TheTable following tables contain certain information concerning our consolidated financial position and results of operations, which is derived in part from our consolidated financial statements. The following is only a summary and should be read in conjunction with the consolidated financial statements and notes beginning on page 48 of this annual report. Contents

Item 7.Table Management’s Discussion and Analysis of Financial Condition and Results of Operations Contents

BusinessTable Strategyof Contents

ComparisonTable of Financial Condition at September 30, 2012 and September 30, 2011 Contents

BorrowedTable funds, which were exclusively Federal Home Loan Bank advances decreased to $8,000,000 at September 30, 2012 from $10,000,000 at September 30, 2011. This represented a decrease of $2,000,000, or 20.00%. At September 30, 2012, the weighted average rate of the advances was 3.30%. The balance of borrowed funds fluctuates depending on, among other things, our ability to attract deposits, the relative pricing of advances compared to deposits, and its liquidity needs. Contents

TheTable provision for loan and lease losses decreased $255,000, or 56.04%, to $200,000 for the year ended September 30, 2012, from $455,000 for the year ended September 30, 2011. The decrease in the provision for loan and lease losses was due to a lower level of specific reserves during fiscal year 2012 as a result of our having fewer non-performing loans for which a provision had not already been taken. The Company recorded net charge-offs of $248,000 and $124,000 for the years ended September 30, 2012 and September 30, 2011, respectively. Contents

AverageTable Balancesof and Yields Contents

Rate/VolumeTable Analysisof Contents

TheseTable estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income and economic value of equity. Although the table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and our economic value of equity and will differ from actual results. Contents

FinancingTable activities consist primarily of activity in deposit accounts. We experienced a net increase in total deposits of $7,079,000 for the year ended September 30, 2012. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. Contents

InTable 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. Contents

InTable 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 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. Contents

InTable October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Company does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements. Contents

INDEXTable TOof CONSOLIDATED FINANCIAL STATEMENTS OF Contents

WeTable conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Contents

ConsolidatedTable Balanceof Sheets Contents

ConsolidatedTable Statements of Income Contents

ConsolidatedTable Statements of Comprehensive Income Contents

ConsolidatedTable Statements of Changes in Stockholders’ Equity Contents

FairmountTable Bancorp,of Inc. and Subsidiary Contents

OnTable October 13, 2011, the Company loaned $63,478 to the ESOP 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. Contents

PrinciplesTable of Consolidation Contents

FederalTable Home Loan Bank of Atlanta (the “FHLB”) stock is an equity interest in the FHLB, which does not have a readily determinable fair value for purposes of Generally Accepted Accounting Standards related to Accounting for Certain Investments in Debt and Equity Securities, because its ownership is restricted and it lacks a market. FHLB stock can be sold back only at par value of $100 per share and only to the FHLB or another member institution. As of September 30, 2012 and 2011, the Company owned shares totaling $479,700 and $604,200, respectively. Contents

TheTable allowance for loan losses is evaluated 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. Contents

TheTable Company maintains the allowance for loan and lease losses at a level considered adequate to provide for losses inherent in the loan portfolio. While the Company utilizes available information to recognize losses on loans, future additions to the allowances for loan and lease losses may be necessary based on changes in economic conditions, particularly in its’ market area in the state of Maryland. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance for loan and lease losses based on their judgments about information available to them at the time of their examination. Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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Table of Contents

Item 7.Table Management’s Discussion and Analysis of Financial Condition and Results of Operations Contents

BusinessTable Strategyof Contents

ComparisonTable of Financial Condition at September 30, 2012 and September 30, 2011 Contents

AverageTable Balancesof and Yields Contents

Rate/VolumeTable Analysisof Contents

Table of Contents

INDEXTable TOof CONSOLIDATED FINANCIAL STATEMENTS OF Contents

ConsolidatedTable Balanceof Sheets Contents

ConsolidatedTable Statements of Income Contents

ConsolidatedTable Statements of Comprehensive Income Contents

ConsolidatedTable Statements of Changes in Stockholders’ Equity Contents

FairmountTable Bancorp,of Inc. and Subsidiary Contents

OnTable October 13, 2011, the Company loaned $63,478 to the ESOP 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. Contents

PrinciplesTable of Consolidation Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended September 30, ~~2012~~2013

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

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.)
(State or Other Jurisdiction ofIncorporation or Organization)		(I.R.S. EmployerIdentification No.)
8216 Philadelphia Road, Baltimore, MD		21237
(Address of Principal Executive Offices)		(Zip Code)

8216 Philadelphia Road, Baltimore, MD		21237
(Address of Principal Executive Offices)		(Zip Code)

(410) 866-4500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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)

Portions of the definitive proxy statement for the 2013 Annual Meeting of Stockholders, to be filed within 120 days of the registrant’s fiscal year (the “Proxy Statement”), are incorporated by reference into Part III, Items 10 through 14, of this Form 10-K.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x

The aggregate market value of the ~~374~~366,~~360~~560 shares of the registrant’s common stock held by non-affiliates, based upon the closing price of $1523.2000 for the common stock on March 30 31, ~~2012~~2013, the last business day of the registrant’s most recently completed second quarter, as reported by the OTC Bulletin Board, was approximately $58.74 million. Shares of common stock held by the registrant’s executive officers, directors and certain plans have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of December 21 23, ~~2012~~2013, the number of shares of common stock outstanding was ~~469~~484,~~714~~839.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the ~~2013~~2014 Annual Meeting of Stockholders (Part III)

FAIRMOUNT BANCORP, INC.

~~2012~~2013 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
	Part I
Item 1.	Business		4
Item 1A.	Risk Factors		31
Item 1B.	Unresolved Staff Comments		31
Item 2.	Properties		31
Item 3.	Legal Proceedings		31
Item 4.	Mine Safety Disclosures		31
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		3132
Item 6.	Selected Financial Data		34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		4746
Item 8.	Financial Statements and Supplementary Data		4847
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		89
Item 9A	Controls and Procedures		89
Item 9B.	Other Information		9089
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance		9089
Item 11.	Executive Compensation		90
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		90
Item 13.	Certain Relationships and Related Transactions, and Director Independence		90
Item 14.	Principal Accounting Fees and Services		90
	Part IV
Item 15.	Exhibits and Financial Statement Schedules		9190
SIGNATURES			92

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans, prospects, growth and operating strategies;

•

statements regarding the asset quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to, and do not take any obligation to update any forward-looking statements after the date of this filing.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•

significantly increased competition among depository and other financial institutions;

•

general economic conditions, either nationally or in our market area, including employment prospects, real estate values and conditions, that are worse than expected;

•

competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

•

decreased demand for our products and services and lower revenues and earnings because of recession and/or other events;

• adverse changes and volatility in the securities markets;

•

adverse changes and volatility in credit markets;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees anand capital requirements;

•

our ability to enter new markets successfully and capitalize on growth opportunities;

•

our ability to successfully integrate acquired entities;

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

• changes in our organization, or compensation and benefit plans;

•

changes in our financial condition or results of operations that reduce capital available to pay dividends;

•

regulatory changes or actions;

•

changes in the financial condition or future prospects of issuers of securities that we own;

•

changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board and changes in the level of government support of housing finance;

•

changes in policy and/or assessment rates of taxing authorities that adversely affect us;

•

changes in expense trends (including, but not limited to, trends affecting non-performing assets, charge-offs and provisions for loan losses);

•

the impact of the current governmental effort to restructure the U.S. financial and regulatory system;

•

inability of third-party providers to perform their obligations to us;

•

adverse changes and volatility in real estate markets;

•

a slowing or failure of the moderate economic recovery;

•

the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) which will impact us;

•

the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Act, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;

• the impact of our coming under the jurisdiction of new federal regulators;

•

the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets; and

•

the ability of the U.S. Federal government to manage federal debt limits.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

PART I

Item 1.

Business

In the Annual Report on Form 10-K, the terms “we”, “our” and “us” refer to Fairmount Bancorp, Inc., unless the context indicates another meaning.

Fairmount Bancorp, Inc.

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~~Maryland ~~stock~~chartered ~~savings~~commercial bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 444,038 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $3,742,000, net of offering expenses of approximately $699,000. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 35,523 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

On October 12, 2011, we completed the acquisition of Fullerton Federal Savings Association, or 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 approximately $793,500 of its common stock, or 56,276 shares at a purchase price of $14.10 per share. The shares were sold in a subscription offering to depositors of Fullerton and to our Employee Stock Ownership Plan and in a community offering to our Recognition and Retention Plan and to the general public. The amount of common stock offered for sale was based on an independent valuation of Fullerton. As a result of the conversion merger, Fullerton merged with and into the Bank, with the Bank as the surviving institution. For additional information, see Note 2 of the Notes to Consolidated Financial Statements.

was based on an independent valuation of Fullerton. As a result of the conversion merger, Fullerton merged with and into the Bank, with the Bank as the surviving institution. For additional information, see Note 2 of the Notes to Consolidated Financial Statements.

The Company’s principal business activity is the ownership of the outstanding shares of common stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank, with the payment of appropriate rental fees, as required by applicable laws and regulations, under the terms of an expense allocation agreement.

Fairmount Bank

Fairmount Bank is a ~~federally~~Maryland chartered ~~savings~~commercial bank located in Baltimore County, Maryland, originally founded in 1879. The Bank has operated as a community-oriented institution by offering a variety of loan and deposit products and serving other financial needs of its local community. The Bank takes its corporate citizenship seriously and is committed to meeting the credit needs of the community, consistent with safe and sound operations.

