 Accounts Receivable 97 285 Cash Surrender Value 391 392 Other Assets 6 6 Total Other Assets $963 $1,351 December 31, 2004 2003 (Dollars in Thousands) Accrued Expenses Payable 246 233 Deferred Membership Fees 33 36 Blanket Bond Fund 37 41 Other Liabilities 41 214 Total Other Liabilities $357 $524 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 $3,000,000 with a correspondent bank. 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, 2004, was $6,557,000, a decrease of $42,000 or .64% from $6,599,000 at December 31, 2003, and amounted to 7.03% of total assets. Realized shareholders' equity, which includes preferred and common stock, capital in excess of par, and retained earnings, decreased $50,000 or .79% to $6,281,000 at December 31, 2004, from $6,331,000 at December 31, 2003. During 2004, the decrease in shareholder's equity was primarily attributable to a $39,000 decrease in net income, a decrease in Preferred Stock of $30,000, an increase in capital in excess of par-retired Preferred Stock of $18,000 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 $8,000. No dividends were paid on shares of Company Common Stock in 2004 or 2003. 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 shareholders' equity) was (.58%) in 2004, compared to 6.44% in 2003. The ratio of average shareholders' equity to average assets was 7.12% and 6.37% in 2004 and 2003, respectively. 22 At December 31, 2004, the Company's primary capital ratio as defined by the FRB was 8.40%, compared to 8.00% in 2003. The total capital ratio (defined as primary capital plus secondary capital) was also 8.40% at December 31, 2004, and 8.00% in 2003, 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, 2004, was 9.25% compared to 8.63% at December 31, 2003, which are compared to the minimum capital requirement of 4.00% for well-managed Banking organizations. The Company's ratios are in excess of the FRB's requirements, as indicated in the Capital Adequacy schedule below: Table 18 Capital Adequacy December 31, 2004 2003 Amount Percent Amount Percent (Dollars in Thousands) Tier I capital Actual 6,590 10.42% 6,581 10.60% Minimum 2,530 4.00% 2,485 4.00% Excess 4,060 6.42% 4,096 6.60% Total risk-based capital Actual 7,393 11.69% 7,370 11.87% Minimum 5,060 8.00% 4,970 8.00% Excess 2,333 3.69% 2,400 3.87% Tier I capital leverage ratio Actual 6,590 6.90% 6,581 6.55% Minimum 3,800 4.00% 4,020 4.00% Excess 2,790 2.90% 2,561 2.55% During 2004, no dividend income from the Bank nor any subordinated debt was received by the Company. During the year ended December 31, 2003, 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. 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 23 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 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 24 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 non bank 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 subject to examination and regulation by the FDIC. 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 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 25 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. 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. Enforcement The Bank entered into a Memorandum of Understanding with the FDIC and the OFI on March 13, 2003. The Memorandum replaces the Memorandum of Understanding entered into by the Bank, the FDIC and the OFI dated December 14, 1999. 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 October 21, 2002, conducted by the FDIC and the OFI. The Memorandum requires the Bank to perform, among other things, the following within specified time periods: (1) The development and implementation of a five-year strategic plan; (2) The development of a five-year profit plan; (3) The development of a Section 23 A/B compliance plan; (4) Correct certain Information Technology findings. The Bank complied with all stipulations and on December 7, 2004, the Memorandum of Understanding was terminated. 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. 26 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. Item 7 Financial Statements 27 To the Board of Directors BOL Bancshares, Inc. & Subsidiary Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheets of BOL BANCSHARES, INC. and its wholly-owned subsidiary, Bank of Louisiana, as of December 31, 2004 and 2003, and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders' equity, and cash flows for the years ended December 31, 2004, 2003 and 2002. 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 the standards of the Public Company Accounting Oversight Board 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. In our opinion, 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, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004, 2003 and 2002, 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 15, 2005 28 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, 2004 2003 Cash and Due from Banks Non-Interest Bearing Balances and Cash $ 6,350,442 $ 7,908,994 Federal Funds Sold - 7,205,000 Investment Securities Securities Held-to-Maturity (Fair Value of $18,773,755in 2004 and $18,852,600 in 2003) 19,000,000 19,000,000 Securities Available-for-Sale, at Fair Value 534,456 521,697 Loans - Less Allowance for Loan Losses of $1,800,000 in 2004 and 2003, and Unearned Discounts of $-0- in 2004 and 2003 63,293,693 60,800,202 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 2,151,284 1,614,895 Other Real Estate 729,317 207,323 Other Assets 963,450 1,350,939 Deferred Taxes 101,888 129,354 Letters of Credit 102,465 71,265 Total Assets $ 93,226,995 $ 98,809,669 The accompanying notes are an integral part of these financial statements. 