PINX:FMTB Fairmount Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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

For the quarterly period ended March 31, 2012

 

¨ 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   ¨  (Do not check if a smaller reporting company)    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 May 14, 2012, the number of shares of common stock outstanding was 500,314.

 

 

 


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 March 31, 2012 (Unaudited) and September 30, 2011

     3   

Consolidated Statements of Income for the Three and Six Months Ended March  31, 2012 and 2011 (Unaudited)

     4   

Consolidated Statements of Comprehensive Income for the Six Months Ended March  31, 2012 and 2011 (Unaudited)

     5   

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended March  31, 2012 and 2011 (Unaudited)

     6   

Consolidated Statements of Cash Flows for the Six Months Ended March  31, 2012 and 2011 (Unaudited)

     7   

Notes to Consolidated Financial Statements (Unaudited)

     8   

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

     30   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4 – Controls and Procedures

     34   

Part II – Other Information

  

Item 1 – Legal Proceedings

     34   

Item 1A – Risk Factors

     35   

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

     35   

Item 3 – Defaults Upon Senior Securities

     35   

Item 4 – Mine Safety Disclosures

     35   

Item 5 – Other Information

     35   

Item 6 – Exhibits

     35   

Signatures

     36   

Exhibit 31.1

     35   

Exhibit 31.2

     36   

Exhibit 32.0

     37   

 

2


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

March 31, 2012 and September 30, 2011

 

     March 31,     September 30,  
     2012     2011  
     (Unaudited)        
Assets     

Cash and due from banks

   $ 861,376      $ 618,683   

Interest-bearing deposits in other banks

     1,093,501        1,417,777   

Federal funds sold

     4,752,190        4,152,566   
  

 

 

   

 

 

 

Cash and cash equivalents

     6,707,067        6,189,026   
  

 

 

   

 

 

 

Certificates of deposit

     1,320,067        —     

Securities available for sale, at fair value

     6,773,446        6,168,351   

Securities held to maturity, at amortized cost

     5,134,372        1,636,563   

Federal Home Loan Bank stock, at cost

     602,300        604,200   

Loans, net of allowances for loan and lease losses of $657,474 at March 31, 2012 and $665,289 at September 30, 2011

     54,421,120        53,758,286   

Accrued interest receivable

     269,759        246,588   

Premises and equipment, net

     3,277,735        2,775,306   

Foreclosed assets, net

     884,000        884,000   

Prepaid expenses

     239,673        302,236   

Cash surrender value of life insurance

     68,809        68,809   

Income taxes receivable

     125,217        —     

Deferred income tax asset

     137,486        110,415   

Other assets

     41,741        43,059   
  

 

 

   

 

 

 

Total assets

   $ 80,002,792      $ 72,786,839   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Noninterest-bearing deposits

   $ 867,302      $ 626,354   

Interest-bearing demand deposits

     4,162,291        3,953,516   

Savings deposits

     14,608,582        10,429,075   

Certificates of deposit

     37,237,941        35,938,465   
  

 

 

   

 

 

 

Total deposits

     56,876,116        50,947,410   

Federal Home Loan Bank advances

     10,000,000        10,000,000   

Accounts payable

     —          55,024   

Income taxes payable

     —          177,084   

Accrued interest payable

     42,010        42,448   

Deferred compensation liability

     15,950        15,950   

Other liabilities

     36,425        71,586   
  

 

 

   

 

 

 

Total liabilities

     66,970,501        61,309,502   
  

 

 

   

 

 

 

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 500,314 shares at March 31, 2012 and 444,038 shares at September 30, 2011

     5,003        4,440   

Additional paid in capital

     4,226,230        3,774,574   

Retained earnings

     8,973,730        7,728,798   

Unearned common stock held by:

    

Employee Stock Ownership Plan

     (293,478     (230,000

Recognition and Retention Plan

     (37,168     —     

Accumulated other comprehensive income

     157,974        199,525   
  

 

 

   

 

 

 

Total stockholders’ equity

     13,032,291        11,477,337   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 80,002,792      $ 72,786,839   
  

 

 

   

 

 

 

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      Six Months Ended  
     March 31,      March 31,  
     2012      2011      2012      2011  

Interest and dividend income:

           

Interest on loans

   $ 846,655       $ 862,707       $ 1,711,083         1,693,236   

Interest and dividends on investments

     107,353         103,354         193,747         197,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     954,008         966,061         1,904,830         1,891,046   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     162,159         208,332         347,033         436,986   

Interest on borrowings

     68,671         69,467         138,091         139,690   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     230,830         277,799         485,124         576,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     723,178         688,262         1,419,706         1,314,370   

Provision for loan and lease losses

     80,000         100,000         180,000         155,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     643,178         588,262         1,239,706         1,159,370   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income:

           

Service fees on deposit accounts

     1,157         1,110         2,802         2,381   

Other service charges, commissions and fees

     23,837         23,983         39,317         48,497   

Gain on disposal of assets

     3,841         —           4,737         —     

Other non-interest income

     1,741         957         3,026         1,938   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     30,576         26,050         49,882         52,816   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense:

           

Salaries, fees and employment

     254,992         223,061         549,527         477,711   

Premises and equipment

     49,401         44,953         98,310         87,472   

Professional fees

     70,283         36,799         101,046         61,634   

Data processing

     32,485         22,651         58,490         42,603   

FDIC insurance premium

     14,147         18,021         31,025         33,385   

Supervisory examination

     8,671         9,662         16,703         19,037   

Insurance and bond premiums

     5,756         5,430         12,747         10,647   

Stationery, printing and supplies

     9,808         11,262         22,564         15,830   

Other operating expenses

     35,347         34,111         68,318         64,303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     480,890         405,950         958,730         812,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     192,864         208,362         330,858         399,564   

Income taxes

     60,000         70,000         108,000         140,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before extraordinary item

     132,864         138,362         222,858         259,564   

Extraordinary item, gain on business combination

     —           —           1,022,074         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 132,864       $ 138,362       $ 1,244,932       $ 259,564   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and dilutive earnings per common share:

           

Net income before extraordinary item, basic

   $ 0.28       $ 0.33       $ 0.48       $ 0.63   

Extraordinary item, gain on business combination, basic

     —           —           2.19         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income, basic

   $ 0.28       $ 0.33       $ 2.67       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     470,176         415,067         467,222         415,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income before extraordinary item, dilutive

   $ 0.28       $ 0.33       $ 0.47       $ 0.63   

Extraordinary item, gain on business combination, dilutive

     —           —           2.17         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income, dilutive

   $ 0.28       $ 0.33       $ 2.64       $ 0.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive weighted average shares outstanding

