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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

June 30, 2011 For the quarterly period ended June 30, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission file number: 000-53996

 

 

Fairmount Bancorp, Inc.

(Exact Name of Registrant as specified in its charter)

 

 

 

Maryland   27-1783911

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

8216 Philadelphia Road,

Baltimore, MD

  21237
(Address of Principal Executive Offices)   (Zip Code)

( 410 ) 866-4500

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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  x    NO  ¨

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 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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  

¨

  

Accelerated Filer

 

¨

Non-Accelerated Filer   ¨    Smaller Reporting Company   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

As of August 15, 2011, the number of shares of common stock outstanding was 444,038.

 

 

 


Table of Contents

FAIRMOUNT BANCORP, INC.

FORM 10-Q

Table of Contents

 

     Page No.  

Part I – Financial Information

  

Item 1 – Financial Statements (Unaudited)

  

Consolidated Balance Sheets at June 30, 2011 (Unaudited) and September 30, 2010

     3   

Consolidated Statements of Income for the Three and Nine Months Ended June  30, 2011 and 2010 (Unaudited)

     4   

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June  30, 2011 and 2010 (Unaudited)

     5   

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010 (Unaudited)

     6   

Notes to Consolidated Financial Statements (Unaudited)

     7   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operation

     27   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     31   

Item 4 – Controls and Procedures

     31   

Part II – Other Information

  

Item 1 – Legal Proceedings

     31   

Item 1A – Risk Factors

     31   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3 – Defaults Upon Senior Securities

     32   

Item 4 – (Removed and Reserved)

     32   

Item 5 – Other Information

     32   

Item 6 – Exhibits

     32   

Signatures

     33   

Exhibit 31.1

     34   

Exhibit 31.2

     35   

Exhibit 32.0

     36   


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

June 30, 2011 and September 30, 2010

 

     June 30,
2011
    September 30,
2010
 
     (Unaudited)        
Assets     

Cash and due from banks

   $ 376,433      $ 281,379   

Interest-bearing deposits in other banks

     246,777        126,173   

Certificates of deposit

     1,499,000        2,748,000   

Federal funds sold

     1,976,343        1,693,959   
  

 

 

   

 

 

 

Cash and cash equivalents

     4,098,553        4,849,511   
  

 

 

   

 

 

 

Securities available for sale, at fair value

     6,353,594        5,510,217   

Securities held to maturity, at amortized cost

     2,637,178        3,778,056   

Federal Home Loan Bank stock, at cost

     611,700        578,600   

Loans, net of allowances for loan and lease losses of $575,059 at June 30, 2011 and $334,486 at September 30, 2010

     54,742,812        52,544,287   

Accrued interest receivable, investments

     52,003        53,716   

Accrued interest receivable, loans

     222,108        217,955   

Premises and equipment, net

     2,792,310        2,939,895   

Foreclosed assets, net

     884,000        35,000   

Prepaid expenses

     229,459        253,506   

Cash surrender value of life insurance

     68,809        66,882   

Income tax receivable

     —          118,862   

Deferred income tax asset

     100,486        —     

Other assets

     5,473        5,151   
  

 

 

   

 

 

 

Total assets

   $ 72,798,485      $ 70,951,638   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Noninterest-bearing deposits

   $ 1,110,297      $ 719,701   

Interest-bearing demand deposits

     3,881,543        4,276,850   

Savings deposits

     9,423,857        9,267,426   

Certificates of deposit

     36,406,080        35,706,562   
  

 

 

   

 

 

 

Total deposits

     50,821,777        49,970,539   

Federal Home Loan Bank advances

     10,500,000        10,000,000   

Income taxes payable

     121,854        —     

Accrued interest payable

     42,853        42,667   

Deferred compensation liability

     15,950        23,360   

Deferred income tax liabilities

     —          18,064   

Other liabilities

     57,049        65,537   
  

 

 

   

 

 

 

Total liabilities

     61,559,483        60,120,167   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     
  

 

 

   

 

 

 

Stockholders’ Equity

    

Preferred stock, $0.01 par value; authorized 1,000,000; none issued

     —          —     

Common stock, $0.01 par value; authorized 4,000,000; issued and outstanding 444,038 shares at June 30, 2011 and September 30, 2010

     4,440        4,440   

Additional paid in capital

     3,744,182        3,744,182   

Retained earnings

     7,649,899        7,239,989   

Unearned ESOP shares

     (289,710     (289,710

Accumulated other comprehensive income

     130,191        132,570   
  

 

 

   

 

 

 

Total stockholders’ equity

     11,239,002        10,831,471   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 72,798,485      $ 70,951,638   
  

 

 

   

 

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

 

3


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2011      2010      2011      2010  

Interest and dividend income:

           

Interest on loans

   $ 851,009       $ 850,921       $ 2,544,244       $ 2,527,868   

Interest and dividends on investments

     100,778         83,681         298,588         240,931   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     951,787         934,602         2,842,832         2,768,799   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     198,291         253,262         635,278         808,509   

Interest on borrowings

     69,102         70,450         208,792         210,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     267,393         323,712         844,070         1,018,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     684,394         610,890         1,998,762         1,750,259   

Provision for loan and lease losses

     200,000         45,000         355,000         105,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     484,394         565,890         1,643,762         1,645,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Service fees on deposit accounts

     713         874         3,094         2,117   

Other service charges, commissions and fees

     16,299         23,503         64,796         91,647   

Gain on sale of assets

     127,256         —           127,256         —     

Gain on disposal of investment securities

     —           —           —           1,164   

Other non-interest income

     5,063         7,554         7,000         11,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     149,331         31,931         202,146         106,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense:

           

Salaries, fees and employment

     239,158         215,420         716,868         646,976   

Premises and equipment

     43,458         42,791         130,930         130,637   

Professional fees

     33,479         20,389         95,112         59,346   

Data processing

     21,419         17,770         64,021         57,665   

FDIC insurance premium

     19,311         19,500         52,696         67,484   

Supervisory examination

     9,662         7,325         28,699         21,561   

Insurance and bond premiums

     10,154         10,410         20,801         17,739   

Stationery, printing and supplies

     9,640         4,754         25,470         22,935   

Other operating expenses

     30,098         27,566         94,401         84,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     416,379         365,925         1,228,998         1,109,209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     217,346         231,896         616,910         642,537   

Income taxes

     67,000         76,000         207,000         237,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 150,346       $ 155,896       $ 409,910       $ 405,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.36       $ 0.38       $ 0.99       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     415,067         408,515         415,067         408,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