29 LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2004 2003 LIABILITIES Deposits Non-Interest Bearing $ 34,926,914 $ 36,980,253 Interest Bearing 48,162,540 51,884,147 Notes Payable 2,187,917 2,199,379 Other Liabilities 357,039 524,017 Federal Funds Purchased 350,000 - Letters of Credit Outstanding 102,465 71,265 Accrued Interest 583,112 551,501 Total Liabilities 86,669,987 92,210,562 STOCKHOLDERS' EQUITY Preferred Stock - Par Value $1 2,157,853 Shares Issued and Outstanding in 2004 2,187,899 Shares Issued and Outstanding in 2003 2,157,853 2,187,899 Common Stock - Par Value $1 179,145 Shares Issued and Outstanding in 2004 and 2003 179,145 179,145 Accumulated Other Comprehensive Income 276,259 267,838 Capital in Excess of Par - Retired Stock 101,863 83,835 Retained Earnings 3,841,888 3,880,390 Total Stockholders' Equity 6,557,008 6,599,107 Total Liabilities and Stockholders' Equity $ 93,226,995 $ 98,809,669 The accompanying notes are an integral part of these financial statements. 30 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the Years Ended December 31, 2004 2003 2002 INTEREST INCOME $ 7,721,357 $ 7,824,182 $ 8,173,711 INTEREST EXPENSE 374,110 523,614 811,068 Net Interest Income 7,347,247 7,300,568 7,362,643 PROVISION FOR LOAN LOSSES 623,869 197,811 399,920 Net Interest Income After Provision for Loan Losses 6,723,378 7,102,757 6,962,723 OTHER INCOME Service Charges on Deposit Accounts 1,136,097 1,167,710 1,097,297 Other Non-Interest Income 987,145 1,356,510 947,153 Total Other Income 2,123,242 2,524,220 2,044,450 OTHER EXPENSES Salaries and Employee Benefits 4,042,975 4,142,912 4,280,844 Occupancy Expense 1,584,409 1,674,331 1,702,095 Estimated Loss Contingency 292,534 113,030 - Other Non-Interest Expense 3,002,136 3,051,881 3,076,026 Total Other Expenses 8,922,054 8,982,154 9,058,965 INCOME (LOSS) BEFORE INCOME (75,434) 644,823 (51,792) TAX EXPENSE (BENEFIT) INCOME TAX EXPENSE (BENEFIT) (36,932) 232,701 (16,185) NET INCOME (LOSS) $ (38,502) $ 412,122 $ (35,607) EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (0.21) $ 2.30 $ (0.20) The accompanying notes are an integral part of these financial statements. 31 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Years Ended December 31, 2004 2003 2002 NET INCOME (LOSS) $ (38,502) $ 412,122 $ (35,607) OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized Holding Gains on Investment Securities Available-for- Sale, Arising During the Period 8,421 46,603 20,723 Less: Reclassification Adjustment for Gains Included in Net Income - - - OTHER COMPREHENSIVE INCOME 8,421 46,603 20,723 COMPREHENSIVE INCOME (LOSS) $ (30,081) $ 458,725 $ (14,884) The accompanying notes are an integral part of these financial statements. 32 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, 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 Net of Applicable Deferred Income Taxes 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 Preferred Stock Retired (51,703) - - 31,022 - (20,681) Other Comprehensive Income, Net of Applicable Deferred Net of Applicable Deferred Income Taxes Income Taxes - - 46,603 - - 46,603 Net Income for the Year 2003 - - - - 412,122 412,122 BALANCE - December 31, 2003 2,187,899 179,145 267,838 83,835 3,880,390 6,599,107 Preferred Stock Retired (30,046) - - 18,028 - (12,018) Other Comprehensive Income, Net of Applicable Deferred Net of Applicable Deferred Income Taxes Income Taxes - - 8,421 - - 8,421 Net Loss for the Year 2004 - - - - (38,502) (38,502) BALANCE - December 31, 2004 $ 2,157,853 $179,145 $276,259 $101,863 $3,841,888$6,557,008 The accompanying notes are an integral part of these financial statements. 33 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2004 2003 2002 OPERATING ACTIVITIES Net Income (Loss) $ (38,502) $ 412,122 $ (35,607) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Provision for Loan Losses 623,869 197,811 399,920 Depreciation and Amortization Expense 211,667 262,829 287,674 Amortization of Investment Security Premiums 22,678 86,085 97,498 Accretion of Investment Security Discounts - (10,779) (5,107) Decrease (Increase) in Deferred Income Taxes 23,128 37,861 (2,709) Gain on Sale of Other Real Estate (97,677) (419,805) (26,663) Decrease in Other Assets 387,489 17,783 825,280 (Decrease) Increase in Other Liabilities and Accrued Interest (135,367) 191,500 84,891 Net Cash Provided by Operating Activities 997,285 775,407 1,625,177 INVESTING ACTIVITIES Proceeds from Held-to-Maturity Investment Securities Released at Maturity 8,000,000 17,500,000 16,000,000 Purchases of Held-to-Maturity Investment Securities (8,022,678) (19,000,000) (18,152,773) Purchases of Available-for-Sale Investment Securities - (26,281) - Proceeds from Sale of Property and Equipment 7,885 4,260 4,840 Purchases of Property and Equipment (755,941) (200,172) (144,562) Proceeds from Sale of Other Real Estate 305,000 1,526,750 100,000 Purchases of Loans (80,384) (4,608,625) - Net Increase in Loans (3,766,293) (412,545) (367,185) Net Cash Used in Investing Activities (4,312,411) (5,216,613) (2,559,680) The accompanying notes are an integral part of these financial statements. 