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

Commission File Number 333-135107

LOTUS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Michigan		20-2377468
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

44350 W. Twelve Mile Road, Novi, MI 48377
(Address of principal executive offices, including zip code)

(248) 735-1000
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

The number of shares outstanding of the Issuer’s Common Stock, $0.01 par value, as of November 13, 2009 was 1,389,965 shares.

 

 

INDEX

PART I		FINANCIAL INFORMATION					3
		ITEM 1.		FINANCIAL STATEMENTS			3
		ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION			15
		ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			19
		ITEM 4T.		CONTROLS AND PROCEDURES			19
PART II		OTHER INFORMATION					20
		ITEM 1.		LEGAL PROCEEDINGS			20
		ITEM 1A.		RISK FACTORS			20
		ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			20
		ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			20
		ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			20
		ITEM 5.		OTHER INFORMATION			20
		ITEM 6.		EXHIBITS			20
SIGNATURES							21

Certification Pursuant to Rule 13a — 15(e) and 15(d) — 15(e)
Certification Pursuant to Rule 13a — 15(e) and 15(d) — 15(e)
Certification Pursuant to Rule 13a — 14(b) and 15(d) — 14(b)

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.

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LOTUS BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

ASSETS

		September 30, 2009
		(unaudited)				December 31, 2008
Cash and cash equivalents
Cash and due from banks		$	910,267			$	457,103
Interest bearing balances due from banks			735,000				1,960,000
Federal funds sold			2,747,307				3,194,033
Total cash and cash equivalents			4,392,574				5,611,136
Loans, 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				25,085,558
Property & equipment, net of depreciation (Note 5)			3,346,186				3,478,775
Accrued interest receivable and other assets			268,519				174,865
Total assets		$	52,285,855			$	34,350,334

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

		September 30, 2009
		(unaudited)				December 31, 2008
Deposits (Note 3)
Non-interest bearing		$	4,229,106			$	3,613,283
Interest bearing			38,024,308				20,107,144
Total deposits			42,253,414				23,720,427
Accrued interest payable and other liabilities			182,321				103,520
Total liabilities			42,435,735				23,823,947
Shareholders’ equity
Common 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				13,899
Additional paid in capital			14,032,659				13,989,315
Accumulated deficit			(4,196,438	)			(3,476,827	)
Total shareholders’ equity			9,850,120				10,526,387
Total liabilities and shareholders’ equity		$	52,285,855			$	34,350,334

See accompanying notes to unaudited condensed financial statements

LOTUS BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)

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

See accompanying notes to unaudited condensed financial statements

LOTUS BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)

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

See accompanying notes to unaudited condensed financial statements

LOTUS BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

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

See accompanying notes to unaudited condensed financial statements

LOTUS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation — The accompanying unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by the accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements of Lotus Bancorp, Inc. should be read in conjunction with the financial statements of Lotus Bancorp, Inc. and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

All adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the results of operations and cash flows, have been made. The results of operations for the three months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

Principles of Consolidation — The accompanying consolidated financial statements include accounts of Lotus Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Lotus Bank (the “Bank”). All significant inter-company accounts and transactions have been eliminated.

Organization — Lotus Bancorp, Inc. (the “Company”) was incorporated as De Novo Holdings, Inc. on October 27, 2004 for the purpose of becoming a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company subsequently changed its name to Lotus Bancorp, Inc. The Company received the required regulatory approvals to purchase the common stock of Lotus Bank (the “Bank”) on February 2, 2007. The Company withdrew common stock subscription funds totaling $12,582,050 from its escrow account on February 27, 2007 and capitalized the Bank with $10,500,000 on that same date. The Bank commenced operations on February 28, 2007. The Company completed the public offering of its common stock on June 30, 2007. The Company raised a total of $13,899,650 in capital. As of November 13, 2009, there were 1,389,965 shares of the Company’s common stock issued and outstanding.

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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term include the determination of loan losses and the valuation of deferred tax assets.

Organization and Pre-opening costs — Organization and pre-opening costs represent incorporation costs, legal, accounting, consultant and other professional fees and costs relating to the organization. The organization and pre-opening costs totaled approximately $790,000 through the commencement of operations, and were charged to expense as incurred.

