10KSB 1 r10ksb1207.txt 10KSB REPORT 2/07 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, 2007 [ ] 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 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] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X] Total Revenue for fiscal year ended December 31, 2007: $10,044,373. The aggregate market value of the voting common equity stock held by non-affiliates of the registrant was approximately $2,336,297. 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 29, 2008 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 6 Item 3: Legal Proceedings 7 Item 4: Submission of Matters to a Vote of Security Holders 7 Part II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6: Management's Discussion and Analysis 8 Item 7: Financial Statements and Supplementary Data 32 Item 8: Changes in and Disagreements with Accountants and Financial Disclosure 68 Item 8A(T): Controls and Procedures 68 Item 8B: Other Information 68 Part III Item 9: Directors and Executive Officers of the Registrant 69 Item 10: Executive Compensation 70 Item 11: Security Ownership of Certain Beneficial Owners and Management 71 Item 12: Certain Relationships and Related Transactions 72 Item 13: Exhibits and Reports on Form 8-K (a) Exhibits 72 (b) Reports on Form 8-K 72 Item 14: Principal Accountant Fees and Services 72 Signatures 73 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". Forward-Looking Statements are Subject to Change We make certain statements in this document as to what we expect may happen in the future. These statements usually contain the words "believe", "estimate", "project", "expect", "anticipate", "intend" or similar expressions. Because these statements look to the future, they are based on our current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. You should be aware that our current expectations and beliefs as to future events are subject to change at any time, and we can give no assurances that the future events will actually occur. Critical Accounting Policies In reviewing and understanding financial information of the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note A of the notes to our consolidated financial statements included in this Form 10-KSB. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United 3 States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods. Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant change. Banking Industry The Company derives its revenues largely from dividends from the Bank when the Bank upstreams 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 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. 4 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, 2007 the Bank held $9,064,000 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, 2007 the Bank held $1,583,000 in proprietary accounts. 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. In December of 2007 an urban planning consultant firm estimated New Orleans population at 300,000 or about 65 percent of its pre- Hurricane Katrina size, which was around 455,000. 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. While there is still a long way to go, considerable measurable progress is being made toward the New Orleans region's gradual economic recovery in the aftermath of the widespread devastation wreaked by Hurricanes Katrina (August 29, 2005) and Rita (September 24, 2005). Maritime Industry: All 14 of Louisiana's public coastal ports are operating at pre-Katrina and Rita capacity. Tourism and Conventions: Tourism is a $4 billion plus industry. Although most of the city flooded and some neighborhoods were devastated, most tourist venues-including the French Quarter-weren't hard hit by Katrina. But the chaos that followed the hurricane left New Orleans with a black eye. As its population has grown, so has the city's crime problem, offering a second worry for the hospitality industry. A spokeswoman for the New Orleans Metropolitan Convention and Visitors Bureau, said 2008 is shaping up to be the best since Katrina for convention business. Bookings stand at 80-90 percent of pre-storm levels. Governmental agencies and coalitions have crafted and embraced comprehensive plans for rebuilding New Orleans and its surrounding parishes for the near, medium and long term. Our communities and citizens are working hard to make a solid come-back. Our vision is one of a more livable, sustainable and safer future for New Orleans, which will include all the rich cultural and architectural heritage that has made the region so beloved to natives and visitors alike. Employees As of December 31, 2007, the Bank had 72 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 5 401(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 five 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. 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. Rental income received is $2,543 per month. The lease commenced December 15, 2003 and terminates on December 15, 2018. The Bank owns the building. 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. On August 20, 2007 for a price of $4,650,000 the Bank purchased the land and improvements from Severn South Partnership which the Bank was paying rent to. The property consists of a four story building with offices that are leased to other businesses. The purchase was approved by FDIC (Federal Deposit Insurance Corp) and OFI (Office of Financial Institutions, State of Louisiana) on August 6, 2007 with the stipulation that the investment in fixed assets not exceed 50 percent of its equity capital and reserves by December 31, 2008. The percentage as of December 31, 2007 was 54.39%. Management feels certain that the required 50% will be reached within the 18 month time frame allowed by the agencies. The Bank leased office space from Severn South Partnership. The general partner of Severn South Partnership is a majority shareholder in BOL BANCSHARES, INC. Rent paid to Severn South Partnership for the years ended December 31, 2007 (prior to the purchase described above), 2006 and 2005 totaled $247,407, $381,386, and $410,012 respectively. Rental income received after the purchase & through December 31, 2007 was $108,326. Oakwood Branch. The Oakwood Branch of the Bank is located in the Oakwood Shopping Center at 197 Westbank Expressway, Gretna, Louisiana. The premises consisted of approximately 3,730 total square feet of office space, which includes 1,560 square feet designated for its drive-in facility. The Bank leases the lobby and drive-in facility from Oakwood Shopping Center, Ltd. There was heavy storm damage to this shopping center and the Bank has relocated its branch to another location within the shopping center and reopened during the 4th quarter of 2007. The lease will expire November 14, 2016 with a monthly lease amount of $12,822 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 lease will expire March, 2017 with a monthly lease amount of $6,384 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 2007 totaled $96,071. 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 owns the building. 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 6 four-story office building, and parking is provided for approximately 200 cars. See "Severn Branch" above for information on the building purchase. Item 3 Legal Proceedings Because of the nature of the banking industry in general, the Company and the Bank are each party from time to time to litigation and other proceedings in the ordinary course of business, none of which (other than those described below), either individually or in the aggregate, have a material effect on the Company's and/or the Bank's financial condition. Reserves for such litigation, if the Company deems such litigation to have sufficient merit or which may subject the Company to significant exposure, have been posted and are reflected in the Company's consolidated financial statements. The following actions, however, have been brought against the Bank and, if the claimants were wholly successful on the merits, could result in significant exposure to the Bank: 1. The Company is a defendant in a lawsuit filed by a proprietary merchant alleging that the Company mishandled the Plaintiff's proprietary credit card portfolio. All previous cases by and between the Bank and the proprietary merchant have become final, with the merchant having received the money which was once held in the registry of the court. One last case is presently pending in the Fifth Circuit Court of Appeals on the Bank's appeal from the last dismissal. The case has been fully briefed and is expected to be decided in the next several months. The outcome is presently doubtful, given the Fifth Circuit's penchant for affirming the decisions of the district judges. 2. 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. The matter is set for trial on April 7, 2008 and a favorable result is expected. Given the amount of time which has elapsed and the possibility of penalties, the case has the potential for a significant recovery of over $400,000. A loss of $272,000 was charged to operations during 2004. 3. The Bank is a defendant in a lawsuit filed by one of its customers for the unauthorized transfer of funds via telephone. The matter was tried before a judge only and has been fully briefed. A favorable decision is expected forthwith. 4. The Bank is a defendant in a lawsuit pending in the 22nd Judicial District Court in St. Tammany Parish. The issues involved the clearing of a safety deposit box at the Gause branch by a notary with authority from the court to do so in the succession of the owner of the box. The causes of action against the Bank are unclear and the case is in the discovery stages. It is doubtful that the Bank has any exposure. 5. The Bank entered into an agreement with a company for disaster protection. The company had a contract to provide technical and physical backup in the event the Bank's data systems were impaired by a natural disaster. When Katrina hit, however, the company woefully failed to provide the services agreed and the Bank has made demand for payment of $901,992.50. The Bank filed suit which is set for trial March 24, 2008 before a jury. The company has counterclaimed for some $75,000 in fees. Item 4 Submission of Matters to a Vote of Security Holders There were no matters submitted, during the fourth quarter of fiscal year 2007 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 7 Stock. The following table sets forth the range of high and low sales prices of Company Common Stock since 2006, 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, 2007, the Company had approximately 589 shareholders of record. There were no dividends declared on the Company common stock for the years ended 2007 or 2006. 2007 High Low First Quarter 31.00 29.75 Second Quarter - - Third Quarter - - Fourth Quarter - - 2006 High Low First Quarter - - Second Quarter - - Third Quarter 28.00 19.00 Fourth Quarter - - No dividends were paid on shares of Company Common stock in 2007 or 2006. Annual Shareholders Meeting The Annual Meeting of the shareholders of Registrant will be held at 300 St. Charles Avenue, 4th Floor, New Orleans, Louisiana, on Tuesday April 8, 2008 at 3:30 p.m. Independent Auditors LaPorte, Sehrt, Romig & Hand, 110 Veterans Memorial Blvd., Suite 200, Metairie, LA 70005-4958. Item 6 MANAGEMENT'S DISCUSSION AND ANALYSIS 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, 2007, 2006, and 2005. 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. 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. 