     472,099         415,067         469,955         415,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 Comprehensive Income

For the Six Months Ended March 31, 2012 and 2011

 

     For the Six Months Ended
March 31,
 
     2012     2011  

Net income

   $ 1,244,932      $ 259,564   

Other comprehensive income, net of tax:

    

Change in fair value of securities available for sale

     (41,711     (39,144

Amortization of unrealized loss for investment securities transferred to held to maturity from available for sale, net of $104 tax

     160        160   
  

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (41,551     (38,984
  

 

 

   

 

 

 

Comprehensive income

   $ 1,203,381      $ 220,580   
  

 

 

   

 

 

 

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 Changes in Stockholders’ Equity

For the Six Months Ended March 31, 2012 and 2011

(Unaudited)

 

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

Balance, September 30, 2010

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

Net income

     —           —           259,564         —          —          —          259,564   

Other comprehensive income (loss)

     —           —           —           —          —          (38,984     (38,984
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011 (unaudited)

   $ 4,440       $ 3,744,182       $ 7,499,553       $ (289,710   $ —        $ 93,586      $ 11,052,051   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 4,440       $ 3,774,574       $ 7,728,798       $ (230,000     $ 199,525      $ 11,477,337   

Net income

     —           —           1,244,932         —          —          —          1,244,932   

Other comprehensive Income (loss)

     —           —           —           —          —          (41,551     (41,551

Issuance of common stock

     563         451,656         —           —          —          —          452,219   

Acquisition of unearned ESOP shares

     —           —           —           (63,478     —          —          (63,478

Acquisition of unearned RRP shares

     —           —           —           —          (37,168     —          (37,168
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012 (unaudited)

   $ 5,003       $ 4,226,230       $ 8,973,730       $ (293,478   $ (37,168   $ 157,974      $ 13,032,291   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Six Months Ended March 31, 2012 and 2011

(Unaudited)

 

     For the Six Months Ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 1,244,932      $ 259,564   

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

    

Gain on business combination

     (1,022,074     —     

Depreciation and amortization

     61,936        56,889   

Amortization and accretion of securities

     23,955        15,231   

Provision for loan and lease losses

     180,000        155,000   

Other (gains) and losses, net

     (4,737     —     

(Increase) decrease in accrued interest receivable

     (23,171     (2,009

(Increase) decrease in prepaid expenses

     62,563        17,359   

(Increase) decrease in income taxes receivable

     (125,217     118,862   

(Increase) decrease in other assets

     175,897        —     

Increase (decrease) in accounts payable

     (55,024     —     

Increase (decrease) in accrued interest payable

     (438     (837

Increase (decrease) in income taxes payable

     (177,084     4,774   

Increase (decrease) in other liabilities

     (112,588     (22,327
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     228,950        584,463   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Cash acquired in business combination, net of merger expenses

     4,113,398        —     

Proceeds from sales of available for sale securities

     189,692        —     

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

     871,389        511,315   

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

     1,000,000        —     

Purchases of available for sale securities

     (1,027,656     (505,746

Purchases of held to maturity securities

     (4,499,000     (866,383

(Purchases) maturities of certificates of deposit

     (1,221,938     —     

(Purchases) redemptions of Federal Home Loan Bank stock

     17,200        (48,500

Net (increase) decrease in loans

     1,571,878        (3,385,635

Proceeds from disposal of foreclosed assets

     —          17,514   

Proceeds from disposal of equipment

     342,325        —     

(Purchases) disposals of premises and equipment

     (15,346     (25,621
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     1,341,942        (4,303,056
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (1,404,424     1,266,499   

Net increase (decrease) in borrowings

     —          500,000   

Proceeds from issuance of common stock

     351,573        —     
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     (1,052,851     1,766,499   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     518,041        (1,952,094

Cash and cash equivalents, beginning balance

     6,189,026        4,849,511   
  

 

 

   

 

 

 

Cash and cash equivalents, ending balance

   $ 6,707,067      $ 2,897,417   
  

 

 

   

 

 

 

Supplemental disclosure of cash flows information:

    

Cash paid during the year for:

    

Interest

   $ 485,562      $ 577,513   

Income taxes

     410,301        16,364   

Supplemental schedule of noncash investing and financing activities:

    

Change in unrealized gain on securities available for sale - net of tax effect of $27,335 and $28,501, respectively

   $ (41,551   $ (38,984

Foreclosed assets acquired in settlement of loans

     —          17,514   

On October 31, 2011, the Company loaned $63,478 to the Employee Stock Ownership Plan, which was used to acquire 4,502 shares of common stock. The loan is secured by the shares purchased and is shown as Unearned ESOP shares in the consolidated balance sheets. See Note 2 for assets acquired and liabilities assumed in business combination.

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

 

7


Table of Contents

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

Fairmount Bancorp, Inc., a Maryland corporation (the “Company”) was incorporated on November 30, 2009, to serve as the holding company for Fairmount Bank (the “Bank”), a wholly owned subsidiary of the Company. 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 become 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. Approximately 50% of the net proceeds of the offering, or $1,900,000, were contributed by the Company to the Bank in return for 100% of the issued and outstanding shares of common stock of the Bank. 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.

On October 12, 2011, the Company completed the acquisition of Fullerton Federal Savings Association (“Fullerton”) in a conversion merger transaction. In connection with the acquisition and pursuant to the terms of the Agreement and Plan of Conversion Merger and the related Plan of Conversion Merger, the Company issued and sold 56,276 shares of common stock at a price of $14.10 per share, through which the Company received proceeds of approximately $452,000, net of offering expenses of $341,000. The shares were sold in a subscription offering to depositors of Fullerton and to the Company’s Employee Stock Ownership Plan and in a community offering to the Company’s Recognition and Retention Plan (the “RRP”) and to the general public. The amount of common stock offered for sale was based on an independent valuation of Fullerton. Upon completion of the conversion merger, Fullerton ceased to exist, and Fairmount Bank become the holding company for Fullerton’s wholly owned subsidiary, Real Estate Holdings Business, Inc. (a Maryland Corporation).

In accordance with the Office of Comptroller of the Currency (the “OCC”) regulations, upon the completion of each of the conversions, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders of the Bank and Fullerton 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 three and six months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending September 30, 2012, 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, 2011. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

 

8


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies (Continued)

 

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 two offices in 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. The accounting policies of the Bank conform to accounting principles generally accepted in the United States of America and general practices within the banking industry.

Principles of Consolidation

The consolidated financial statements include the accounts of Fairmount Bancorp, Inc., its wholly owned subsidiary Fairmount Bank and Real Estate Holdings Business, Inc., the wholly owned subsidiary of Fairmount Bank. Material intercompany accounts and transactions have been eliminated in consolidation.