34 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For The Years Ended December 31, 2004 2003 2002 FINANCING ACTIVITIES Net Decrease in Non-Interest Bearing and Interest Bearing Deposits (5,774,946) (2,538,329) (209,335) Federal Funds Purchased 350,000 - - Proceeds from Issuance of Long-Term Debt - 1,753,000 - Preferred Stock Retired (12,018) (20,681) (24,508) Principal Payments on Long-Term Debt (11,462) (1,763,023) (8,763) Net Cash Used in Financing Activities (5,448,426) (2,569,033) (242,606) NET DECREASE IN CASH AND CASH EQUIVALENTS (8,763,552) (7,010,239) (1,177,109) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 15,113,994 22,124,233 23,301,342 CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,350,442 $ 15,113,994 $ 22,124,233 SUPPLEMENTAL DISCLOSURES: Additions to Other Real Estate through Foreclosure $ 729,317 $ 1,106,945 $ 281,860 Cash Paid During the Year for Interest $ 342,499 $ 511,948 $ 810,790 Cash Paid During the Year for Income Taxes $ (84,513) $ (80,000) $ (39,600) Market Value Adjustment for Unrealized Gain on Securities Available-for-Sale $ 12,759 $ 70,610 $ 31,398 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. 35 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. 36 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 $1,430,538 and $1,870,308 for the years ended December 31, 2004 and 2003, 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and deferred tax assets. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Most of the Bank's activities are with customers located within the New Orleans area, except for credit card lending, which is nationwide. Note C discusses the types of lending that the Bank engages in and Note E discusses the type of securities that the Company invests in. The Bank does not have any significant concentrations in any one industry or customer. 37 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 151 (SFAS 151), "Inventory Costs, an Amendment of ARB No. 43, Chapter 4," amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. This pronouncement is expected to have no effect on the financial position and results of operations of the Company. Statement of Financial Accounting Standards No. 152 (SFAS 152), "Accounting for Real Estate Time-Sharing Transactions, an Amendment of FASB Statements No. 66 and 67," amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions." This Statement also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental Operation of Real Estate Projects," to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. This pronouncement is expected to have no effect on the financial position and results of operations of the Company. Statement of Financial Accounting Standards No. 153 (SFAS 153), "Exchanges of Nonmonetary Assets," amends Accounting Principals Board Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring if fiscal periods beginning after June 15, 2005. This pronouncement is not expected to have an affect on the financial position and results of operations of the Company. In December 2004, the Financial Accounting Standards Board revised SFAS No. 123 (SFAS 123), "Share-Based Payment." This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005, and for nonpublic entities as of the beginning of the first annual reporting period that begins after December 15, 2005. 38 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 $80,403 in 2004 and $318,102 in 2003 and $22,032 in 2002, respectively. NOTE C LOANS Major classification of loans are as follows: December 31, 2004 2003 Real Estate Mortgages: Residential 1-4 Family $ 13,635,071 $ 13,037,487 Commercial 19,368,896 16,766,657 Construction 6,534,649 4,566,931 Second Mortgages 2,212,301 1,785,762 Other 1,792,000 1,794,167 43,542,917 37,951,004 Commercial 3,594,189 3,858,408 Personal 3,576,374 3,634,801 Credit Cards 14,204,241 17,034,183 Overdrafts 175,972 121,806 65,093,693 62,600,202 Unearned Discounts - - 65,093,693 62,600,202 Allowance for Loan Losses 1,800,000 1,800,000 $ 63,293,693 $ 60,800,202 39 NOTE C LOANS (Continued) The following is a classification of loans by rate and maturity: (Dollar amounts in thousands) December 31, 2004 2003 Fixed Rate Loans: Maturing in 3 Months or Less $ 13,624 $ 8,226 Maturing Between 3 and 12 Months 20,702 19,173 Maturing Between 1 and 5 Years 24,830 32,003 Maturing After 5 Years 270 733 59,426 60,135 Variable Rate Loans: Maturing Quarterly or More Frequently 5,144 1,692 Maturing Between 3 and 12 Months - - Non-Accrual Loans 524 773 65,094 62,600 Less: Unearned Discount - - Less: Allowance for Loan Losses 1,800 1,800 Net Loans $ 63,294 $ 60,800 As of December 31, 2004 and 2003, there was no recorded investment in loans that are considered impaired under SFAS Nos. 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, 2004 and 2003 totaled $93,996 and $181,132, 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 $729,317 at December 31, 2004 and $207,323 at December 31, 2003. 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. 40 NOTE D NON-PERFORMING ASSETS (Continued) At December 31, 2004, $523,836 of loans was in the non-accrual status and $2,757 of interest was foregone in the year then ended. At December 31, 2003, $773,286 of loans was in non-accrual status and $61,527 of interest was foregone in the year then ended. Interest income recognized on non-accrual loans totaled $764, $-0- and $52,151 during the years ended December 31, 2004, 2003 and 2002, respectively. 