8 Hurricane Katrina Disclosure Management expects insurance proceeds for storm damages caused by Hurricane Katrina to cover the majority of damages sustained to the Bank's branches. Of the 7 branch locations that were affected by Hurricane Katrina, only the Carrollton branch was not reopened. Repairs to several of the Bank's buildings are ongoing. The Company's management team and employees have and are continuing to work diligently to control operating expenses and costs while restoring normal business operations. Overview The Company provides a full range of quality financial services in selected market areas. As of December 31, 2007, the Company's total assets were $105,270,000 as compared to $105,171,000 at December 31, 2006. 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 $55,820,000, and $57,335,000 net of unearned discount and Allowance for Loan Losses at December 31, 2007, and 2006. The Bank's net interest margin was 8.04% for the year ended December 31, 2007. 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, 2007, credit card loans were $9,064,000 and represented 16.24% of the Bank's loan portfolio of $55,820,000. At December 31, 2006, credit card loans were $9,995,000 and represented 17.43% of the Bank's loan portfolio of $57,335,000. 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. 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 - December 31, 2007 Compared to December 31, 2006 The Company's net income for the year 2007 was $1,477,000 or $8.24 per share, a decrease of $653,000 from the Company's net income of $2,130,000 in 2006. Net income for the year 2005 was $468,000. The most significant contributing factor within the non-interest income and expense category for 2007 is a decrease of $514,000 in non-interest income. This decrease was due mainly to a gain on insurance settlement. In 2006, $600,000 in insurance proceeds was received on an OREO property that the Bank had no plans to repair. The Bank had a purchase offer and the property was sold in July, 2006. This was offset by an increase of $87,000 from the gain of an OREO sale of $88,000 in 2007, as compared to a minimal gain of $1,000 on sold OREO in 2006. Non-interest expense increased $24,000. The major component of this increase was the recovery of $202,000 during 2006 due to insurance recovery of damages sustained during Hurricane Katrina in 2005 as compared to the recovery of $1,200 during 2007. This was offset by a decrease in Other Real Estate write-downs of $241,000. During 2007, the write-down on Other Real Estate parcels was $24,000 compared to a write-down of $265,000 in 2006. Income tax expense decreased $217,000 in 2007 compared to the same period last year from $938,000 in 2006 to $721,000 in 2007 due to the decrease in pretax net income of $870,000 from 2006 to 2007. Net Income - December 31, 2006 Compared to December 31, 2005 The Company's net income for the year 2006 was $2,130,000 or $11.89 per share, an increase of $1,662,000 from the Company's net income of $468,000 in 2005. The most significant contributing factor within the non-interest income and expense category for 2006 is a decrease of $1,143,000 in non- 9 interest expenses. Salaries and employee benefits decreased $499,000. This decrease is directly attributable to the Bank outsourcing its credit card operations and the Bank's core processing, thereby reducing staff, and also staff not returning after Hurricane Katrina. Occupancy expense decreased $324,000 and rental expense was reduced by $207,000 in 2006 post Katrina due to two branch offices that were not able to reopen and one branch office wherein only the drive-in facility was operating. Depreciation expense increased $58,000 due to the purchase of equipment necessary to facilitate outsourcing the Bank's core processing, in addition to the replacement of equipment, furniture and fixtures destroyed by Hurricane Katrina. Disaster recovery services decreased $136,000 from an expense of $77,000 in 2006 to a recovery of $59,000 from insurance proceeds. Estimated loss (recovery) contingency decreased $432,000 due to the insurance recovery of damages sustained during Hurricane Katrina of $202,000 in 2006 from an expense of $230,000 in 2005. ORE expenses increased $228,000 due mainly to $265,000 write-down of one ORE property in 2006. Non-interest income decreased $51,000, due mainly to a decrease in deposit related fees of $192,000 of which $139,000 was due to the reduction of fees collected on overdrawn accounts. Other Real Estate income decreased $245,000 due to the gain on the sale of an ORE property of $235,000 in 2005 as compared to a gain of $1,000 in 2006. Other income decreased $173,000 in 2006 due mainly to the Bank receiving $141,000 as beneficiary of two insurance policies on the life of the Bank's president, Mr. James Comiskey, who passed on in February 2005. In 2006, $600,000 in insurance proceeds was received on an OREO property that the Bank had no plans to repair. The Bank had a purchase offer and the property was sold in July, 2006. Income tax expense increased $795,000 in 2006 compared to the same period last year from $143,000 in 2005 to $938,000 in 2006 due to the increase in net income from $612,000 in 2005 to $3,067,000 in 2006. Net Interest Income/Margin - December 31, 2007 Compared to December 31, 2006 Net interest income which is total interest income (including fees) less total interest expense was $7,804,000 in 2007 compared to $8,424,000 in 2006. Net interest income for 2005 was $7,084,000. Interest on earning assets decreased $420,000 from $9,037,000 in 2006 to $8,617,000 in 2007. Interest income on federal funds sold decreased $467,000 due to a decrease in the average balance of $10,161,000 from $36,360,000 in 2006 as compared to $26,199,000 in 2007. This decrease was due primarily to the decrease in the average balance of deposits which decreased $17,131,000 from $109,103,000 in 2006 to $91,972,000 in 2007. The customers who had received insurance proceeds and road home money have used these funds to repair or replace property damaged by Hurricane Katrina. Interest income on investment securities decreased $88,000 from $531,000 earning 2.96% in 2006 to $443,000 earning 3.58% in 2007 due to $6,000,000 in called or matured securities resulting in a decrease of average balances from $17,939,000 in 2006 to $12,370,000 in 2007. Taxable-equivalent income on loans increased $135,000 or 2.01%, from $6,731,000 in 2006 to $6,866,000 in 2007. This increase primarily resulted from an increase of $784,000 in the average balance of loans from $57,718,000 in 2006 to $58,502,000 in 2007. Interest on deposits increased $225,000 from $475,000 in 2006 to $700,000 in 2007. This increase resulted primarily from an increase in the rates paid from .88% in 2006 to 1.52% in 2007. Net Interest Income/Margin - December 31, 2006 Compared to December 31, 2005 Net interest income which is total interest income (including fees) less total interest expense was $8,424,000 in 2006 compared to $7,084,000 in 2005. Interest on earning assets increased $1,468,000 from $7,569,000 in 2005 to $9,037,000 in 2006. Taxable-equivalent income on loans decreased $50,000 or .74%, from $6,781,000 in 2005 to $6,731,000 in 2006. This decrease primarily resulted from a decrease of $3,111,000 in the average balance of loans from $60,829,000 in 2005 to $57,718,000 in 2006. Interest income on federal funds sold increased $1,479,000 due to an increase in the average balance of $27,957,000 from $8,403,000 in 2005 as compared to $36,360,000 in 2006. The additional funds sold was attributable to additional funds on 10 deposit from customers receiving insurance proceeds and FEMA monies post Katrina. Due to the uncertainty of how long the funds would remain in customer's accounts, the Bank chose to invest the additional monies in overnight Federal Funds. In addition, Federal Funds rates paid increased from 3.52% in 2005 to 4.88% in 2006. Interest income on investment securities increased $39,000 from $492,000 earning 2.51% in 2005 to $531,000 earning 2.96% in 2006 due to several step-up rates in government agencies held for investment. Interest on deposits increased $156,000 from $319,000 in 2005 to $475,000 in 2006. This increase resulted primarily from an increase in the rates paid from .67% in 2005 to .88% in 2006. 11 TABLE 1 Average Balances, Interests and Yields 2007 2006 2005 Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars in Thousands) ASSETS INTEREST-EARNING ASSETS: Loans, net of Unearned income (1)(2) 58,502 6,866 11.74% 57,718 6,731 11.66% 60,829 6,781 11.15% Investment securities 12,370 443 3.58% 17,939 531 2.96% 19,567 492 2.51% Federal funds sold 26,199 1,308 4.99% 36,360 1,775 4.88% 8,403 296 3.52% Total Interest-Earning Assets 97,071 8,617 8.88% 112,017 9,037 8.07% 88,799 7,569 8.52% Cash and due from banks 3,946 6,084 6,475 Allowance for loan Losses (1,803) (1,804) (1,797) Premises and equipment 4,001 2,334 2,124 Other Real Estate 1,105 894 633 Other assets 1,284 1,517 1,392 TOTAL ASSETS 105,604 121,042 97,626 LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST-BEARING LIABILITIES: Deposits: Demand Deposits 15,487 214 1.38% 18,313 158 0.86% 14,866 83 0.56% Savings deposits 24,505 271 1.11% 30,273 177 0.58% 26,712 134 0.50% Time deposits 6,181 215 3.47% 5,576 140 2.51% 6,154 102 1.66% Total Int-Bearing Deposits 46,173 700 1.52% 54,162 475 0.88% 47,732 319 0.67% Long-Term debt 1,544 113 7.30% 1,843 138 7.48% 2,169 164 7.56% Total Interest-Bearing Liabilities 47,717 813 1.70% 56,005 613 1.09% 49,901 483 0.97% Non-interest-bearing deposits 45,799 54,941 39,458 Other liabilities 2,199 1,783 1,256 Shareholders' equity 9,889 8,313 7,011 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 105,604 121,042 97,626 Net Interest Income 7,804 8,424 7,086 Net Interest Spread 7.17% 6.97% 7.56% Net Interest Margin 8.04% 7.52% 7.98% (1) Fee income relating to loans of $452,000 in 2007, $586,000 in 2006 and $663,000 in 2005 is included in interest income. (2) Non-accrual loans are included in average balances and income on such loans, if recognized, is recognized on the cash basis.
