##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934
 For the Quarter Ended September 30, 2009
 Commission File Number 333-135107
 LOTUS BANCORP, INC.
  Michigan
    
    20-2377468(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 44350 W. Twelve Mile Road, Novi, MI 48377
 (248) 735-1000
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)Smaller reporting company þ
 o þ




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##### 



INDEX
 PART I
    
    FINANCIAL INFORMATION
    
    3ITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    3ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
    
    
    15ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    19ITEM 4T.
    
    CONTROLS AND PROCEDURES
    
    
    19PART II
    
    OTHER INFORMATION
    
    20ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    20ITEM 1A.
    
    RISK FACTORS
    
    
    20ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    20ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    20ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    20ITEM 5.
    
    OTHER INFORMATION
    
    
    20ITEM 6.
    
    EXHIBITS
    
    
    20SIGNATURES
    
    
    
    
    
    
    21
  
 Information Concerning Forward-Looking Statements
 Statements contained in this Form 10-Q which are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements involve important known and unknown risks,
uncertainties and other factors and can be identified by phrases using estimate, anticipate,
believe, project, expect, intend, predict, potential, future, may, should and
similar expressions or words. Such forward-looking statements are subject to risk and
uncertainties which could cause actual results to differ materially from those projected. Such
risks and uncertainties include potential changes in interest rates, competitive factors in the
financial services industry, general economic conditions, the effect of new legislation and other
risks detailed in documents filed by the Company with the Securities and Exchange Commission from
time to time.
 2




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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS.
 
 ASSETS
 September 30, 2009(unaudited)
    
    
    December 31, 2008Cash and cash equivalentsCash and due from banks
    
    $
    910,267
    
    
    $
    457,103Interest bearing balances due from banks
    
    
    735,000
    
    
    
    1,960,000Federal funds sold
    
    
    2,747,307
    
    
    
    3,194,033Total cash and cash equivalents
    
    
    4,392,574
    
    
    
    5,611,136Loans, less allowance for loan losses of $538,000
and $314,000 at September 30, 2009 and December
31, 2008, respectively (Note 2)
    
    
    44,278,576
    
    
    
    25,085,558Property & equipment, net of depreciation (Note 5)
    
    
    3,346,186
    
    
    
    3,478,775Accrued interest receivable and other assets
    
    
    268,519
    
    
    
    174,865Total assets
    
    $
    52,285,855
    
    
    $
    34,350,334
 LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
 September 30, 2009(unaudited)
    
    
    December 31, 2008Deposits (Note 3)Non-interest bearing
    
    $
    4,229,106
    
    
    $
    3,613,283Interest bearing
    
    
    38,024,308
    
    
    
    20,107,144Total deposits
    
    
    42,253,414
    
    
    
    23,720,427Accrued interest payable and other liabilities
    
    
    182,321
    
    
    
    103,520Total liabilities
    
    
    42,435,735
    
    
    
    23,823,947Shareholders equityCommon Stock, $0.01 par value Authorized
8,000,000 shares Issued and outstanding 
1,389,965 shares at September 30, 2009 and at
December 31, 2008, respectively
    
    
    13,899
    
    
    
    13,899Additional paid in capital
    
    
    14,032,659
    
    
    
    13,989,315Accumulated deficit
    
    
    (4,196,438
    )
    
    
    (3,476,827
    )Total shareholders equity
    
    
    9,850,120
    
    
    
    10,526,387Total liabilities and shareholders equity
    
    $
    52,285,855
    
    
    $
    34,350,334
  3




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSept 30
    
    
    Sept 30
    
    
    Sept 30
    
    
    Sept 302009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Loans receivable, including fees
    
    $
    601,146
    
    
    $
    261,217
    
    
    $
    1,435,208
    
    
    $
    622,957Interest bearing balances due from banks
    
    
    12,585
    
    
    
    
    
    
    
    43,882
    
    
    
    23,034Federal funds sold
    
    
    2,674
    
    
    