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, 2004 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $19,000,000 $ - $226,245 $18,773,755 Securities available-for-sale consisted of the following at December 31, 2004: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities $317,681 $216,775 $ - $534,456 Securities held-to-maturity consisted of the following at December 31, 2003: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $19,000,000 $21,890 $169,290 $18,852,600 41 NOTE E INVESTMENT SECURITIES (Continued) Securities available-for-sale consisted of the following at December 31, 2003: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities $ 317,681 $ 204,016 $ - $ 521,697 The maturities of investment securities at December 31, 2004 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 $ - $ - $ 317,681 $ 534,456 After One Year Through Five Years 19,000,000 18,773,755 - - $19,000,000 $18,773,755 $ 317,681 $ 534,456 Securities of $1,100,000 at December 31, 2004 and 2003 were pledged to secure public funds. NOTE F INCOME TAXES The components of the provision for income tax expense (benefit) are: 2004 2003 2002 Current $ 12,573 $ 194,840 $ (13,476) Deferred (49,505) 37,861 (2,709) Total Provision for Income Tax $ (36,932) $ 232,701 $ (16,185) 42 NOTE F INCOME TAXES (Continued) A reconciliation of income tax at the statutory rate to income tax expense at the Company's effective rate is as follows: 2004 2003 2002 Computed Tax (Benefit) at the Expected Statutory Rate $ (25,648) $ 219,239 $ (17,609) Other Adjustments (11,284) 13,462 1,424 Income Tax Expense (Benefit) for Operations $ (36,932) $ 232,701 $ (16,185) 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 $101,888 and $129,354 as of December 31, 2004 and 2003, respectively. The major temporary differences, which created deferred tax assets and liabilities, are as follows: 2004 2003 Deferred Tax Assets: Other Real Estate $ 101,321 $ 101,321 Allowance for Loan Loss 195,757 195,757 Accrued Litigation Settlements 105,180 44,157 Total Deferred Tax Assets 402,258 341,235 Deferred Tax Liabilities: Section 481A Adjustment - Prepaid Expenses (60,152) - Unrealized Gain on Securities (123,400) (119,061) Accumulated Depreciation (116,818) (92,820) Total Deferred Tax Liabilities (300,370) (211,881) Deferred Tax Assets, Net of Deferred Tax Liabilities $ 101,888 $ 129,354 43 NOTE G PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS December 31, 2004 2003 Furniture and Equipment $ 1,926,649 $ 1,754,880 Bank Owned Vehicles 81,735 81,232 Leasehold Improvements 356,502 290,827 Land 578,425 468,425 Buildings 1,723,133 1,334,075 4,666,444 3,929,439 Less: Accumulated Depreciation and Amortization 2,515,160 2,314,544 $ 2,151,284 $ 1,614,895 Depreciation and amortization expense aggregated $211,667 in 2004, $262,829 in 2003 and $287,674 in 2002. NOTE H ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows: For The Years Ended December 31, 2004 2003 2002 Balance - January 1 $1,800,000 $1,800,000 $1,800,000 Provision Charged to: Operations 623,869 197,811 399,920 Loans Charged Off (934,205) (848,729) (907,523) Recoveries 310,336 650,918 507,603 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, 2,157,853 shares issued and outstanding in 2004 and 2,187,899 shares issued and outstanding in 2003. 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 2004 and 2003. 44 NOTE I STOCKHOLDERS' EQUITY (Continued) 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. NOTE J EARNINGS PER COMMON SHARE Earnings per share are computed using the weighted average number of shares outstanding, which were 179,145 in 2004, 2003 and 2002. There was no provision for dividends for the years ended December 31, 2004, 2003 or 2002. 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: 2004 2003 2002 Credit Card Arrangements $33,669,000 $50,452,000 $70,125,000 Commitments to Extend Credit 4,803,000 3,399,000 2,853,000 Commitments to extend credit, credit card arrangements and standby 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 consolidated balance sheets. 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. 45 NOTE K CONTINGENT LIABILITIES AND COMMITMENTS (Continued) 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. This case is pending appeal. In another case, the Subsidiary Bank is a defendant in a lawsuit filed by a former employee in connection with a deferred compensation agreement that was terminated before the merger described in Note A. During 2003, a judgment was rendered against the bank and a loss from litigation totaling $93,882 was charged to operations. The Subsidiary Bank is appealing a ruling on a case where the Bank was a plantiff in a suit against its former health insurer for reimbursement of claims paid on behalf of the Bank's employee health plan. A loss of $271,628, related to this case, was charged to operations during 2004. 