12 Table 2 Rate/Volume Analyses (1) 2007 Compared to 2006 2006 Compared to 2005 Change In Interest Change in Interest Due to Total Due to Total (Dollars in Thousands) Rate Volume Change Rate Volume Change Net Loans 44 91 135 297 (347) (50) Investment Securities 77 (165) (88) 80 (41) 39 Federal Funds Sold 29 (496) (467) 494 985 1,479 Total Interest Income 150 (570) (420) 871 597 1,468 Deposits: Demand Deposits 80 (24) 56 56 19 75 Savings Deposits 128 (34) 94 25 18 43 Time Deposits 60 15 75 48 (10) 38 Total Int-Bearing Dep 268 (43) 225 129 27 156 Long-Term Debt (3) (22) (25) (1) (25) (26) Total Interest Expense 265 (65) 200 128 2 130 (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. Interest Sensitivity Gap Analysis 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, 2007, has a net interest sensitive asset gap of 33.71% when projecting out one year. In the near term, defined as 90 days, the Company currently has a net interest sensitive liability gap of 5.55%. 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, 2007, as well as the cumulative position at December 31, 2007: 13 TABLE 3 Asset/Liability and Gap Analysis December 31, 2007 1-30 31-60 1-90 91-365 1 Year- Over Days Days Days Days 5 Years 5 Years Total (Dollars in Thousands) Total Earning Assets Securities-HTM - 3,000 5,000 - - - 8,000 Securities - AFS - - - - 740 - 740 Loans 11,715 2,744 3,413 28,753 8,794 401 55,820 Federal Funds sold 27,490 - - - - - 27,490 Total Earning Assets 39,205 2,744 6,413 33,753 9,534 401 92,050 Non Earning Assets - - - - 13,220 - 13,220 TOTAL ASSETS 39,205 2,744 6,413 33,753 22,754 401 105,270 Interest-Bearing Liabilities Savings & Now accounts 35,936 - - 204 - - 36,140 Money market 4,248 - - - - 4,248 CD's < $100,000 519 476 343 2,882 1,391 - 5,611 CD's > $100,000 - 100 900 1,025 235 - 2,260 Notes payable - - - - 1,543 - 1,543 Total Int- Bearing Liabilities 40,703 576 1,243 4,111 3,169 - 49,802 Non Costing Liabilities 1,518 - - - 53,950 - 55,468 TOTAL LIABILITIES 42,221 576 1,243 4,111 57,119 - 105,270 Interest Sensitivity Gap (1,498) 2,168 5,170 29,642 6,365 401 42,248 Cumulative Gap (1,498) 670 5,840 35,482 41,847 42,248 Cumulative Gap/Total Assets -1.42% 0.64% 5.55% 33.71% 39.75% 40.13% 14 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, 2007 and December 31, 2006 the allowance for possible loan losses was $1,800,000. In 2007, the provision for loan losses was $277,000 compared to $564,000 in 2006. Net charge-offs were $277,000 in 2007 compared to $677,000 in 2006. 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. TABLE 4 Allowance for Loan Losses December 31, 2007 2006 (Dollars in Thousands) Balance at beginning of period $1,800 $1,913 Charge-Offs: Commercial 32 22 Real estate 11 58 Installment 15 150 Credit Cards 424 704 Total Charge-offs 482 934 Recoveries: Commercial 3 20 Real estate 0 0 Installment 7 24 Credit Cards 195 213 Total Recoveries 205 257 Net charge-offs 277 677 Provision for loan losses 277 564 Balance at end of period $1,800 $1,800 Ratio of net charge-offs during period to average loans outstanding 0.47% 1.17% Allowance for possible loan losses as a percentage of loans 3.12% 3.04% Non-interest Income An important source of the Company's revenue is derived from non- interest income. For the year 2007 non-interest income decreased $514,000. This decrease was due mainly to a gain on insurance settlement. In 2006, $600,000 in insurance proceeds was received on an OREO property that the Bank had no plans to repair. The Bank had a purchase offer and the property was sold in July, 2006. This was offset by an increase of $87,000 from the gain of an OREO sale of $88,000 in 2007, as compared to a minimal gain of $1,000 on sold OREO in 2006. For the year 2006 non-interest income decreased $51,000, due mainly to a decrease in deposit related fees of $196,000 of which $139,000 was due to the reduction of fees collected on overdrawn accounts. Other Real Estate income decreased $245,000 due primarily to the gain on the sale of an ORE property of $235,000 in 2005 as compared to a gain of $1,000 in 2006. Other income decreased $173,000 in 2006 due mainly to the Bank receiving $141,000 as beneficiary of two insurance policies on the life of the Bank's president, Mr. James Comiskey, who passed in February 2005. In 2006, $600,000 in insurance proceeds was received on an OREO property that the Bank had no plans 15 to repair. The Bank had a purchase offer and the property was sold in July, 2006. The following table sets forth the major components of non-interest income for the last two years. TABLE 5 Non-interest Income $ Change December 31, From Prior 2007 2006 Year (Dollars in Thousands) Service Charges 277 337 (60) NSF Charges 315 270 45 Gain on Sale of Securities 0 0 0 Cardholder & Other Cr Card Inc 543 608 (65) Other Comm. & Fees 65 60 5 ORE Income 0 0 0 Gain on Sale of ORE 88 1 87 Gain on Insurance Settlement 0 600 (600) Other Income 139 65 74 Total Non-interest Income $1,427 $1,941 ($514) Non-interest Expense The major categories of non-interest expense include salaries and employee benefits, occupancy and equipment expenses and other operating costs associated with the day-to-day operations of the Company. For the year 2007 non-interest expense increased $24,000. The major component of this increase was the recovery of $202,000 during 2006 due to insurance recovery of damages sustained during Hurricane Katrina in 2005 as compared to the recovery of $1,200 during 2007. This was offset by a decrease in Other Real Estate write-downs of $241,000. During 2007, the write- down on Other Real Estate parcels was $24,000 compared to a write-down of $265,000 in 2006. The most significant factor during 2006 is a decrease of $1,143,000. Salaries and employee benefits decreased $499,000. This decrease is directly attributable to the Bank outsourcing its credit card operations and the Bank's core processing, thereby reducing staff, and also staff not returning after Hurricane Katrina. Occupancy expense decreased $324,000 and rental expense was reduced by $207,000 in 2006 post Katrina due to 2 branch offices that were not able to reopen and one branch office wherein only the drive-in facility was operating. Depreciation expense increased $58,000 due to the purchase of equipment necessary to facilitate outsourcing the Bank's core processing, in addition to the replacement of equipment, furniture and fixtures destroyed by Hurricane Katrina. Disaster recovery services decreased $136,000 from an expense of $77,000 in 2005 to a recovery of $59,000 from insurance proceeds. Estimated loss (recovery) contingency decreased $432,000 due to the insurance recovery of damages sustained during Hurricane Katrina of $202,000 in 2006 from an expense of $230,000 in 2005. ORE expenses increased $228,000 due mainly to $265,000 write-down of one ORE property in 2006. The following table sets forth the major components of non-interest expense for the last two years: 16 TABLE 6 Non-interest Expenses $ Change December 31, From Prior 2007 2006 Year (Dollars in Thousands) Salaries & Benefits 2,749 2,689 60 Occupancy Expense 1,058 1,080 (22) Advertising Expense 9 5 4 Communications 163 171 (8) Postage 59 66 (7) Outsourcing Fees 1,432 1,406 26 Loan & Credit Card Expense 125 132 (7) Professional Fees 202 173 29 Legal Fees 103 119 (16) Insurance & Assessments 76 83 (7) Stationery, Forms & Supply 111 143 (32) Promotional Expenses 74 68 6 ORE Expenses 87 389 (302) Misc. Losses 100 5 95 Estimated Loss (Recovery) Contingency 0 (202) 202 Other Operating Expense 410 407 3 Total Non-interest Expense $6,758 $6,734 $24 Provision for Income Taxes Income tax expense for 2007 was $721,000 compared to $938,000 in 2006, and an income tax expense of $143,000 in 2005. 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. 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, 17 liquidity sources for the Bank are generated from operating activities and financing activities. Net cash from operating activities primarily results from net income adjusted for the following non-cash items: the provision for loan losses; depreciation and amortization; fair value adjustments on foreclosed property; and deferred income taxes or benefits. 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 4.13% to $89,666,000 in 2007 from $93,531,000 in 2006, or $3,865,000, was the primary reason for the decrease in liquidity. As customers utilize their insurance proceeds for purchasing new homes or making repairs for the damages caused by Katrina, they are withdrawing the funds in their accounts. Management anticipated this fact and therefore has invested the funds in readily available Federal Funds Sold to correspondent banks. The Bank had unused sources of liquidity in the form of unused federal funds lines of $4,000,000 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. 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, 2007 2006 (Dollars in Thousands) Commercial, financial, & 2,754 3,491 agricultural Real estate-mortgage 43,513 42,557 Personal Loans 2,175 2,215 Credit cards 9,064 9,995 Overdrafts 114 877 Loans 57,620 59,135 Less: Allowance for possible loan losses 1,800 1,800 Loans, net $55,820 $57,335 At December 31, 2007 total loans outstanding were $55,820,000 and $57,335,000 at December 31, 2006. Average total loans during 2007 increased $784,000 or 1.36%, to $58,502,000 from $57,718,000 at December 31, 2006. The Bank experienced an increase of $956,000 in real estate loans from $42,557,000 in 2006 to $43,513,000 in 2007, which was offset by a decrease in credit card loans of $931,000, a decrease in commercial loans of $737,000, a decrease of 763,000 in overdrafts and a decrease in personal loans of $40,000. In 2005 the Bank experienced a decrease of $3,656,000 in real estate loans from $43,543,000 in 2004 to $39,887,000 in 2005, a decrease in credit card loans of $1,747,000, a decrease in personal loans of $908,000, and a 18 decrease in commercial loans of $49,000. The Bank lost several seasoned lenders during the first quarter of 2005. Loan production was down until lenders were replaced. In addition, Management has noted strong housing appreciation in undamaged housing in the Gulf Coast areas which were impacted by the 2005 hurricanes. When a significant portion of the housing stock has been destroyed, the law of supply and demand dictates that the remaining houses will dramatically increase in value. We feel the gains don't accurately reflect normal market conditions as the market will likely experience significant, unpredictable shifts during the next two years. Therefore, Management has been extremely conservative when considering appraisal values as collateral on real estate. The following table shows the maturity distribution and interest rate sensitivity of the Bank's loan portfolio at December 31, 2007: TABLE 8 Loan Maturity and Interest Rate Sensitivity December 31, 2007 Maturing Within One To Over One Year 5 Years 5 Years Total (Dollars in Thousands) Loan Maturity by Type Commercial, financial and agricultural 2,513 243 0 2,756 Real estate construction, land and land development 37,562 5,341 611 43,514 All other loans 1,956 9,394 0 11,350 Total $42,031 $14,978 $611 $57,620 Rate Sensitivity of Loans Loans: Fixed rate loans 38,214 14,978 611 53,803 Variable rate loans 3,400 0 0 3,400 Non-Accrual Loans 417 0 0 417 Total $42,031 $14,978 $611 $57,620 As of December 31, 2007 and 2006, the Bank's recorded investment in loans that are considered impaired under SFAS 114 totaled $417,000 and $68,000, respectively. 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 19 market levels. Other real estate owned is real property acquired by foreclosure or deed taken in lieu of foreclosure. Non-performing assets at December 31, 2007 were $1,453,000 and $1,233,000 at December 31, 2006. During 2007, non-accrual loans increased by $349,000 and other real estate owned decreased $129,000. At December 31, 2007, and 2006, there were no restructured loans. Since December 31, 2006, the ratio of past due loans to total loans has decreased from 2.52% to .85% at December 31, 2007. During that time, the Bank increased its ratio of non-performing assets to loans and other real estate owned from a low of 2.04% at December 31, 2006, to a high of 2.48% at December 31, 2007. The allowance for possible loan losses as a percent of period-end loans increased to 3.12% at December 31, 2007, compared to 3.04% at December 31, 2006. Management believes the allowance for possible loan losses is dequate 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 that amount is made to the allowance for possible loan losses. For 2007, the gross amount of interest income that would have been recorded on non-accrual loans at December 31, 2007, if all such loans had been accruing interest at the original contract rate, was $31,000. TABLE 9 Non-performing Assets December 31, 2007 2006 (Dollars in Thousands) Non-accrual Loans 417 68 Restructured Loans 0 0 Other Real Estate Owned 1,036 1,165 Total Non-performing Assets $1,453 $1,233 Loans past due 90 days or more 488 1,491 Ratio of past due loans to loans 0.85% 2.52% Ratio of non-performing assets to loans and other real estate owned 2.48% 2.04% Management is aware of and working with customers who experienced damage due to the hurricanes. 