    10,712
    
    
    
    8,683
    
    
    
    63,895Total interest income
    
    
    616,405
    
    
    
    271,929
    
    
    
    1,487,773
    
    
    
    709,886Interest expense:Deposits
    
    
    177,000
    
    
    
    67,381
    
    
    
    515,287
    
    
    
    173,909Other
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Total interest expense
    
    
    177,005
    
    
    
    67,381
    
    
    
    515,292
    
    
    
    173,909Net interest income
    
    
    439,400
    
    
    
    204,548
    
    
    
    972,481
    
    
    
    535,977Provision for loan losses
    
    
    135,582
    
    
    
    18,500
    
    
    
    226,082
    
    
    
    152,500Net interest income after
provision for loan losses
    
    
    303,818
    
    
    
    186,048
    
    
    
    746,399
    
    
    
    383,477Non-interest income:Service charges and fees
    
    
    12,002
    
    
    
    5,662
    
    
    
    28,019
    
    
    
    14,613Gain on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.575Other income
    
    
    20,791
    
    
    
    4,371
    
    
    
    33,572
    
    
    
    6,557Total non-interest income
    
    
    32,793
    
    
    
    10,033
    
    
    
    61,591
    
    
    
    25,745Non-interest expense:Compensation and employee benefits
    
    
    261,437
    
    
    
    228,942
    
    
    
    759,362
    
    
    
    715,246Occupancy and equipment
    
    
    96,019
    
    
    
    64,524
    
    
    
    241,053
    
    
    
    172,987Stock based compensation
    
    
    14,448
    
    
    
    14,448
    
    
    
    43,344
    
    
    
    24,080Professional fees
    
    
    34,000
    
    
    
    46,000
    
    
    
    102,010
    
    
    
    147,000Data processing costs
    
    
    31,405
    
    
    
    23,850
    
    
    
    92,116
    
    
    
    73,654Advertising and promotion
    
    
    21,146
    
    
    
    12,575
    
    
    
    39,353
    
    
    
    43,910Travel and entertainment
    
    
    17,473
    
    
    
    19,661
    
    
    
    36,226
    
    
    
    42,388Michigan business tax
    
    
    3,900
    
    
    
    9,000
    
    
    
    17,900
    
    
    
    28.500ATM and debit card expenses
    
    
    10,551
    
    
    
    8,770
    
    
    
    29,974
    
    
    
    26,040Other
    
    
    58,756
    
    
    
    55,586
    
    
    
    166,263
    
    
    
    175,698Total non-interest expense
    
    
    549,135
    
    
    
    483,356
    
    
    
    1,527,601
    
    
    
    1,449,503Loss before income tax benefit
    
    
    (212,524
    )
    
    
    (287,275
    )
    
    
    (719,611
    )
    
    
    (1,041,281
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (212,524
    )
    
    $
    (287,275
    )
    
    $
    (719,611
    )
    
    $
    (1,041,281
    )Basic and Diluted Loss Per Share
    
    $
    (.15
    )
    
    $
    (.21
    )
    
    $
    (.52
    )
    
    $
    (.75
    )Weighted Average Shares Outstanding
    
    
    1,389,965
    
    
    
    1,389,965
    
    
    
    1,389,965
    
    
    
    1,389,965
  4




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##### Table of Contents



Common
    
    Paid In
    
    AccumulatedStock
    
    Capital
    
    Deficit
    
    TotalBalance December 31, 2008
    
    $
    13,899
    
    
    $
    13,989,315
    
    
    $
    (3,476,827
    )
    
    $
    10,526,387Stock option expense
    
    
    
    
    
    
    43,344
    
    
    
    
    
    
    
    43,344Net loss
    
    
    
    
    
    
    
    
    
    
    (719,611
    )
    
    
    (719,611
    )Balance September 30, 2009
    
    $
    13,899
    
    
    $
    14,032,659
    
    
    $
    (4,196,438
    )
    