The Bank has ~~two~~ ~~offices~~one office. The Bank is regulated by the Office of the ~~Comptroller~~Commissioner of ~~the~~Financial Regulation ~~Currency,~~of or the ~~OCC~~State of Maryland, and its deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation, or the FDIC, under the Deposit Insurance Fund. The Bank is a member of the Federal Home Loan Bank System.

The Bank has been, and continues to be, a community-oriented ~~savings~~commercial ~~institution~~ bank offering a variety of financial products and services to meet the needs of the communities it serves. The Bank delivers personalized service and responds promptly to customer needs and inquiries. The Bank believes that its community orientation is attractive to its customers and distinguishes it from larger banks that operate in its market area.

Available Information

Fairmount Bancorp, Inc. is a public company and files interim, quarterly, and annual reports with the Securities and Exchange Commission (the “SEC”). These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

The Company’s website address is www.fairmountbancorp.com. Information on this website should not be considered a part of this annual report.

General

The Bank’s principal business consists primarily of attracting and accepting retail deposits from the general public in the areas surrounding its ~~two~~office ~~offices~~ and investing those deposits, together with funds generated from operations, in primarily one-to four-family residential mortgage loans. We also invest in various investment securities. Our profitability depends primarily on our net interest income, which is the difference between the income the we receive on our loans and other assets and our cost of funds, which consists of the interest we pay on deposits and borrowings.

Our executive offices are located at 8216 Philadelphia Road, Baltimore, Maryland 21237. Our telephone number is (410) 866-4500.

Market Area

We primarily serve communities located in Baltimore City and in Baltimore and Harford counties in Maryland from our ~~offices~~office in Baltimore County, which is contiguous to Baltimore City, the largest city in Maryland, and located near the District of Columbia. The economy of the greater Baltimore metropolitan area constitutes a diverse cross section of employment sectors, with a mix of services, manufacturing, wholesale/retail trade, federal and local government, health care facilities and finance related employment. The largest employers in the Baltimore metropolitan area include the University System of Maryland, Johns Hopkins University, Johns Hopkins Hospital and Health System, U.S. Social Security Administration, Fort Meade, and Aberdeen Proving Ground.

Competition

We face significant competition in both originating loans and attracting deposits. Our market area has a large number of financial institutions, most of which are significantly larger institutions with greater financial resources than us, and all of which are competitors to varying degrees. Competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as mutual funds, securities and brokerage firms and insurance companies.

Lending Activities

General. Our principal lending activity is the origination of fixed-rate, one-to four-family owner occupied residential mortgage loans with ~~terms~~ terms of up to 30 years and one-to four-family non-owner occupied investor mortgage loans with terms of up to 25 years, subject to a balloon payment at 7 or 10 years. At September 30, ~~2012~~2013, one-to four-family owner occupied loans totaled $26,~~098~~364,000, or 4746.2093%, of our total loan portfolio. At September 30, ~~2012~~2013 one-to four-family non-owner occupied loans totaled $17,~~855~~481,000, or 3231.2911%, of our total loan portfolio.

5To a lesser extent, we also originate home equity and second mortgage loans, loans secured by other properties, construction and land development loans, secured commercial loans and savings loans. At September 30, 2013, home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages totaled $2,244,000, or 3.99%, of our total loan portfolio. At September 30, 2013, loans secured by other properties totaled $2,784,000, or 4.96%, of our total loan portfolio. At September 30, 2013, construction and land development loans totaled $3,911,000, or 6.96%, of our total loan portfolio. At September 30, 2013, other loans totaled $1,612,000, or 2.87%, of our total loan portfolio. We no longer originate loans secured by mobile homes. The remaining balance on our mobile home loan portfolio totaled $1,786,000, or 3.18%, of our total loan portfolio.

To a lesser extent, we also originate home equity and second mortgage loans, loans secured by other properties, construction and land development loans, secured commercial loans and savings loans. At September 30, 2012, home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages totaled $2,172,000, or 3.93%, of our total loan portfolio. At September 30, 2012, loans secured by other properties totaled $2,613,000, or 4.73%, of our total loan portfolio. At September 30, 2012, construction and land development loans totaled $3,262,000, or 5.90%, of our total loan portfolio. At September 30, 2012, other loans totaled $1,223,000, or 2.21%, of our total loan portfolio. We no longer originate loans secured by mobile homes. The remaining balance on our mobile home loan portfolio totaled $2,069,000, or 3.74%, of our total loan portfolio.

We do not offer “interest only” loans, where the borrower pays interest for an initial period after which the loan converts to a fully amortizing loan, nor do we offer “Option ARM” or negative amortization loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not make loans that are known as “sub-prime” or “Alt-A” loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated.

	At September 30,
	2012						2011
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One-to four-family owner occupied	$	26,098			47.20	%	$	24,910			45.74	%
One-to four-family non-owner occupied		17,855			32.29			17,516			32.16
Home equity(1)		2,172			3.93			1,821			3.35
Mobile home		2,069			3.74			2,430			4.46
Secured by other properties		2,613			4.73			1,783			3.27
Construction and land development		3,262			5.90			4,496			8.25
Total real estate loans		54,069			97.79			52,956			97.23
Other loans:
Secured commercial		1,213			2.19			1,496			2.75
Commercial leases		—			—			6			0.01
Savings account		10			0.02			6			0.01
Total other loans		1,223			2.21			1,508			2.77
Total loans		55,292			100.00	%		54,464			100.00	%
Unamortized premiums and loan fees		320						362
Unearned income on loans		(345	)					(403	)
Allowance for loan losses		(617	)					(665	)
Total loans, net	$	54,650					$	53,758

(1) Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

Loan Portfolio ~~Maturities~~Composition. The following table sets forth ~~maturity information at September 30, 2012, regarding~~ the ~~dollar~~composition ~~amount~~ of our loan ~~principal~~portfolio ~~repayments becoming due during~~ at the ~~periods~~dates indicated. The table does not reflect scheduled principal payments, unscheduled prepayments, or the ability of certain loans to reprice prior to maturity dates. Demand loans and loans having no stated repayment schedule are reported as being due in one year or less.

	One-to fourFamilyOwnerOccupied			One-to fourFamilyNon-OwnerOccupied			HomeEquity(1)			MobileHome			Secured byOtherProperties		Constructionand LandDevelopment
	At September 30,
	(In thousands)
	2013						2012
Amounts due after September 30, 2012 in:
	Amount			Percent			Amount			Percent
One year or less	$	188		$	638		$	—		$	—		$	714	$	3,094
	(Dollars in thousands)
After one year through two years		131			95			—			—			—		118
Real estate loans:
After two years through three years		60			299			—			5			—		—
One-to four-family owner occupied	$	26,364			46.93	%	$	26,098			47.20	%
After three years through five years		258			4,019			—			12			189		—
One-to four-family non-owner occupied		17,481			31.11			17,855			32.29
After five years through ten years		4,200			6,896			201			152			1,010		50
Home equity(1)		2,244			3.99			2,172			3.93
After ten years through fifteen years		4,307			5,741			224			1,628			325		—
Mobile home		1,786			3.18			2,069			3.74
After fifteen years		16,954			167			1,747			272			375		—
Secured by other properties		2,784			4.96			2,613			4.73
Total	$	26,098		$	17,855		$	2,172		$	2,069		$	2,613	$	3,262
Construction and land development		3,911			6.96			3,262			5.90
Total real estate loans		54,570			97.13			54,069			97.79
Other loans:
Secured commercial		1,603			2.85			1,213			2.19
Savings account		9			0.02			10			0.02
Total other loans		1,612			2.87			1,223			2.21
Total loans		56,182			100.00	%		55,292			100.00	%
Unamortized premiums and loan fees		251						320
Unearned income on loans		(325	)					(345	)
Allowance for loan losses		(733	)					(617	)
Total loans, net	$	55,375					$	54,650

	SecuredCommercial		Savings		Total
	(In thousands)
Amounts due after September 30, 2012 in:
One year or less	$	153	$	—	$	4,787
After one year through two years		—		—		344
After two years through three years		—		—		364
After three years through five years		311		—		4,789
After five years through ten years		415		10		12,934
After ten years through fifteen years		334		—		12,559
After fifteen years		—		—		19,515
Total	$	1,213	$	10	$	55,292

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

Loan Portfolio Maturities. The following table sets forth maturity information at September 30, 2013, regarding the dollar amount of ~~all~~loan ~~fixed~~principal ~~and~~repayments ~~adjustable-rate~~becoming ~~loans~~due ~~at September 30~~during the periods indicated. The table does not reflect scheduled principal payments, ~~2012~~unscheduled prepayments, ~~that~~or the ability of certain loans to reprice prior to maturity dates. Demand loans and loans having no stated repayment schedule are ~~contractually~~reported as being due ~~after~~in ~~September 30,~~one ~~2013~~year or less.