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 20 provision for credit card losses is included in the Bank's overall provision for loan losses. Table 10 Allocation of Allowance for Possible Loan Losses December 31, 2007 December 31, 2006 Allowance % * Allowance % * (Dollars in Thousands) Non-accrual loans 163 0.72% 34 0.11% Substandard/Impaired/Doubtful 591 14.17% 627 0.12% Construction loans 201 12.62% - - Commercial, financial and agricultural 287 49.74% 370 62.58% Consumer Installment 48 6.82% 50 6.99% Credit Cards 501 15.73% 716 16.90% Overdrafts 9 0.20% 3 1.48% 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 $8,740,000 at December 31, 2007, and $14,536,000 at December 31, 2006. The majority of the holdings are backed by U.S. Government or federal agency guarantees limiting the credit risks associated with these securities. Although credit risks are minimal, interest rates and their respective interest income is subject to risk due to fluctuating interest rates. The average maturity of the securities portfolio was one year or less at December 31, 2007. At year-end 2007, $740,000 of the Company's investment securities were classified as available-for-sale, compared to $536,000 at December 31, 2006. The gross unrealized holding gains on these securities at December 31, 2007 were $437,000 and $218,000 at December 31, 2006. There were no investments and no obligations of any one state or municipality at December 31, 2007, or 2006. At December 31, 2007, and 2006 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: 21 TABLE 11 Investment Securities December 31, 2007 2006 Amortized Fair Amortized Fair Cost Value Cost Value (Dollars in Thousands) U.S. Treasury securities and obligations of U.S. government corporations and agencies 8,000 7,997 14,000 13,815 Other investments 302 740 318 536 Total $8,302 $8,737 $14,318 $14,351 TABLE 12 Securities Maturities and Yields December 31, 2007 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 8,000 7,997 4.31% Due 1-5 years Total $8,000 $7,997 4.31% (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, 2007 (dollars in thousands): 22 TABLE 13 Other Securities Mississippi River Bank 613 Liberty Financial Services, Inc. 96 Business Resource Capital 20 MasterCard International 11 Total Other Securities $740 Deposits Total deposits at December 31, 2007 were $89,666,000 which represented a decrease of $3,865,000 or 4.13% from $93,531,000 at December 31, 2006. During 2007, interest bearing deposits increased by $2,175,000. Core deposits, the Bank's largest source of funding, consists of all interest bearing and non- interest bearing deposits except certificates of deposits over $100,000. Core deposits are obtained from a broad range of customers. Average core deposits decreased $17,872,000 or 16.44% to $90,868,000 in 2007. Market rate core deposits, primarily CD's of less than $100,000 and money market accounts, decreased $177,000 in 2007. Non-interest bearing deposits are comprised of business accounts, including correspondent bank accounts, escrow deposits, as well as individual accounts. Average non-interest bearing demand deposits represented 50.40% of average core deposits in 2007 compared to 50.53% in 2005. 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, 2007 2006 Average Average Amount Rate Amount Rate (Dollars in Thousands) Non-interest-bearing Deposits $45,799 N/A $54,941 N/A Interest-bearing Demand Deposits 15,487 1.38% 18,313 0.86% Savings Deposits 24,505 1.11% 30,273 0.58% Time Deposits 6,181 3.47% 5,576 2.51% Total Average Deposits $91,972 $109,103 The composition of average deposits for the last two years is presented below: 23 TABLE 15 Deposit Composition December 31, 2007 2006 (Dollars in Thousands) Average % Of Average % Of Balances Deposits Balances Deposits Demand, non-interest-bearing 45,799 49.80% 54,941 50.36% NOW accounts 11,728 12.75% 14,513 13.30% Money market deposit accounts 3,759 4.09% 3,800 3.48% Savings accounts 24,505 26.64% 30,273 27.75% Other time deposits 5,077 5.52% 5,213 4.78% Total core deposits 90,868 98.80% 108,740 99.67% Certificates of deposit of $100,000 or more 1,104 1.20% 363 0.33% Total deposits $91,972 100.00% $109,103 100.00% 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, 2007 2006 (Dollars in Thousands) Three months or less 1,000 200 After three months through one year 1,025 305 Over one year through three years 235 0 Total $2,260 $505 Other Assets and Other Liabilities Other liabilities increased $2,308,000 mainly due to insurance proceeds that will be used to complete the repairs on property damaged by Hurricane Katrina. The following are summaries of other assets and other liabilities for the last two years: 24 TABLE 17 Other Assets & Other Liabilities Other Assets December 31, 2007 2006 (Dollars in Thousands) Interest Receivable 285 416 Prepaid Expenses 361 281 Accounts Receivable 69 129 Cash Surrender Value 209 267 Other Assets 0 4 Total Other Assets $924 $1,097 Other Liabilities December 31, 2007 2006 (Dollars in Thousands) Accrued Expenses Payable 225 284 Deferred Membership Fees 17 21 Blanket Bond Fund 50 50 Other Liabilities 2,577 206 Total Other Liabilities $2,869 $561 Borrowings The Company's long-term debt is comprised primarily of debentures which will be due July 5, 2009. Each $500 debenture is secured by a pledge of 51.07 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 $4,000,000 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, 20067 was $10,740,000, an increase of $1,617,000 or 17.72% from $9,123,000 at December 31, 2006, and amounted to 10.20% of total assets. Realized shareholders' equity, which includes preferred and common stock, capital in excess of par, and retained earnings, increased $1,472,000 or 16.64% to $10,318,000 at December 31, 2007, from $8,846,000 at December 31, 2006. During 2007, the increase in shareholder's equity was primarily attributable to net income of $1,476,000, a decrease in Preferred Stock of $7,000, and an increase in capital in excess of par-retired Preferred Stock of $3,000. In addition, there was a 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 $145,000. No dividends were paid on shares of Company Common Stock in 2007 or 2006. Shareholders' equity at December 31, 2006, was $9,123,000, an increase of $2,058,000 or 29.13% from $7,065,000 at December 31, 2005, and amounted to 8.67% of total assets. Realized shareholders' equity, which includes 25 preferred and common stock, capital in excess of par, and retained earnings, increased $2,113,000 or 31.38% to $8,846,000 at December 31, 2006, from $6,733,000 at December 31, 2005. During 2006, the increase in shareholder's equity was primarily attributable to net income of $2,130,000, a decrease in Preferred Stock of $28,000, and an increase in capital in excess of par-retired Preferred Stock of $12,000. In addition, there was a decrease 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 $55,000. No dividends were paid on shares of Company Common Stock in 2006 or 2005. 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) for 2007 was 14.93% compared to 25.62% in 2006. The ratio of average shareholders' equity to average assets was 9.36% and 6.87% in 2007 and 2006, respectively. At December 31, 2007, the Company's primary capital ratio as defined by the FRB was 11.19%, compared to 9.82% in 2006. The total capital ratio was 11.19% at December 31, 2007, and 9.82% in 2006, 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, 2007, was 10.31% compared to 9.27% at December 31, 2006, 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, 2007 2006 Amount Percent Amount Percent (Dollars in Thousands) Tier I capital Actual 10,740 15.84% 9,123 15.06% Minimum 2,715 4.00% 2,425 4.00% Excess 8,025 11.84% 6,698 11.06% Total risk-based capital Actual 11,599 17.11% 9,893 16.33% Minimum 5,425 8.00% 4,845 8.00% Excess 6,174 9.11% 5,048 8.33% Tier I capital leverage ratio Actual 10,740 10.17% 9,123 7.54% Minimum 4,220 4.00% 4,845 4.00% Excess 6,520 6.17% 4,278 3.54% 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. 26 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 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 27 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 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 Deposit Insurance Fund ("DIF") 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 28 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 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. Effect of Governmental Policies The Company and the Bank are affected by the policies of regulatory authorities, including the FRB. An important function of the Federal Reserve System is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels, and inflation. The monetary policies of the Federal Reserve and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the financial markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest 29 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. Code of Ethics The Company has adopted a code of ethics that applies to all directors, officers and employees that is designed to deter wrongdoing and promote the following: 1.) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 2.) Full, fair, accurate, timely and understandable disclosure in reports and documents; 3.) Compliance with applicable governmental laws, rules and regulations; 4.) The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and 5.) Accountability for adherence to the code. A copy of the Bank's code of ethics may be obtained by writing to: Bank of Louisiana Accounting Department 300 St. Charles Avenue New Orleans, LA 70130-3104 Community Reinvestment Act (CRA) In connection with its lending activities, the Bank is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and populations. The CRA requires FDIC insured banks to define the assessment areas that they serve, identify the credit needs of those assessment areas and take actions that respond to the credit needs of the community. The FDIC must conduct regular CRA examinations of the Bank and assign it a CRA rating of "outstanding," "satisfactory," "needs improvement" or "unsatisfactory." The Bank has received a "satisfactory" rating from the FDIC. Indemnification of Directors and Officers The Board of Directors of the Bank of Louisiana, on June 8, 1988, adopted a resolution to amend the Articles of Incorporation of the Bank by adding a new Article VII as follows: No director or officer of the corporation shall be personally liable to the corporation or its shareholder for monetary damages for breach of fiduciary duty as a director or officer, except for liability (i) for breach of the director's or officer's duty of loyalty to the corporation or its shareholders, (ii) for acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for any unlawful dividend or any other unlawful distribution, payment or return of assets made to shareholders, or (iv) for any transaction from which the director or officer derived an improper personal benefit. Sarbanes-Oxley Act of 2002 The following is a brief summary of some of the provision of the Sarbanes-Oxley Act of 2002 ("SOX") that affect the Company and the Bank. It is not intended as an exhaustive description of SOX or its impact on us. SOX instituted or increased various requirements for corporate governance, board of director and audit committee composition and membership, board