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 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.

 

9


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies (Continued)

 

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 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 since 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.

In September 2011, the FASB issued ASU 2011-08, “Intangible-Goodwill and Other (Topic 350)-Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first access qualitative factors related to goodwill to determine whether it is more likely that not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more that 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 will have on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single

 

10


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies (Continued)

 

continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its 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

Earnings per common share on income before extraordinary income is computed by dividing income before extraordinary item by the weighted average number of common shares outstanding during the period and the earnings per share on the extraordinary items is computed by dividing the extraordinary item by the weighted average number of common shares outstanding during the period. Weighted average shares excludes unallocated ESOP shares and unearned RRP shares. Basic earnings per share excludes dilution and is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Dilutive earnings per share reflects the potential dilution that could occur if stock options were exercised and is computed by dividing net income by the dilutive weighted average number of common shares outstanding during the period. The Company had no dilutive common shares for the three and six month periods ending March 31, 2011.

Note 2. Business Combinations

On October 12, 2011, the Company completed an acquisition of Fullerton, a federally chartered mutual savings association with one office located at 7527 Belair Road in Baltimore, Maryland. Fullerton converted from the mutual to the stock form of organization and immediately issued all of its capital stock to the Company and merged with and into the Bank. In connection with the conversion merger, the Company issued and sold 56,276 shares of its common stock at a price of $14.10 per share, resulting in proceeds of approximately $452,000, net of offering expenses of approximately $341,000.

The Company recorded the following assets and liabilities as of October 12, 2011. These amounts represent the carrying value of Fullerton’s assets and liabilities adjusted to reflect the fair value at the date of the acquisition. The discounts and premiums resulting from the fair value adjustments will be accreted and amortized on a level yield basis over the anticipated lives of the underlying financial assets or liabilities. This amortization of premiums and discounts is not expected to have a material impact on the Company’s results of operations on future periods.

 

     Assets Acquired  

Assets

  

Cash and cash equivalents

   $ 4,224,279   

Securities available for sale

     827,139   

Loans receivable

     2,414,712   

Federal Home Loan Bank stock, at cost

     15,300   

Premises and equipment

     887,503   

Other assets

     174,579   
  

 

 

 

Total assets acquired

   $ 8,543,512   
  

 

 

 
     Liabilities Assumed  

Liabilities

  

Deposits

   $ 7,333,130   

Other liabilities

     77,427   
  

 

 

 

Total liabilities assumed

   $ 7,410,557   
  

 

 

 

The excess fair value of assets acquired over liabilities assumed, less transaction costs incurred, resulted in $1,022,074 in negative goodwill. This negative goodwill is reflected as an extraordinary item in the Company’s consolidated financial statements.

 

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Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 2. Business Combinations (Continued)

 

The primary purpose of the Fullerton acquisition was to expand the Bank’s deposit market share. The primary reasons for the stock offering by the Company were to:

 

   

provide a larger capital cushion for asset growth, which will primarily be realized through existing operations;

 

   

support growth and diversification of operations, products and services to transition us into a full-service community bank;

 

   

improve the Company’s overall capital and competitive position;

 

   

increase the Bank’s loans to one borrower limit to allow the Bank to make larger loans, including larger commercial real estate loans; and

 

   

provide additional financial resources to pursue branch expansion and possible future acquisition opportunities.

Because the individual assets and liabilities of Fullerton have been absorbed into Fairmount operations, revenue and earnings of Fullerton since the acquisition date are not available and supplemental pro forma information is not able to be provided.

Note 3. Securities

The amortized cost and estimated market value of securities classified as available for sale and held to maturity at March 31, 2012, and September 30, 2011 are as follows:

 

     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities Available for Sale

          

Residential Mortgage-Backed Securities

   $ 6,508,494       $ 264,952       $ —        $ 6,773,446   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities Held to Maturity

          

U.S. Government and Federal Agency Obligations

   $ 3,499,057       $ 1,734       $ (8,657   $ 3,492,134   

State and Municipal Securities

     1,635,315         129,920         —          1,765,235   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 5,134,372       $ 131,654       $ (8,657   $ 5,257,369   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Securities Available for Sale

           

Residential Mortgage-Backed Securities

   $ 5,834,512       $ 333,839       $ —         $ 6,168,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

           

State and Municipal Securities

   $ 1,636,563       $ 116,853       $ —         $ 1,753,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 3. Securities (Continued)

 

The amortized cost and estimated market value of securities at March 31, 2012 and September 30, 2011, 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.

 

     March 31, 2012  
     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

     160,776         170,313         3,117,560         3,190,212   

Due after ten years

     6,347,718         6,603,133         2,016,812         2,067,157   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,508,494       $ 6,773,446       $ 5,134,372       $ 5,257,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 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

     168,796         180,628         647,812         699,870   

Due after ten years

     5,665,716         5,987,723         988,751         1,053,546   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,834,512       $ 6,168,351       $ 1,636,563       $ 1,753,416   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from the sale of available for sale securities totaled $189,692, realizing gross gains of $896 for the six months ended March 31, 2012. There were no sales of investment securities for the year ended September 30, 2011.

There were no securities at September 30, 2011 with gross unrealized losses. Securities with gross unrealized losses at March 31, 2012 aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     March 31, 2012  
     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

                 

Residential Mortgage-Backed Securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

                 

U.S. Government and Federal Agency Obligations

   $ 2,491,342       $ 8,657       $ —         $ —         $ 2,491,342       $ 8,657   

State and Municipal Securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,491,342       $ 8,657       $ —         $ —         $ 2,491,342       $ 8,657   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, the Company held three investments with gross unrealized losses totaling ($8,657). At September 30, 2011, the Company held no investments with gross unrealized losses. 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

 

13


Table of Contents

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 3. Securities (Continued)

 

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 an 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.

Market Risks

Investments of the Company are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the financial statements. In addition, recent economic uncertainty and market events have led to unprecedented volatility in currency, commodity, credit and equity markets, culminating in failures of some banking and financial service firms and government intervention to solidify others. These recent events underscore the level of investment risk associated with the current economic environment, and accordingly, the level of risk in the Company’s investments.

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.

 

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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)

 

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.

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.

 

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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 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 Comptroller of the Currency, 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.

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 February 2012, the Company charged off the principal balance of a mobile home loan. The loan balance was charged against the mobile home loan reserve account, which was established when the loan was originated. The loss on this mobile home loan 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 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.

 

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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 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.