Deferred Offering Costs — Direct costs relating to the offering of common stock totaled approximately $487,000 through September 30, 2009, and were capitalized and netted against the offering proceeds.

Cash and Cash Equivalents — Cash and cash equivalents are comprised of highly liquid investments with purchase maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. At times bank balances may be in excess of insured limits. Management has deemed this a normal business risk.

Loans — The Company grants mortgage, commercial and consumer loans to customers. A large portion of the loan portfolio is represented by commercial and commercial real estate loans in Oakland County, Michigan and elsewhere. The ability of the Company’s debtors to honor their contracts is dependent on the real estate and general economic conditions in those areas.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using either the straight line or interest method.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed in nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses — The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Actual loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and allocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market value) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimates of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the borrower and the loan, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable interest rate, or by the fair value of the collateral if the loan is collateral dependent.

Large groups of homogenous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential mortgage loans for impairment disclosures.

During the first three years of operation, the Bank will maintain an allowance for loan losses at or above a minimum level of 1.00% established by the Federal Deposit Insurance Corporation and the State of Michigan Office of Financial and Insurance Regulation pursuant to their orders granting the Bank authority to commence activity as a de novo financial institution.

Off-balance-sheet Instruments — In the ordinary course of business, the Company has entered into commitments under commercial lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Property and Equipment — Equipment is stated at cost. Depreciation is computed for financial reporting purposes using the straight-line method over the useful life of the assets.

Income Taxes — Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effect of the various temporary differences between the book value and tax basis of the various balance sheet assets and liabilities, and requires the current recognition of changes in tax rates and laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Earnings per Share — Basic earnings per share have been computed by dividing the net loss by the weighted-average number of common shares outstanding for the period.

Reclassification — Certain amounts appearing in the prior year’s financial statements have been reclassified to conform to the current year’s financial statements.

Recent Accounting Pronouncements — On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements. FASB 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of FASB 157, guidance for applying fair value was incorporated in several accounting pronouncements. FASB 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. FASB 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under FASB 157, fair value measurements are disclosed by level within the hierarchy. While FASB 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. FASB 157 was initially effective for the Company beginning January 1, 2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP) FAS No. 157-2, Effective Date of FASB Statement No. 157. FSP FAS No. 157-2 allows entities to electively defer the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. The Company has applied the fair value measurement and disclosure provisions of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities effective January 1, 2009. The adoption of SFAS No. 157 is not material to our results of operations or financial position. In October 2008, the FASB approved the issuance of FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS No. 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued, such as the period ended September 30, 2009. SFAS No. 157 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As such, it is Company policy to maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value levels for those financial assets for which there exists an active market. In instances where the market is indicated to be inactive, the Company incorporates measured risk adjustments which market participants would assume for credit and liquidity risks when determining fair value levels.

Fair value levels for financial assets in instances where there is limited or no observable market activity and, thus, are determined upon estimates, are often derived based on the specific characteristics of the financial asset, as well as the competitive and economic environment in existence at that particular time. As a result, fair value levels cannot be measured with certainty and may not be achieved in a sale of the financial asset. Any pricing model utilized to determine fair value may contain potential weaknesses and variation in assumptions utilized, including discount rates, prepayment speeds, default rates and future cash flow estimates, can result in substantially different estimates of fair values. The adoption of this standard did not have a material impact on the financial statements due to the fact that the Company did not have any assets or liabilities that would be required to be measured under SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or after November 15, 2007, provided the entity also elects to apply the provisions of FASB 157. The Company has determined the impact of adopting FASB 159 is immaterial to the financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard also includes a required disclosure of the date through which the entity has evaluated subsequent events and whether the evaluation date is the date of issuance or the date the financial statements were available to be issued. The standard is effective for interim or annual periods ending after June 15, 2009. The Company has complied with the disclosure requirements. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent

Events, we have evaluated subsequent events through the date of this filing. We do not believe there are any material subsequent events which would require further disclosure.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 approved the FASB Accounting Standards Codification (the Codification) as a single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, the American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission, have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification is effective for interim or annual periods ending after September 15, 2009. There have been no changes to the content of our financial statements or disclosures as a result on implementing the Codification during the quarter ended September 30, 2009. However, as a result of implementation of the Codification, previous references to new accounting standards and literature are no longer applicable. All future references to authoritative accounting literature in our consolidated financial statements will be referenced in accordance with the Codification.