duties, auditing standards, external audit firm standards, additional disclosure requirements, including CEO and CFO certification of financial statements and related controls, and other new requirements. Board of directors are now required to have a majority of independent directors, and audit committees are required to be wholly independent, with 30 greater financial expertise. Such independent directors are not allowed to receive compensation from the company on whose board they serve except for directors' fees. Additionally, requirements for auditing standards and independence of external auditors were increased and included independent audit partner review, audit partner rotation, and limitations over non-audit services. Penalties for non-compliance with existing and new requirements were established or increased. In addition, Section 404 of SOX currently requires that by the end of 2006, our management perform a detailed assessment of internal controls and report thereon as follows: 1. We must state that we accept the responsibility for maintaining an adequate internal control structure and procedures for financial reporting 2. We must present an assessment, as of the end of the December 31, 2007 fiscal year, of the effectiveness of the internal control structure and procedure for our financial reporting, and 3. We must have our auditors attest to, and report on, as of the end of the December 31, 2008 fiscal year, the assessment made by management. The attestation must be made in accordance with standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board. We have taken steps with respect to achieving compliance. Financial Modernization Act The Gramm-Leach-Bliley Act, ("GLB") of 1999 permits bank holding companies meeting certain management, capital, and community reinvestment act standards to engage in a substantially broader range of non-banking activities than permitted previously, including insurance underwriting and merchant banking activities. This act repeals the provision of the Glass Steagall Act, thus permitting affiliations of banks with securities firms and registered investment companies. The act authorizes financial holding companies, which permits banks to be owned by or to own securities firms, insurance companies, and merchant banking companies. The act gives the FRB authority to regulate financial holding companies, but provides for functional regulation of subsidiary activities. In addition, the GLB Act also provided significant new protections for the privacy of customer information that are applicable to the Company. Accordingly, we must (1) adopt and disclose a privacy policy; (2) give customers the right to prevent us from making disclosure of non-public financial information, subject to specified exceptions; and (3) follow regulatory standards to protect the security and confidentiality of customer information. Item 7 Financial Statements 31 Laport, Sehrt, Romig & Hand Certified Public Accountants 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. (the Company) and its wholly-owned subsidiary, Bank of Louisiana, as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years ended December 31, 2007, 2006 and 2005. 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 audits 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, 2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America. /s/ LaPorte, Sehrt, Romig and Hand A Professional Accounting Corporation Metairie, Louisiana February 27, 2008 110 Veterans Memorial Boulevard, Suite 200, Metairie, LA 70005-4958 504-835-5522 Fax 504-835-5535 5100 Village Walk, Suite 202, Covington, La 70433-4012 985-892-5850 Fax 985-892-5956 5153 Bluebonnet Boulevard, Suite B, Baton Rouge, La 70809-3076 225-296-5150 Fax 225-296-5151 WWW. LAPORTE.COM RSM McGladrey Network An Independently Owned Member 32 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, 2007 2006 Cash and Cash Equivalents Non-Interest Bearing Balances and Cash $ 4,161,408 $ 4,814,778 Federal Funds Sold 27,490,000 23,750,000 Total Cash and Cash Equivalents 31,651,408 28,564,778 Investment Securities Securities Held-to-Maturity (Fair Value of $7,997,180in 2007 and $13,814,690 in 2006) 8,000,000 14,000,000 Securities Available-for-Sale, at Fair Value 739,676 535,517 Loans - Less Allowance for Loan Losses of $1,800,000 in 2007 and 2006 55,819,935 57,334,547 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 6,923,048 2,285,414 Other Real Estate 1,035,924 1,165,240 Other Assets 924,281 1,097,474 Deferred Taxes 80,645 88,532 Letters of Credit 94,934 99,420 Total Assets $105,269,851 $105,170,922 The accompanying notes are an integral part of these financial statements. 33 LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2007 2006 LIABILITIES Deposits Non-Interest Bearing $ 41,407,597 $ 47,447,486 Interest Bearing 48,258,817 46,083,880 Notes Payable 1,543,201 1,544,201 Other Liabilities 2,869,250 561,154 Letters of Credit Outstanding 94,934 99,420 Accrued Interest 355,775 311,459 Total Liabilities 94,529,574 96,047,600 STOCKHOLDERS' EQUITY Preferred Stock - Par Value $1 2,081,857 Shares Issued and Outstanding in 2007 2,089,334 Shares Issued and Outstanding in 2006 2,081,857 2,089,334 Common Stock - Par Value $1 179,145 Shares Issued and Outstanding in 2007 and 2006 179,145 179,145 Accumulated Other Comprehensive Income 421,934 276,959 Capital in Excess of Par - Retired Stock 140,892 137,901 Retained Earnings 7,916,449 6,439,983 Total Stockholders' Equity 10,740,277 9,123,322 Total Liabilities and Stockholders' Equity $105,269,851 $105,170,922 34 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2007 2006 2005 INTEREST INCOME $8,617,125 $9,036,957 $7,569,237 INTEREST EXPENSE 812,904 612,641 485,006 Net Interest Income 7,804,221 8,424,316 7,084,231 PROVISION FOR LOAN LOSSES 276,704 563,587 586,871 Net Interest Income After Provision for Loan Losses 7,527,517 7,860,729 6,497,360 OTHER INCOME Service Charges on Deposit Accounts 610,691 607,063 803,319 Gain on Insurance Settlement - 600,000 - Other Non-Interest Income 816,557 733,917 1,188,611 Total Other Income 1,427,248 1,940,980 1,991,930 OTHER EXPENSES Salaries and Employee Benefits 2,749,357 2,688,824 3,188,009 Occupancy Expense 1,058,482 1,080,441 1,403,933 Estimated (Recovery) Loss Contingency( 1,200) (202,442) 230,000 Other Non-Interest Expense 2,950,938 3,167,473 3,055,426 Total Other Expenses 6,757,577 6,734,296 7,877,368 INCOME BEFORE INCOME TAX EXPENSE 2,197,188 3,067,413 611,922 INCOME TAX EXPENSE 720,722 937,807 143,433 NET INCOME $1,476,466 $2,129,606 $468,489 EARNINGS PER SHARE OFCOMMON STOCK $8.24 $11.89 $2.62 The accompanying notes are an integral part of these financial statements. 35 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2007 2006 2005 NET INCOME $,476,466 $2,129,606 $468,489 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized Holding (Losses) Gains on Investment Securities Available-for- Sale, Arising During the Period 144,975 (54,740) 55,440 OTHER COMPREHENSIVE INCOME (LOSS) 144,975 (54,740) 55,440 COMPREHENSIVE INCOME $1,621,441 $2,074,866 $523,929 The accompanying notes are an integral part of these financial statements. 36 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 - January 1, 2005 2,157,853 179,145 276,259 101,863 3,841,888 6,557,008 Preferred Stock Retired (40,609) - - 24,365 - (16,244) Other Comprehensive Income, Net of Applicable Deferred Income Taxes - - 55,440 - - 55,440 Net Income for the Year 2005 - - - - 468,489 468,489 BALANCE - December 31, 2005 2,117,244 179,145 331,699 126,228 4,310,377 7,064,693 Preferred Stock Retired (27,910) - - 11,673 - (16,237) Other Comprehensive Loss, Net of Applicable Deferred Income Taxes - - (54,740) - - (54,740) Net Income for the Year 2006 - - - - 2,129,606 2,129,606 BALANCE - December 31, 2006 2,089,334 179,145 276,959 137,901 6,439,983 9,123,322 Preferred Stock Retired (7,477) - - 2,991 - (4,486) Other Comprehensive Income, Net of Applicable Deferred Income Taxes - - 144,975 - - 144,975 Net Income for the Year 2007 - - - - 1,476,466 1,476,466 BALANCE - December 31, 2007 $2,081,857 $79,145 $421,934 $140,892 $7,916,449 $10,740,277 The accompanying notes are an integral part of these financial statements. 37 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2007 2006 2005 OPERATING ACTIVITIES Net Income $1,476,466 $2,129,606 $468,489 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 276,704 563,587 586,871 Write Down of Other Real Estate 24,493 265,000 - Depreciation and Amortization Expense 351,653 296,109 237,975 (Increase) Decrease in Deferred Income Taxes (66,800) (24,584) 37,580 (Gain) Loss on Sale or Disposal of Property and Equipment - (99,451) 6,471 Gain on Sale of Other Real Estate (88,341) (683) (235,000) Decrease (Increase) in Other Assets 173,193 (56,655) (77,369) Increase (Decrease) in Other Liabilities and Accrued Interest Payable 2,352,412 (386,609) 319,067 Net Cash Provided by Operating Activities4,499,780 2,686,320 1,344,084 INVESTING ACTIVITIES Proceeds from Held-to-Maturity Investment Securities Released at Maturity 6,000,000 5,000,000 - Proceeds from Sale of Available-for-Sale Investment Securities 15,500 - - Proceeds from Sale or Disposal of Property and Equipment - 152,400 1,251 Purchases of Property and Equipment (4,989,287) (403,618) (325,267) Proceeds from Sale of Other Real Estate 300,000 380,000 585,000 Purchases of Loans - (109,624) (242,899) Net Decrease (Increase) in Loans 1,131,075 (1,671,256)5,402,230 Net Cash Provided by Investing Activities 2,457,288 3,347,902 5,420,315 The accompanying notes are an integral part of these financial statements. 38 BOL BANCSHARES, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2007 2006 2005 FINANCING ACTIVITIES Net (Decrease) Increase in Non-Interest Bearing and Interest Bearing Deposits (3,864,952) 21,883,923) 32,325,835 Federal Funds Repaid - - ( 350,000) Preferred Stock Retired (4,486) (16,237) (16,244) Proceeds from Issuance of Long-Term Debt - 1,400,000 - Principal Payments on Long-Term Debt (1,000) (2,001,206) (42,510) Net Cash (Used in) Provided by Financing Activities (3,870,438) (22,501,366)31,917,081 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,086,630 (16,467,144) 38,681,480 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 28,564,778 45,031,922 6,350,442 CASH AND CASH EQUIVALENTS - END OF YEAR $31,651,408 $28,564,778 $45,031,922 SUPPLEMENTAL DISCLOSURES: Additions to Other Real Estate Through Foreclosure $106,836 $1,151,659 $278,578 Cash Paid During the Year for Interest $768,588 $909,350 $459,950 Cash Paid During the Year for Income Taxes $783,704 $952,000 $55,777 Market Value Adjustment for Unrealized Gain on Securities Available-for- Sale $219,659 $(82,939) $84,000 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. 39 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS OF THE COMPANY BOL BANCSHARES, INC. (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. 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 (the Bank) 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. 40 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 $2,168,500 and $3,588,500 for the years ended December 31, 2007 and 2006, respectively. NON-DIRECT RESPONSE ADVERTISING The Bank expenses advertising costs as incurred. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 41 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NEW ACCOUNTING STANDARDS In June 2006, the FASB issued Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes (as amended). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (as amended). This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. An employer with publicly traded equity securities shall initially apply the requirement to recognize the funded status of a benefit plan as of the end of the fiscal year ending after December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 31, 2008. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (as amended). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (an amendment of ARB No. 51). This Statement was issued to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. This Statement is effective for fiscal years, and interim periods with those fiscal years, beginning on or 42 after December 31, 2008. BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B OTHER REAL ESTATE The 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 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 $1,014 in 2007, ($387,931) in 2006, and $85,754 in 2005, respectively. During the year ended December 31, 2007 and 2006, the bank wrote down Other Real Estate to appraised value, less cost to sell. As such, $24,493 and $265,000 was charged to operations in 2007 and 2006, respectively. In addition, during the year ended December 31, 2006 the Bank received insurance proceeds, for damages incurred on Other Real Estate, in excess of repairs made, resulting in a $600,000 gain included in Other Income on the Statement of Income. NOTE C LOANS Major classification of loans is as follows: December 31, 2007 2006 Real Estate Mortgages: Residential 1-4 Family $6,964,793 $8,910,361 Commercial 23,032,682 22,813,013 Construction 9,789,755 7,349,548 Second Mortgages 1,623,948 1,692,099 Other 2,101,669 1,792,055 43,512,847 42,557,076 Commercial 2,754,150 3,491,341 Personal 2,175,194 2,214,607 Credit Cards 9,063,742 9,994,816 Overdrafts 114,002 876,707 57,619,935 59,134,547 Allowance for Loan Losses 1,800,000 1,800,000 $55,819,935 $57,334,547 43 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C LOANS (Continued) The following is a classification of loans by rate and maturity: (Dollar amounts in thousands) December 31, 2007 2006 Fixed Rate Loans: Maturing in 3 Months or Less $11,644 $15,579 Maturing Between 3 and 12 Months 26,570 21,142 Maturing Between 1 and 5 Years 14,978 16,772 Maturing After 5 Years 611 681 53,803 54,174 Variable Rate Loans: Maturing Quarterly or More Frequently 3,400 4,893 Maturing Between 3 and 12 Months - - Non-Accrual Loans 417 68 57,620 59,135 Less: Allowance for Loan Losses 1,800 1,800 Net Loans $55,820 $57,335 As of December 31, 2007 and 2006, the Bank's recorded investment in loans that are considered impaired under SFAS No. 114 totaled $417,382 and $67,826, respectively. Specific allowances pertaining to impaired loans totaled $162,607 and $33,911 at December 31, 2007 and 2006, respectively. 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, 2007 and 2006,totaled $-0-. 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 $1,035,924 at December 31, 2007, and $1,165,240 at December 31, 2006. 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. 44 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D NON-PERFORMING ASSETS (Continued) At December 31, 2007, $417,386 of loans were in non-accrual status and $30,587 of interest was foregone in the year then ended. At December 31, 2006, $67,826 of loans were in non-accrual status and $1,460 of interest was foregone in the year then ended. Interest income recognized on non-accrual loans totaled $-0- during the years ended December 31, 2007, 2006 and 2005. 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, 2007: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $8,000,000 $ - $2,820 $7,997,180 Securities available-for-sale consisted of the following at December 31, 2007: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities 302,180 $437,496 $ - $739,676 Securities held-to-maturity consisted of the following at December 31, 2006: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Agency Securities $14,000,000 $ - $185,310 $13,814,690 45 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E INVESTMENT SECURITIES (Continued) Securities available-for-sale consisted of the following at December 31, 2006: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Equity Securities $317,681 $217,836 $ - $535,517 The maturities of investment securities at December 31, 2007, 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 $ 8,000,000 $ 7,997,180 $ 302,180 $ 739,676 After One Year Through Five Years - - - - $ 8,000,000 $ 7,997,180 $ 302,180 $ 739,676 Securities of $500,000 and $600,000 at December 31, 2007 and 2006, respectively, were pledged to secure public funds, $500,000 at December 31, 2007 and 2006, was pledged to secure treasury tax and loan accounts with the Federal Reserve Bank, and $500,000 at December 31, 2007 and 2006, was pledged to VISA USA. The Company's investment in U.S. Agency Securities has been in a continuous unrealized loss position in excess of twelve months as of December 31, 2007 and 2006. The unrealized losses on the Company's investments were caused by interest rate increases. The Company purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by agencies of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007. 46 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F INCOME TAXES The components of the provision for income tax expense (benefit) are: 2007 2006 2005 Current $ 787,522 $ 962,391 $ 105,853 Deferred (66,800) (24,584) 37,580 Total Provision for Income Tax $ 720,722 $ 937,807 $ 143,433 A reconciliation of income tax at the statutory rate to income tax expense at the Company's effective rate is as follows: 2007 2006 2005 Computed Tax Expense (Benefit) at the Expected Statutory Rate $ 747,044 $ 1,042,920 $ 208,053 Katrina Tax Credits (58,105) (70,569) (41,439) Other Adjustments 31,783 (34,544) (23,181) Income Tax Expense for Operations $ 720,722 $ 937,807 $ 143,433 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 $80,646 and $88,532 as of December 31, 2007 and 2006, respectively. The major temporary differences, which created deferred tax assets and liabilities, are as follows: 2007 2006 Deferred Tax Assets: Other Real Estate $ 235,711 $ 227,383 Allowance for Loan Loss 276,996 252,052 Total Deferred Tax Assets 512,707 479,435 Deferred Tax Liabilities: Section 481A Adjustment - Prepaid Expenses (102,568) (65,364) Unrealized Gain on Securities (198,447) (123,760) Fixed Assets (131,047) (201,779) Total Deferred Tax Liabilities (432,062) (390,903) Deferred Tax Assets, Net of Deferred Tax Liabilities $ 80,645 $ 88,532 47 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS December 31, 2007 2006 Furniture and Equipment $ 2,610,160 $ 2,402,250 Bank Owned Vehicles 42,354 57,441 Leasehold Improvements 490,843 359,466 Land 1,092,425 578,425 Buildings 5,859,133 1,723,133 10,094,915 5,120,715 Less: Accumulated Depreciation and Amortization 3,171,867 2,835,301 $ 6,923,048 $ 2,285,414 Depreciation and amortization expense aggregated $351,653 in 2007, $296,109 in 2006, and $237,975 in 2005. NOTE H ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows: For the Years Ended December 31, 2007 2006 Balance - January 1 $ 1,800,000 $ 1,912,908 Provision Charged to Operations 276,704 563,587 Loans Charged Off (482,510) (933,105) Recoveries 205,806 256,610 Balance - December 31 $ 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, 2,081,857 shares issued and outstanding in 2007, and 3,000,000 shares authorized, 2,089,334 shares issued and outstanding in 2006. 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 2007 and 2006. 48 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2007, 2006 and 2005. There was no provision for dividends for the years ended December 31, 2007, 2006 or 2005. NOTE K CONTINGENT LIABILITIES AND COMMITMENTS The 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: 2007 2006 Credit Card Arrangements $ 44,190,000 $ 46,472,000 Commitments to Extend Credit 3,448,000 5,755,000 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 Bank in the course of conducting its business, becomes involved as a defendant or plaintiff in various lawsuits. The Bank has appealed a decision by a federal district court regarding a lawsuit filed by one of its proprietary customers for alleged breach of contract. The case is expected to be decided during 2008. Outside counsel for the Bank has advised that a favorable outcome is unlikely. 49 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE K CONTINGENT LIABILITIES AND COMMITMENTS (Continued) The Bank is a plaintiff in a suit against its former health insurer for reimbursement of claims paid on behalf of the Bank's employee health plan. The Bank has amended its complaint to seek penalties and damages in excess of $273,000. Although the matter is set for trial in 2008 and a favorable outcome is expected, the amount of damages expected to be recovered has not been reflected in the accompanying financial statements. The Bank is a defendant in a lawsuit filed by one of its customers for the unauthorized transfer of funds via telephone. The matter has been tried before a judge, and a favorable decision is expected. The Bank is a plaintiff in a suit against a vendor that was contracted to provide technical and physical backup for the Bank's data systems. The Bank has demanded payment for approximately $902,000 in damages. The matter is set for trial in 2008, and the outcome is presently unknown. Several of the Bank's branches sustained damage as a result of Hurricane Katrina. In addition, due to concessions made to customers to facilitate the timely processing of transactions, the Bank has estimated that it has sustained some losses. Based on management's evaluation, $150,000 in building and equipment losses and $80,000 in transaction losses were accrued during 2005. During 2007 and 2006, the Bank recognized a recovery from this contingency of $1,200 and $202,442, respectively. NOTE L RELATED PARTY TRANSACTIONS In the ordinary course of business, the 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: 2007 2006 Balance - January 1 $ 367,315 $ 696,950 New Loans Made 448,973 865,680 Repayments (332,092) (1,195,315) Balance - December 31 $ 484,196 $ 367,315 In 2007, the Bank leased office space from Severn South Partnership. The general partners of this Partnership are majority shareholders in BOL BANCSHARES, INC. During 2007, the Bank purchased the building from Severn South Partnership. Rent paid to Severn South Partnership, prior to the purchase, for the years ended December 31, 2007, 2006 and 2005, totaled $247,407, $381,386 and $410,012, respectively. 50 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE L RELATED PARTY TRANSACTIONS (Continued) During the years ended December 31, 2007, 2006, and 2005, legal fees paid to a director totaled $34,407, $54,216 and $63,813, respectively. At December 31, 2007 and 2006, amounts due to Directors of the Company, including accrued interest, totaled $367,483 and $353,063, 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, 2007 and 2006, $38,500 and $33,500, respectively, were to Directors of the Company (see Note S). NOTE M LEASES The Bank leases office space under agreements expiring in various years through December 31, 2016. Two of the leases are with related parties, as discussed in Note L. In addition, the 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, 2007, under the leases is due as follows: December 31, 2008 $ 171,956 2009 173,821 2010 175,686 2011 177,551 2012 179,416 Thereafter 722,327 $ 1,600,757 For the years ended December 31, 2007, 2006 and 2005, $374,970, $428,186 and $635,299 was charged to rent expense, respectively. The Bank is the lessor of office space under operating leases expiring in various years through 2018. 