	Due after September 30, 2013
	One-to fourFamilyOwnerOccupied		One-to fourFamilyNon-OwnerOccupied		HomeEquity(1)		MobileHome		Secured byOtherProperties		Constructionand LandDevelopment
	Fixed Rate		AdjustableRate		Total
	(In thousands)
	(In thousands)
Amounts due after September 30, 2013 in:
One-to four-family owner occupied	$	25,910	$	—	$	25,910
One year or less	$	4	$	94	$	—	$	4	$	—	$	2,994
One-to four-family non-owner occupied		17,218		—		17,218
After one year through two years		29		255		—		9		—		203
Home equity(1)		449		1,723		2,172
After two years through three years		29		2,463		—		—		—		174
Mobile home		2,069		—		2,069
After three years through five years		640		2,696		13		23		842		—
Secured by other properties		1,898		—		1,898
After five years through ten years		3,947		10,881		207		102		1,220		—
Construction and land development		110		58		168
After ten years through fifteen years		3,718		839		247		1,383		557		425
Secured commercial		1,060		—		1,060
After fifteen years		17,997		253		1,777		265		165		115
Savings		10		—		10
Total	$	26,364	$	17,481	$	2,244	$	1,786	$	2,784	$	3,911
	$	48,724	$	1,781	$	50,505


	Secured Commercial		Savings		Total
	(In thousands)
Amounts due after September 30, 2013 in:
One year or less	$	—	$	—	$	3,096
After one year through two years		—		—		496
After two years through three years		—		—		2,666
After three years through five years		220		—		4,434
After five years through ten years		689		9		17,055
After ten years through fifteen years		694		—		7,863
After fifteen years		—		—		20,572


Total	$	1,603	$	9	$	56,182

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

~~One-~~8 to Four-Family Owner Occupied Loans. A significant portion of our primary lending activity consists of the origination of first mortgage loans secured by one-to four-family owner occupied residential properties located in our market area. Loans are generated through our existing customers and referrals, real estate brokers and other marketing efforts. We generally limit our real estate loan originations to the financing of properties located within our market area and have not made out-of-state loans. At September 30, 2012, $26,098,000, or 47.20%, of the loan portfolio, consisted of one-to four-family owner-occupied residential mortgage loans.

The following table sets forth the dollar amount of all fixed and adjustable-rate loans at September 30, 2013, that are contractually due after September 30, 2014.


	Due after September 30, 2014
	Fixed Rate		Adjustable Rate		Total
	(In thousands)
One-to four-family owner occupied	$	26,360	$	—	$	26,360
One-to four-family non-owner occupied		17,387		—		17,387
Home equity (1)		326		1,918		2,244
Mobile home		1,782		—		1,782
Secured by other properties		2,401		383		2,784
Construction and land development		540		377		917
Secured commercial		1,603		—		1,603
Savings		9		—		9

	$	50,408	$	2,678	$	53,086

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

One-to Four-Family Owner Occupied Loans. A significant portion of our primary lending activity consists of the origination of first mortgage loans secured by one-to four-family owner occupied residential properties located in our market area. Loans are generated through our existing customers and referrals, real estate brokers and other marketing efforts. We generally limit our real estate loan originations to the financing of properties located within our market area and have not made out-of-state loans. At September 30, 2013, $26,364,000, or 46.93%, of the loan portfolio, consisted of one-to four-family owner-occupied residential mortgage loans.

Our residential mortgage loans generally have terms of 15, 20 or 30 years. Currently, we offer only fixed-rate residential loans however, may consider implementing a program to originate adjustable-rate mortgages. All of the owner occupied loans we originate are retained in our portfolio for long-term investment. Generally, we have not sold these loans in the secondary mortgage market. However, our loans are underwritten to secondary mortgage market standards. Fixed-rate mortgage loans amortize monthly with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.

Under our real estate lending policy, a title insurance policy must be obtained for each real estate loan. We also require fire and extended coverage casualty insurance, in order to protect the properties securing our real estate loans. Borrowers must also obtain flood insurance policies when the property is in a flood hazard area. We require borrowers either to advance funds to an escrow account for the payment of real estate taxes and hazard insurance premiums or alternatively to provide it with other proof of the payment of taxes and an effective hazard insurance policy. We do not conduct environmental testing on residential mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan.

Our residential mortgage loans customarily include due-on-sale clauses, which are provisions giving it the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan.

We generally limit the maximum loan to value ratio to 80% of the lesser of the appraised value or the purchase price of the property securing the loan, although we will occasionally originate loans with a loan to value ratio up to 90% of the appraised value or purchase price of the property. Any loan in excess of an 80% loan-to-value requires adequate private mortgage insurance.

When underwriting residential real estate loans, we review and verify each loan applicant’s employment, income and credit history and, if applicable, our experience with the borrower. Our policy is to obtain credit reports and financial statements on all borrowers and guarantors, and to verify references. Properties securing real estate loans are appraised by board-approved independent appraisers, although we may rely on county tax records on smaller loans. Appraisals are subsequently reviewed by the loan underwriting committee.

In the recent economic climate, many areas of the United States have experienced an increase in foreclosures. Management believes that foreclosures in our market area have also increased, but not to the same extent as in more severely impacted areas of the United States.

One-to Four-Family Non-Owner Occupied Loans. A portion of our lending activity consists of the origination of first mortgage loans secured by one-to four-family non-owner occupied residential properties in our market area. These loans are generated through our existing customer base and referrals, real estate brokers, real estate investors and other marketing efforts. At September 30, ~~2012~~2013, $17,~~855~~481,000, or 3231.2911%, of the total loan portfolio, consisted of this type of mortgage loan.

Most loans originated in this program have payment periods of 25 years, subject to a balloon payment at 7 or 10 years. We require that the properties be occupied at the time the loan is made and require a minimum debt coverage ratio of 1.25 times. The maximum loan-to-value generally is 75%, and a majority of current loan originations are sold on a participation basis to other community banks. A majority of the properties are occupied by tenants receiving government vouchers that subsidize the rent payments. The subsidy represents a majority of the rent payment and is paid to the owner of the property who is responsible for the mortgage payment. While we plan to continue originating these loans, our planned growth is limited.

A title insurance policy must be obtained for each loan, and we require fire and extended coverage casualty insurance. We do not require environmental testing unless specific concerns for hazards are identified by the appraiser.

Home Equity Second Mortgage Loans. Our home equity loans and our home equity lines of credit are secured by second mortgages on owner occupied one-to four-family residences. The maximum loan-to-value of these loans generally is 85%. At September 30, ~~2012~~2013, home equity loans and home equity lines of credit secured by second mortgages totaled $2,~~172~~244,000, or 3.9399%, of total loans. Home equity loans consist of fixed-rate loans with terms up to a maximum of 20 years. At September 30, ~~2012~~2013, home equity loans totaled $~~449~~326,000. Home equity lines of credit are adjustable monthly and tied to the prime rate. At September 30, ~~2012~~2013, home equity lines of credit totaled $1,~~723~~918,000.

A home equity loan and a home equity line of credit can be used for a variety of purposes. The underwriting standards for the second mortgage include a title review, the recordation of a junior lien, a determination of the applicant’s ability to satisfy existing debt obligations and payments on the proposed loan, and the value of the collateral securing the loan.

Loans secured by second mortgages have greater risk than owner-occupied residential loans secured by first mortgages. When customers default on their loans, we attempt to foreclose on the property. However, the value of the collateral may not be sufficient to compensate for the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from these customers. In addition, decreases in property values could adversely affect the value of properties used as collateral for the loans.

Mobile Home Loans. As of September 30, ~~2012~~2013, mobile home loans totaled $21,~~069~~786,000, or 3.7418%, of the total loan portfolio. We ceased originating mobile home loans in September 2007, and no future originations of these types of loans are planned. Our mobile home loans were purchased from a third-party originator and funded by us at settlement. We paid a premium/loan origination fee to the third party originator, of which one-half was wired upon settlement and the remainder was retained by us in a depository account as a reserve for any losses or prepayments. At September 30, ~~2012~~2013, we had prepaid loan origination fees related to this program of $~~261~~211,000, and we had depleted the balance in the reserve account. ~~available~~Any losses that may be incurred moving forward relating to itthe ~~was~~mobile ~~$43,000~~home portfolio will be charged against the allowance for loan losses.

For us to have financed a mobile home loan, the mobile home must have been based on a permanent foundation. Mobile home lending involves additional risks as a result of higher loan-to-value ratios usually associated with these types of loans. The most frequent purchasers of mobile homes are retirees and younger, first-time buyers. These borrowers may be deemed to be relatively high credit risks due to various factors, including, among other things, the manner in which they have handled previous credit, the absence or limited extent of their prior credit history or limited financial resources. Mobile home loan customers have historically been more adversely impacted by weak economic conditions, loss of employment and increases in other household costs. Consequently, mobile home loans bear a higher rate of interest, have a higher probability of default and may involve higher delinquency rates and greater servicing costs relative to loans to more creditworthy borrowers. In addition, the values of mobile homes 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.

910

Commercial Real Estate Lending Secured by Other Properties. Although our loan policies ~~economic~~permit ~~conditions,~~the ~~loss~~origination of ~~employment~~loans ~~and~~secured ~~increases~~by incommercial ~~other~~real ~~household~~estate, ~~costs.~~including ~~Consequently~~multi-family dwellings, ~~mobile~~during ~~home~~recent ~~loans~~years ~~bear~~our loan portfolio has not included a ~~higher~~significant ~~rate~~amount of ~~interest,~~these ~~have~~loans. aThe ~~higher~~current ~~probability~~portfolio of ~~default~~these ~~and~~loans ~~may~~at ~~involve~~September 30, ~~higher~~2013, ~~delinquency~~totaled ~~rates~~$2,784,000, ~~and~~or ~~greater~~4.96%, ~~servicing~~of ~~costs~~total ~~relative~~loans. The current loan-to-value of these loans togenerally ~~more~~does ~~creditworthy~~not ~~borrowers~~exceed 80%. InWe ~~addition,~~intend ~~the~~to ~~values~~increase our origination of ~~mobile~~commercial ~~homes~~real ~~decline~~estate ~~over~~loans ~~time~~when market conditions improve and expect ~~higher~~that ~~levels~~such ofloans ~~inventories~~will ofrepresent ~~repossessed~~a ~~and~~more ~~used~~significant ~~mobile~~portion ~~homes~~of ~~may~~our ~~affect~~ loan portfolio in the ~~values~~future. ofSee ~~collateral~~“Management’s Discussion and ~~result~~Analysis inof ~~higher~~Financial ~~charge-offs~~Condition and ~~provisions~~Results ~~for~~of ~~loan~~Operations—Business ~~losses~~Strategy.”