 

     As of March 31, 2012  
     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

   $ 64,547      $ 382,023      $ 52,719       $ 25,702      $ 91,135      $ 3,907      $ 45,256       $ 665,289   

Charge-offs

     (17,815     (170,000     —           —          —          —          —           (187,815

Recoveries

     —          —          —           —          —          —          —           —     

Provision

     89,568        92,483        11,169         (126     (15,322     (488     2,716         180,000   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 136,300      $ 304,506      $ 63,888       $ 25,576      $ 75,813      $ 3,419      $ 47,972       $ 657,474   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 51,645      $ 35,768      $ 3,050       $ —        $ —        $ —        $ —         $ 90,463   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 84,655      $ 268,738      $ 60,838       $ 25,576      $ 75,813      $ 3,419      $ 47,972       $ 567,011   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing receivables: Ending balance

   $ 28,200,154      $ 18,026,065      $ 2,194,414       $ 1,775,491      $ 3,522,120      $ 1,367,681         $ 55,085,925   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ 493,058      $ 1,559,524      $ 125,210       $ 216,000      $ —        $ —           $ 2,393,792   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 27,308,147      $ 16,466,541      $ 2,069,204       $ 1,559,491      $ 3,522,120      $ 1,367,681         $ 52,293,184   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ 398,949      $ —        $ —         $ —        $ —        $ —           $ 398,949   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

 

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, 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

     —           (9,770     —           (114,427     —          —          —           (124,197

Recoveries

     —           —          —           —          —          —          —           —     

Provision

     25,590         316,958        52,719         78,613        (38,873     (1,544     21,537         455,000   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 64,547       $ 382,023      $ 52,719       $ 25,702      $ 91,135      $ 3,907      $ 45,256       $ 665,289   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ 152,000      $ 11,142       $ —        $ —        $ —        $ —         $ 163,142   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 64,547       $ 230,023      $ 41,577       $ 25,702      $ 91,135      $ 3,907      $ 45,256       $ 502,147   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financing receivables: Ending balance

   $ 26,731,123       $ 17,516,270      $ 2,429,452       $ 1,783,214      $ 4,495,930      $ 1,507,891         $ 54,463,880   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ —         $ 829,477      $ 51,313       $ 216,000      $ —        $ —           $ 1,096,790   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 26,731,123       $ 16,686,793      $ 2,378,139       $ 1,567,214      $ 4,495,930      $ 1,507,891         $ 53,367,090   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

      

 

 

 

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 their 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, 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 March 31, 2012 and September 30, 2011:

 

     March 31, 2012  
    

One-to

Four-Family

    

One-to

Four-Family

                   Secured by      Construction  
     Owner      Non-Owner      Home      Mobile      Other      and Land  
     Occupied      Occupied      Equity      Home      Properties      Development  

Grade:

                 

Pass

   $ 25,458,115       $ 16,094,101       $ 1,850,032       $ 2,040,828       $ 1,559,491       $ 2,998,915   

Special Mention

     —           —           —           —           —           —     

Substandard

     892,007         1,931,964         —           153,586         —           523,205   

Doubtful

     —           —           —           —           216,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,350,122       $ 18,026,065       $ 1,850,032       $ 2,194,414       $ 1,775,491       $ 3,522,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Secured
Commercial
     Commercial
Leases
     Savings  

Grade:

        

Pass

   $ 1,356,466       $ 610       $ 10,605   

Special Mention

     —           —           —     

Substandard

     —           —           —     

Doubtful

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 1,356,466       $ 610       $ 10,605   
  

 

 

    

 

 

    

 

 

 

 

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, 2011  
    

One-to

Four-Family

    

One-to

Four-Family

                   Secured by      Construction  
     Owner      Non-Owner      Home      Mobile      Other      and Land  
     Occupied      Occupied      Equity      Home      Properties      Development  

Grade:

                 

Pass

   $ 24,759,826       $ 16,116,447       $ 1,747,844       $ 2,252,642       $ 1,567,214       $ 3,982,117   

Special Mention

     —           440,137         —           —           —           90,000   

Substandard

     150,407         959,686         73,046         176,810         —           423,813   

Doubtful

     —           —           —           —           216,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,910,233       $ 17,516,270       $ 1,820,890       $ 2,429,452       $ 1,783,214       $ 4,495,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Secured
Commercial
     Commercial
Leases
     Savings  

Grade:

        

Pass

   $ 1,495,579       $ 4,941       $ 6,438   

Special Mention

     —           —           —     

Substandard

     —           933         —     

Doubtful

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 1,495,579       $ 5,874       $ 6,438   
  

 

 

    

 

 

    

 

 

 

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 attempts 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 March 31, 2012 and September 30, 2011:

 

     March 31, 2012  
     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

   $ —         $ —         $ 661,610       $ 661,610       $ 25,688,512       $ 26,350,122       $ —     

One-to four-family non-owner occupied

     —           3,780         726,475         730,255         17,295,810         18,026,065         —     

Home equity

     8,157         —           —           8,157         1,841,875         1,850,032         —     

Mobile home

     103,983         —           —           103,983         2,090,431         2,194,414         —     

Secured by other properties

     —           —           216,000         216,000         1,559,491         1,775,491         —     

Construction and land development

     89,985         —           —           89,985         3,432,135         3,522,120         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     202,125         3,780         1,604,085         1,809,990         51,908,254         53,718,244         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and consumer loans:

                    

Secured commercial

     —           —           —           —           1,356,466         1,356,466         —     

Commercial leases

     —           —           —           —           610         610         —     

Savings accounts

     —           —           —           —           10,605         10,605         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and consumer loans

     —           —           —           —           1,367,681         1,367,681         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 202,125       $ 3,780       $ 1,604,085       $ 1,809,990       $ 53,275,935       $ 55,085,925       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 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

   $ 30,153       $ —         $ 150,407       $ 180,560       $ 24,729,673       $ 24,910,233       $ —     

One-to four-family non-owner occupied

     377,862         —           920,322         1,298,184         16,218,086         17,516,270         —     

Home equity

     —           —           73,046         73,046         1,747,844         1,820,890         —     

Mobile home

     49,292         —           95,904         145,196         2,284,256         2,429,452         —     

Secured by other properties

     —           —           216,000         216,000         1,567,214         1,783,214         —     

Construction and land development

     —           —           —           —           4,495,930         4,495,930         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     457,307         —           1,455,679         1,912,986         51,043,003         52,955,989         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and consumer loans:

                    

Secured commercial

     —           —           —           —           1,495,579         1,495,579         —     

Commercial leases

     —           —           933         933         4,941         5,874         —     

Savings accounts

     —           —           —           —           6,438         6,438         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and consumer loans

     —           —           933         933         1,506,958         1,507,891         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 457,307       $ —         $ 1,456,612       $ 1,913,919       $ 52,549,961       $ 54,463,880       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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:

 

     March 31,      September 30,  
     2012      2011  

Real estate loans:

     

One-to four-family owner occupied

   $ 892,007       $ 150,407   

One-to four-family non-owner occupied

     732,419         920,322   

Home equity

     —           73,046   

Mobile home

     75,055         95,904   

Secured by other properties

     216,000         216,000   

Construction and land development

     —           —     
  

 

 

    

 

 

 

Total real estate loans

     1,915,481         1,455,679   
  

 

 

    

 

 

 

Commercial and consumer loans:

     

Secured commercial

     —           —     

Commercial leases

     —           933   

Savings accounts

     —           —     
  

 

 

    

 

 

 

Total commercial and consumer loans

     —           933   
  

 

 

    

 

 

 

Total loans

   $ 1,915,481       $ 1,456,612   
  

 

 

    

 

 

 

At March 31, 2012 and September 30, 2011, there were no loans 90 days past due and still accruing interest. At March 31, 2012, the Company had twenty-four loans on non-accrual status with foregone interest in the amount of $107,262. At September 30, 2011, the Company had twenty-two loans on non-accrual status with foregone interest in the amount of $78,102.

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 based on the present value of the expected future cash flows discounted at the loan’s original effective interest rate, or based on the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

 

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)

 

The following tables are a summary of impaired loans by class of loans as of March 31, 2012 and September 30, 2011:

 

    March 31, 2012  
          Unpaid           Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  

With no related allowance recorded:

         

One-to four-family owner occupied

  $ 406,956      $ 398,948      $ —        $ 406,956      $ 14,392   

One-to four-family non-owner occupied

    865,005        732,419        —          865,005        11,396   

Secured by other properties

    225,289        216,000        —          225,289        —     

Mobile home

    75,128        75,055        —          75,128        4,468   

With an allowance recorded:

         

One-to four-family owner occupied

  $ 506,203      $ 493,058      $ 51,645      $ 506,203      $ 5,680   

One-to four-family non-owner occupied

    830,103        827,105        35,768        830,103        30,534   

Mobile home

    50,328        50,156        3,050        50,328        1,556   

Total

         

One-to four-family owner occupied

  $ 913,159      $ 892,006      $ 51,645      $ 913,159      $ 20,072   

One-to four-family non-owner occupied

    1,695,108        1,559,524        35,768        1,695,108        41,930   

Secured by other properties

    225,289        216,000        —          225,289        —     

Mobile home

    125,456        125,211        3,050        125,456        6,024   

 

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

With no related allowance recorded:

              

Secured by other properties

   $ 224,193       $ 216,000       $ —         $ 224,193       $ 642   

With an allowance recorded:

              

One-to four-family non-owner occupied

   $ 920,579       $ 829,477       $ 152,000       $ 920,579       $ 17,923   

Mobile home

     51,507         51,313         11,142         51,507         5,236   

Total

              

One-to four-family non-owner occupied

   $ 920,579       $ 829,477       $ 152,000       $ 920,579       $ 17,923   

Secured by other properties

     224,193         216,000         —           224,193         642   

Mobile home

     51,507         51,313         11,142         51,507         5,236   

Loans may be periodically modified in a troubled debt restructuring (a “TDR”) 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. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or a charge-off to the allowance. At March 31, 2012, we had seven loans that were restructured. One loan was secured by a one-to four-family owner occupied property in the amount of $150,222. Four loans to the same borrower in the amount of $827,105 were secured by one-to four-family non-owner occupied properties. One loan was secured by other properties in the amount of $216,000 and one loan was secured by a mobile home loan in the amount of $50,156. At September 30, 2011, we had two loans that were restructured. One loan was secured by other properties in the amount of $216,000 and one loan was secured by a mobile home loan in the amount of $51,313. The Company has no commitments to loan additional funds to borrowers whose loans have been modified.

 

23


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 impaired loans that were modified due to a TDR by class as of March 31, 2012 and September 30, 2011:

 

     Modifications as of March 31, 2012  
     Number of
contracts
     Pre-Modification
Outstanding
Recorded
Investments
     Post-Modification
Outstanding
Recorded
Investments
 

Troubled Debt Restructuring

        

One-to four-family owner occupied

     1       $ 158,671       $ 145,026   

One-to four-family non-owner occupied

     4         830,103         794,335   

Secured by other properties

     1         225,289         225,289   

Mobile home

     1         50,328         47,278   
            Recorded
Investment
        

Troubled Debt Restructuring that subsequently defaulted

        

Secured by other properties

     —           —        

 

     Modifications as of September 30, 2011  
     Number of
contracts
     Pre-Modification
Outstanding
Recorded
Investments
     Post-Modification
Outstanding
Recorded
Investments
 

Troubled Debt Restructuring

        

Secured by other properties

     1       $ 224,193       $ 224,193   

Mobile home

     1         51,507         40,365   
            Recorded
Investment
        

Troubled Debt Restructuring that subsequently defaulted

        

Secured by other properties

     1       $ 551,466      

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.

 

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Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5. Fair Value Measurements (Continued)

 

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.

The following table presents a summary of financial assets measured at fair value at March 31, 2012 and September 30, 2011:

 

     Level 1      Level 2      Level 3      Total      Total
Losses
 

March 31, 2012

              

Securities available for sale:

              

Mortgage-backed securities invested in Government Agencies

   $ —         $ 6,773,446       $ —         $ 6,773,446       $ —     

Impaired loans

     —           —           2,702,278         2,702,278         (170,000

Foreclosed assets

           884,000         884,000         —     

September 30, 2011

              

Securities available for sale:

              

Mortgage-backed securities invested in Government Agencies

   $ —         $ 6,168,351       $ —         $ 6,168,351       $ —     

Impaired loans

     —           —           933,648         933,648         —     

Foreclosed assets

     —              884,000         884,000         (114,427

In accordance with generally accepted accounting principles concerning accounting for Loan and Lease Losses, a loss of $114,427 for the year ended September 30, 2011, 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.

Certificates of Deposit (Carried at Cost). The carrying amounts of certificates of deposit 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.

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.

 

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Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5. Fair Value Measurements (Continued)

 

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.