51 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE M LEASES (Continued) Minimum future rentals to be received on non-cancelable leases as of December 31, 2007, are: December 31, 2008 $ 181,185 2009 159,961 2010 115,423 2011 47,670 2012 43,383 Thereafter 181,859 $ 729,481 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 $94,934 and $99,420 as of December 31, 2007 and 2006, respectively. Of the $94,934 in letters of credit at December 31, 2007, $26,314 was secured by cash, $37,420 was secured by real property, and $31,200 was unsecured. All of the letters of credit are scheduled to mature in 2008. NOTE O INTEREST BEARING DEPOSITS Major classifications of interest bearing deposits are as follows: December 31, 2007 2006 NOW Accounts $ 12,143,180 $ 11,999,572 Money Market Accounts 4,247,728 3,721,879 Savings Accounts 23,789,080 25,321,413 Certificates of Deposit Greater Than $100,000 2,259,884 504,741 Other Certificates of Deposit 5,818,945 4,536,275 $ 48,258,817 $ 46,083,880 52 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE O INTEREST BEARING DEPOSITS (Continued) The maturities of Certificates of Deposit Greater than $100,000 at December 31, 2007 follows: (Dollar amounts in thousands) Three Months or Less $ 1,000 After Three Months Through One Year 1,025 Over One Year Through Three Years 235 $ 2,260 NOTE P FUNDS AVAILABLE FOR DIVIDENDS The 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 Bank's earnings. During the year ended December 31, 2007 and 2006, the Bank paid BOL Bancshares, Inc. dividends totaling $643,500 and $1,001,000, respectively. NOTE Q 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 R 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, 2007, 2006 or 2005. 53 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE S NOTES PAYABLE The following is a summary of notes payable at December 31, 2007 and 2006: December 31, 2007 2006 Notes payable to a current Director of the Company, payable on demand, interest at 10%. $ 144,201 $ 144,201 Debentures payable, due July 2009, 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 51.07 shares of the Bank's stock. 1,399,000 1,400,000 $ 1,543,201 $ 1,544,201 Following are maturities of long-term debt: December 31, 2008 144,201 2009 1,399,000 $ 1,543,201 54 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE T INTEREST INCOME AND INTEREST EXPENSE Major categories of interest income and interest expense are as follows: December 31, 2007 2006 2005 INTEREST INCOME Interest and Fees on Loans: Real Estate Loans $ 3,678,857 $ 3,105,702 $ 2,880,180 Installment Loans 149,420 164,472 373,797 Credit Cards and Related Plans 2,744,183 3,017,998 3,275,934 Commercial and All Other Loans 293,519 442,563 251,444 Interest on Investment Securities - U.S. Treasury and Other Securities 443,302 531,038 492,062 Interest on Federal Funds Sold 1,307,844 1,775,184 295,820 $ 8,617,125 $ 9,036,957 $ 7,569,237 INTEREST EXPENSE Interest on Time Deposits of $100,000 or More $ 49,009 $ 10,710 $ 5,747 Interest on Other Deposits 651,236 464,101 312,948 Interest on Federal Funds Purchased - - 1,623 Interest on Notes Payable 112,659 137,830 164,688 $ 812,904 $ 612,641 $ 485,006 55 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE U NON-INTEREST INCOME AND NON-INTEREST EXPENSES Major categories of other non-interest income and non-interest expenses are as follows: December 31, 2007 2006 2005 OTHER NON-INTEREST INCOME Cardholder and Other Charge Card Income $ 547,641 $ 607,878 $ 637,331 Other Commission and Fees 62,253 59,864 67,151 Other Real Estate Income 88,491 683 246,353 Other Income 118,172 65,492 237,776 $ 816,557 $ 733,917 $ 1,188,611 OTHER NON-INTEREST EXPENSES Loan and Charge Card Expenses$ 125,011 $ 132,441 $ 151,527 Communications 221,459 237,171 237,770 Outsourcing Fees 1,431,830 1,406,282 1,403,693 Stationery, Forms and Supplies 110,869 142,522 169,019 Professional Fees 304,946 291,550 285,126 Insurance and Assessments 76,404 83,027 101,651 Advertising 9,090 5,110 4,127 Miscellaneous Losses 4,477 4,538 129,878 Promotional Expenses 73,911 68,283 80,327 Other Real Estate Expenses 87,477 388,614 160,598 Other Expenses 505,464 407,935 331,710 $ 2,950,938 $ 3,167,473 $ 3,055,426 56 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE V CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY BOL BANCSHARES, INC. CONDENSED BALANCE SHEETS December 31, 2007 2006 ASSETS Due from Banks $ 1,054,614 $ 416,632 Securities Available-for-Sale, at Fair Value 708,896 489,236 Other Assets 1,104 25,542 Due from Subsidiary Bank 56,653 63,571 Investment in Bank of Louisiana 10,943,907 10,071,875 $ 12,765,174 $ 11,066,856 LIABILITIES AND STOCKHOLDERS' EQUITY Notes Payable $ 1,543,201 $ 1,544,201 Deferred Taxes 148,749 74,064 Accrued Interest 264,332 256,654 Shareholders' Equity 10,808,892 9,191,937 $ 12,765,174 $ 11,066,856 57 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE V CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF INCOME December 31, 2007 2006 2005 INCOME Dividend Income - Bank of Louisiana $ 643,500 $ 1,001,000 $ 214,500 Interest Income 5,544 2,329 983 Miscellaneous Income 40,323 38,278 28,243 689,367 1,041,607 243,726 EXPENSES Interest 112,659 137,830 164,688 Other Expenses 5,226 4,325 7,345 117,885 142,155 172,033 INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 571,482 899,452 71,693 Equity in Undistributed Earnings of Subsidiary 872,032 1,176,974 341,519 INCOME BEFORE INCOME TAX BENEFIT 1,443,514 2,076,426 413,212 INCOME TAX BENEFIT 32,952 53,180 55,277 NET INCOME $ 1,476,466 $ 2,129,606 $ 468,489 58 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE V CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued) BOL BANCSHARES, INC. STATEMENTS OF CASH FLOWS December 31, 2007 2006 2005 OPERATING ACTIVITIES Net Income $ 1,476,466 $ 2,129,606 $ 468,489 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Undistributed Earnings of Subsidiary (872,032) (1,176,974) (341,519) Net (Increase) Decrease in Other Assets 24,438 17,365 52,610 Net Decrease in Other Liabilities 7,678 (303,012) (5,787) Net Cash Provided by Operating Activities 636,550 666,985 173,793 FINANCING ACTIVITIES Preferred Stock Retired (4,486) (16,237) (16,244) Decrease (Increase) in Due to/from Subsidiary 6,918 33,367 (96,938) Proceeds from Issuance of Long-Term Debt - 1,400,000 - Repayment of Long-Term Debt (1,000) (2,001,206) (42,510) Net Cash Provided by (Used in) Financing Activities 1,432 (584,076) (155,692) NET INCREASE IN CASH AND CASH EQUIVALENTS 637,982 82,909 18,101 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 416,632 333,723 315,622 CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,054,614 $ 416,632 $ 333,723 59 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE W COMPREHENSIVE INCOME Comprehensive income was comprised of changes in the Company's unrealized holding gains or losses on securities available-for-sale during 2007, 2006 and 2005. The following represents the tax effects associated with the components of comprehensive income: December 31, 2007 2006 2005 Gross Unrealized Holding Gains (Losses) Arising During the Period $ 219,659 $ (82,939) $ 84,000 Tax (Expense) Benefit (74,684) 28,199 (28,560) 144,975 (54,740) 55,440 Reclassification Adjustment for Gains Included in Net Income - - - Tax Benefit - - - - - - Net Unrealized Holding Gains (Losses) Arising During the Period $ 144,975 $ (54,740) $ 55,440 NOTE X REGULATORY MATTERS As of December 31, 2007, 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 Bank to ensure the continuity of operations. 60 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE X REGULATORY MATTERS (Continued) The Bank's actual capital amounts and ratios are also presented in the table. (Dollars in thousands.) December 31, 2007 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) $10,944 10.31% $4,246 4.00% $5,307 5.00% Tier I Capital (to Risk- Weighted Assets) $10,944 16.08% $2,720 4.00% $4,081 6.00% Total Capital (to Risk-Weighted Assets) $11,807 17.34% $5,441 8.00% $6,801 10.00% December 31, 2006 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) $10,072 9.27% $4,347 4.00% $5,434 5.00% Tier I Capital (to Risk- Weighted Assets) $10,072 15.56% $2,588 4.00% $3,883 6.00% Total Capital (to Risk-Weighted Assets) $10,893 16.83% $5,177 8.00% $6,471 10.00% 61 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT NOTE Y DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value: CASH AND SHORT-TERM INVESTMENTS For cash, the carrying amount approximates fair value. For short-term investments, fair values are calculated based upon general investment market interest rates for similar maturity investments. INVESTMENT SECURITIES For securities and marketable equity securities held-for-investment purposes, fair values are based on quoted market prices. LOAN RECEIVABLES For certain homogeneous categories of loans, such as residential mortgages, credit card receivables and other consumer loans, fair value is estimated using the current U.S. treasury interest rate curve, a factor for cost of processing and a factor for historical credit risk to determine the discount rate. DEPOSIT LIABILITIES The fair value of demand deposits, savings deposits and certain money market deposits are calculated based upon general investment market interest rates for investments with similar maturities. The value of fixed maturity certificates of deposit is estimated using the U.S. treasury interest rate curve currently offered for deposits of similar remaining maturities. 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, 2007 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $4,161,408 $4,161,408 Investment Securities 8,739,676 8,736,856 Loans 57,619,935 57,814,110 Less: Allowance for Loan Losses (1,800,000) (1,800,000) $68,721,019 $68,912,374 Financial Liabilities: Deposits $89,666,414 $89,713,840 Unrecognized Financial Instruments: Commitments to Extend Credit $3,448,000 $3,448,000 Credit Card Arrangements 44,190,000 44,190,000 $47,638,000 $47,638,000 62 BOL BANCSHARES, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Y DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) December 31, 2006 Carrying Fair Amount Value Financial Assets: Cash and Short-Term Investments $4,814,778 $4,814,778 Investment Securities 14,535,517 14,350,207 Loans 59,134,547 59,255,169 Less: Allowance for Loan Losses (1,800,000) (1,800,000) $76,684,842 $76,620,154 Financial Liabilities: Deposits $93,531,366 $93,523,876 Unrecognized Financial Instruments: Commitments to Extend Credit $5,755,000 $5,755,000 Credit Card Arrangements 46,472,000 46,472,000 $52,227,000 $52,227,000 63 Laport, Sehrt, Romig & Hand Certified Public Accountants 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, 2007 and 2006, 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 purpose 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 audits 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 and Hand A Professional Accounting Corporation Metairie, Louisiana February 27, 2008 110 Veterans Memorial Boulevard, Suite 200, Metairie, LA 70005-4958 504-835- 5522 Fax 504-835-5535 5100 Village Walk, Suite 202, Covington, La 70433-4012 985-892-5850 Fax 985- 892-5956 5153 Bluebonnet Boulevard, Suite B, Baton Rouge, La 70809-3076 225-296-5150 Fax 225-296-5151 WWW. LAPORTE.COM RSM McGladrey Network An Independently Owned Member 64 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE I BALANCE SHEETS UNCONSOLIDATED ASSETS December 31, 2006 2005 Cash and Due from Banks Non-Interest Bearing Balances and Cash $4,161,408 $4,814,778 Federal Funds Sold 27,490,000 23,750,000 Investment Securities Securities Held-to-Maturity (Fair Value of $7,997,180 in 2007 and $13,814,690 in 2006) 8,000,000 14,000,000 Securities Available-for-Sale, at Fair Value 30,780 46,280 Loans: Less Allowance for Loan Losses of $1,800,000 in 2007 and in 2006 55,819,935 57,334,547 Property, Equipment and Leasehold Improvements (Net of Depreciation and Amortization) 6,923,048 2,285,414 Other Real Estate 1,035,924 1,165,240 Other Assets 928,536 1,077,291 Deferred Taxes 298,006 231,208 Letters of Credit 94,934 99,420 Total Assets $104,782,571 $104,804,178 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-Interest Bearing $41,408,938 $47,451,276 Interest Bearing 49,313,135 46,500,361 Other Liabilities 2,925,903 561,154 Letters of Credit Outstanding 94,934 99,420 Due to Parent - 63,571 Accrued Interest 91,443 54,805 Total Liabilities 93,834,353 94,730,587 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 4,901,422 4,026,795 Total Stockholders' Equity 10,948,218 10,073,591 Total Liabilities and Stockholders' Equity $104,782,571 $104,804,178 See independent registered public accounting firm report on supplementary information. 