~~Commercial~~Loans ~~Real~~secured ~~Estate~~by ~~Lending~~commercial ~~Secured~~real ~~by Other~~estate ~~Properties.~~generally ~~Although~~have ~~our~~larger loan ~~policies~~balances ~~permit~~and ~~the~~more ~~origination~~credit ofrisk ~~loans~~than ~~secured~~one-to ~~by commercial real estate, including multi~~four-family ~~dwellings,~~mortgage ~~during~~loans. ~~recent~~The ~~years~~increased ~~our~~credit risk ~~loan~~is ~~portfolio~~a ~~has~~result ~~not~~of ~~included~~several afactors, ~~significant~~including ~~amount~~the concentration of ~~these loans.~~principal ~~The~~in ~~current~~a ~~portfolio~~limited number of ~~these~~ loans atand ~~September 30~~borrowers, ~~2012,~~the ~~totaled~~impact ~~$2,613,000,~~of orlocal ~~4.73%,~~and ofgeneral ~~total~~economic ~~loans.~~conditions ~~The~~on ~~current~~the ~~loan-to-value~~borrower’s ofability ~~these~~to ~~loans~~repay ~~generally~~the ~~does~~loan, ~~not~~and ~~exceed~~the ~~80%.~~increased difficulty Weof ~~intend~~evaluating toand ~~increase~~monitoring ~~our~~these ~~origination~~types of ~~commercial real estate~~ loans. ~~when~~If ~~market~~the ~~conditions~~cash ~~improve~~flows ~~and~~from ~~expect~~the ~~that~~property ~~such~~are ~~loans~~reduced, ~~will~~the ~~represent~~borrower’s aability ~~more~~to ~~significant~~repay ~~portion~~the ofloan ~~our~~may ~~loan~~be ~~portfolio~~impaired. inHowever, ~~the~~commercial ~~future.~~real ~~See~~estate ~~“Management’s~~loans ~~Discussion~~generally ~~and~~have ~~Analysis~~higher ofinterest ~~Financial~~rates than ~~Condition~~loans ~~and~~secured ~~Results~~by ~~of Operations~~one- –to ~~Business~~four-family ~~Strategy~~real estate.”

Loans secured by commercial real estate generally have larger loan balances and more credit risk than one- to four-family mortgage loans. The increased credit risk is a 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. If the cash flows from the property are reduced, the borrower’s ability to repay the loan may be impaired. However, commercial real estate loans generally have higher interest rates than loans secured by one- to four-family real estate.

Construction and Land Development Loans. On a limited basis, we originate residential construction loans to individuals for the construction and permanent financing of their personal residences. Construction loans to individuals are made on the same general terms as our one-to four-family mortgage loans, but provide for the payment of interest only during the construction phase, which is usually six months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent appraiser. We also review and inspect each project prior to disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection of the project based on percentage of completion.

At September 30, ~~2012~~2013, the balance of these loans was $3,~~262~~911,000, or 56.9096%, of our total loans. When market conditions improve, we anticipate an expansion of our construction and land development loan activity. We limit speculative construction activity, as well as the speculative purchase of building lots. The maximum loan-to-value of these originations generally is 75%, and all these loans include personal guarantees.

Construction 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, we 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 us 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 us to significantly greater risk of non-payment and loss.

Other Loans. Commercial business loans are made to borrowers that demonstrate the ability to repay the debt through corporate cash flows. A majority of our commercial business loans are secured by assignments of corporate assets and include personal guarantees of the business owners. At September 30, ~~2012~~ 2013, commercial business loans totaled $1,~~213~~603,000, or 2.1985%, of total loans.

Underwriting standards for commercial business loans include a review of the applicant’s tax returns, financial statements, credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan based on cash flows generated by the applicant’s business.

10Commercial 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. We typically require a principal of the company obtaining a commercial business loan to personally sign the note as a co-borrower or guarantor.

Currently, the only consumer loans we offer consist of deposit account loans. At September 30, 2013, these loans totaled $9,000, or 0.02%, of total loans. Generally, these loans are made at an interest rate that is 2.00% above the account rate for up to 80% of the account balance and for a term through the next maturity date.

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. We typically require a principal of the company obtaining a commercial business loan to personally sign the note as a co-borrower or guarantor.

Currently, the only consumer loans we offer consist of deposit account loans. At September 30, 2012, these loans totaled $10,000, or 0.02%, of total loans. Generally, these loans are made at an interest rate that is 2.00% above the account rate for up to 80% of the account balance and for a term through the next maturity date.

Loan Originations, Purchases and Sales. Loan originations are obtained through a variety of sources, including referrals from existing customers and real estate brokers. We hold the majority of our loan originations other than one-to four-family non-owner occupied loans for long-term investment. Currently, the majority of one-to four-family non-owner occupied originations are sold on a participation basis to other community banks. However, there can be no assurance that these community banks will continue to participate in the originations of our non-owner occupied loans.

The following table shows loan origination, sale and principal repayment activity during the periods indicated.

	Years Ended September 30,
	2012		2011
	2013		2012
	(In thousands)
Total loans at beginning of period	$	5455,~~464~~292	$	5254,~~866~~464
Loans originated:
Real estate:
One- to four-family owner occupied		3,098		4,602
One-to four-family owner occupied		4,840		3,098
One- to four-family non-owner occupied		420		560
One-to four-family non-owner occupied		530		420
Home equity(1)		~~380~~474		~~159~~380
Secured by other properties		~~1,200~~725		—1,200
Construction and land development		~~152~~2,314		~~2,359~~152
Other loans:
Secured commercial		—700		~~1,168~~—
Savings		155		915
Total loans originated		59,~~265~~588		85,~~857~~265
Loans purchased in Fullerton acquisition		~~2,415~~—		—2,415
Deduct:
Participation of originated loans		—		336
Principal repayments		8,698		6,852
Principal repayments		6,852		6,923
Total deductions		8,698		6,852
Total deductions		6,852		7,259
Net loan activity		890		828
Net loan activity		828		1,598
Total loans at end of period	$	56,182	$	55,292
Total loans at end of period	$	55,292	$	54,464

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

Loan Approval Procedures and Authority. Our lending activities are subject to written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.

Our policies and loan approval limits are established by the board of directors. Upon receipt of a loan application from a prospective borrower, a credit report, tax returns and verifications are ordered or requested to confirm specific information relating to the loan applicant’s employment, income and credit standing. We require appraisals by independent, licensed, third-party appraisers of all real property secured loans, except where it relies on county tax records on smaller loans. All appraisers are approved by the board of directors annually. All loans are processed at our main office. The loan underwriting committee, comprised of Messrs. Solomon (Chairman), Yanke and Lally, approves all loans originated in amounts between $200,000 and $750,000. All loans in excess of $750,000 require board approval. Mr. Solomon’s lending authority is up to $200,000.

Loans to One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, ~~2012~~2013, our largest lending relationship with a single or related group of borrowers totaled $1,~~286~~530,000, which represented 1112.3394% of the Bank’s unimpaired capital and surplus. Therefore, we were in compliance with the loans-to-one borrower limitations.

Asset Quality

General. When a loan is 15 days past due, we send the borrower a late notice. We also contact 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, we mail the borrower a letter reminding the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90^th day of delinquency, we will send the borrower a final demand for payment and may recommend foreclosure. Loans are charged off when we believe 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 Bank 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.

We account 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 we classify a problem asset as impaired, we provide a specific allowance for that portion of the asset that is deemed uncollectable, based on the present value of 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. As of September 30, ~~2012~~2013 we had ~~fourteen~~fifteen loan relationships with total balances of $23,~~781~~152,000 that are individually evaluated for impairment.

Loans may be periodically modified in a troubled debt restructuring (TDR) to make concessions to help a borrower remain current on the loan and 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~~ 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 September 30, ~~2012~~2013, we had one loan secured by a one-to four-family owner occupied property in the amount of $~~138~~136,000 that was restructured, five loans with one borrower secured by one-to four-family non-owner occupied properties in the amount of $~~856~~784,000 that were restructured, one loan secured by other properties in the amount of $~~216~~213,000 that was restructured, ~~and~~ one loan secured by aconstruction ~~mobile~~and ~~home~~land development in the amount of $49370,000 that was restructured and two loans secured by mobile homes in the amount of $106,000 that were restructured. All of the loans restructured were considered troubled debt restructurings. At September 30, ~~2011~~2012, we had one loan secured by ~~other~~a ~~properties~~one-to four-family owner occupied property in the amount of $~~216~~138,000 that was restructured, five ~~and~~loans ~~was~~with ~~considered~~one aborrower ~~troubled~~secured ~~debt~~by ~~restructuring~~one-to four-family non-owner occupied properties in the amount of $856,000 that were restructured, one loan secured by other properties in the amount of $216,000 that was restructured and one loan secured by a mobile home in the amount of $51,000 that was restructured. ~~and~~All ~~was~~of ~~considered~~the aloans restructured were considered troubled debt ~~restructuring~~restructurings.

1213

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

	At September 30,
	2012			2011
	2013			2012
	(Dollars in thousands)
Non-accrual loans:
One- to four-family owner occupied	$	836		$	151
One-to four-family owner occupied	$	691		$	836
One-to four-family non-owner occupied		~~721~~1,635			~~920~~721
Home equity(1)		—			73—
Mobile home		~~104~~60			96104
Secured by other properties		~~216~~—			216
Construction and land development		—			—
Secured commercial		—			—
Commercial leases		—			1
Savings		—			—
Total non-accrual loans		12,~~877~~386			1,~~457~~877
Loans delinquent 90 days or more and still accruing interest		—			—
Foreclosed assets		~~296~~20			~~884~~296
Total non-performing	$	2,~~173~~406		$	2,~~341~~173
Ratios:
Non-performing loans to total loans		34.3931	%		23.6739	%
Non-performing assets to total assets		23.7512	%		32.2275	%

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

For the years ended September 30, ~~2012~~2013 and ~~2011~~2012, the amount of additional interest income that would have been recognized on non-accrual loans if ~~such~~ such loans had continued to perform in accordance with their contractual terms was $~~160~~252,000 and $78160,000, respectively. Interest income of $4870,000 and $3248,000 was recognized on these loans for the years ended September 30, ~~2012~~2013 and ~~2011~~2012, respectively.