    $
    9,850,120
  5




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##### Table of Contents



Nine Months EndedSeptember 30, 2009
    
    September 30, 2008CASH FLOWS FROM OPERATING ACTIVITIESAdjustments to reconcile actual loss to net cash from operating activities:Net loss
    
    $
    (719,611
    )
    
    $
    (1,040,281
    )Stock option expense
    
    
    43,344
    
    
    
    24,080Depreciation
    
    
    142,206
    
    
    
    111,395Provision for loan losses
    
    
    226,082
    
    
    
    152,500Decrease (increase) in accrued interest receivable and other assets
    
    
    (93,654
    )
    
    
    21,222Increase in accrued interest payable and other liabilities
    
    
    78,801
    
    
    
    48,466Net cash used in operating activities
    
    
    (322,832
    )
    
    
    (682,618
    )CASH FLOWS FROM INVESTING ACTIVITIESNet increase in loans
    
    
    (19,417,018
    )
    
    
    (10,388,278
    )Net charge-offs on loans
    
    
    (2,082
    )
    
    
    Purchase of equipment
    
    
    (9,617
    )
    
    
    (1,127,983
    )Net cash used in investing activities
    
    
    (19,428,717
    )
    
    
    (11,516,261
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in non-interest bearing deposits
    
    
    615,823
    
    
    
    1,441,989Net increase in interest bearing deposits
    
    
    17,917,164
    
    
    
    5,357,809Net cash provided by financing activities
    
    
    18,532,987
    
    
    
    6,799,798INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (1,218,562
    )
    
    
    (5,399,081
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    5,611,136
    
    
    
    7,565,861CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,392,574
    
    
    $
    2,166,780Cash Paid for Interest
    
    $
    496,375
    
    
    $
    165,393
  6




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##### Table of Contents



LOTUS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Financial Statement Presentation
  Principles of Consolidation
 Organization
 Use of Estimates
 Organization and Pre-opening costs
 Deferred Offering Costs
 Cash and Cash Equivalents
 Loans
  7




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Allowance for Loan Losses
      Off-balance-sheet Instruments
 Property and Equipment
 Income Taxes
 8




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##### Table of Contents



Earnings per Share
 Reclassification
 Recent Accounting Pronouncements Fair Value Measurements Effective Date of FASB Statement
No. 157. Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active. .
  The Fair Value Option for Financial Assets and
Financial Liabilities
 Subsequent Events Subsequent
 9




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##### Table of Contents



Events
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles.
 NOTE 2  LOANS
  September 30, 2009
    
    
    December 31, 2008Mortgage loans on real estate:Residential 1 to 4 family
    
    $
    3,097,329
    
    
    $
    2,419,361Commercial
    
    
    24,585,491
    
    
    
    12,843,133Second mortgage
    
    
    229,919
    
    
    
    172,393Equity lines of credit
    
    
    2,142,557
    
    
    
    839,607Total mortgage loans on real estate
    
    
    30,055,296
    
    
    
    16,274,494Commercial loans
    
    
    14,312,103
    
    
    
    8,443,881Consumer installment loans
    
    
    559,965
    
    
    
    700,235Total loans
    
    
    44,927,364
    
    
    
    25,418,610Less:Allowance for loan losses
    
    
    538,000
    
    
    
    314,000Net deferred loan fees (costs) and
unearned income
    
    
    110,788
    
    
    
    19,052Net loans
    
    $
    44,278,576
    
    
    $
    25,085,558
  Maturing or repricing inless than
    
    1 to 5
    
    after1 year
    
    years
    
    5 years
    
    TotalCommercial and financial
    
    $
    21,268,336
    
    
    $
    14,401,571
    
    
    $
    3,227,687
    
    
    $
    38,897,594Real estate  mortgage
    
    
    2,322,611
    
    
    
    2,738,866
    
    
    
    408,328
    
    
    
    5,469,805Installment loans to individuals
    
    
    305,769
    
    
    
    241,675
    
    
    
    12,521
    
    
    