NOTE 2 — LOANS

A summary of the balances of loans as of September 30, 2009 and December 31,2008, respectively, is as follows:

		September 30, 2009				December 31, 2008
Mortgage loans on real estate:
Residential 1 to 4 family		$	3,097,329			$	2,419,361
Commercial			24,585,491				12,843,133
Second mortgage			229,919				172,393
Equity lines of credit			2,142,557				839,607
Total mortgage loans on real estate			30,055,296				16,274,494
Commercial loans			14,312,103				8,443,881
Consumer installment loans			559,965				700,235
Total loans			44,927,364				25,418,610
Less:
Allowance for loan losses			538,000				314,000
Net deferred loan fees (costs) and unearned income			110,788				19,052
Net loans		$	44,278,576			$	25,085,558

The following table shows the maturities and sensitivity to changes in interest rates of the loan portfolio as of September 30, 2009:

		Maturing or repricing in
		less than				1 to 5				after
		1 year				years				5 years				Total
Commercial and financial		$	21,268,336			$	14,401,571			$	3,227,687			$	38,897,594
Real estate — mortgage			2,322,611				2,738,866				408,328				5,469,805
Installment loans to individuals			305,769				241,675				12,521				559,965
Total loans		$	23,896,716			$	17,382,112			$	3,648,536			$	44,927,364

At September 30, 2009, loans maturing in greater than 1 year are comprised of the following:

Fixed rate		$	19,232,506
Variable rate		$	16,639,747

The Company has no loan concentrations greater than 10% of total loans.

An analysis of the allowance for loan losses is as follows:

		September 30, 2009
Balance at December 31, 2008		$	314,000
Provision for loan losses			226,082
Loans charged-off			(2,082	)
Recoveries on loans previously charged-off			—
Balance at September 30, 2009		$	538,000

At September 30, 2009, there were no loans considered to be impaired or over 90 days delinquent and still accruing.

In the ordinary course of business, the Bank has granted loans to executive officers and directors and their affiliates amounting to $7,474,624 at September 30, 2009 and $4,328,595 at December 31, 2008.

NOTE 3 — DEPOSITS

The following is a distribution of deposits as of September 30, 2009 and December 31, 2008:

		September 30, 2009				December 31, 2008
Non-interest bearing deposits		$	4,229,106			$	3,613,283
NOW accounts			417,308				357,123
Savings and money market accounts			17,720,769				9,505,159
Certificates of deposit less than $100,000			4,449,457				2,718,608
Certificates of deposit greater than $100,000			15,436,774				7,526,254
Total		$	42,253,414			$	23,720,427

At September 30, 2009, the scheduled maturities of time deposits are as follows:

		Less than				Greater than
		$100,000				$100,000				Total
Less than one year		$	3,925,457			$	14,854,259			$	18,779,716
One through five years			524,000				582,515				1,106,515
Over five years			—				—				—
Total		$	4,449,457			$	15,436,774			$	19,886,231

NOTE 4 — OFF BALANCE SHEET ARRANGEMENTS

Credit Related Financial Instruments - The subsidiary bank is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and undisbursed lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

The total contractual amounts of commitments to extend credit, standby letters of credit, and undisbursed lines of credit as of September 30, 2009 and December 31, 2008 are shown below:

		September 30, 2009				December 31, 2008
Commitments to extend credit		$	2,659,900			$	3,298,200
Standby letters of credit			666,561				917,498
Undisbursed lines of credit			7,074,397				5,241,053
Total		$	10,400,858			$	9,456,751

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require repayment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Undisbursed lines of credit under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit can be collateralized and may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are used primarily to support public and private borrowing arrangements. Essentially all letters of credit have expiration dates within one year. The Company generally holds collateral supporting those commitments if deemed necessary.