Classification of Assets. Our 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~~ 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~~ 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 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. ~~On the basis of our review of our assets as of September 30, 2012, we had $75,000 of assets designated as special mention.~~

When assets are classified as either substandard or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. When we classify a problem asset as impaired, we provide a specific reserve for that portion of the asset that is deemed uncollectible. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the ~~OCC~~Office of the Commissioner of Financial Regulation of the State of Maryland, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets at September 30, ~~2012~~2013, we had $3,~~409~~387,000 of assets classified as substandard, of which ~~fourteen~~fifteen relationships were considered impaired based on fair market value appraisals. On the basis of our review of our assets at September 30, 2013, we had $345,000 of assets classified as doubtful and this loan relationship was considered impaired.

1314

impaired based on fair market value appraisals. On the basis of our review of our assets at September 30, 2012, we had $216,000 of assets classified as doubtful and this loan was considered impaired. This loan was restructured and is considered a troubled debt restructuring. Based on the appraisal of the commercial property, an additional allowance was not required for the remaining loan.

On the basis of management’s review of its assets, we had classified or held as special mention the following assets as of the date indicated:

	At September 30,
	2012		2011
	2013		2012
	(In thousands)
Substandard	$	3,~~409~~387	$	13,~~785~~409
Doubtful		~~216~~345		216
Loss		—		—
Special mention		75—		~~530~~75
Total classified and special mention assets	$	3,~~700~~732	$	23,~~531~~700

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies by type and amount at the dates indicated.

	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(In thousands)
At September 30, 2013
Real estate:
One-to four-family owner occupied		—	$	—		3	$	691		3	$	691
One-to four-family non-owner occupied		—		—		25		1,636		25		1,636
Home equity (1)		—		—		—		—		—		—
Mobile home		—		—		—		—		—		—
Secured by other properties		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Other loans:
Secured commercial		—		—		—		—		—		—
Savings		—		—		—		—		—		—
Total		—	$	—		28	$	2,327		28	$	2,327
At September 30, 2012
Real estate:
One-to four-family owner occupied		—	$	—		4	$	836		4	$	836
One-to four-family non-owner occupied		—		—		16		721		16		721
Home equity(1)		—		—		—		—		—		—
Home equity (1)		—		—		—		—		—		—
Mobile home		—		—		2		104		2		104
Secured by other properties		—		—		1		216		1		216
Construction and land development		—		—		—		—		—		—
Other loans:
Secured commercial		—		—		—		—		—		—
Savings		—		—		—		—		—		—
Total		—	$	—		23	$	1,877		23	$	1,877
At September 30, 2011
Real estate:
One- to four-family owner occupied		1	$	30		1	$	151		2	$	181
One-to four-family non-owner occupied		4		378		16		920		20		1,298
Home equity(1)		—		—		1		73		1		73
Mobile home		1		49		2		96		3		145
Secured by other properties		—		—		1		216		1		216
Construction and land development		—		—				0		1
Other loans:
Secured commercial		—		—		—		—		—		—
Commercial leases		—		—		1		1		1		1
Savings		—		—		—		—		—		—
Total		6	$	457		22	$	1,457		28	$	1,914

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

14Foreclosed Assets. Real estate and assets acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed assets until sold. When property is acquired it is recorded at the lower of cost or estimated fair market value at the date of foreclosure, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At September 30, 2013 and September 30, 2012, we had $20,000 and $296,000, respectively in foreclosed assets.

Foreclosed Real Estate. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate until sold. When property is acquired it is recorded at the lower of cost or estimated fair market value at the date of foreclosure, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At September 30, 2012 and September 30, 2011, we had $296,000 and $884,000, respectively in foreclosed real estate.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses. We maintain the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the 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 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. Such risk factors are periodically reviewed by management and revised as deemed appropriate. 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 OCC, as an integral part of its examination process, periodically reviews the allowance for loan losses. The OCC may require us to make additional provisions for estimated loan losses based upon judgments different from those of management.

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 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. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Office of the Commissioner of Financial Regulation of the State of Maryland, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require us 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 doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

We will continue to monitor and modify our allowances 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~~16 February 2012, we 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 was not was not charged against the allowance for loan losses since the reserve account for the mobile home loans was sufficient enough to absorb the loss. The mobile home loan portfolio is evaluated on a quarterly basis to assess the overall collection probability for the mobile home loan portfolio and includes the same evaluation process that it is used for the loans included in the allowance for loan losses. We will continue to monitor the reserve account and modify our allowances for loan losses relative to mobile home loans.

The following table sets forth activity in our allowance for loan losses for the periods indicated.

	At or For the Years EndedSeptember 30,
	2012			2011
	2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	~~665~~617		$	~~334~~665
Charge-offs:
Real estate:
One- to four-family owner occupied		55			—
One-to four-family owner occupied		—			55
One-to four-family non-owner occupied		~~175~~364			10175
Home equity(1)		18			—
Home equity (1)		—			18
Mobile home		—24			—
Secured by other properties		—			~~114~~—
Construction and land development		—			—
Total real estate loans		~~248~~388			~~124~~248
Other loans:
Secured commercial		—			—
Savings		—			—
Total other loans		—			—
Total charge-offs		~~248~~388			~~124~~248
Recoveries:
Real estate:
One-to four-family owner occupied		—			—
One-to-four-family non-owner occupied		—4			—
Home equity(1)		—			—
Home equity (1)		—			—
Mobile home		—			—
Secured by other properties		—			—
Construction and land development		—			—
Total real estate loans		—4			—
Other loans:
Secured commercial		—			—
Savings		—			—
Total other loans		—			—
Total recoveries		—4			—
Net (charge-offs) recoveries		(~~248~~384	)		(~~124~~248	)
Provision for loan losses		~~200~~500			~~455~~200
Balance at end of year	$	~~617~~733		$	~~665~~617
Ratios:
Net charge-offs to average loans outstanding		0.4569	%		0.2345	%
Allowance for loan losses to non-performing loans at end of period		3230.9074	%		4532.6790	%
Allowance for loan losses to total loans at end of period		1.1231	%		1.2212	%

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

1617

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

	At September 30,
	2012							2011
	2013							2012
	Allowancefor LoanLosses		LoanBalancesby Category		Percent ofLoans ~~inEachCategoryto~~inEachCategory ~~TotalLoans~~toTotalLoans			Allowancefor LoanLosses		LoanBalancesby Category		Percent ofLoans ~~inEachCategoryto~~inEachCategory ~~TotalLoans~~toTotalLoans
	(Dollars in thousands)
Real estate loans:
One-to four-family owner occupied	$	7874	$	26,~~098~~364		4746.2093	%	$	5278	$	2426,~~910~~098		4547.7420	%
One-to four-family non-owner occupied		~~274~~475		17,~~855~~481		3231.2911			~~382~~274		17,~~516~~855		32.1629
Home equity(1)		7		2,~~172~~244		3.9399			127		12,~~821~~172		3.3493
Mobile home		9681		21,~~069~~786		3.7418			5396		2,~~430~~069		43.4674
Secured by other properties		3022		2,~~613~~784		4.7396			2630		12,~~783~~613		34.2773
Construction and land development		8031		3,~~262~~911		56.9096			9180		43,~~496~~262		85.2590
Total real estate loans		~~565~~690		54,~~069~~570		97.7913			~~616~~565		5254,~~956~~069		97.2379
Other loans:
Secured commercial		34		1,~~213~~603		2.7585			3		1,~~496~~213		2.75
Commercial leases		—		—		—			1		6		0.01
Savings		—		9		0.02			—		10		0.02
Savings		—		10		0.02			—		6		0.01
Total other loans		4		1,612		2.87			3		1,223		2.21
Total other loans		3		1,223		2.21			4		1,508		2.77
Unallocated		39							49
Unallocated		49							45
Total loans	$	733	$	56,182		100.00	%	$	617	$	55,292		100.00	%
Total loans	$	617	$	55,292		100.00	%	$	665	$	54,464		100.00	%

(1)	Includes home equity loans secured by second mortgages and home equity lines of credit secured by second mortgages.

Investment Activities

General. We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and collateralized mortgage obligations issued and guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae, deposits at the Federal Home Loan Bank of Atlanta, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Within certain regulatory limits, we may also invest a portion of our assets in commercial paper and corporate debt securities. We are also required to maintain an investment in Federal Home Loan Bank stock.

Our investment objectives are to maintain high asset quality, to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. The board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy. The board of directors is also responsible for implementation of the investment policy and monitoring investment performance. The board of directors reviews the status of the investment portfolio on a quarterly basis, or more frequently if warranted.

17The current investment policy authorizes us to invest in debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises. The policy also permits investments in mortgage-backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The investment policy also permits investments in federal funds and deposits in other insured institutions. In addition, management is authorized to invest in investment grade state and municipal

~~The current investment policy authorizes us to invest in debt securities issued by the United States~~ Government, agencies of the United States Government or United States Government-sponsored enterprises. The policy also permits investments in mortgage-backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The investment policy also permits investments in federal funds and deposits in other insured institutions. In addition, management is authorized to invest in investment grade state and municipal obligations, commercial paper and corporate debt obligations within regulatory parameters. We do not engage in any hedging activities or trading activities, nor do we purchase any high-risk mortgage derivative products, corporate junk bonds, zero coupon bonds, certain types of structured notes or any other derivative products.