The following table presents quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a non-recurring basis for March 31, 2012 and September 30, 2011:

 

     Quantitative Information about Level 3 Fair Value Measurements  for
March 31, 2012 and September 30, 2011
 
     Valuation Techniques      Unobservable Input      Range  

Assets:

        

Impaired loans

     Discounted appraised value         Selling costs         6-12

Foreclosed assets

     Discounted appraised value         Selling costs         6-12

The following table presents a reconciliation of the beginning and ending balances for Level 3 assets:

 

      Impaired
Loans
    Foreclosed
Assets
 

Balance, September 30, 2010

   $ 1,162,728      $ 35,000   

Purchases, settlements and chargeoffs

     (573,427     849,000   

Transfers in and/or out of Level 3

     344,347        —     
  

 

 

   

 

 

 

Balance, September 30, 2011

     933,648        884,000   

Purchases, settlements and chargeoffs (unaudited)

     (170,000     —     

Transfers in and/or out of Level 3 (unaudited)

     1,938,630        —     
  

 

 

   

 

 

 

Balance, March 31, 2012 (unaudited)

   $ 2,702,278      $ 884,000   
  

 

 

   

 

 

 

 

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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:

 

00000000000 00000000000 00000000000 00000000000 00000000000
            Fair Value Measurements at March 31, 2012 Using  
     Carrying
Value
     Quoted
Prices in
Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair
Value
 
     (in thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 6,707       $ 6,707       $ —         $ —         $ 6,707   

Certificates of deposit

     1,320         1,320         —           —           1,320   

Securities available for sale

     6,773         —           6,773         —           6,773   

Securities held to maturity

     5,134         —           5,257         —           5,257   

Federal Home Loan Bank stock

     602         —           602         —           602   

Loans receivable, net

     54,421         —           53,137         2,703         55,840   

Foreclosed assets

     884         —           —           884         884   

Accrued interest receivable

     270         —           270         —           270   

Financial liabilities:

              

Deposits

     56,876         —           57,045         —           57,045   

Federal Home Loan Bank advances

     10,000         —           10,858         —           10,858   

Accrued interest payable

     42         —           42         —           42   

Off-Balance sheet financial instruments

     —           —              —           —     

 

00000000000 00000000000 00000000000 00000000000 00000000000
            Fair Value Measurements at September 30, 2011 Using  
     Carrying
Value
     Quoted
Prices in
Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair
Value
 
     (in thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 6,189       $ 6,189       $ —         $ —         $ 6,189   

Securities available for sale

     6,168         —           6,168         —           6.168   

Securities held to maturity

     1,637         —           1,753         —           1,753   

Federal Home Loan Bank stock

     604         —           604         —           604   

Loans receivable, net

     53,758         —           56,752         935         57,687   

Foreclosed assets

     884         —           —           884         884   

Accrued interest receivable

     247         —           247         —           247   

Financial liabilities:

              

Deposits

     50,947         —           51,578         —           51,578   

Federal Home Loan Bank advances

     10,000         —           10,681         —           10,681   

Accrued interest payable

     42         —           42         —           42   

Off-Balance sheet financial instruments

     —           —              —           —     

Note 6. Employee Stock Ownership Plan

In connection with the conversion to stock form in June 2010, the Company established an Employee Stock Ownership Plan (“ESOP”) 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 and sold in the initial public offering in June 2010. The shares were acquired at a price of $10.00 per share. The ESOP borrowed additional funds from the Company in the amount of $63,478, which was sufficient to purchase 4,502, shares or 8% of the common stock issued and sold in the conversion merger of Fullerton in October 2011. The shares were acquired at a price of $14.10 per share.

 

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Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 6. Employee Stock Ownership Plan (Continued)

 

The loans are secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 10-year terms of the loans with funds from Fairmount Bank’s contributions to the ESOP and dividends paid on the stock, if any. The interest rate on the ESOP loans 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 March 31, 2012, is 3.25%.

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 three and six months ended March 31, 2012 and 2011, respectively.

A summary of ESOP shares is as follows:

 

     March 31, 2012      March 31, 2011  

Shares committed for release

     12,523         6,552   

Unearned shares

     27,502         28,971   
  

 

 

    

 

 

 

Total ESOP shares

     40,025         35,523   
  

 

 

    

 

 

 

Fair value of unearned shares

   $ 418,030       $ 463,536   
  

 

 

    

 

 

 

Note 7. Recognition and Retention Plan

On December 15, 2010, the Board of Directors adopted the 2010 Recognition and Retention Plan and Trust Agreement (the “RRP”), which was approved at the 2011 Annual Meeting of Stockholders. The RRP is designed to enable Fairmount to provide officers, other employees and non-employee directors with a proprietary interest in Fairmount and as incentive to contribute to its success. Officers, other employees and non-employee directors who are selected by the board of directors or members of a committee appointed by the Board will be eligible to receive benefits under the RRP.

The Board may make grants under the 2010 Recognition and Retention Plan to eligible participants based on the following factors. RRP participants will vest in their share awards at a rate no more rapid than 20% per year over a five year period, beginning on the date of the plan share award. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested share awards will be forfeited. As of March 31, 2012, 15,104 shares have been awarded under the plan. No compensation expense has been recorded for the three and six months ended March 31, 2012 and March 31, 2011, respectively.

The Recognition and Retention Plan Trust (the “Trust”) has been established to acquire, hold, administer, invest and make distributions from the Trust in accordance with provisions of the Plan and Trust. The

 

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Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 7. Recognition and Retention Plan (Continued)

 

Company will contribute sufficient funds to the Trust so that the Trust can acquire 17,761 shares of common stock as part of the initial public offering, which are held in the Trust subject to the RRP’s vesting requirements. At March 31, 2012, there were 15,125 shares remaining to be purchased for the RRP. The RRP provides that grants to each employee and non-employee director shall not exceed 25% and 5% of the shares available under the Plan, respectively. Shares awarded to non-employee directors in the aggregate shall not exceed 30% of the shares available under the RRP.

Note 8. Stock Option Plan

On December 15, 2010, the Board of Directors adopted the 2010 Stock Option Plan. The 2010 Stock Option Plan will provide Fairmount’s directors and key employees with a proprietary interest in Fairmount as an as incentive to contribute to its success. The Board of Directors of the Company may grant options to eligible employees and non-employee directors based on these factors. Plan participants will vest in their options at a rate of no more rapid than 20% per year over a five year period, beginning on the grant date of the option. Vested options will have an exercise period of ten years commencing on the date of grant. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested options shall be forfeited. The Company recognizes compensation expense during the vesting period based on the fair value of the option on the date of the grant. As of March 31, 2012, 37,760 options have been granted to eligible employees and non-employee directors. No compensation expense has been recorded for the three and six months ended March 31, 2012 and March 31, 2011, respectively.