 

4


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended June 30, 2011 and 2010

(Unaudited)

 

      Common
Stock
     Additional
Paid-In
Capital
     Retained
Earnings
     Unearned
ESOP
Shares
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 

Balance, September 30, 2009

   $ —         $ —         $ 6,727,340       $ —        $ 62,500      $ 6,789,840   

Comprehensive income:

               

Net income

     —           —           405,537         —          —          405,537   

Change in unrealized gain on available for sale securities, net of tax effect of $49,035

     —           —           —           —          73,120        73,120   
               

 

 

 

Total comprehensive income

                  478,657   

Issuance of common stock

     4,440         3,737,162         —           (355,230     —          3,386,372   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2010

   $ 4,440       $ 3,737,162       $ 7,132,877       $ (355,230   $ 135,620      $ 10,654,869   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2010

   $ 4,440       $ 3,744,182       $ 7,239,989       $ (289,710   $ 132,570      $ 10,831,471   

Comprehensive income:

               

Net income

     —           —           409,910         —          —          409,910   

Change in unrealized gain on available for sale securities, net of tax effect of $1,947

     —           —           —           —          (2,379     (2,379
               

 

 

 

Total comprehensive income

                  407,531   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 4,440       $ 3,744,182       $ 7,649,899       $ (289,710   $ 130,191      $ 11,239,002   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The notes to consolidated financial statements are an integral part of these consolidated statements.

 

5


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Nine Months Ended
June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 409,910      $ 405,537   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     85,429        83,050   

Amortization and accretion of securities

     19,120        8,216   

Provision for loan and lease losses

     355,000        105,000   

Other (gains) and losses, net

     (127,256     (2,536

Deferred income taxes

     (117,000  

(Increase) decrease in accrued interest receivable

     (2,440     (37,416

(Increase) decrease in prepaid expenses

     24,047        (226,640

(Increase) decrease in income taxes receivable

     118,862        —     

(Increase) decrease in cash surrender value of life insurance

     (1,927     (1,953

(Increase) decrease in other assets

     (322     (103

Increase (decrease) in accrued interest payable

     186        395   

Increase (decrease) in income taxes payable

     121,854        (51,635

Increase (decrease) in other liabilities

     (8,488     24,077   
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     876,975        305,992   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities, payments and calls of available for sale securities

     663,884        634,696   

Proceeds from maturities, payments and calls of held to maturity securities

     2,000,000        500,000   

Purchases of available for sale securities

     (1,523,049     (3,018,855

Purchases of held to maturity securities

     (866,383     (1,000,000

(Purchases) redemptions of Federal Home Loan Bank stock

     (33,100     —     

Net (increase) in loans

     (2,553,525     (2,095,029

Proceeds from disposal of foreclosed assets

     17,514        95,712   

Proceeds from disposal of premises and equipment

     204,020        660   

Purchases of premises and equipment

     (881,122     (147,104
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     (2,971,761     (5,029,920
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     851,238        4,008,807   

Net increase (decrease) in borrowings

     500,000        —     

Payments on accrued deferred compensation obligation

     (7,410     —     

Proceeds from issuance of common stock

     —          3,386,372   
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     1,343,828        7,395,179   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (750,958     2,671,251   

Cash and cash equivalents, beginning balance

     4,849,511        4,632,905   
  

 

 

   

 

 

 

Cash and cash equivalents, ending balance

   $ 4,098,553      $ 7,304,156   
  

 

 

   

 

 

 

Supplemental disclosure of cash flows information:

    

Cash paid during the year for:

    

Interest

   $ 843,884      $ 1,018,145   

Income taxes

     133,840        351,420   

Supplemental schedule of noncash investing and financing activities:

    

Change in unrealized gain (loss) on securities available for sale - net of tax effect of $1,947 and $49,035, respectively

   $ (2,379   $ 73,120   

Foreclosed assets acquired in settlement of loans

     866,514        —     

The notes to consolidated financial statements are an integral part of these consolidated statements.

 

6


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

Fairmount Bancorp, Inc. (the “Company”) was incorporated on November 30, 2009, to serve as the holding company for Fairmount Bank (the “Bank”), a federally chartered savings bank. On June 2, 2010, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 444,038 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $3,742,000, net of offering expenses of approximately $699,000. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 35,523 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with Office of Thrift Supervision (the “OTS”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the nine months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ending September 30, 2011, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

Nature of Operations

The Bank is a community-oriented federal savings bank, which provides a variety of financial services to individuals and corporate customers through its home office in the Rosedale area of Baltimore County, Maryland, and is subject to competition from other financial institutions. The Bank’s primary deposit products are interest-bearing savings, certificates of deposit and individual retirement accounts. The Bank’s primary lending products are single-family residential mortgage loans. The Bank is subject to the regulation of certain Federal agencies and undergoes periodic examination by those regulatory authorities.

 

7


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

Estimates

The preparation of consolidated 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 and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and leases and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and leases and foreclosed real estate, management obtains independent appraisals for significant properties.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has included the required disclosures in its consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending at December 31, 2010. Specific items regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning after December 31, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations”. The guidance requires pro forma disclosure for business combinations that occurred in the current period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exits. For public entities, the amendments in this Update are

 

8


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is A Troubled Debt Restructuring”. The ASU provides additional guidance to creditors in determining what constitutes a troubled debt restructuring. The ASU also amends ASU 2010-20 to defer the disclosure of troubled debt restructurings to coincide with the effective date of this ASU. ASU 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011 for public entities and interim and annual periods ending on or after December 15, 2012 for nonpublic entities. The release will not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other

 

9


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

The SEC has issued Final Rule No. 33-9002, “Interactive data to Improve Financial Reporting”, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports with their first quarterly report for fiscal periods ending on or after June 15, 2011. The release will not have a material impact on the Company’s consolidated financial statements.

Other than the disclosures contained within these statements, the Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.

Earnings per Common Share

Basic earnings per share amounts are based on the weighted average number of shares outstanding for the period and the net income applicable to common stockholders. Weighted average shares excludes unallocated ESOP shares. The Company has no dilutive potential common shares for the three or nine month periods ended June 30, 2011 and 2010.

 

     Three Months Ended June 30,      Nine Months Ended June 30,  
     2011      2010      2011      2010  

Net income

   $ 150,346       $ 155,896       $ 409,910       $ 405,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     415,067         408,515         415,067         408,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share, basic

   $ 0.36       $ 0.38       $ 0.99       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 2. Employee Stock Ownership Plan

In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in the amount of $355,230, which was sufficient to purchase 35,523 shares or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 10-year term of the loan with funds from Fairmount Bank’s contributions to the ESOP and dividends paid on the stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest prime rate, as published in The Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the last business day of the fiscal year. The interest rate on the loan as of June 30, 2011, is 3.25%.