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: 2004 2003 Balance - January 1 $1,242,403 $ 384,023 New Loans Made 983,619 1,073,835 Repayments (169,550) (148,849) Reclassifications - (66,606) Balance - December 31 $2,056,472 $1,242,403 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, 2004, 2003 and 2002 totaled $412,380, $425,320 and $465,633, respectively. During 2004, the Subsidiary Bank purchased the building from which it was operating a branch and paying rent to Tammany Mall Partnership. For the year ended December 31, 2004, $49,600 was paid to Tammany Mall Partnership in rent expense before the purchase. For the years ended December 31, 2003 and 2002, $74,400 was paid in rent expense. At December 31, 2004 and 2003, amounts due to Directors of the Company, including accrued interest, totaled $395,643 and $588,778, 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, 2004 and 2003, $91,500 were to Directors of the Company (see Note Q.) 46 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. The total minimum rental commitment at December 31, 2004, under the leases is $500,448, which is due as follows: December 31, 2005 $ 417,490 2006 82,958 $ 500,448 For the years ended December 31, 2004, 2003 and 2002, $784,275, $795,302 and $812,161 was charged to rent expense, respectively. The Subsidiary Bank is the lessor of office space under operating leases expiring in various years through 2018. Minimum future rentals to be received on non-cancelable leases as of December 31, 2004 are: December 31, 2005 $110,059 2006 84,825 2007 43,803 2008 30,522 2009 30,522 Thereafter 274,695 $574,426 NOTE N LETTERS OF CREDIT Standby Letters of Credit obligate the Bank to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions. Outstanding letters of credit were $102,465 and $71,265 as of December 31, 2004 and 2003, respectively. Of the $102,465 in letters of credit, $51,960 were secured by cash, $8,505 were secured by real property, and $42,000 were unsecured. As of December 31, 2004, all of the letters of credit will mature during 2005. 47 NOTE O INTEREST BEARING DEPOSITS Major classifications of interest bearing deposits are as follows: December 31, 2004 2003 NOW Accounts $11,292,539 $12,265,082 Money Market Accounts 3,830,223 5,080,517 Savings Accounts 27,431,575 28,658,991 Certificates of Deposit Greater Than $100,000 528,085 426,853 Other Certificates of Deposit 5,080,118 5,452,704 $48,162,540 $51,884,147 The maturities of Certificates of Deposit Greater than $100,000 at December 31, 2004 and 2003 are as follows: (Dollar amounts in thousands) Three Months or Less $ 420 $ 320 After Three Months Through One Year 108 107 $ 528 $ 427 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. During the year ended December 31, 2003, the Bank received approval and paid BOL Bancshares, Inc. dividends totaling $143,000. Refer to Note W. 48 NOTE Q NOTES PAYABLE The following is a summary of notes payable at December 31, 2004 and 2003: December 31, 2004 2003 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. 24,163 35,625 Debentures payable, due July 2006, interest at 7%, 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 $ 2,187,917 $2,199,379 Following are maturities of long-term debt: December 31, 2005 $ 423,863 2006 1,764,054 $ 2,187,917 49 NOTE R INTEREST INCOME AND INTEREST EXPENSE Major categories of interest income and interest expense are as follows: December 31, 2004 2003 2002 INTEREST INCOME Interest and Fees on Loans: Real Estate Loans $ 2,862,647 $ 2,703,422 $ 2,988,238 Installment Loans 224,860 519,348 551,788 Credit Cards and Related Plans 3,669,991 3,818,380 3,537,538 Commercial and all Other Loans 494,471 192,303 221,068 Interest on Investment Securities - U.S. Treasury and Other Securities 416,597 446,928 583,738 Interest on Federal Funds Sold 52,791 143,801 291,341 $ 7,721,357 $ 7,824,182 $ 8,173,711 INTEREST EXPENSE Interest on Time Deposits of $100,000 or More $ 2,804 $ 6,448 $ 20,154 Interest on Other Deposits 201,660 329,173 585,249 Interest on Federal Funds Purchased 623 - - Interest on Notes Payable 169,023 187,993 205,665 $ 374,110 $ 523,614 $ 811,068 50 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, 2004 2003 2002 OTHER NON-INTEREST INCOME Cardholder and Other Charge Card Income $ 682,658 $ 746,262 $ 737,031 Other Commission and Fees 75,450 85,585 89,761 Other Real Estate Income 111,880 419,805 27,824 Other Income 117,157 104,858 92,537 $ 987,145 $ 1,356,510 $ 947,153 OTHER NON-INTEREST EXPENSES Loan and Charge Card Expenses $ 1,019,595 $ 1,240,832 $ 1,120,444 Communications 331,977 422,343 431,923 Outsourcing Fees 306,769 - - Stationery, Forms and Supplies 227,229 263,625 240,054 Professional Fees 427,886 341,606 442,433 Insurance and Assessments 119,697 101,102 104,323 Advertising 6,692 54,336 179,186 Miscellaneous Losses 59,087 34,230 33,226 Promotional Expenses 124,387 119,959 140,522 Other Real Estate Expenses 31,477 101,703 5,791 Other Expenses 347,340 372,145 378,124 $ 3,002,136 $ 3,051,881 $ 3,076,026 51 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY BOL BANCSHARES, INC. CONDENSED BALANCE SHEETS December 31, 2004 2003 ASSETS Due from Banks $ 315,622 $ 354,635 Securities Available-for-Sale, at Fair Value 488,176 475,416 Other Assets 95,513 6,116 Due from Subsidiary - 170,269 Investment in Bank of Louisiana 8,553,383 8,506,924 $ 9,452,694 $ 9,513,360 LIABILITIES AND STOCKHOLDERS' EQUITY Notes Payable $ 2,187,917 $ 2,199,379 Due to Subsidiary - - Deferred Taxes 73,704 69,365 Accrued Interest 557,036 524,253 Other Liabilities 8,417 52,644 Shareholders' Equity 6,625,620 6,667,719 $ 9,452,694 $ 9,513,360 52 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF INCOME (LOSS) December 31, 2004 2003 2002 INCOME Dividend Income - Bank of Louisiana $ - $ 143,000 $ - Interest Income 874 672 1,578 Miscellaneous Income 27,562 27,563 26,882 28,436 171,235 28,460 EXPENSES Interest 169,023 187,993 205,665 Other Expenses 7,896 10,797 16,559 176,919 198,790 222,224 LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY (148,483) (27,555) (193,764) Equity in Undistributed Earnings of Subsidiary 46,458 375,128 85,879 INCOME (LOSS) BEFORE INCOME TAX BENEFIT (102,025) 347,573 (107,885) INCOME TAX BENEFIT 63,523 64,549 72,278 NET INCOME (LOSS) $ (38,502) $ 412,122 $ (35,607) 53 NOTE T CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF CASH FLOWS December 31, 2004 2003 2002 OPERATING ACTIVITIES Net Income (Loss) $ (38,502) $ 412,122 $ (35,607) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities Equity in Undistributed (Earnings) of Subsidiary (46,458) (375,128) (85,879) Net (Increase) Decrease in Other Assets (89,398) 52,410 (29,457) Net (Decrease) Increase in Other Liabilities (11,444) 87,764 41,075 Net Cash Provided by (Used in) Operating Activities (185,802) 177,168 (109,868) FINANCING ACTIVITIES Preferred Stock Retired (12,018) (20,681) (24,508) (Increase) Decrease in Due to/from Subsidiary 170,269 (190,467) 91,979 Proceeds from Issuance of Long-Term Debt - 1,753,000 - Repayment of Long-Term Debt (11,462) (1,763,023) (8,763) Net Cash Provided by (Used in) Financing Activities 146,789 (221,171) 58,708 NET DECREASE IN CASH AND CASH EQUIVALENTS (39,013) (44,003) (51,160) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 354,635 398,638 449,798 CASH AND CASH EQUIVALENTS - END OF YEAR $ 315,622 $ 354,635 $ 398,638 54 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 2004, 2003 and 2002. The following represents the tax effects associated with the components of comprehensive income: December 31, 2004 2003 2002 Gross Unrealized Holding Gains Arising During the Period $ 12,759 $ 70,610 $ 31,398 Tax (Expense) (4,338) (24,007) (10,675) 8,421 46,603 20,723 Reclassification Adjustment for Gains Included in Net Income - - - Tax Benefit - - - - - - Net Unrealized Holding Gains Arising During the Period $ 8,421 $ 46,603 $ 20,723 NOTE W REGULATORY MATTERS As of December 31, 2004, 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. 55 NOTE W REGULATORY MATTERS (Continued) The Bank's actual capital amounts and ratios are also presented in the table. (Dollars in thousands.) December 31, 2004 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) $ 8,544 9.25% $ 3,696 4.00% $ 4,620 5.00% Tier I Capital (to Risk- Weighted Assets) $ 8,544 13.45% $ 2,541 4.00% $ 3,811 6.00% Total Capital (to Risk-Weighted Assets) $ 9,351 14.72% $ 5,082 8.00% $ 6,352 10.00% December 31, 2003 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) $ 8,489 8.63% $ 3,937 4.00% $ 4,921 5.00% Tier I Capital (to Risk- Weighted Assets) $ 8,489 13.63% $ 2,491 4.00% $ 3,737 6.00% Total Capital (to Risk-Weighted Assets) $ 9,280 14.90% $ 4,983 8.00% $ 6,229 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: 56 NOTE X DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) 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. 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, 2004 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $ 6,350,442 $ 6,350,442 Investment Securities 19,534,456 19,308,211 Loans 65,093,693 64,957,503 Less: Allowance for Loan Losses (1,800,000) (1,800,000) $ 89,179,194 $ 88,816,156 Financial Liabilities: Deposits $ 83,089,454 $ 83,145,553 Unrecognized Financial Instruments: Commitments to Extend Credit $ 4,803,000 $ 4,803,000 Credit Card Arrangements 33,669,000 33,669,000 $ 38,472,000 $ 38,472,000 57 NOTE X DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) December 31, 2003 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $ 15,113,994 $ 15,113,994 Investment Securities 19,521,697 19,374,297 Loans 62,600,202 62,498,457 Less: Allowance for Loan Losses 1,800,000 1,800,000 $ 95,435,893 $ 95,186,748 Financial Liabilities: Deposits $ 88,866,400 $ 88,894,013 Unrecognized Financial Instruments: Commitments to Extend Credit $ 3,399,000 $ 3,399,000 Credit Card Arrangements 50,452,000 50,452,000 $ 53,851,000 $ 53,851,000 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. 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 years ended December 31, 2004, 2003 or 2002. 58 To the Board of Directors BOL Bancshares, Inc. & Subsidiary Report of Independent Registered Public Accounting Firm 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, 2004 and 2003, 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 15, 2005 59 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE I BALANCE SHEETS UNCONSOLIDATED ASSETS December 31, 2004 2003 Cash and Due from Banks Non-Interest Bearing Balances and Cash $ 6,350,442 $ 7,908,994 Federal Funds Sold - 7,205,000 Investment Securities Securities Held-to-Maturity (Fair Value of $18,773,755 in 2004 and $18,852,600 in 2003) 19,000,000 19,000,000 Securities Available-for-Sale, at Fair Value 46,281 46,281 Loans: Less Allowance for Loan Losses of $1,800,000 in 2004 and 2003 and Unearned Discount of $-0- in 2004 and 2003 63,293,693 60,800,202 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 2,151,284 1,614,895 Other Real Estate 729,317 207,323 Other Assets 873,293 1,347,219 Deferred Taxes 244,204 267,331 Letters of Credit 102,465 71,265 Total Assets $ 92,790,979 $ 98,468,510 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-Interest Bearing $ 34,936,104 $ 36,980,625 Interest Bearing 48,477,889 52,238,411 Other Liabilities 348,624 341,499 Federal Funds Purchased 350,000 - Letters of Credit Outstanding 102,465 71,265 Due to Parent - 170,269 Accrued Litigation Settlement - 129,875 Accrued Interest 26,076 27,248 Total Liabilities 84,241,158 89,959,192 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 2,503,025 2,462,522 Total Stockholders' Equity 8,549,821 8,509,318 Total Liabilities and Stockholders' Equity $ 