A summary of the Stock Option Plan during the six months ended March 31, 2012:

 

     Number of
Shares
     Weighted
Average

Exercise
Price
 

Outstanding at September 30, 2011

     —           —     

Granted

     37,760       $ 14.10   
  

 

 

    

 

 

 

Outstanding at March 31, 2012

     37,760       $ 14.10   
  

 

 

    

 

 

 

Options Exercisable at March 31, 2012

     —           —     
  

 

 

    

 

 

 

Note 9. Subsequent Events

The Company has evaluated events and transactions subsequent to March 31, 2012, 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 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 9 of the Company’s prospectus dated August 12, 2011 under the section 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 six month period ended March 31, 2012, 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, 2011 included in the Company’s Annual Report on 10-K.

Comparison of Financial Condition at March 31, 2012 and September 30, 2011

Total assets increased by $7,216,000, or 9.91%, to $80,003,000 at March 31, 2012 from $72,787,000 at September 30, 2011. The increase was primarily the results of increases in investment securities, certificates of deposit, loans receivable and premises and equipment of $4,102,000, $1,320,000, $663,000 and $503,000, respectively.

The increase in the Company’s total assets was primarily funded by increases in total deposits of $5,929,000, or 11.64%, and stockholders’ equity of $1,556,000, or 13.56% in association with the Fullerton acquisition.

Cash and cash equivalents increased from $6,189,000 at September 30, 2011 to $6,707,000 at March 31, 2012. This was an increase of $518,000, or 8.37%. The increase in cash and cash equivalents was due to increases in total deposits in association with the Fullerton acquisition.

Certificates of deposit increased by $1,320,000 at March 31, 2012. The increase was due to the investment of available liquidity in FDIC insured certificates of deposits with maturities greater than one year.

Investment securities increased by $4,102,000, or 52.56%, to $11,907,000, at March 31, 2012, from $7,805,000 at September 30, 2011. The increase was primarily the result of $5,527,000 in purchases offset by $2,061,000 in sales, maturities, payments and calls.

Total net loans increased from $53,758,000 at September 30, 2011 to $54,421,000 at March 31, 2012. This represented an increase of $663,000, or 1.23%. The increase was primarily attributable to loans added of $2,415,000 in association with the Fullerton acquisition. This increase from the acquisition was offset primarily by a decrease of $974,000, or 21.66%, in construction and land development loans.

 

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Total liabilities at March 31, 2012 were $66,970,000, an increase of $5,660,000, or 9.23%, from $61,310,000 at September 30, 2011. The increase was primarily attributable to deposits added of $7,333,000 in association with the Fullerton acquisition offset by fluctuating deposit balances during the quarter.

Deposits increased from $50,947,000 at September 30, 2011 to $56,876,000 at March 31, 2012. The increases were primarily the result of increases in savings deposits of $4,180,000, or 40.08% and increases in certificates of deposit of $1,300,000, or 3.62%.

Stockholders’ equity was $13,033,000, or 16.29%, of total assets at March 31, 2012, compared to $11,477,000, or 15.77%, of total assets at September 30, 2011. The primary reason for the $1,556,000, or 13.56%, increase in equity was the $1,022,000 extraordinary gain recorded as the result of the Fullerton acquisition. Also in October 2011, the Company completed a stock offering related to the Fullerton conversion merger in which 56,276 shares of the Company’s common stock were issued and sold at a price of $14.10 per share, resulting in net proceeds of approximately $452,000. Several factors also contributed to the changes in stockholders’ equity including net income before extraordinary gain of $223,000 for the six months ended March 31, 2012, offset by deductions for ESOP shares of $63,000 and RRP shares of $37,000, as well as a decrease of $41,000 in other comprehensive income related to the interest rate fluctuations on the Company’s available for sale securities portfolio.

Results of Operations for the Three Months Ended March 31, 2012 and 2011

Overview. Net income decreased by $5,000, to $133,000 for the three months ended March 31, 2012 from $138,000 for the three months ended March 31, 2011. Net interest income increased by $36,000, or 5.23%, to $724,000 for the three months ended March 31, 2012 from $688,000 for the three months ended March 31, 2011. Provision for loan and lease losses decreased by $20,000, or 20.00%, to $80,000 for the three months ended March 31, 2012 from $100,000 for the three months ended March 31, 2011. Non-interest income increased $4,000, or 15.38%, from $26,000 for the three months ended March 31, 2011 to $30,000 for the three months ended March 31, 2012. Non-interest expense increased $75,000, or 18.47%, to $481,000 for the three months ended March 31, 2012 from $406,000 for the three months ended March 31, 2011.

Net Interest Income. Net interest income increased $36,000, or 5.23%, to $724,000 for the three months ended March 31, 2012 from $688,000 for the three months ended March 31, 2011. The increase primarily resulted from the combined effects of a decrease of $12,000, or 1.24%, in interest and dividend income to $954,000 for the three months ended March 31, 2012 from $966,000 for the three months ended March 31, 2011, and a decrease of $48,000, or 17.27%, in interest expense to $230,000 for the three months ended March 31, 2012 from $278,000 for the three months ended March 31, 2011. The decrease in interest and dividend income was primarily the result of a decrease in the average rates earned on loans and investments. Interest expense decreased primarily as a result of decreases in the average rates paid on deposits and borrowings.

Provision for Loan and Lease Losses. The provision for loan and lease losses decreased $20,000 to $80,000 for the three months ended March 31, 2012, from $100,000 for the three months ended March 31, 2011. The Company recorded $170,000 in charge-offs during the three months ended March 31, 2012. The Company did not record charge-offs during the three months ended March 31, 2011. To the best of management’s knowledge, the allowance for loan and lease losses is maintained at a level believed to cover all known and inherent losses in the loan portfolio, both probable and reasonable to estimate.

Non-Interest Income. Non-interest income was $30,000 for the three months ended March 31, 2012, which was an increase of $4,000, or 15.38%, from $26,000 for the three months ended March 31, 2011. The Company recorded a $4,000 gain on the sale of an investment property from the Bank’s subsidiary, Real Estate Holdings Business, Inc.

Non-Interest Expense. Non-interest expense increased by $75,000, or 18.47%, to $481,000 for the three months ended March 31, 2012 from $406,000 for the three months ended March 31, 2011. The increase was primarily the result of increases in salaries, fees and employment expenses of $32,000, or 14.35%, from $223,000 for the three months ended March 31, 2011 to $255,000 for the three months ended March 31,

 

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2012. The increase in salaries, fees and employment expenses can be attributed to the additional personnel associated with the Fullerton acquisition that occurred in October 2011. Increases in professional fees of $33,000, or 89.19%, can be attributed to a consulting agreement with a former employee of Fullerton and well as increased costs associated with increased reporting requirements associated with the Company’s public company status. Increases in premises and equipment of $4,000, or 8.89% and increases in data processing of $9,000, or 39.13%, can also be attributed to the Fullerton acquisition and the additional expenses associated with the additional bank branch.