 

10


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 2. Employee Stock Ownership Plan (Continued)

 

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 20% per year. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. There was no ESOP compensation expense for the nine months ended June 30, 2011 and 2010, respectively.

A summary of ESOP shares at June 30, 2011, is as follows:

 

Shares committed for release

     6,552   

Unearned shares

     28,971   
  

 

 

 

Total ESOP shares

     35,523   
  

 

 

 

Fair value of unearned shares

   $ 492,507   
  

 

 

 

Note 3. Securities

The amortized cost and estimated market value of securities classified as available for sale and held to maturity at June 30, 2011 and September 30, 2010 are as follows:

 

     June 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available for Sale

          

Mortgage-Backed Securities

   $ 6,134,129       $ 223,985       $ (4,520   $ 6,353,594   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,134,129       $ 223,985       $ (4,520   $ 6,353,594   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

U.S. Government and Federal Agency Obligations

   $ 1,000,000       $ —         $ (22,730   $ 977,270   

State and Municipal Securities

     1,637,178         65,289         —          1,702,467   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,637,178       $ 65,289       $ (22,730   $ 2,679,737   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 3. Securities (Continued)

 

 

     September 30, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available for Sale

          

Mortgage-Backed Securities

   $ 5,286,426       $ 223,791       $ —        $ 5,510,217   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 5,286,426       $ 223,791       $ —        $ 5,510,217   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

U.S. Government and Federal Agency Obligations

   $ 3,005,655       $ 24,698       $ (24,320   $ 3,006,033   

State and Municipal Securities

     772,401         45,579         —          817,980   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,778,056       $ 70,277       $ (24,320   $ 3,824,013   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and estimated market value of securities at June 30, 2011 and September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2011  
     Securities Available for Sale      Securities Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ —         $ —         $ —         $ —     

Due after one year through five years

     —           —           —           —     

Due five years to ten years

     187,420         199,995         2,115,422         2,153,252   

Due after ten years

     5,946,709         6,153,599         521,756         526,485   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,134,129       $ 6,353,594       $ 2,637,178       $ 2,679,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2010  
     Securities Available for Sale      Securities Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ —         $ —         $ —         $ —     

Due after one year through five years

     —           —           —           —     

Due five years to ten years

     240,954         254,961         2,304,912         2,308,640   

Due after ten years

     5,045,472         5,255,256         1,473,144         1,515,373   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,286,426       $ 5,510,217       $ 3,778,056       $ 3,824,013   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no sales of investment securities for the nine months ended June 30, 2011 or for the year ended September 30, 2010.

 

12


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 3. Securities (Continued)

 

Securities with gross unrealized losses at June 30, 2011 and September 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     June 30, 2011  
     Less than 12 Months      12 Months or Greater      Total  
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 

Securities Available for Sale

                 

Mortgage-Backed Securities

   $ 1,012,693       $ 4,520       $ —         $ —         $ 1,012,693       $ 4,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

                 

U.S. Government and Federal Agency Obligations

   $ 977,270       $ 22,730       $ —         $ —         $ 977,270       $ 22,730   

State and Municipal Securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 977,270       $ 22,730       $ —         $ —         $ 977,270       $ 22,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2010  
     Less than 12 Months      12 Months or
Greater
     Total  
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 

Securities Available for Sale

                 

Mortgage-Backed Securities

   $ —         $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

                 

U.S. Government and Federal Agency Obligations

   $ 975,680       $ 24,320       $ —         $ —         $ 975,680       $ 24,320   

State and Municipal Securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 975,680       $ 24,320       $ —         $ —         $ 975,680       $ 24,320   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011, the Company held two investments with gross unrealized losses totaling ($27,250). At September 30, 2010, the Company held one investment with a gross unrealized loss totaling ($24,320). The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Mortgage-backed securities are invested in U.S. Government Agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.

 

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Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses

Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments.

One-to Four-Family Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in our market area. The Company has experienced no foreclosures on its owner occupied loan portfolio during recent periods and believe this is due mainly to its conservative lending strategies including its non-participation in “interest only”, “Option ARM,” “sub-prime” or “Alt-A” loans.

One-to Four-Family Non-Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans secured by one-to four-family non-owner occupied residential properties in its market area. A majority of these loans are sold on a participation basis to other community banks. Such lending involves additional risks, since the properties are not owner occupied, and the renters of these properties are less likely to be concerned with property upkeep.

Mobile Home Loans. This portfolio segment consists of mobile home loans that were purchased from a third-party originator and funded by us at settlement. Mobile home lending involves additional risks as a result of higher loan-to-value ratios usually associated with these types of loans. Mobile home loan customers have historically been more adversely impacted by weak economic conditions, consequently, mobile home loans bear a higher rate of interest, have a higher probability of default, and may involve higher delinquency rates. In addition, the values of mobile home loans decline over time and higher levels of inventories of repossessed and used mobile homes may affect the values of collateral and result in higher charge-offs and provisions for loan losses. The Company ceased originating these loans in September 2007, and no future originations of these types of loans are planned.

Secured by Other Properties. This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to four-family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Construction and Land Development Loans. This portfolio segment includes construction loans to individuals and builders, primarily for the construction of residential properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties. In addition, many of these borrowers have more than one outstanding loan, so an adverse development with respect to one loan or credit relationship can expose the Company to significantly greater risk of non-payment and loss.

 

14


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

Commercial Business and Consumer Loans. This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners and consumer loans consisting solely of deposit account loans. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Loans are generally carried at the amount of unpaid principal, less the allowance for loan losses and adjusted for deferred loan fees, which are amortized over the term of the loan using the interest method. Interest on loans is accrued based on the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when the principal or interest is delinquent for 90 days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash collections on such loans are applied as reductions of the loan principal and no interest income is recognized on those loans until the principal balance has been collected. The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

As a financial services provider, the Company is routinely party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made.

Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

The allowance for loan losses is established through a provision for loan losses. The Company maintains the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate at each reporting date.

Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation

process by portfolio segment includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

The allowance generally consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

 

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Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

During December 2010, the Company repossessed a mobile home which was subsequently sold during March 2011. The total principal loss that was charged against the mobile home loan reserve account, after the sale of the mobile home, was $19,000. The loss on this mobile home repossession was not charged against the allowance for loan losses. The mobile home loan portfolio segment is evaluated on a quarterly basis to assess the overall collection probability for the mobile home loan portfolio and includes the same evaluation process that it is used for the loans included in the allowance for loan losses. The Company will continue to monitor the reserve account and modify its allowance for loan losses relative to mobile home loans.

The following tables set forth as of the end of each reporting period, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

16


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

     As of June 30, 2011  
     One - to
Four-Family
Owner
Occupied
     One-to
Four-Family
Non-Owner
Occupied
     Mobile
Home
     Secured by
Other
Properties
    Construction
and Land
Development
    Commercial
Business and
Consumer

Loans
    Unallocated     Total  

Allowance for Credit Losses:

                   

Beginning Balance

   $ 38,957       $ 74,835       $ —         $ 61,516      $ 130,008      $ 5,451      $ 23,719      $ 334,486   

Charge-offs

     —           —           —           (114,427     —          —          —          (114,427

Recoveries

     —           —           —           —          —          —          —          —     

Provision

     13,029         211,832         74,730         116,567        (38,350     (1,477     (21,331     355,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 51,986       $ 286,667       $ 74,730       $ 63,656      $ 91,658      $ 3,974      $ 2,388      $ 575,059   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ 80,000       $ —         $ 38,000      $ —        $ —        $ —        $ 118,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 51,986       $ 206,667       $ 74,730       $ 25,656      $ 91,658      $ 3,974      $ 2,388      $ 457,059   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —         $ —         $ —         $ —        $ —        $ —        $ —        $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing receivables: Ending balance

   $ 27,432,947       $ 17,458,805       $ 2,511,020       $ 1,789,986      $ 4,560,893      $ 1,589,786        $ 55,343,437   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ 487,174       $ —         $ 216,000      $ —        $ —          $ 703,174   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance: collectively evaluated for impairment

   $ 27,432,947       $ 16,971,631       $ 2,511,020       $ 1,573,986      $ 4,560,893      $ 1,589,786        $ 54,640,263   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —         $ —         $ —         $ —        $ —        $ —          $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

 

 

 

 

17


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

     As of September 30, 2010  
     One-to
Four-Family
Owner
Occupied
     One-to
Four-Family
Non-Owner
Occupied
    Mobile
Home
     Secured by
Other
Properties
     Construction
and Land
Development
    Commercial
Business  and
Consumer

Loans
    Unallocated      Total  

Allowance for Credit Losses:

                    

Beginning Balance

   $ 36,960       $ 85,927      $ —         $ 10,160       $ 62,686      $ 6,119      $ 17,865       $ 219,717   

Charge-offs

     —           —          —           —           (81,219     (6,953     —           (88,172

Recoveries

     —           —          —           —           —          2,941        —           2,941   

Provision

     1,997         (11,092        51,356         148,541        3,344        5,854         200,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 38,957       $ 74,835      $ —         $ 61,516       $ 130,008      $ 5,451      $ 23,719       $ 334,486   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ —        $ —         $ 35,880       $ —        $ —        $ —         $ 35,880   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 38,957       $ 74,835      $ —         $ 25,636       $ 130,008      $ 5,451      $ 23,719       $ 298,606   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —         $ —        $ —         $ —         $ —        $ —        $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Financing receivables: Ending balance

   $ 25,763,915       $ 17,281,713      $ 2,684,489       $ 2,392,537       $ 3,770,400      $ 973,329         $ 52,866,383   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ 428,623      $ —         $ 769,985       $ —        $ —           $ 1,198,608   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 25,763,915       $ 16,853,090      $ 2,684,489       $ 1,622,552       $ 3,770,400      $ 973,329         $ 51,667,775   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —         $ —        $ —         $ —         $ —        $ —           $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

      

 

 

 

 

18


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that there continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When assets are classified as either substandard or doubtful, the Company allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, as of July 21, 2011, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Company regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following tables are a summary of the loan portfolio quality indicators by loan class recorded investment as of June 30, 2011 and September 30, 2010:

 

     June 30, 2011  
     One-to
Four-Family
Owner
Occupied
     One-to
Four-Family
Non-Owner
Occupied
     Home
Equity
     Mobile
Home
     Secured by
Other
Properties
     Construction
and Land
Development
 

Grade:

                 

Pass

   $ 25,485,139       $ 16,025,544       $ 1,724,355       $ 2,354,684       $ 1,573,986       $ 4,047,080   

Special Mention

     —           377,099         —           23,309         —           90,000   

Substandard

     150,407         1,056,162         73,046         133,027         —           423,813   

Doubtful

     —           —           —           —           216,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,635,546       $ 17,458,805       $ 1,797,401       $ 2,511,020       $ 1,789,986       $ 4,560,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Secured
Commercial
     Commercial
Leases
     Savings                       

Grade:

                 

Pass

   $ 1,563,379       $ 12,184       $ 14,223            

Special Mention

     —           —           —              

Substandard

     —           —           —              

Doubtful

     —           —           —              
  

 

 

    

 

 

    

 

 

          
   $ 1,630,035       $ 17,983       $ 18,073            
  

 

 

    

 

 

    

 

 

          

 

19


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

 

     September 30, 2010  
     One-to
Four-Family
Owner
Occupied
     One-to
Four-Family
Non-Owner
Occupied
     Home
Equity
     Mobile
Home
     Secured by
Other
Properties
     Construction
and Land
Development
 

Grade:

                 

Pass

   $ 24,059,987       $ 16,471,597       $ 1,703,928       $ 2,684,489       $ 1,622,552       $ 2,880,433   

Special Mention

     —           381,493         —           —           —           90,000   

Substandard

     —           428,623         —           —           769,985         799,967   

Doubtful

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,059,987       $ 17,281,713       $ 1,703,928       $ 2,684,489       $ 2,392,537       $ 3,770,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Secured
Commercial
     Commercial
Leases
     Savings                       

Grade:

                 

Pass

   $ 906,770       $ 40,650       $ 25,909            

Special Mention

     —           —           —              

Substandard

     —           —           —              

Doubtful

     —           —           —              
  

 

 

    

 

 

    

 

 

          
   $ 906,770       $ 40,650       $ 25,909            
  

 

 

    

 

 

    

 

 

          

When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. Loans are charged off when the Company believes that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors of the Company each month.

Loans are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent.