Generally accepted accounting principles require that, at the time of purchase, we designate a security as held-to-maturity, available-for-sale, or trading, depending on our ability and intent. Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We do not maintain a trading portfolio. Establishing a trading portfolio would require specific authorization by the board of directors.

Investment Securities

At September 30, ~~2012~~2013, the held to maturity portfolio, which is carried at amortized cost, totaled $3,~~637~~756,000, or 4.6088% of total assets and the available-for-sale portfolio, which is carried at fair value, totaled $75,~~804~~792,000, or 97.8752% of total assets. We also held $32,~~512~~142,000 in federal funds sold in other institutions, $~~337~~859,000 in interest-bearing deposits at other banks, $3,~~532~~784,000 in certificates of deposit in other institutions, and $~~480~~454,000 in Federal Home Loan Bank Stock of Atlanta at September 30, ~~2012~~2013.

Investment Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated.

	At September 30,
	2012				2011
	2013				2012
	AmortizedCost		~~Fair Value~~FairValue		AmortizedCost		~~Fair Value~~FairValue
	(In thousands)
Securities held to maturity:
U.S. Government and federal agency obligations	$	13,~~999~~756	$	23,~~011~~603	$	—1,999	$	—2,011
State and municipal		~~1,638~~—		~~1,793~~—		1,~~637~~638		1,~~754~~793
Total securities held to maturity		3,~~637~~756		3,~~804~~603		13,637		13,~~754~~804
Securities available for sale:
Residential mortgage-backed		53,~~630~~855		54,~~980~~021		5,~~834~~630		65,~~168~~980
Collateralized mortgage obligations		~~1,832~~535		~~1,824~~530		—1,832		—1,824
Total securities available for sale		7,462		7,804		5,834		6,168
State and municipal		1,273		1,241		—		—
Total investment securities	$	11,099	$	11,608	$	7,471	$	7,922
Total securities available for sale		5,663		5,792		7,462		7,804
Total investment securities	$	9,420	$	9,395	$	11,099	$	11,608

1819

Investment Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at September 30, ~~2012~~2013, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent adjustments have been made to the yields in the following table.

	One Year or Less				More than One Yearthrough Five Years					More than Five Yearsthrough Ten Years					More than TenYears					Total
	AmortizedCost		WeightedAverageYield		AmortizedCost		WeightedAverageYield			AmortizedCost		WeightedAverageYield			AmortizedCost		WeightedAverageYield			AmortizedCost		FairValue		WeightedAverageYield
	(Dollars in thousands)									~~(Dollars in thousands)~~
Securities held to maturity:
U.S. Government and federal agency obligations	$	—		—	$	999		1.52	%	$	—		—	%	$	1,000		3.47	%	$	1,999	$	2,011		2.50	%
U.S. Government and federal agency securities	$	—		—	$	1,741		1.14	%	$	2,016		1.59	%	$	—		—	%	$	3,756	$	3,603		1.38	%
State and municipal		—		—		343		2.30			775		4.46			520		3.94			1,638		1,793		3.84
Total securities held to maturity		—				1,342		1.72			775		4.46			1,520		3.63			3,637		3,804		3.10
Securities available for sale:
Residential mortgage-backed		—		—		9		2.00			123		4.05			5,498		3.42			5,630		5,980		3.43
Residential mortgage-backed securities		—		—		69		4.23			37		1.80			3,749		2.95			3,855		4,021		2.96
Collateralized mortgage obligations		—		—		—		—			—		—			~~1,832~~535		12.3327			~~1,832~~535		~~1,824~~530		12.3327
Total securities available for sale						9		2.00			123		4.05			7,330		2.90			7,462		7,804		2.92
State and municipal		—		—		481		0.84			453		1.73			339		2.20			1,273		1,241		1.52
Total investment securities		—		—	$	1,351		1.72	%	$	898		4.40	%	$	8,850		3.02	%	$	11,099	$	11,608		2.98	%
Total securities available for sale		—		—		550		1.27			490		1.73			4,623		2.82			5,663		5,792		2.57
Total investment securities		—		—	$	2,291		1.17	%	$	2,506		1.62	%	$	4,623		2.82	%	$	9,420	$	9,395		2.10	%

Deposits and Borrowings

Deposits traditionally have been the primary source of funds for our lending and investment activities. In addition to deposits, we derive funds primarily from principal and interest payments on loans. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates, money market conditions and competition. Borrowings may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources and may be used on a longer-term basis for general business purposes.

Deposits. We generate deposits primarily from within our market area. We rely on our competitive pricing and customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Deposit accounts consist of savings accounts, certificates of deposit and NOW accounts.

Total deposits ~~increased~~decreased to $5855,~~026~~930,000 at September 30, ~~2012~~2013, compared to $5058,~~947~~026,000 at September 30, ~~2011~~2012. Deposits are generated primarily from within our market area.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, interest rates paid by competitors and deposit growth goals.

At September 30, ~~2012~~2013, we had a total of $3734,~~428~~442,000 in certificates of deposit, of which $2317,~~094~~426,000, or 6150.7060% had remaining maturities of one year or or less. Based on historical experience and its current pricing strategy, management believes we will retain a large portion of these accounts upon maturity.

The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.

	At September 30,
	2012					2011
	2013					2012
	Amount		%			Amount		%
	(Dollars in thousands)
Certificates of deposit:
Less than 1.00%	$	1620,~~406~~860		2837.2730	%	$	316,~~618~~406		728.1027	%
1.00% - 1.99%		1711,~~447~~900		3021.0727			2317,~~607~~447		4630.3407
2.00% - 2.99%		21,~~508~~543		42.3276			62,~~259~~508		124.2932
3.00% - 3.99%		~~318~~139		0.5525			~~823~~318		10.6255
4.00% - 4.99%		~~633~~—		~~1.09~~—			~~1,415~~633		21.7809
5.00% - 5.99%		~~116~~—		~~0.20~~—			~~216~~116		0.4220
Total certificate accounts		3734,~~428~~442		6461.5058			3537,~~938~~428		7064.5450
Non-interest bearing deposits(1)		~~780~~562		1.3400			~~626~~780		1.2334
Interest bearing deposits		4,~~356~~076		7.5129			34,~~954~~356		7.7651
Savings		1516,~~462~~850		2630.6513			1015,~~429~~462		2026.4765
Total transaction accounts		2021,~~598~~488		3538.5042			1520,~~009~~598		2935.4650
Total deposits	$	5855,~~026~~930		100.00	%	$	5058,~~947~~026		100.00	%

(1)	Includes nondemand escrows.

The following table shows the average balance by each type of deposit and the average rate paid on each type of deposit for the periods indicated.

	At September 30,
	2012							2011
	2013							2012
	AverageBalance		InterestExpense		AverageRatePaid			AverageBalance		InterestExpense		AverageRatePaid
	(Dollars in thousands)
Interest bearing deposits	$	4,~~044~~279	$	1810		0.4524	%	$	4,~~038~~044	$	2918		0.7245	%
Savings		1416,~~151~~620		9765		0.6839			914,~~578~~151		7597		0.7868
Certificates of deposit		3736,~~400~~105		~~532~~390		1.4208			3637,~~370~~400		~~719~~532		1.9842
Total deposits	$	5557,~~595~~004	$	~~647~~465		10.1682	%	$	4955,~~986~~595	$	~~823~~647		1.6516	%

The following table sets forth the amount and maturities of certificates of deposits at September 30, ~~2012~~2013.

	Less ThanOne Year		Over OneYear to TwoYears		Over TwoYears totoThree ~~ThreeYears~~Years		Over ThreeYears		Total		Percentageof TotalCertificateAccounts
					(Dollars in thousands)
Interest Rate:
less than 1.00%	$	1113,~~795~~547	$	46,~~291~~048		~~320~~1,265		—	$	1620,~~406~~860		4360.8357	%
1.00% - 1.99%		93,~~305~~844		42,~~292~~397		~~2,185~~900		14,~~665~~759		1711,~~447~~900		4634.6255
2.00% - 2.99%		~~1,074~~9		36224		~~293~~586		~~1,105~~724		21,~~508~~543		64.7048
3.00% - 3.99%		~~171~~26		38113		~~109~~—		—		~~318~~139		0.8540
4.00% - 4.99%		633		—		—		—		633		1.69
Total	$	17,426	$	8,782	$	2,751	$	5,483	$	34,442		100.00	%
5.00% - 5.99%		116		—		—		—		116		0.31
Total	$	23,094	$	8,657	$	2,907	$	2,770	$	37,428		100.00	%

20As of September 30, 2013, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $15,446,000. The following table sets forth the maturity of these certificates as of September 30, 2013.


	At September 30, 2013
	(Dollars in thousands)
	Amount		Weighted Average Rate
Three months or less	$	2,062		1.03	%
Over three months through six months		2,565		0.78
Over six months through one year		2,506		0.74
Over one year		8,313		1.32


Total	$	15,446		1.10	%

As of September 30, 2012, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $16,264,000. The following table sets forth the maturity of these certificates as of September 30, 2012.

	At September 30, 2012
	(Dollars in thousands)
	Amount		WeightedAverage Rate
Three months or less	$	2,537		1.23	%
Over three months through six months		3,756		1.20
Over six months through one year		2,895		1.21
Over one year		7,076		1.20
Total	$	16,264		1.27	%

The following table sets forth deposit activities for the periods indicated.