Income Taxes. The provision for income taxes decreased by $10,000, or 14.29%, to $60,000 for the three months ended March 31, 2012, from $70,000 for the three months ended March 31, 2011. The decrease in provision for income taxes was due to the decrease in the Company’s income before income taxes of of $15,000 or 7.21% from $208,000 for the three months ended March 31, 2011 to $193,000 for the three months ended March 31, 2012.

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 $127,000 and $143,000 for the three months ended March 31, 2012 and 2011, respectively. The decrease in total comprehensive income resulted from a decrease of $5,000 in net income and a decrease of $11,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

Results of Operations for the Six Months Ended March 31, 2012 and 2011

Overview. Net income increased by $985,000 to $1,245,000 for the six months ended March 31, 2012 from $260,000 for the six months ended March 31, 2011. This increase in net income included an extraordinary gain of $1,022,000 recorded in association with the acquisition of Fullerton. Net interest income increased by $106,000, or 8.07%, to $1,420,000 for the six months ended March 31, 2012 from $1,314,000 for the six months ended March 31, 2011. Provision for loan and lease losses increased by $25,000, or 16.13%, to $180,000 for the six months ended March 31, 2012 from $155,000 for the six months ended March 31, 2011. Non-interest income decreased $3,000, or 5.66%, from $53,000 for the six months ended March 31, 2011 to $50,000 for the six months ended March 31, 2012. Non-interest expense increased $147,000, or 18.10%, to $959,000 for the six months ended March 31, 2012 from $812,000 for the six months ended March 31, 2011.

Net Interest Income. Net interest income increased $106,000, or 8.07%, to $1,420,000 for the six months ended March 31, 2012 from $1,314,000 for the six months ended March 31, 2011. The increase primarily resulted from the combined effects of an increase of $14,000, or 0.74%, in interest and dividend income to $1,905,000 for the six months ended March 31, 2012 from $1,891,000 for the six months ended March 31, 2011, and a decrease of $92,000, or 15.94%, in interest expense to $485,000 for the six months ended March 31, 2012 from $577,000 for the six months ended March 31, 2011. The decrease in interest and dividend income was mainly the result of decreases in the average rates earned on loans and investments. Interest expense decreased primarily as a result of decreases in the average rates paid on deposits and borrowings.

Provision for Loan and Lease Losses. The provision for loan and lease losses increased $25,000 to $180,000 for the six months ended March 31, 2012, from $155,000 for the six months ended March 31, 2011. 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 2011, increases in the specific allowance for our impaired loans and the uncertainty regarding the housing market. The Company recorded $188,000 in charge-offs during the six months ended March 31, 2012. The Company did not record charge-offs during the six months ended March 31, 2011.

Non-Interest Income. Non-interest income was $50,000 for the six months ended March 31, 2012, which was a decrease of $3,000, or 5.66%, from $53,000 for the six months ended March 31, 2011. The decrease was primarily the result of a decrease in service charges and fees, which decreased due to a decline in one-to four-family non-owner occupied loan settlements during the comparable six month periods.

 

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Non-Interest Expense. Non-interest expense increased by $147,000, or 18.10%, to 959,000 for the six months ended March 31, 2012 from $812,000 for the six months ended March 31, 2011. The increase was primarily the result of increases in salaries, fees and employment expenses of $72,000, or 15.06%, from $478,000 for the six months ended March 31, 2011 to $550,000 for the six months ended March 31, 2012. The increase in salaries, fees and employment expenses can be attributed to the additional personnel retained in the Fullerton acquisition that occurred in October 2011. Professional fees increased from $62,000 for the six months ended March 31, 2011, to $101,000 for the six months ended March 31, 2012. This increase of $39,000, or 62.90%, was the result of several factors including a consulting agreement with a former Fullerton employee and the increased reporting requirements associated with the Company’s public company status. Increases in premises and equipment of $11,000, or 12.64%, increases in data processing of $15,000, or 34.88%, and increases in stationery, printing and supplies of $7,000, or 43.75%, can also be attributed to the Fullerton acquisition and the additional expenses associated with the additional bank branch.

Income Taxes. The provision for income taxes decreased by $32,000, or 22.86%, to $108,000 for the six months ended March 31, 2012 from $140,000 for the six months ended March 31, 2011. The decrease in provision for income taxes was due to the decrease in the Company’s income before income taxes and extraordinary gain of $69,000, or 17.25%, from $400,000 for the six months ended March 31, 2011 to $331,000 for the six months ended March 31, 2012.

Extraordinary Item. The Company recognized $1,022,000 of extraordinary income during the six months ended March 31, 2012 relating to the acquisition of Fullerton. The extraordinary income, also defined as negative goodwill, was the result of the sum of the fair values of assets acquired less the liabilities assumed exceeding the acquisition cost.

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 $1,203,000 and $221,000 for the six months ended March 31, 2012 and 2011, respectively. The increase in total comprehensive income resulted from an increase of $985,000 in net income, including the extraordinary gain of $1,022,000 and a decrease of $3,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on 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, Company the 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 has enough sources of liquidity to satisfy its short and long-term liquidity needs as of March 31, 2012.

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 March 31, 2012, cash and cash-equivalents totaled $6,707,000. Certificates of deposit of $1,320,000 and securities classified as available for sale, totaling $6,773,000 provide additional sources of liquidity. In addition, at March 31, 2012, the Company had the ability to borrow a total of approximately $24,000,000 from the Federal Home Loan

 

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Bank of Atlanta. At March 31, 2012, the Company had $10,000,000 in Federal Home Loan Bank advances outstanding. The Company also has a credit availability of $1,500,000 with a correspondent bank. There were no borrowings outstanding at March 31, 2012.

At March 31, 2012, the Company had $5,165,000 in unused lines of credit to borrowers and standby letters of credit. Certificates of deposit due within one year of March 31, 2012, totaled $23,438,000, or 41.74% 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 March 31, 2013. 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 OCC regulatory requirements. As of March 31, 2012, 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 13.31%, 25.18% and 26.43%, 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 approval from the OCC but with the prior notice to the OCC, cannot exceed net income for that year to date plus retained net income for the preceding two calendar years. At March 31, 2012, the Company had liquid assets of $1,777,000.

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 March 31, 2012 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.

 

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Item 1A. Risk Factors

Not applicable.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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: May 14, 2012   Joseph M. Solomon
  President and Chief Executive Officer
 

/s/ Jodi L. Beal

Date: May 14, 2012   Jodi L. Beal
  Vice President and Chief Financial Officer

 

36

PINX:FMTB Fairmount Bancorp Inc Quarterly Report 10-Q Filling

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