 

20


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

The following tables set forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of June 30, 2011, and September 30, 2010:

 

     June 30, 2011  
     30-59
Days Past
Due
     60-89
Days Past
Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investment >
90 Days and
Accruing
 

Real estate loans:

                    

One-to four-family owner occupied

   $ 117,832       $ 142,584       $ 150,407       $ 410,823       $ 25,224,723       $ 25,635,546       $ —     

One-to four-family non-owner occupied

     134,188         5,327         1,016,678         1,156,193         16,302,612         17,458,805         —     

Home equity

     —           —           73,046         73,046         1,724,355         1,797,401         —     

Mobile home

     37,484         —           133,027         170,511         2,340,509         2,511,020         —     

Secured by other properties

     —           —           216,000         216,000         1,573,986         1,789,986         —     

Construction and land development

     —           —           —           —           4,560,893         4,560,893         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     289,504         147,911         1,589,158         2,026,573         51,727,078         53,753,651         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and consumer loans:

                    

Secured commercial

     —           —           —           —           1,563,379         1,563,379         —     

Commercial leases

     3,272         —           —           3,272         8,912         12,184         —     

Savings accounts

     —           —           —           —           14,223         14,223         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and

consumer loans

     3,272         —           —           3,272         1,586,514         1,589,786         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 292,776       $ 147,911       $ 1,589,158       $ 2,029,845       $ 53,313,592       $ 55,343,437       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2010  
     30-59
Days

Past
Due
     60-89
Days
Past
Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investment >
90 Days and
Accruing
 

Real estate loans:

                    

One-to four-family owner occupied

   $ 12,111       $ —         $ —         $ 12,111       $ 24,047,876       $ 24,059,987       $ —     

One-to four-family non-owner occupied

     622,160         —           113,875         736,035         16,545,678         17,281,713         —     

Home equity

     —           —           —           —           1,703,928         1,703,928         —     

Mobile home

     130,308         —           —           130,308         2,554,181         2,684,489         —     

Secured by other properties

     —           —           —           —           2,392,537         2,392,537         —     

Construction and land development

     —           —           388,067         388,067         3,382,333         3,770,400         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     764,579         —           501,942         1,266,521         50,626,533         51,893,054         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and consumer loans:

                    

Secured commercial

     —           —           —           —           906,770         906,770         —     

Commercial leases

     —           322         —           322         40,328         40,650         —     

Savings accounts

     —           —           —           —           25,909         25,909         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and consumer loans

     —           322         —           322         973,007         973,329         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 764,579       $ 322       $ 501,942       $ 1,266,843       $ 51,599,540       $ 52,866,383       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

The following table is a summary of the recorded investment in non-accrual loans by loan class as of the dates indicated:

 

     June 30,
2011
     September 30,
2010
 

Real estate loans:

     

One-to four-family owner occupied

   $ 150,407       $ —     

One-to four-family non-owner occupied

     1,016,678         113,875   

Home equity

     73,046         —     

Mobile home

     133,026         —     

Secured by other properties

     216,000         —     

Construction and land development

     —           388,067   
  

 

 

    

 

 

 

Total real estate loans

     1,589,157         501,942   
  

 

 

    

 

 

 

Commercial and consumer loans:

     

Secured commercial

     —           —     

Commercial leases

     —           —     

Savings accounts

     —           —     
  

 

 

    

 

 

 

Total commercial and consumer loans

     —           —     
  

 

 

    

 

 

 

Total loans

   $ 1,589,157       $ 501,942   
  

 

 

    

 

 

 

At June 30, 2011 and September 30, 2010, there were no loans 90 days past due and still accruing interest. At June 30, 2011, the Company had twenty-one loans on non-accrual status with foregone interest in the amount of $63,913. At September 30, 2010, the Company had two loans on non-accrual status with foregone interest in the amount of $14,810.

The Company accounts for impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Company classifies a problem asset as impaired, it provides a specific reserve for that portion of the asset that is deemed uncollectible.

The following tables are a summary of impaired loans by class as of June 30, 2011 and September 30, 2010:

 

     June 30, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

   $ —         $ —         $ —         $ —         $ —     

With an allowance recorded:

              

One-to four-family non-owner occupied

   $ 545,593       $ 487,174       $ 80,000       $ 545,593      

Secured by other properties

   $ 223,764       $ 216,000       $ 38,000       $ 223,764       $ 642   

Total

              

One-to four-family non-owner occupied

   $ 545,593       $ 487,174       $ 80,000       $ 545,593      

Secured by other properties

   $ 223,764       $ 216,000       $ 38,000       $ 223,764       $ 642   

 

22


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)

 

 

     September 30, 2010  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

   $ —         $ —         $ —         $ —         $ —     

One-to four-family non-owner occupied

   $ 442,159       $ 428,623       $ —         $ 442,159       $ 35,539   

With an allowance recorded:

              

Secured by other properties

   $ 767,466       $ 769,985       $ 35,880       $ 767,466       $ 32,462   

Total

              

One-to four-family non- owner occupied

   $ 442,159       $ 428,623       $ —         $ 442,159       $ 35,539   

Secured by other properties

   $ 767,466       $ 769,985       $ 35,880       $ 767,466       $ 32,462   

Loans may be periodically modified to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. Generally we do not forgive principal or interest on a loan or modify the interest rate on loans that are below market rates. At June 30, 2011 and September 30, 2010, we had one loan secured by other properties in the amount of $216,000 and $770,000, respectively, that was restructured.

Note 5. Fair Value Measurements

Generally accepted accounting principles (GAAP) define fair value, establish a framework for measuring fair value, a three-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. GAAP clarifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement and based on the Company’s own assumptions about market participants’ assumptions.

 

23


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5. Fair Value Measurements (Continued)

 

The following table presents a summary of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2011 and September 30, 2010:

 

     Level 1      Level 2      Level 3      Total  

June 30, 2011

           

Securities available for sale:

           

Mortgage-backed securities invested in Government Agencies

   $ —         $ 6,353,594       $ —         $ 6,353,594   

September 30, 2010

           

Securities available for sale:

           

Mortgage-backed securities invested in Government Agencies

   $ —         $ 5,510,217       $ —         $ 5,510,217   

The following table presents a summary of financial assets and liabilities measured at fair value on a non-recurring basis at June 30, 2011 and September 30, 2010:

 

     Level 1      Level 2      Level 3      Total      Total
Losses
 

June 30, 2011

              

Impaired loans

   $ —         $ —         $ 585,174       $ 585,174       $ —     

Foreclosed assets

   $ —         $ —         $ 884,000       $ 884,000       $ (114,427

September 30, 2010

              

Impaired loans

   $ —         $ —         $ 734,105       $ 734,105       $ —     

Foreclosed assets

   $ —         $ —         $ 35,000       $ 35,000       $ (81,219

In accordance with generally accepted accounting principles concerning accounting for Loan and Lease Losses, a loss of $114,427 and $81,219, for the nine months ended June 30, 2011 and the year ended September 30, 2010, respectively, was recognized as a charge to the Allowance for Loan and Lease Losses at the time the foreclosed real estate was acquired based on an independent appraisal of the property’s fair value.