Collateral Requirements — To reduce credit risk related to the use of credit related financial instruments, the Company might deem it necessary to obtain collateral. The amount and nature of the collateral obtained are based on the Company’s evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate.

If the counterparty does not have the right and the ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral on its balance sheet at fair value with a corresponding obligation to return it.

NOTE 5 — PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

		September 30, 2009				December 31, 2008
Building and improvements		$	2,212,089			$	2,212,089
Land			854,233				854,233
Office equipment			642,571				632,954
			3,708,893				3,699,276
Less: Accumulated depreciation			362,707				220,501
Property and equipment net of depreciation		$	3,346,186			$	3,478,775

The Company’s headquarters is an approximately 5,200 square foot building completed in 2008 featuring full service banking accommodations. The building also houses the Company’s executive management.

NOTE 6 — INCOME TAXES

The Company has net operating loss carryforwards of approximately $4,196,000 as of September 30, 2009 that are available to reduce future taxable income through the year ending December 31, 2028. The deferred tax asset created by that loss carryforward has been offset with a valuation allowance since the Company does not have a history of earnings.

The components of the Company’s net deferred tax assets, included in other assets, are as follows:

Deferred Tax Asset:
Net Operating Loss Carryforward		$	1,426,789
Less: Valuation Allowance			(1,426,789	)
Total net deferred tax asset		$	—

A reconciliation of the provision for income taxes for the period ended September 30 follows:

		2009				2008
Income tax benefit at federal statutory rate of 34 percent		$	244,668			$	353,696
Change in valuation allowance			(245,000	)			(354,000	)
Other — net			332				304
Net income tax expense		$	—			$	—

NOTE 7 — STOCK BASED COMPENSATION

At the Company’s Annual Meeting of Shareholders held May 21, 2008, its shareholders approved the 2008 Stock Incentive Plan, which had previously been approved by the Board of Directors. Under the Company’s stock based incentive plan, the Company may grant stock options to its directors, officers and employees for up to 166,795 shares of common stock. Effective January 1, 2007, the Company adopted the fair value recognition provisions of SFAS No. 123 (R), Share based Payment. SFAS No. 123 (R) established a fair value method of accounting for stock options whereby compensation expense is recognized based on the computed fair value of the options on the grant date.

At September 30, 2009, stock options outstanding had a weighted average remaining contractual life of 8.6 years. The following table summarizes stock options outstanding and aggregate intrinsic value as of September 30, 2009:

Weighted Average

Remaining

Aggregate

Number

Contractual

Exercise

Intrinsic

Exercise Price

Outstanding

Life

Price

Value

$10.00

59,024

8.6 years

$

10.00

—

The Company did not grant stock options during the nine months ended September 30, 2009.

Stock options have an exercise price of $10.00 per share. 41,649 of the options vest over a five year term, while 17,375 of the options vest ratably over a three year term. All of the options expire 10 years following the date of grant.

As of September 30, 2009, there was $134,136 of total unrecognized pre-tax compensation expense related to nonvested stock options outstanding. The weighted average term over which this expense will be recognized is 1.2 years. Common shares issued upon exercise of stock options result in new shares issued by the Company from authorized but unissued shares.

As of September 30, 2009, there were 59,024 options to purchase the Company’s common stock issued and outstanding.

In conjunction with its initial stock offering, the Company has issued a total of 277,993 warrants to initial shareholders in the ratio of one warrant for every five shares of common stock purchased in the offering. These warrants have a strike price of $12.50. Additionally, the Company has issued 142,500 warrants to its organizers. These warrants have a strike price of $10.00. A total of 420,493 warrants to purchase the Company’s common stock were outstanding as of September 30, 2009 and December 31, 2008.

Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised) requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors. SFAS No. 123 (R) requires companies to estimate the fair value of the stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over the requisite service periods in the Company’s statement of operations.

NOTE 8 — MINIMUM REGULATORY CAPITAL REQUIREMENTS

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting policies. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations

provide five classifications; well capitalized, adequately capitalized, undercapitalized and critical undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank was well capitalized as of September 30, 2009.