    559,965Total loans
    
    $
    23,896,716
    
    
    $
    17,382,112
    
    
    $
    3,648,536
    
    
    $
    44,927,364
  Fixed rate
    
    $
    19,232,506Variable rate
    
    $
    16,639,747
  10




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##### Table of Contents



September 30, 2009Balance at December 31, 2008
    
    $
    314,000Provision for loan losses
    
    
    226,082Loans charged-off
    
    
    (2,082
    )Recoveries on loans previously charged-off
    
    
    Balance at September 30, 2009
    
    $
    538,000
   NOTE 3  DEPOSITS
  September 30, 2009
    
    
    December 31, 2008Non-interest bearing deposits
    
    $
    4,229,106
    
    
    $
    3,613,283NOW accounts
    
    
    417,308
    
    
    
    357,123Savings and money market accounts
    
    
    17,720,769
    
    
    
    9,505,159Certificates of deposit less than $100,000
    
    
    4,449,457
    
    
    
    2,718,608Certificates of deposit greater than $100,000
    
    
    15,436,774
    
    
    
    7,526,254Total
    
    $
    42,253,414
    
    
    $
    23,720,427
  Less than
    
    Greater than$100,000
    
    $100,000
    
    TotalLess than one year
    
    $
    3,925,457
    
    
    $
    14,854,259
    
    
    $
    18,779,716One through five years
    
    
    524,000
    
    
    
    582,515
    
    
    
    1,106,515Over five years
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,449,457
    
    
    $
    15,436,774
    
    
    $
    19,886,231
 NOTE 4  OFF BALANCE SHEET ARRANGEMENTS
 Credit Related Financial nstruments
   September 30, 2009
    
    
    December 31, 2008Commitments to extend credit
    
    $
    2,659,900
    
    
    $
    3,298,200Standby letters of credit
    
    
    666,561
    
    
    
    917,498Undisbursed lines of credit
    
    
    7,074,397
    
    
    
    5,241,053Total
    
    $
    10,400,858
    
    
    $
    9,456,751
 11




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##### Table of Contents



Collateral Requirements
  NOTE 5  PROPERTY AND EQUIPMENT
  September 30, 2009
    
    
    December 31, 2008Building and improvements
    
    $
    2,212,089
    
    
    $
    2,212,089Land
    
    
    854,233
    
    
    
    854,233Office equipment
    
    
    642,571
    
    
    
    632,9543,708,893
    
    
    
    3,699,276Less: Accumulated depreciation
    
    
    362,707
    
    
    
    220,501Property and equipment net of depreciation
    
    $
    3,346,186
    
    
    $
    3,478,775
  NOTE 6  INCOME TAXES
   Deferred Tax Asset:Net Operating Loss Carryforward
    
    $
    1,426,789Less: Valuation Allowance
    
    
    (1,426,789
    )Total net deferred tax asset
    
    $
    
 12




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##### Table of Contents



2009
    
    2008Income tax benefit at federal statutory rate of 34 percent
    
    $
    244,668
    
    
    $
    353,696Change in valuation allowance
    
    
    (245,000
    )
    
    
    (354,000
    )Other  net
    
    
    332
    
    
    
    304Net income tax expense
    
    $
    
    
    
    $
    
 NOTE 7  STOCK BASED COMPENSATION
   Weighted AverageRemaining
    
    
    
    
    
    AggregateNumber
    
    Contractual
    
    Exercise
    
    IntrinsicExercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Value$10.00
    
    
    59,024
    
    
    8.6 years
    
    $
    10.00
    
    
    
    
       NOTE 8  MINIMUM REGULATORY CAPITAL REQUIREMENTS
  13




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##### Table of Contents



For Capital
    
    To BeActual
    
    Adequacy Purposes
    
    Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of September 30, 2009:Total Risk Based Capital
to Risk Weighted Assets
Lotus Bank
    
    $
    8,127
    
    
    
    16.59
    %
    
    $
    3,918
    
    
    