	Years EndedSeptember 30,
	2012			2011
	2013			2012
	(In thousands)
Beginning balance	$	5058,~~947~~026		$	4950,~~971~~947
Net deposits (withdrawals) before interest credited		6(2,~~432~~561	)		~~153~~6,432
Interest credited		~~647~~465			~~823~~647
Net increase in deposits		7(2,~~079~~096	)		~~976~~7,079
Ending balance	$	5855,~~026~~930		$	5058,~~947~~026

Borrowings. We may obtain advances from the Federal Home Loan Bank of Atlanta upon the security of the common stock we own in that bank and certain of our residential mortgage loans, provided certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.

The following table shows certain information regarding Federal Home Loan Bank advances at or for the dates indicated:

	At or For the Year EndedSeptember 30,
	2012			2011
	2013			2012
	(Dollars in thousands)
Average balance outstanding	$	98,~~246~~000		$	109,~~562~~246
Maximum outstanding at any month-end during the period		108,000			1110,~~500~~000
Balance outstanding at the end of the period		8,000			108,000
Average interest rate during the period		23.9635	%		2.6496	%
Weighted average interest rate at end of period		3.3035	%		23.7135	%

At September 30, ~~2012~~2013, we were permitted to borrow up to an aggregate total of $23,~~600~~100,000 from the Federal Home ~~Loan~~ Loan Bank of Atlanta. We had $8,000,000 of Federal Home Loan Bank advances outstanding at September 30, ~~2012~~2013. Additionally, we have credit availability of $1,500,000 with a correspondent bank for short -term liquidity needs, if necessary. There ~~were~~ were no borrowings outstanding at September 30, ~~2012~~2013 and ~~2011~~2012 under this facility.

Subsidiaries

At September 30, ~~2012~~2013, Fairmount Bancorp, Inc., had one subsidiary, Fairmount Bank.

Personnel

As of September 30, ~~2012~~ 2013, we had ~~twelve~~ ten full-time employees and two part-time employees. The employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

SUPERVISION AND REGULATION

General

~~Fairmount~~As ~~Bancorp, Inc., is~~ a ~~savings~~bank ~~and loan~~ holding company, ~~and~~Fairmount Bancorp, Inc. is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve ~~Board~~System (the “Federal Reserve”), as the primary regulator of Fairmount Bancorp. Fairmount Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Fairmount Bank is examined and supervised by the OCC, as the primary regulator of Fairmount Bank, and is subject to examination by the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance funds and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Fairmount Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters. The OCC will examine the Bank and prepare reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.

Any change in these laws or regulations, whether by the FDIC, the OCC, the Federal Reserve Board or Congress, could have a material adverse impact on the Company, the Bank and their operations.

Certain of the regulatory requirements that are or will be applicable to the Bank and the Company are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual statutes and regulations.

Dodd-Frank Act

The Dodd-Frank Act significantly changed the bank regulatory structure and the lending, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated the Company’s former primary federal regulator, the OTS, and required Fairmount Bank to be regulated by the OCC (the primary regulator for national banks). The Dodd-Frank Act also authorized the Federal Reserve Board to supervise and regulate all savings and loan holding companies like Fairmount Bancorp, Inc., in addition to bank holding companies which it

already regulated. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, apply to savings and loan holding companies. The Dodd-Frank Act also required the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect on July 21, 2012 and directed the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau (the “CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Fairmount Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadened the base for FDIC insurance assessments. Assessments are now being based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be subject to regulations implemented over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements, or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

The federal banking agencies have proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The proposed rules would implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to various documents released by the Basel Committee on Banking Supervision. As published, the proposed rules contemplated a general effective date of January 1, 2013, and, for certain provisions, various phase-in periods and later effective dates for specified provisions. Recently, the federal banking agencies announced that the proposed rules will not be effective on January 1, 2013. The agencies have not adopted final rules or published any modifications to the proposed rules, which are summarized below. It is not possible to predict when or in what form final regulations may be adopted.

The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definitions of “capital” for purpose of calculating those ratios. The proposed new minimum capital level requirements would be: (i) a new minimum common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The proposed rules would also establish a “capital conversation buffer” of 2.5% above each of the new regulatory minimum capital ratios. The new capital conversation buffer requirement would be phased in beginning in January 2016 until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level fell below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

The proposed rules also implement other revisions to the current capital rules such as recognition of all unrealized gains and losses on available for sale debt and equity securities, and provide that instruments that will no longer qualify as capital would be phased out over time.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from the current rules).

The proposed rules set forth certain changes for the calculation of risk-weighted assets. The proposed rule utilizes an increased number of credit risk and other exposure categories and risk weights, and also addresses: (i) a proposed alternative standard of creditworthiness consistent with the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposure and past due loans; and (iv) revised capital treatment for derivatives and repo-style transactions.

In particular, the proposed rules would expand the risk-weighting categories from the current four categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures. Higher risk weights would apply to a variety of exposure categories, including:

• For residential mortgage exposures, changing the current 50% risk weight for high-quality seasoned mortgages and 100% risk-weight for all other mortgages to a risk weight between 34% and 200% depending upon the mortgage’s LTV ratio and whether the mortgage is a “category 1” or “category 2” residential mortgage exposure (based on criteria that include the term, seniority of the lien, use of negative amortization, balloon payments and certain rate increases).

• Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

• Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.

• Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%).

Federal Banking Regulation

Business Activities. As a federal savings association, the Bank may invest in mortgage loans secured by residential real estate without limitation as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage. The Dodd-Frank Act authorized depository institutions to commence paying interest on business checking accounts, effective July 21, 2011.

Branching. Federal savings banks are authorized to establish branch offices in any state or states of the United States and its territories, subject to the approval of the OCC.

~~Capital~~Fairmount ~~Requirements.~~Bank ~~OCC~~is ~~regulations~~examined ~~require~~and ~~savings~~supervised ~~associations~~by tothe ~~meet~~Office ~~three~~of ~~minimum~~the Commissioner of Financial Regulation of the State ~~capital~~of ~~standards:~~Maryland (the “Commissioner”), as the primary regulator of the Bank, and is subject to examination by the Federal Deposit Insurance Corporation (the “FDIC”). This regulation and supervision establishes a 1comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors.5% ~~tangible~~Under this system of federal and state regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital ~~ratio~~adequacy, aassets, ~~4.0%~~management, ~~leverage~~earnings, ~~ratio~~liquidity (3and sensitivity to market interest rates.0% ~~for~~Following ~~savings~~completion ~~associations~~of ~~receiving~~its examination, the ~~highest~~federal agency critiques the institution’s operations and assigns its rating on(known ~~the~~as an institution’s CAMELS rating ~~system~~). ~~and~~Under federal law, an 8institution may not disclose its CAMELS rating to the public.0% ~~risk-based~~The ~~capital~~Bank ~~ratio~~also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Federal Reserve, governing reserves to be maintained against deposits and other matters. The Commissioner will examine the Bank and prepare reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.

~~The~~Any ~~risk-based~~change ~~capital~~in ~~standard~~these ~~for~~laws ~~savings~~or ~~associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4.0% and 8.0%~~regulations, ~~respectively.~~whether Inby ~~determining~~ the ~~amount of risk-weighted assets~~FDIC, ~~all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by~~ the ~~OCC~~Commissioner, ~~based on~~ the ~~risks~~Federal ~~believed~~Reserve ~~inherent~~or ~~in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings)~~Congress, ~~certain~~could ~~noncumulative~~have perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a ~~maximum~~material ofadverse ~~1.25%~~impact ~~of risk-weighted assets and up to 45% of net unrealized gains~~ on ~~available-for-sale equity securities with readily determinable fair market values. Overall,~~ the ~~amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings~~ association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. In assessing an institution’s capital adequacyCompany, the ~~OCC takes~~Bank ~~into consideration not only these numeric factors but also qualitative factors as well,~~ and ~~has~~their ~~the authority to establish higher capital requirements for individual associations where necessary~~operations.

AtCertain ~~September 30,~~of ~~2012,~~the regulatory requirements that are or will be applicable to the Bank’s ~~capital~~and ~~exceeded~~the ~~all~~Company ~~applicable~~are ~~requirements~~described below. ~~See~~This ~~Note~~description 17of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the ~~notes~~Bank toand ~~our~~the ~~consolidated~~Company ~~financial statements~~and ~~included~~is ~~elsewhere~~qualified ~~herein~~in its entirety by reference to the actual statutes and regulations.

~~Capital~~Banking ~~Distributions. Federal~~Regulation regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings association must file an application for approval of a capital distribution if:

•Financial Institutions Article of the ~~total~~Maryland ~~capital~~Annotated ~~distributions~~Code. The ~~for~~Financial Institutions Article of the ~~applicable~~Maryland ~~calendar~~Annotated ~~year~~Code ~~exceed~~(the “Banking Code”), contains detailed provisions governing the ~~sum~~organization, operations, corporate powers, commercial and investment authority, branching rights and responsibilities of ~~the~~directors, ~~savings~~officers ~~association’s~~and ~~net~~employees ~~income~~of ~~for~~Maryland ~~that~~banking ~~year~~institutions. toThe ~~date~~Banking ~~plus~~Code ~~the~~delegates ~~savings~~extensive ~~association’s~~rulemaking ~~retained~~power ~~net~~and ~~income~~administrative ~~for~~discretion to the Commissioner ~~preceding~~in ~~two~~its ~~years;~~supervision and regulation of state-chartered banking institutions. The Commissioner may order any banking institution to discontinue any violation of law or unsafe or unsound business practice.