The methods and assumptions used to estimate the fair values, including items in the above tables, are included in the disclosures that follow.

Cash and Cash Equivalents (Carried at Cost). The carrying amounts of cash and cash equivalents approximate fair value.

Securities Available for Sale (Carried at Fair Value). Where quoted prices are available in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 would include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, securities available for sale are classified within level 2 and fair value values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Federal Home Loan Bank Stock (Carried at Cost). The carrying amount of Federal Home Loan Bank stock approximates fair value, and considers the limited marketability of such securities.

 

24


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5. Fair Value Measurements (Continued)

 

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value). Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by appraisal or independent valuation, which is then adjusted for the related cost to sell. Impaired loans allocated to the Allowance for Loan and Lease Losses are measured at the lower of cost or fair value on a nonrecurring basis.

Foreclosed Assets (Carried at Lower of Cost or Fair Value Less Estimated Selling Costs). Fair values of foreclosed assets are measured at fair value less cost to sell. The valuation of the fair value measurement follows GAAP. Foreclosed assets are measured on a nonrecurring basis.

Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair value for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.

Federal Home Loan Bank Advances (Carried at Cost). Fair values of FHLB advances are estimated using discounted cash flows analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Accrued Interest Receivable and Payable (Carried at Cost). The carrying amounts of accrued interest approximate fair value.

Off- Balance Sheet Credit-Related Instruments (Disclosures at Cost). Fair values for off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.

 

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Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5. Fair Value Measurements (Continued)

 

The estimated fair values of the Company’s financial instruments were as follows:

 

     June 30, 2011      September 30, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 4,099       $ 4,099       $ 4,849       $ 4,849   

Securities available for sale

     6,354         6,354         5,510         5,510   

Securities held to maturity

     2,637         2,680         3,778         3,824   

Federal Home Loan Bank stock

     612         612         579         579   

Loans receivable, net

     54,743         58,174         52,544         56,555   

Accrued interest receivable

     274         274         272         272   

Financial liabilities:

           

Deposits

     50,822         51,412         49,971         50,805   

Federal Home Loan Bank advances

     10,500         9,837         10,000         9,441   

Accrued interest payable

     43         43         43         43   

Off-Balance sheet financial instruments

     —           —           —           —     

Note 6. Proposed Conversion Merger

On May 12, 2011, the Company announced that it had entered into a definitive agreement with Fullerton Federal Savings Association (“Fullerton Federal”) headquartered in Baltimore, Maryland, to acquire Fullerton Federal in a conversion merger transaction. At June 30, 2011, Fullerton Federal had total assets, loans, deposits and equity of $8,932,000, $2,598,000, $7,750,000 and $1,127,000, respectively. In connection with this transaction, the Company will offer shares of its common stock to certain members of Fullerton Federal and then to the Company’s ESOP (described in Note 2) in a subscription offering. Any stock not purchased in the subscription offering, will then be offered to certain members of Fullerton Federal’s community and to the general public. Following the closing of the offering of the Company’s common stock, Fullerton Federal will merge with and into Fairmount Bank, with Fairmount Bank as the surviving institution. The Company currently expects this transaction to be finalized late in the third quarter or early in the fourth quarter of 2011.

Note 7. Subsequent Events

On July 21, 2011, supervisory responsibility for Fairmount Bank transferred from the Office of Thrift Supervision to the Office of the Comptroller of the Currency. On that date, supervisory responsibility for the Company transferred from the Office of Thrift Supervision to the Board of Governors of the Federal Reserve System.

The Company has evaluated events and transactions subsequent to June 30, 2011, through the date these financials were issued. Based on definitions and requirements of Generally Accepted Accounting Principles for “Subsequent Events”, the Company has not identified any events other than the conversion merger disclosed in Note 6 that require adjustment to or disclosure in the financial statements.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects”, “believes”, “anticipates”, “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed beginning on page 13 of the Company’s prospectus dated April 15, 2010, and the Company’s preliminary prospectus dated June 9, 2011, under the sections titled “Risk Factors”. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the nine month period ended June 30, 2011, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s audited consolidated financial statements and related footnotes for the year ended September 30, 2010 included in the Company’s Annual Report on 10-K.

Comparison of Financial Condition at June 30, 2011 and September 30, 2010

Total assets increased by $1,846,000, or 2.60%, to $72,798,000 at June 30, 2011, from $70,952,000 at September 30, 2010. The increase was primarily the result of an increase of $2,199,000 in net loans and an increase of $849,000 in foreclosed real estate, funded by a decrease of $750,000 in cash and cash equivalents and an increase of $851,000 in deposits and an increase of $500,000 in Federal Home Loan Bank advances.

Cash and cash equivalents decreased to $4,099,000 at June 30, 2011, from $4,849,000 at September 30, 2010. This represented a decrease of $750,000, or 15.47%, which was due to loan funding during the nine months ended June 30, 2011.

Investment securities decreased by $297,000, or 3.20%, from $9,288,000 at September 30, 2010, to $8,991,000, at June 30, 2011. Our held to maturity portion of the portfolio, at amortized cost, was $2,637,000, and our available-for-sale portion of the portfolio, at fair value, was $6,354,000.

Total net loans increased from $52,544,000 at September 30, 2010, to $54,743,000 at June 30, 2011. This represented an increase of $2,199,000, or 4.19%. The one-to four-family owner occupied real estate loans increased $1,576,000, or 6.55%, to $25,636,000 at June 30, 2011, from $24,060,000 at September 30, 2010. Construction and land development loans increased $790,000, or 20.95%, to $4,561,000 at June 30, 2011, from $3,770,000 at September 30, 2010. Secured commercial loans increased $657,000, or 72.44%, to $1,563,000 at June 30, 2011, from $907,000 at September 30, 2010. Loans secured by other properties decreased by $603,000, or 25.20%, from $2,393,000 at September 30, 2010 to $1,790,000 at June 30, 2011.

Total liabilities at June 30, 2011, were $61,559,000, an increase of $1,438,000, or 2.39%, from $60,121,000 at September 30, 2010. The increase was due primarily to an increase in deposits of $851,000, or 1.70%, from September 30, 2010 to June 30, 2011, and an increase in Federal Home Loan Bank advances of $500,000, or 5.00%.