The Bank’s actual capital amounts and ratios as of September 30, 2009 are presented in the following table (dollars in thousands):

										For Capital								To Be
		Actual								Adequacy Purposes								Well Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As 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

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents — the carrying amounts of cash and cash equivalents approximate fair value.

Loans — for variable rate loans that may reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit — the fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying values also approximate fair value for money market deposit accounts, other savings, and variable rate certificates of deposit. Fair values for fixed rate certificate of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits.

Accrued Interest — the carrying amounts of accrued interest approximate fair value.

Other Financial Instruments — the fair value of other financial instruments, including loan commitments, unfunded lines of credit and unfunded standby letters of credit, based on discounted cash flow analyses, is not material.

The carrying and fair values of the Company’s assets and liabilities as of September 30, 2009 and December 31, 2008 are as follows:

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis provides information which the Company believes is relevant to an assessment and understanding of its results of operations and financial condition. This discussion should be read in conjunction with the financial statements and accompanying notes appearing in this report.

OVERVIEW

Lotus Bancorp, Inc.(the “Company”) is a Michigan corporation that was incorporated on October 27, 2004 to serve as a bank holding company for Lotus Bank (the “Bank”). On February 2, 2007, the Company received approval from the Federal Reserve Bank of Chicago to become a bank holding company. The Bank received final regulatory approvals on February 5, 2007, and commenced banking operations on February 28, 2007. The Company has no material business operations other than owning and managing the Bank, and has no plans for other business operations in the foreseeable future.

The Company commenced its initial public offering on September 28, 2006 to raise the capital required to capitalize Lotus Bank. The initial public offering was completed on June 30, 2007. On February 26, 2007, we broke escrow in the amount of $12,769,358, which consisted of $12,582,050 in stock subscriptions received and $187,308 in accrued interest receivable. On February 27, 2007, the Company capitalized the Bank by downstreaming $10,500,000 into its capital accounts. Early in the third quarter of 2007, the Company closed on the remaining portion of its equity offering of $1,317,600, bringing its total equity to $13,899,650. As of November 13, 2009, there were 1,389,965 shares of the Company’s common stock issued and outstanding.

We provide customary retail and commercial banking services to our customers, including checking and savings accounts, time deposits, safe deposit facilities, commercial loans, real estate mortgage loans, installment loans, IRAs and night depository facilities. Our deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to applicable legal limits and we are supervised and regulated by the FDIC and Michigan Office of Financial and Insurance Regulation.

We provide a full range of retail and commercial banking services designed to meet the borrowing and depository needs of small and medium-sized businesses and consumers in local areas. Substantially all of our loans are to customers located within our service area. We conduct our lending activities pursuant to the loan policies adopted by our Board of Directors. These loan policies grant individual loan officers authority to make secured and unsecured loans in specific dollar amounts; senior officers or various loan committees must approve larger loans. Our management information systems and loan review policies are designed to monitor lending sufficiently to ensure adherence to our loan policies.

PLAN OF OPERATION

The Company’s (and the Bank’s) main office is located at the intersection of 12 Mile and Dixon Roads in Novi, Michigan. The building, completed in April 2008, is a free standing facility of approximately 5,200 square feet.

The Bank has 13.55 full-time equivalent employees, and the Company does not currently have any employees who are not also employees of the Bank.

The Bank uses its capital for customer loans, investments and other general banking purposes. We believe that the Company’s minimum initial public offering proceeds will enable the Bank to maintain a leverage capital ratio, which is a measure of core capital to average total assets, in excess of 8% for the first three years of operations as required by the FDIC. While we do not anticipate raising additional capital during the next 12 month period, we cannot assure you that the Company will not need to raise additional capital within the next three years or over the next 12 month period.