92,790,979 98,468,510 60 See independent registered public accounting firm report on supplementary information. BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE II STATEMENTS OF INCOME UNCONSOLIDATED For The Years Ended December 31, 2004 2003 2002 INTEREST INCOME $ 7,721,357 $ 7,824,182 $ 8,173,711 INTEREST EXPENSE 205,961 336,293 606,981 Net Interest Income 7,515,396 7,487,889 7,566,730 PROVISION FOR LOANS LOSSES 623,869 197,811 399,920 Net Interest Income After Provision For Loan Losses 6,891,527 7,290,078 7,166,810 OTHER INCOME Service Charges on Deposit Accounts 1,136,097 1,167,710 1,097,297 Other Non-Interest Income 949,583 1,328,946 920,271 2,085,680 2,496,656 2,017,568 OTHER EXPENSES Salaries and Employee Benefits 4,042,975 4,142,912 4,280,844 Occupancy Expense 1,584,409 1,674,331 1,702,095 Estimated Loss Contingency 292,534 113,030 - Other Non-Interest Expense 2,990,195 3,040,904 3,057,252 8,910,113 8,971,177 9,040,191 INCOME BEFORE INCOME TAX EXPENSE 67,094 815,557 144,187 INCOME TAX EXPENSE 26,591 297,250 56,093 NET INCOME $ 40,503 $ 518,307 $ 88,094 See independent registered public accounting firm report on supplementary information. 61 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE III STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNCONSOLIDATED Common Retained Stock Surplus Earnings Total 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 Dividends Paid - $1 Per Share - - (143,000) (143,000) Net Income for the Year 2003 - - 518,307 518,307 BALANCE - December 31, 2003 1,430,000 4,616,796 2,462,522 8,509,318 Net Income for the Year 2004 - - 40,503 40,503 BALANCE - December 31, 2004 $1,430,000 $4,616,796 $ 2,503,025 $8,549,821 See independent registered public accounting firm report on supplementary information. 62 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None Item 8A 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. Item 9 Directors and Executive Officers of the Company Directors and executive officers of the Company each serve for a term of one year. Position with the Company and the Director Name Age Bank and Principal Occupation Since G. Harrison Scott 81 Director; Chairman of the Board of the 1981 Company and President of the Bank Douglas A. Schonacher 74 Director of the Company and the 1988 Bank and Secretary of the Company; President, V.I.P. Distributors Franck F. LaBiche 59 Director of the Bank and the Company 2004 President, Executone Systems Co. of La. Inc. Henry L. Klein 60 Director of the Bank 2004 Attorney at Law, Klein Daigle, L.L.C. Non-Director Executive Officer Position with the Company and the Name Age Bank and Principal Occupation Peggy L. Schaefer 52 Ms. Schaefer has served as Treasurer of the Company since 1988 and Senior Vice President, and Chief Financial Officer since 1983 and Cashier of the Bank since 2004. No family relationships exist among the current directors or executive officers of the Company or the Bank, and except for service as a director 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 63 company registered as an investment company under the Investment Company Act of 1940. Item 10 Executive Compensation The Company pays no salaries or other compensation to its directors and executive officers. The Bank paid each director, other than Messrs. Scott and Comiskey, a fee 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 fees to the Company. The total amount loaned to the Company since October 1, 1990, and as of December 31, 2004, was $916,017, 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 2004, 2003, and 2002. No other executive officer received total compensation in excess of $100,000 during 2004. Annual Compensation Long Term Compensation Awards Payouts Restricted Other Annual Stock Options/ LTIP All Other Year Salary Bonus Compensation Award(s)SARsPayouts Compensation Name and Principal Position ($) ($) ($) ($) (#) ($) ($) G. Harrison Scott, Chairman of the Board 2004 89,800 0 41,000 0 0 0 - 2003 89,800 0 41,000 0 0 0 19,494 2002 89,800 0 41,000 0 0 0 19,494 James A. Comiskey, President 2004 89,800 0 41,000 0 0 0 - 2003 89,800 0 41,000 0 0 0 19,000 2002 89,800 0 41,000 0 0 0 19,000 In addition to the cash compensation shown in the foregoing table, the Bank provided automobiles for Messrs. Scott and Comiskey. Annual compensation does not include amounts attributable to miscellaneous benefits received by Messrs. Scott and Comiskey. The cost to the Bank of providing such benefits did not exceed 10% of the total annual salary and bonus paid to Messrs. Scott and Comiskey. Committees of the Board of Directors of the Company and the Bank he 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. uring fiscal year 2004, the Board of Directors of the Company held a total of 5 meetings. Each director attended at least 75% of the aggregate of the meetings of the Board of Directors. he Bank does not have standing 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. During fiscal year 2004, the Board of Directors of the Bank held a total of 11 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. The Board of Directors of the Bank has an Executive Committee consisting of two permanent members and three rotating members. The permanent members of the Executive Committee in 2004 were Messrs. Scott (chairman), and Comiskey, and the rotating members were selected from Messrs. Schonacher, LaBiche, and Mrs. Chouest. The Executive Committee formulates policy matters for 64 determination by the Board of Directors and reviews financial reports, loan reports, new business, and other real estate owned information. The xecutive Committee met 27 times in 2004. The Board of Directors of the Bank does have an Audit and Finance Committee. This committee meets monthly on the first Tuesday of the month. By Bank policy, 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 charged off loans. The Audit and Finance Committee met 12 times in 2004. 