 

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Deposits increased from $49,971,000 at September 30, 2010, to $50,822,000 at June 30, 2011. The increase of $851,000, or 1.70%, in total deposits was primarily the result of an increase in certificates of deposit. Certificates of deposit increased from $35,707,000 at September 30, 2010, to $36,406,000 at June 30, 2011. This represented an increase of $699,000, or 1.96%, from September 30, 2010, to June 30, 2011.

Total equity was $11,239,000, or 15.44%, of total assets at June 30, 2011, compared to $10,831,000, or 15.27% of total assets at September 30, 2010. The primary reason for the $408,000, or 3.77%, increase in equity was $410,000 in net income reported during the nine months ended June 30, 2011. Accumulated other comprehensive income decreased by $2,000 from a gain of $132,000 at September 30, 2010, to a gain of $130,000 at June 30, 2011. The change in accumulated other comprehensive income was primarily due to the effects of interest rate fluctuations on the Company’s available-for-sale securities portfolio.

Results of Operations for the Three Months Ended June 30, 2011 and June 30, 2010

Overview. Net income decreased by $6,000, or 3.85%, to $150,000 for the three months ended June 30, 2011, from $156,000 for the three months ended June 30, 2010. Net interest income increased by $73,000, or 11.95%, to $684,000 for the three months ended June 30, 2011, from $611,000 for the three months ended June 30, 2010. Provision for loan and lease losses increased by $155,000, or 344.44%, to $200,000 for the three months ended June 30, 2011, from $45,000 for the three months ended June 30, 2010. Non-interest income increased $117,000, or 365.63%, to $149,000 for the three months ended June 30, 2011, from $32,000 for the three months ended June 30, 2010. Non-interest expense increased $50,000, or 13.66%, to $416,000 for the three months ended June 30, 2011, from $366,000 for the three months ended June 30, 2010.

Net Interest Income. Net interest income increased $73,000, or 11.95%, to $684,000 for the three months ended June 30, 2011, from $611,000 for the three months ended June 30, 2010. The increase primarily resulted from the combined effects of an increase of $17,000, or 1.82%, in interest and dividend income to $952,000 for the three months ended June 30, 2011, from $935,000 for the three months ended June 30, 2010, and a decrease of $56,000, or 17.28%, in interest expense to $268,000 for the three months ended June 30, 2011, from $324,000 for the three months ended June 30, 2010. The increase in interest and dividend income was the result of increases in the average balances of loans and investments partially offset by a decrease in the average rate earned on loans and investments. Interest expense decreased as a result of the decrease in average rates paid on deposits and borrowings partially offset by increases in the overall balances in deposits.

Provision for Loan and Lease Losses. The provision for loan and lease losses increased $155,000 to $200,000 for the nine months ended June 30, 2011, from $45,000 for the three months ended June 30, 2010. The primary factors that contributed to the increase in the provision for loan and lease losses was an increase of $80,000 in the specific allowance for our impaired loans and the uncertainty regarding the housing market. The Company recorded charge-offs of $114,000 during the three months ended June 30, 2011. The Company recorded charge-offs of $7,000 during the three months ended June 30, 2010.

Non-Interest Income. Non-interest income was $149,000 for the three months ended June 30, 2011, which was an increase of $117,000, or 365.63%, from $32,000 for the three months ended June 30, 2010. The primary reason for the increase was that the Company sold its previous headquarters location and recorded a gain of $127,000 on the sale.

Non-Interest Expense. Non-interest expense increased by $50,000, or 13.66%, to $416,000 for the three months ended June 30, 2011, from $366,000 for the three months ended June 30, 2010. The increase was due to increases in salaries, fees and employment expenses, increases in professional fees and increases in stationery, printing and supplies. Salaries, fees and employment expenses increased by $24,000, or 11.16%, from $215,000 for the three months ended June 30, 2010, to $239,000 for the three months ended June 30, 2011, primarily as a result of normal pay scale adjustments. Professional fees increased $13,000, or 65.00% from $20,000 for the three months ended June 30, 2010, to $33,000 for the three months ended June 2011. Stationery, printing and supplies increased $5,000, or 100.00% from $5,000 for the three months ended June 30, 2010 to $10,000 for the three months ended June 30, 2011. The increases in professional fees and stationery, printing and supplies were the result of the increased reporting requirements associated with the Company’s new public company status.

 

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Income Taxes. The provision for income taxes decreased by $9,000, or 11.84%, to $67,000 for the three months ended June 30, 2011, from $76,000 for the three months ended June 30, 2010. The Company changed its accounting method for taxes from cash basis to accrual basis for the fiscal year ended September 30, 2010, and therefore anticipates a decrease in the current provision for income taxes in the fiscal year ending September 30, 2011.

Total Comprehensive Income. Total comprehensive income for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $187,000 and $214,000 for the three months ended June 30, 2011 and 2010, respectively. The decrease of $27,000, or 12.62%, in total comprehensive income resulted from an decrease of $6,000 in net income and a decrease of $21,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

Results of Operations for the Nine Months Ended June 30, 2011 and June 30, 2010

Overview. Net income increased by $4,000, or 0.99%, to $410,000 for the nine months ended June 30, 2011, from $406,000 for the nine months ended June 30, 2010. Net interest income increased by $248,000, or 14.16%, to $1,999,000 for the nine months ended June 30, 2011, from $1,751,000 for the nine months ended June 30, 2010. Provision for loan and lease losses increased by $250,000, or 238.10%, to $355,000 for the nine months ended June 30, 2011, from $105,000 for the nine months ended June 30, 2010. Non-interest income increased $96,000, or 90.57%, from $106,000 for the nine months ended June 30, 2010, to $202,000 for the nine months ended June 30, 2011. Non-interest expense increased by $120,000, or 10.82%, to $1,229,000 for the nine months ended June 30, 2011, from $1,109,000 for the nine months ended June 30, 2010.

Net Interest Income. Net interest income increased by $248,000, or 14.16%, to $1,999,000 for the nine months ended June 30, 2011, from $1,751,000 for the nine months ended June 30, 2010. The increase primarily resulted from the combined effects of an increase of $74,000, or 2.67%, in interest and dividend income to $2,843,000 for the nine months ended June 30, 2011, from $2,769,000 for the nine months ended June 30, 2010, and a decrease of $174,000, or 17.09%, in interest expense to $844,000 for the nine months ended June 30, 2011, from $1,018,000 for the nine months ended June 30, 2010. The increase in interest and dividend income was the result of increases in the average balances of loans and investments partially offset by a decrease in the average rate earned on loans and investments. Interest expense decreased as a result of the decrease in average rates paid on deposits and borrowings partially offset by increases in the overall balances in deposits.