FINANCIAL RESULTS

For the three and nine months ended September 30, 2009, the Company generated net losses of $212,524 and $719,611, respectively. The largest expenses in the quarter ended September 30, 2009 were compensation and employee benefits which amounted to $261,437, interest expenses of $177,005, occupancy and equipment costs totaling $96,019, professional fees totaling $34,000, data processing expenses totaling $31,405, , and advertising and promotion costs totaling $21,146. Additionally, stock based compensation expense totaling $14,448 was recognized during the quarter ended September 30, 2009. Similarly, year-to-date through September 30, 2009, the largest expense components were salaries and employee benefits totaling $759,362, interest expenses amounting to $515,292, occupancy costs totaling $241,053, professional fees of $102,010, and data processing expenses totaling $92,116. Most expense categories showed increases in the year-over-year period due to growth in the Company’s business lines and the addition of staff. Interest and fee income for the quarter of $616,405 was largely due to interest and fees on loans of $601,146, earnings from investments in certificates of deposit of other banks amounting to $12,585, and federal funds sold of $2,674. The provision for possible loan losses totaled $135,582 for the quarter and $226,082 year-to-date. At September 30, 2009, the reserve stood at $538,000 or 1.20% of gross loans and 1.24% of adjusted total loans. As the Company had no loans past due more than 30 days at quarter end or any loans in nonaccrual status, the Company’s management felt it prudent to maintain its loan loss reserve provisions at current levels given the state of both the local and national economies.

In analyzing the appropriate level of the Company’s reserve for possible loan losses, management takes into account several factors including historical loss rates, current and anticipated levels of past due and non-performing loans, local economic conditions, competitor loss rates and portfolio composition. The Company has no experience of loan losses, other than $2,082 associated with participation interest being held by a financial institution that was closed by regulators, has no history of loans of any material amount past due more than 30 days, and has no loans classified as non-performing or in non-accrual status. Additionally, the Company has avoided making those types of loans considered “high risk” such as option ARMS, and typically underwrites commercial loans and commercial and residential real estate loans, the bulk of its portfolios, with current loan to value ratios of around 70% and/or debt service coverage ratios in excess of 125%; even in light of the moribund local economy and the struggles with credit quality of local competitor financial institutions, management closely monitors the performance of its credit portfolios and is satisfied that it’s reserve for possible loan losses is adequate.

In comparing the September 30, 2009 quarterly results to those of the same period ending in 2008, it is necessary to remember that the Company’s subsidiary bank had only been in operation since February 28, 2007, and has experienced fairly rapid balance sheet growth during 2007, 2008 and the first nine months of 2009, with total assets, net loans and total deposits increasing 108%, 130%, and 198%, respectively from September 30, 2008 to September 30, 2009. The Company’s primary source of income for the quarters ended September 30, 2008 and 2009 was interest and fees on loans, investment CD’s and federal funds sold totaling $271,929 and $616,405, respectively. While the composition of revenue sources was similar, significant decreases in the general level of interest rates, coupled with the fairly high funding costs associated with gathering deposits and high carrying balances of relatively low yielding assets (federal funds sold and investment certificates of deposit) resulted in a decline of the Company’s annualized net interest margin from 4.01% at September 30, 2008 to 3.69% at September 30, 2009. While erosion in the net interest margin, in percentage terms, has made it more difficult to cover the Company’s other operating costs such as salaries and benefits and occupancy, net interest income has increased during the same period. This trend has been accelerating during 2009, particularly in the 3^rd quarter, as the Company continues to convert lower yielding assets into higher yielding loans, and its costs of funding continue to decline

The Company’s assets have grown by approximately 52% since year-end 2008. We believe this growth is primarily attributable to the new location of the Company’s headquarters, recent marketing and advertising promotions, perceived instability of competitor financial institutions, and the resultant inactivity of that competition, all of which have attracted additional customer relationships into the Bank. The Bank’s asset mix has continued to improve with the conversion of cash equivalent assets into loans. Net loans totaled $44,278,576 at September 30, 2009, an increase of approximately $19.2 million,

or 77% over December 31, 2008, and were funded largely by increases in deposits gathered amounting to $42,253,414. The Company expects this growth to continue for the foreseeable future, as tempered competition and increased consolidation in its market allow it to gain more customer relationships, which should result in the continued enrichment in its asset mix as federal funds sold and investment certificate of deposit balances are to be converted into higher-yielding loans.