65 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE II STATEMENTS OF INCOME UNCONSOLIDATED For the Years Ended December 31, 2007 2006 2005 INTEREST INCOME $8,617,125 $9,036,957 $7,569,237 INTEREST EXPENSE 705,790 477,140 321,300 Net Interest Income 7,911,335 8,559,817 7,247,937 PROVISION FOR LOAN LOSSES 276,704 563,587 586,871 Net Interest Income After Provision for Loan Losses 7,635,631 7,996,230 6,661,066 OTHER INCOME Service Charges on Deposit Accounts610,691 607,063 803,319 Other Non-Interest Income 776,234 1,295,637 1,160,367 1,386,925 1,902,700 1,963,686 OTHER EXPENSES Salaries and Employee Benefits 2,749,357 2,688,824 3,188,009 Occupancy Expense 1,058,482 1,080,441 1,403,933 Estimated Loss Contingency (1,200) (202,442) 230,000 Other Non-Interest Expense 2,943,116 3,160,969 3,044,981 6,749,755 6,727,792 7,866,923 INCOME BEFORE INCOME TAX EXPENSE 2,271,801 3,171,138 757,829 INCOME TAX EXPENSE 753,674 990,987 198,710 NET INCOME $1,518,127 $2,180,151 $559,119 See independent registered public accounting firm report on supplementary information. 66 BANK OF LOUISIANA SUPPLEMENTARY INFORMATION SCHEDULE III STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNCONSOLIDATED Common Retained Stock Surplus Earnings Total BALANCE - January 1, 2005 $1,430,000 $4,616,796 $2,503,025 $8,549,821 Dividends Paid - $1.50 Per Share - - (214,500) (214,500) Net Income for the Year 2005 - - 559,119 559,119 BALANCE - December 31, 2005 1,430,000 4,616,796 2,847,644 8,894,440 Dividends Paid - $1.50 Per Share - - (1,001,000) (1,001,000) Net Income for the Year 2006 - - 2,180,151 2,180,151 BALANCE - December 31, 2006 1,430,000 4,616,796 4,026,795 10,073,591 Dividends Paid - $1.50 Per Share - - (643,500) (643,500) Net Income for the Year 2007 - - 1,518,127 1,518,127 BALANCE - December 31, 2007 $1,430,000 $4,616,796 $4,901,422 $10,948,218 See independent registered public accounting firm report on supplementary information. 67 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None Item 8A(T) Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. With the participation of management, the certifying officers of the Company have evaluated the effectiveness of the design and operation of 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. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial report for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material affect on our financial statements would have been prevented or detected on a timely basis. Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, with the participation of the certifying officers of the Company, assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, management, with the participation of the certifying officers of the Company, believes that, as of December 31, 2007, the Company's internal control over financial reporting is effective based on those criteria. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Item 8B Other Information None 68 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 Bank of Director Name Age Louisiana (the "Bank") and Principal Occupation Since G. Harrison Scott 84 Director; Chairman of the Board of 1981 the Company and the Bank and President of the Company and the Bank Franck F. LaBiche 62 Director of the Company and the Bank 2004 President, Executone Systems Co. of La. Inc. Henry L. Klein 63 Director of the Company and the Bank 2004 and Secretary of the Company Attorney at Law Johnny C. Crow 57 Director of the Company and the Bank 2005 Insurance Agent, New York Life Ins. Co. Sharry R. Scott 37 Director of the Company and the Bank 2005 Assistant Attorney General, Louisiana Department of Justice Non-Director Executive Officer Position with the Company and the Name Age Bank and Principal Occupation Peggy L. Schaefer 56 Ms. Schaefer has served as Treasurer of the Company since 1988 and Senior Vice President and Chief Financial Officer of the Bank since 1996. No family relationships exist among the executive officers of the Company or the Bank. There is one family relationship that exists among the current directors, that of Mr. G. Harrison Scott and his daughter Sharry R. Scott. 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 company registered as an investment company under the Investment Company Act of 1940. 69 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 Mr. Scott, 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. During the year 2006, the Company paid off the loans to the former directors for a total of $563,091, including principal and interest. There is one director who was not paid off, and as of December 31, 2007, the balance due was $367,483, including accrued and unpaid interest at the rate of 10% per annum. At this time, there is no maturity date. The following table sets forth compensation for the Bank's executive officer for the calendar years 2007, 2006, and 2005. No other executive officer received total compensation in excess of $100,000 during 2007. Annual Compensation Long Term Compensation Awards Payouts Other Annual Restricted Stock Options/LTIP All Other Name and Principal Year Salary Bonus Compensation Award(s) SARs Payouts Compensation Position ($) ($) ($) ($) (#) ($) ($) G. Harrison Scott, 2007 89,800 0 82,000 0 0 0 12,837 Chairman of the 2006 89,800 0 82,000 0 0 0 - Board & President 2005 89,800 0 68,333 0 0 0 - of the Bank
In addition to the cash compensation shown in the foregoing table, the Bank provided an automobile to Mr. Scott. Annual compensation does not include amounts attributable to miscellaneous benefits received by Mr. Scott. The cost to the Bank of providing such benefits did not exceed 10% of the total annual salary and bonus paid to Mr. Scott. Committees of the Board of Directors of the Company and the Bank The Company does not have standing audit, 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 2007, the Board of Directors of the Company held a total of 4 meetings. Each director attended at least 75% of the aggregate of the meetings of the Board of Directors. The 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 2007, the Board of Directors of the Bank held a total of 13 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 five permanent members. The permanent members of the Executive Committee in 2007 were Messrs. Scott (chairman), Crow, Klein, LaBiche, and Ms. S. Scott. The Executive Committee formulates policy matters for determination by the Board of Directors and reviews financial reports, loan reports, new business, and other real estate owned information. The Executive Committee met 29 times in 2007. The Board of Directors of the Bank does have an Audit and Finance Committee and does not have a charter. 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 70 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 2007. 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 as issued by the independent auditors be included in the Annual Report. The permanent members of the Audit and Finance Committee were Messrs. LaBiche (chairman), Klein, and Crow, and the rotating member was Ms. S. Scott. Item 11 Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of December 31, 2006, 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, 2007 (1) Common Preferred Name of Beneficial Owner Number Percent Number Percent Edward J. Soniat 10,381 5.79% 257,326 12.36% Directors: G. Harrison Scott (Direct) 41,865 23.37% 157,673 7.57% G. Harrison Scott (Beneficial owner of Scott Family, LLP) 55,992 31.26% - - Franck F. LaBiche 500 - (*) - - Henry L. Klein 500 - (*) - - Johnny C. Crow 1,502 - (*) - - Sharry R. Scott 0 - (2) - - All Directors & Executive Officers 100,614 56.16% 160,445 7.70% of the Company and the Bank as a group (6 persons) (*)Represents less than 1% of the shares outstanding. (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) Sharry R. Scott, through ownership of an interest in Scott Family LLP, owns 7,151 shares of common stock. 71 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, 2007, two directors had aggregate loan balances in excess of $60,000, which amounted to approximately $280,000 in the aggregate. On August 20, 2007 for a price of $4,650,000 the Bank purchased the land and improvements from Severn South Partnership to which the Bank was paying rent. The property consists of a four story building with offices that are leased to other businesses. The purchase was approved by FDIC (Federal Deposit Insurance Corp) and OFI (Office of Financial Institutions, State of Louisiana) on August 6, 2007 with the stipulation that the investment in fixed assets not exceed 50 percent of its equity capital and reserves by December 31, 2008. The percentage as of December 31, 2007 was 54.39%. Management feels certain that the required 50% will be reached within the 18 month time frame allowed by the agencies. The Bank leased office space from Severn South Partnership. The general partner of Severn South Partnership is a majority shareholder in BOL Bancshares, Inc. Rent paid to Severn South Partnership for the years ended December 31, 2007 (prior to the purchase described above), 2006 and 2005 totaled $247,407, $381,386, and $410,012 respectively. 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 2007 and for its reviews of the Company's unaudited interim financial statements included in Form 10-QSB filed by the Company during 2007 was $79,803. The fees billed for 2006 were $71,373. Tax Fees The aggregate fees billed by LaPorte, Sehrt, Romig and Hand for tax compliance, tax preparation, and tax review for 2007 were $27,241. The fees billed for 2006 were $24,812. All Other Fees The aggregate fees billed by LaPorte, Sehrt, Romig & Hand for other accounting services for 2007 were $3,185. The fees billed for 2006 were $0. 72 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. BOL BANCSHARES, INC. /s/ G. Harrison Scott ______________________ April 8, 2008 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 April 8, 2008. /s/ G. Harrison Scott /s/ Johnny C. Crow ___________________________________ _________________________________ G. Harrison Scott - Director Johnny C. Crow - Director /s/ Franck F. LaBiche /s/ Sharry R. Scott ___________________________________ ____________________________ Franck F. LaBiche - Director Sharry R. Scott - Director /s/ Henry L. Klein ___________________________________ Henry L. Klein - Director 73