Provision for Loan and Lease Losses. The provision for loan and lease losses increased $250,000, or 238.10%, to $355,000 for the nine months ended June 30, 2011, from $105,000 for the nine months ended June 30, 2010. The primary factors that contributed to the increase in the provision for loan and lease losses were the increase in substandard rated loans from September 2010, an increase of $80,000 in the specific allowance for our impaired loans and the uncertainty regarding the housing market. The Company recorded charge-offs of $114,000 during the nine months ended June 30, 2011. The Company recorded net charge-offs of $5,000 for the nine months ended June 30, 2010.

Non-Interest Income. Non-interest income was $202,000 for the nine months ended June 30, 2011, which was an increase of $96,000, or 90.57%, from $106,000 for the nine months ended June 30, 2010. The primary reason for the increase was that the Company sold its previous headquarters location and recorded a gain of $127,000 on the sale. Service charges and fees decreased by $27,000, or 29.35%, from $92,000 for the nine months ended June 30, 2010, to $65,000 at June 30, 2011. This decrease in service fees and charges was primarily due to a decrease in loan settlements during the comparable nine month periods.

 

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Non-Interest Expense. Non-interest expense increased by $120,000, or 10.82%, to $1,229,000 for the nine months ended June 30, 2011, from $1,109,000 for the nine months ended June 30, 2010. The increase was due to increases in salaries, fees, and employment expenses, increases in professional fees, partially offset by decreases in FDIC insurance premiums. Salaries, fees and employment expenses increased by $70,000, or 10.82%, from $647,000 for the nine months ended June 30, 2010, to $717,000 for the nine months ended June 30, 2011, primarily as a result of normal pay scale adjustments. Professional fees increased by $36,000, or 61.02%, from $59,000 for the nine months ended June 30, 2010, to $95,000 for the nine months ended June 30, 2011. This increase was the result of the increased reporting requirements associated with the Company’s new public company status. FDIC insurance premiums decreased by $14,000, or 20.90% from $67,000 for the nine months ended June 30, 2010, to $53,000 for the nine months June 30, 2011. This decrease was the result of the recording of additional FDIC expenses during the nine months ended June 30, 2010, after the depletion of the one-time assessment credit in the quarter ending September 2009.

Income Taxes. The provision for income taxes decreased by $30,000, or 12.66%, to $207,000 for the nine months ended June 30, 2011, from $237,000 for the nine months ended June 30, 2010. The Company changed its accounting method for taxes from cash basis to accrual basis for the fiscal year ended September 30, 2010 and therefore anticipates a decrease in the current provision for income taxes.

Total Comprehensive Income. Total comprehensive income for the nine months ended June 30, 2011, and June 30, 2010 consisted of net income and the change in unrealized gains on investment securities available-for-sale, net of tax. Total comprehensive income was $408,000 and $479,000 for the nine months ended June 30, 2011 and 2010, respectively. The decrease of $71,000, or 14.82%, in total comprehensive income resulted from an increase in net income of $4,000 offset by a decrease in adjustments to other comprehensive income of $75,000 from a change in unrealized gains on investment securities available-for-sale.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments, and maturities of securities. In addition, the Company has the ability to borrow funds from the Federal Home Loan Bank of Atlanta, and it has credit availability with a correspondent bank. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Board of Directors is responsible for establishing and monitoring the Company’s liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of its customers as well as unanticipated contingencies. The Company believes that it had enough sources of liquidity to satisfy its short and long-term liquidity needs as of June 30, 2011.

The Company regularly monitors and adjusts its investments in liquid assets based upon its assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short and intermediate term assets.

The Company’s most liquid assets are cash and cash equivalents, which include federal funds sold and interest-bearing deposits in other banks. The levels of these assets are dependent on its operating, financing, lending and investing activities during any given period. At June 30, 2011, cash and cash-equivalents totaled $4,099,000. Securities classified as available-for-sale, totaling $6,354,000 at June 30, 2011, provide additional sources of liquidity. In addition, at June 30, 2011, the Company had the ability to borrow a total of approximately $21,800,000 from the Federal Home Loan Bank of Atlanta. At June 30, 2011, the Company had $10,500,000 in Federal Home Loan Bank advances outstanding. The Company also had a credit availability of $1,500,000 at June 30, 2011, with a correspondent bank. There were no borrowings outstanding at June 30, 2011 on this facility.

 

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At June 30, 2011, the Company had $150,000 in mortgage loan commitments outstanding. In addition, at that date, the Company had $4,334,000 in unused lines of credit to borrowers and standby letters of credit. Certificates of deposit due within one year of June 30, 2011, totaled $25,362,000, or 49.90% of total deposits. If these deposits do not remain with the Company, the Company will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, the Company may be required to pay higher rates on such deposits or borrowings than it currently pays on certificates of deposit on or before June 30, 2012. The Company believes, however, based on past experience that a significant portion of such deposits will remain with it. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of June 30, 2011, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tier 1 core, tier 1 risk-based, and total risk-based capital ratios of 12.84%, 22.82% and 23.94%, respectively. The regulatory requirements as of that date were 4.0%, 4.0% and 8.0% respectively.

The Company is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior regulatory approval but with prior regulatory notice, cannot exceed net income for that year to date plus retained net income for the preceding two calendar years. At June 30, 2011, the Company had liquid assets of $1,327,000.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Bank’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Bank’s financial condition and results of operations.

Item 1A. Risk Factors

Not applicable.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved)

Not applicable.

Item 5. Other Information

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be transferred to the Office of the Comptroller of the Currency, which on July 21, 2011 also regulates national banks. As of that date, savings and loan holding companies are regulated by the Board of Governors of the Federal Reserve System. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan, holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in Fairmount Bank that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

Item 6. Exhibits

 

Exhibit 31.1    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 31.2    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 32.0    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Exhibit 101    Interactive Data File (XBRL) furnished herewith

 

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SIGNATURES

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

 

  FAIRMOUNT BANCORP, INC.
 

/s/ Joseph M. Solomon

Date: August 15, 2011   Joseph M. Solomon
  President and Chief Executive Officer

 

 

/s/ Jodi L. Beal

Date: August 15, 2011   Jodi L. Beal
  Vice President and Chief Financial Officer

 

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