An approximately 78% increase in deposits at quarter-end, as compared to year-end 2008, were comprised primarily of non-interest bearing demand balances, money market deposit accounts and certificates of deposit. The Company’s equity declined during the same period to $9,850,120 due exclusively to its operating losses discussed above.

The Bank derives its revenues primarily from interest charged on loans, and to a lesser extent, from interest earned on investments, fees received in connection with the origination of loans and other miscellaneous fees and service charges. Its principal expenses are interest expense on deposits and operating expenses. The funds for these activities are provided principally by operating revenues, deposit growth, purchases of federal funds from other financial institutions, sales of loans and investment securities, and the partial or full repayment of loans by borrowers.

The Bank’s operations depend substantially on its net interest income, which is the difference between interest earned on loans and other investments, and interest expense paid on deposits and other borrowings. This difference can be largely affected by changes in market interest rates, credit policies of monetary authorities, and other local, national or international economic factors which are beyond the Bank’s ability to predict or control. Large moves in interest rates may decrease or eliminate the Bank’s profitability.

FUNDING OF OPERATIONS AND LIQUIDITY

On February 26, 2007, the Company had its first closing on the common stock subscriptions received, and issued 1,258,205 shares of stock for a total of $12,582,050, which included the conversion of $109,990 of organizer advances into common stock. The Company continued to offer its common stock for sale pursuant to the terms of the registration statement until June 30, 2007. Since the initial closing on February 26, 2007, the Company closed on an additional $1,314,600 in common stock subscriptions, and issued an additional 131,760 shares. As of November 13, 2009, a total of 1,389,965 shares of the Company’s common stock were issued and outstanding.

The Company believes that the proceeds raised during the initial public offering will provide sufficient capital to support the growth of both the Company and the Bank for their initial years of operations.

CAPITAL EXPENDITURES

The Company has made $3,385 in capital expenditures for the three month period ended September 30, 2009, and recorded $46,505 in depreciation expense related to its headquarters building and office equipment during the quarter.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Liquidity represents the ability to provide a steady source of funds for loan commitments and other investment activities, as well as the ability to maintain sufficient funds to cover deposit withdrawals and the payment of debt and operating obligations. The Bank can obtain these funds by converting assets into cash, obtaining new deposits, or by borrowing funds. Its ability to attract and maintain these deposits will serve as its primary source of funding.

On February 26, 2007, the Company met the conditions to capitalize and open Lotus Bank and issued 1,258,205 shares of stock for the subscriptions received in escrow and in lieu of cash repayment of the organizer advances of $109,990. The Company repaid the outstanding balance on its organizational line of credit by using a portion of the proceeds of its initial public offering, and then invested $10,500,000 of the proceeds in the capital of the Bank. Since that date, the Company has issued an additional 131,760 shares. As of September 30, 2009, the Company’s primary sources of liquidity are cash and due from banks and federal funds sold which amounted to $5,851,450. As the Bank continues to grow, it is expected that a substantial portion of these funds will be invested in loans and be supplanted by increases in deposits.

Additionally, the Bank has arranged a federal funds borrowing line with one of its correspondent banks, has gained access to the discount window of the Federal Reserve Bank of Chicago (the “FRBC”), and has established a borrowing line with the Federal Home Loan Bank of Indianapolis (the “FHLBI”). Any borrowings from the FRBC and the FHLBI are required to be collateralized with certain of the Bank’s assets. The federal funds line is unsecured. As of September 30, 2009, there were no balances outstanding on any of these borrowing lines.

Net interest income, the Bank’s primary source of earnings, will fluctuate with significant interest rate movements. The Company’s profitability depends substantially on the Bank’s net interest income. A large change in interest rates may significantly impact the Bank’s net interest income and decrease or eliminate the Company’s profitability. Most of the factors that influence changes in market interest rates, including economic conditions, are beyond the Company’s ability to control. While the Bank will take measures to minimize the impact of these fluctuations, the Bank intends to structure its balance sheet such that repricing opportunities exist both for assets and liabilities in roughly equal amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.

Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates. The Bank will generally attempt to maintain a balance between rate sensitive assets and liabilities and the changes in interest income and expense in order to limit its overall interest rate risk. The Bank regularly evaluates the balance sheet’s asset mix in terms of several variables: yield, credit quality, funding sources and liquidity.

To effectively manage the balance sheet’s liability mix, the Bank plans to expand its deposit base and convert assets to cash where necessary. As the Bank continues to grow, it will continuously structure its rate sensitivity position in an attempt to hedge against rapidly rising or falling interest rates. The Bank’s asset and liability committee meets regularly to develop strategies for the upcoming period.

Other than increases in loans and deposits, management knows of no trends, demands, commitments, events or uncertainties that would result in or are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way in the foreseeable future.

OFF BALANCE SHEET ARRANGEMENTS

At September 30, 2009, the Company had unfunded loan commitments outstanding of approximately $10.4 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitments level does not necessarily represent future cash requirements. The Company has the ability to fund these commitments if required. See also Note 4 of the Company’s consolidated financial statements (unaudited) in Item 1 of Part 1 of this report.

CAPITAL ADEQUACY

There are two primary measures of capital adequacy for banks and bank holding companies: (i) risk-based capital guidelines and (ii) the leverage ratio. The risk-based capital guidelines measure the amount of a bank’s required capital in relation to the degree of risk perceived in its assets and its off-balance sheet items. Under the risk-based capital guidelines, capital is divided into two “tiers.” Tier 1 capital consists of common stockholder’s equity, non-cumulative perpetual preferred stock, and minority interests. Goodwill, if any, is deducted from the total. Tier 2 capital consists of the allowance for loan losses, hybrid capital instruments, term subordinated debt and immediate term preferred stock. Banks are required to maintain a minimum risk-based capital ratio of 8%, with at least 4% consisting of Tier 1 capital.

The second measure of capital adequacy relates to the leverage ratio. The FDIC has established a 3% minimum leverage ratio requirement. The leverage ratio in computed by dividing Tier 1 capital by total assets. In the case of the Bank and other banks that are experiencing growth or have not received the highest regulatory rating from their primary regulator, the minimum leverage ratio should be 3% plus an additional cushion of at least 1% to 2%, depending upon risk profiles and other factors.

The Bank is currently, and expects to continue to be, in compliance with these guidelines. The following table shows the capital totals and ratios for the Bank as of September 30, 2009 (in thousands):

Tier 1 capital		$	7,589
Total capital		$	8,127
Tier 1 capital to risk-weighted assets			15.49	%
Total capital to risk-weighted assets			16.59	%
Tier 1 capital to average assets			14.51	%

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     This item does not apply to smaller reporting companies.

ITEM 4T. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures — As of the end of the period covered by this Quarterly Report on Form 10-Q for the three month period ended September 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of its management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its “disclosure controls and procedures,” as such term is defined under the Exchange Act Rule 13a-15(e).

Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports the Company files or submits under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance. Management of the Company necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls — There was no change in the Company’s control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2009, that materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material non-financial information regarding the Company’s business. While the Company believes that the present design of its disclosure controls and procedures is effective in achieving its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

There are no known pending legal proceedings to which the Company or the Bank is a party or to which any of its properties are subject, nor are there any material proceedings known to the Company in which any director, officer or affiliate, or any principal shareholder is a party or has an interest adverse to the Company.

ITEM 1A. RISK FACTORS.

     This item does not apply to smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

     This item is not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

     This item is not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     None.

ITEM 5. OTHER INFORMATION.

     This item is not applicable.

ITEM 6. EXHIBITS.

Exhibit number		Description of Exhibit
31.1		Rule 13 a — 14 (a) Certification of Chief Executive Officer
31.2		Rule 13 a — 14 (a) Certification of Chief Financial Officer
32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

Exhibit number		Description of Exhibit
31.1		Certification pursuant to Rules 13a — 15(e) and 15d — 15(e) of the Securities Exchange Act
31.2		Certification pursuant to Rules 13a — 15(e) and 15d — 15(e) of the Securities Exchange Act
32		Certification pursuant to Rules 13a — 14(b) or Rule 15d — 14(b) of the Securities Exchange Act and 18 U.S.C. §1350