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. The Audit and Finance Committee consisted of Messrs. Schonacher (chairman), LaBiche, and Mrs. Chouest. Item 11 Security Ownership Of Certain Beneficial Owners and Management The following table sets forth as of December 31, 2004, certain information as to the Company Stock beneficially owned by (i) each person or entity, including any "group" as that term is used in Section 13(d) (3) of the Exchange Act, who or which was known to the Company to be the beneficial owner of more that 5% of the issued and outstanding Stock, (ii) the directors of the Company, (iii) all directors and executive officers of the Company and the Bank as a group. Company Stock Beneficially Owned as of December 31, 2004 (1) Common Preferred Name of Beneficial Owner Number Percent Number Percent Edward J. Soniat 10,381 5.79% 257,326 11.93% Directors: G. Harrison Scott 56,465 31.52% (2) 127,368 5.90% James A. Comiskey 35,467 19.80% (3) 94,706 4.39% Douglas A. Schonacher 2,740 1.53% (4) 18,537 (*) Shannon Scott Chouest 7,826 4.37% - - Franck F. LaBiche 500 - (*) - - Henry L. Klein 500 - (*) - - All Directors & Executive Officers 103,623 57.84% 243,383 11.28% of the Company and the Bank as a group (7 persons) (*)Represents less than 1% of the shares outstanding. 65 (1) Based upon information furnished by the respective persons. Pursuant to rules promulgated under the 1934 Act, a person is deemed to beneficially own shares of stock if he or she directly or indirectly has or shares (a) voting power, which includes the power to vote or to direct the voting of the shares; or (b) investment power, which includes the power to dispose or direct the disposition of the shares. Unless otherwise indicated, the named beneficial owner has sole voting power and sole investment power with respect to the indicated shares. (2) Includes 15,229 common shares owned by Scott Family Limited Liability Partnership, L.L.P. (3) Includes 47 common shares and 2,661 preferred shares owned by Director Comiskey's spouse. (4) Includes 2,525 common shares and 9,213 preferred shares owned by Director Schonacher'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 collectability or present other unfavorable features. At December 31, 2004, three of the directors had aggregate loan balances in excess of $60,000, which amounted to approximately $1.8 million in the aggregate. 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, 2004, there was a balance of $24,162 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 two 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 three also serve as directors of the Bank, namely Messrs. Scott, Comiskey, and Schonacher. The Bank pays $21,909, 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, 2005. An appraisal has been obtained to determine fair market value of the leased space. 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, 2005. The Bank leased 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, three are currently directors of the Bank, namely Messrs. Scott, Comiskey, and Schonacher. On September 1, 2004 for a price of $499,058, the Subsidiary Bank purchased the building from which it was operating a branch and paying rent to Tammany Mall Partnership. For the year ended December 31, 2004, $49,600 was paid to Tammany Mall Partnership in rent expense before the purchase. For the years ended December 31, 2003 and 2002, $74,400 was paid to Tammany Mall Partnership in rent expense. anagement 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. 66 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 Exhibits 31.1 Section 302 Principal Executive Officer Certification 31.2 Section 302 Principal Financial Officer Certification 32.1 Section 1350 Certification 32.2 Section 1350 Certification Reports on Form 8-K NONE Item 14 Principal Accountant Fees and Services AUDIT FEES The aggregate fees billed by LaPorte, Sehrt, Romig and Hand for its audit of the Company's annual financial statements for 2004 and for its reviews of the Company's unaudited interim financial statements included in Form 10-QSB filed by the Company during 2004 was $63,166. The fees billed for 2003 were $65,823. Audit-Related Fees The Company did not pay any fees to LaPorte, Sehrt, Romig & Hand for assurance and related services during 2004 or 2003. Tax Fees The aggregate fees billed by LaPorte, Sehrt, Romig and Hand for tax compliance, tax advice, and tax planning for 2004 was $12,090. The fees billed for 2003 were $10,467. All Other Fees The Company did not pay any fees to LaPorte, Sehrt, Romig & Hand for any other services rendered to the Company during 2004 or 2003. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 67 BOL BANCSHARES, INC. /s/ G. Harrison Scott March 29, 2005 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) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 2005. /s/ G. Harrison Scott /s/ Douglas A. Schonacher G. Harrison Scott - Director Douglas A. Schonacher - Director /s/ Franck F. LaBiche Franck F. LaBiche - Director