    8.00
    %
    
    $
    4,898
    
    
    
    10.00
    %Tier One Capital to Risk
Weighted Assets
Lotus Bank
    
    $
    7,589
    
    
    
    15.49
    %
    
    $
    1,959
    
    
    
    4.00
    %
    
    $
    2,939
    
    
    
    6.00
    %Tier One Capital to
Total Assets
Lotus Bank
    
    $
    7,589
    
    
    
    14.51
    %
    
    $
    2,091
    
    
    
    4.00
    %
    
    $
    2,614
    
    
    
    5.00
    %
 NOTE 9  FAIR VALUE OF FINANCIAL INSTRUMENTS
   Cash and Cash Equivalents
 Loans
 Deposit
 Accrued Interest
 Other Financial Instruments
 14




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##### Table of Contents



September 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueCash and due from banks
    
    $
    910,267
    
    
    $
    910,267
    
    
    $
    457,103
    
    
    $
    457,103Interest bearing deposits with banks
    
    
    735,000
    
    
    
    735,000
    
    
    
    1,960,000
    
    
    
    1,960,000Federal funds sold
    
    
    2,747,307
    
    
    
    2,747,307
    
    
    
    3,194,033
    
    
    
    3,194,033Loans  net
    
    
    44,278,576
    
    
    
    45,645,618
    
    
    
    25,085,558
    
    
    
    26,703,966Accrued interest receivable
    
    
    109,349
    
    
    
    109,349
    
    
    
    81,521
    
    
    
    81,521Noninterest bearing deposits
    
    
    4,229,106
    
    
    
    4,229,106
    
    
    
    3,613,283
    
    
    
    3,613,283Interest bearing deposits
    
    
    18,138,077
    
    
    
    18,138,077
    
    
    
    9,862,282
    
    
    
    9,862,282Time deposits
    
    
    19,886,231
    
    
    
    19,872,663
    
    
    
    10,244,862
    
    
    
    10,154,759Accrued interest payable
    
    
    66,150
    
    
    
    66,150
    
    
    
    47,233
    
    
    
    47.233
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
  OVERVIEW
     PLAN OF OPERATION
  15




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FINANCIAL RESULTS
   rd
  16




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FUNDING OF OPERATIONS AND LIQUIDITY
   CAPITAL EXPENDITURES
  LIQUIDITY AND INTEREST RATE SENSITIVITY
    17




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##### Table of Contents



OFF BALANCE SHEET ARRANGEMENTS
  CAPITAL ADEQUACY
    Tier 1 capital
    
    $
    7,589Total capital
    
    $
    8,127Tier 1 capital to risk-weighted assets
    
    
    15.49
    %Total capital to risk-weighted assets
    
    
    16.59
    %Tier 1 capital to average assets
    
    
    14.51
    %
 18




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4T. CONTROLS AND PROCEDURES.
 Disclosure Controls and Procedures
   Changes in Internal Controls
  19




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
 Exhibit number
    
    Description of Exhibit31.1
    
    Rule 13 a  14 (a) Certification of Chief Executive Officer31.2
    
    Rule 13 a  14 (a) Certification of Chief Financial Officer32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 20




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SIGNATURES
  LOTUS BANCORP, INC.Date: November 13, 2009
    By:

/s/ Satish B. JastiSatish B. JastiPresident and Chief Executive OfficerDate: November 13, 2009
    By:
    /s/ Richard E. BauerRichard E. BauerChief Financial Officer 21




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EXHIBIT INDEX
 Exhibit number
    
    Description of Exhibit31.1
    
    Certification pursuant to Rules 13a  15(e) and 15d  15(e) of the Securities Exchange Act31.2
    
    Certification pursuant to Rules 13a  15(e) and 15d  15(e) of the Securities Exchange Act32
    
    Certification pursuant to Rules 13a  14(b) or Rule 15d  14(b) of the Securities Exchange
Act and 18 U.S.C. §1350
 22