•Capital Requirements. Under the ~~savings~~FDIC’s ~~association~~regulations, ~~would~~federally insured state-chartered banks that are not bemembers atof ~~least~~the ~~adequately~~Federal Reserve ~~capitalized~~System ~~following~~(“state non-member banks”), such as Fairmount Bank, are required to comply with minimum leverage capital requirements. The minimum leverage capital requirement for a bank is the ~~distribution;~~ratio of Tier 1 (core) capital to total assets of not less than 3% if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general is considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the CAMELS rating system) established by the Federal Financial Institutions Examination Council. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.

•In ~~the~~addition, FDIC ~~distribution~~regulations ~~would~~require ~~violate~~state ~~any~~non-member ~~applicable~~banks ~~statute~~to maintain certain ratios of regulatory capital to regulatory risk-weighted assets, ~~regulation~~or “risk-based capital ratios.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to risk-weighted categories ranging from 0% to 200%. State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, ~~agreement~~of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or ~~Office~~supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the ~~Comptroller~~net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the ~~Currency-imposed~~amount ~~condition;~~of orthe institution’s Tier 1 capital.

•The ~~the~~bank ~~savings~~regulatory ~~association~~agencies isappear ~~not~~to ~~eligible~~be more inclined to impose higher capital requirements in order to meet well capitalized standards, and future regulatory change could impose higher capital standards. The regulators may also set higher capital requirements for ~~expedited~~holding ~~treatment~~companies ofwhose ~~its~~circumstances ~~filings~~warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the Office of the Comptroller of the Currency at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The OCC and the Federal Reserve Board have established similar criteria for approving an application or notice.

The notice or application may be disapproved if:

• the savings association would be undercapitalized following the distribution;

• the proposed capital distribution raises safety and soundness concerns; or

• the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.

To date, the Bank has paid no dividends to the Company.

Liquidity. We maintain sufficient liquidity to ensure safe and sound operation in accordance with federal regulations.

~~Loans~~As toan ~~One~~additional ~~Borrower.~~means ~~Federal~~to ~~law~~identify ~~provides~~problems ~~that~~in ~~savings institutions are generally subject to~~ the ~~limits~~financial onmanagement ~~loans~~of todepository ~~one borrower applicable to national banks. Subject to certain exceptions~~institutions, athe ~~savings~~Federal Deposit ~~institution~~Insurance ~~may~~Act ~~not~~requires ~~make~~federal abank ~~loan~~regulatory oragencies ~~extend credit~~ to aestablish ~~single~~certain ornon-capital ~~related~~safety ~~group~~and ofsoundness ~~borrowers~~standards infor ~~excess~~institutions offor ~~15%~~which ofthey ~~its~~are ~~unimpaired~~the ~~capital~~primary ~~and surplus~~federal regulator. AnThe ~~additional~~standards ~~amount~~relate ~~may~~generally ~~be lent, equal~~ to ~~10%~~operations ~~of unimpaired capital~~ and ~~surplus~~ management, ifasset ~~secured~~quality, byinterest ~~specified~~rate ~~readily-marketable~~exposure ~~collateral~~and ~~which~~executive ~~generally does not include real estate~~compensation. AsThe ofagencies ~~September~~are ~~30,~~authorized ~~2012~~to ~~the~~take ~~Bank~~action ~~was~~against ininstitutions ~~compliance~~that ~~with these~~fail ~~limitations. See “ – Lending Activities – Loans~~ to ~~One~~meet ~~Borrower~~such standards.”

~~Qualified~~Under ~~Thrift~~federal ~~Lender~~action regulations, the FDIC is authorized and, under certain circumstances, required to take various “prompt corrective actions” to ~~Test~~resolve the problems of any state non-member bank that is not adequately capitalized. As Under these regulations, a ~~federal~~bank ~~savings~~is ~~association~~considered to be (i) “well capitalized” if it has total risk-based capital of 10% or more, weTier ~~must~~1 ~~satisfy~~risk-based capital ~~the~~of ~~qualified~~6.0% ~~thrift~~or ~~lender~~more, Tier I leverage capital of 5% or ~~“QTL~~more, and is not subject to any written capital order or directive; (ii) “adequately capitalized” ~~test.~~if ~~Under~~it ~~the~~has ~~QTL~~total ~~test,~~risk-based wecapital ~~must~~of ~~maintain~~8% ator ~~least~~more, 65Tier I risk-based capital of 4.0% or more and Tier I leverage capital of ~~our~~4% ~~“portfolio~~or ~~assets”~~more in(3% under certain circumstances), and does not meet the definition of “~~qualified~~well ~~thrift investments~~capitalized”; (~~primarily~~iii) “undercapitalized” ~~residential~~if ~~mortgages~~it ~~and~~has ~~related~~total ~~investments~~risk-based capital of less than 8%, Tier ~~including~~I ~~mortgage~~risk-~~backed~~based ~~securities)~~capital inof atless ~~least~~than ~~nine~~4% ~~months~~or Tier I leverage capital of ~~the~~less ~~most~~than ~~recent~~4% ~~12-month~~(3% ~~period.~~under certain circumstances); (iv) “~~Portfolio~~significantly ~~assets~~undercapitalized” ~~generally~~if ~~means~~it has total ~~assets~~risk-based capital of aless ~~savings~~than 6%, Tier I risk-based capital ~~institution~~less than 3%, or Tier I leverage capital of less ~~the~~than ~~sum~~3%; and (v) “critically undercapitalized” if its ratio of ~~specified~~tangible ~~liquid~~equity to total assets upis equal to 20or less than 2%. ofUnder ~~total~~certain ~~assets~~circumstances, ~~goodwill~~the ~~and~~FDIC ~~other~~may ~~intangible~~reclassify ~~assets~~a well capitalized institution as adequately capitalized, and ~~the~~may ~~value~~require ofan ~~property~~adequately ~~used~~capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the ~~conduct~~next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of September 30, 2013 the ~~savings~~Bank ~~association’s~~was ~~business~~“well capitalized” for this purpose and their capital exceeded all applicable requirements.

WeProposed ~~also~~New ~~may~~Capital ~~satisfy~~Rules. On June 12, 2012, the ~~QTL~~federal ~~test~~bank regulatory agencies adopted notices of proposed rulemaking in which they proposed to revise their risk-based and leverage capital requirements consistent with agreements reached by ~~qualifying~~the asBasel aCommittee on Banking Supervision (BCBS) in “~~domestic~~Basel ~~building~~III: A Global Regulatory Framework for More Resilient Banks and Banking ~~loan~~Systems” ~~association~~(“Basel III”). asIf ~~defined~~adopted, the new requirements would introduce new tier 1 common equity ratio requirements of 4.5% and 6.5%, net of regulatory deductions, for adequately capitalized and well-capitalized institutions, respectively, and would also establish more conservative standards for including an instrument in regulatory capital. The new requirements would also introduce a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the ~~Internal~~target ~~Revenue~~minimum ~~Code~~common equity ratio to 7%, the minimum tier 1 capital ratio to 8.5%, and the minimum total capital ratio to 10.5%. An institution’s failure to achieve these minimum levels including the capital conservation buffer would restrict the institution’s ability to make capital distributions, including dividends, and to make certain discretionary bonus payments to executive officers. The regulatory agencies also reserve the right to require capital ratios for individual institutions that are higher than these minimums depending on the institution’s individual circumstances. The new requirements would also assign new risk weight categories for certain assets, most notably residential mortgage loans, high volatility commercial real estate loans, and past due assets. These new risk weightings may require banks and bank holding companies to maintain additional capital against assets in those categories and may introduce more volatility in their capital ratios.

AIf ~~savings~~adopted ~~association~~in ~~that~~their ~~fails~~proposed form, the ~~QTL~~requirements ~~test~~will ~~must~~be ~~either~~phased ~~convert~~in toover a ~~bank~~multi-year ~~charter~~period. orThe ~~operate~~ultimate ~~under~~impact ~~specified~~of ~~restrictions~~the ~~set~~new capital ~~forth~~and inliquidity ~~the Home~~standards ~~Owners’~~on ~~Loan~~our ~~Act.~~operations Atis ~~September 30,~~currently ~~2012~~being reviewed and will depend on a number of factors, weincluding ~~maintained~~the ~~approximately~~final 92rulemaking and implementation by the bank regulatory agencies.~~35%~~ ofWe ~~our~~cannot ~~portfolio~~determine ~~assets~~the inultimate ~~qualified~~effect ~~thrift~~that ~~investments~~the final ~~and~~regulations, ~~therefore~~if enacted, ~~satisfied~~would have upon our earnings or financial position, although the ~~QTL~~requirements ~~test~~to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact our financial results.

~~Community Reinvestment Act and Fair Lending Laws~~Liquidity. The ~~All~~Bank ~~federal~~is ~~savings~~subject ~~associations~~to ~~have~~the areserve ~~responsibility~~requirements ~~under~~imposed by the ~~Community~~State ~~Reinvestment~~of ~~Act~~Maryland. ~~and~~A ~~related~~Maryland ~~regulations~~banking toinstitution ~~help meet the credit~~is ~~needs~~required ofto ~~their~~have ~~communities,~~at ~~including~~all ~~low-~~times ~~and~~a ~~moderate-income~~reserve ~~borrowers.~~equal Into ~~connection~~at ~~with~~least ~~its~~15% ~~examination~~ of aits ~~federal~~demand ~~savings~~deposits. ~~association,~~The ~~the~~Bank ~~OCC~~ is ~~required~~also subject to ~~assess~~ the ~~savings~~uniform ~~association’s~~reserve ~~record~~requirements of ~~compliance~~Federal ~~with~~Reserve ~~the~~Board ~~Community Reinvestment~~Regulation ~~Act.~~D, Inwhich ~~addition,~~applies ~~the~~to ~~Equal~~all ~~Credit~~depository ~~Opportunity~~institutions ~~Act~~with ~~and~~transaction accounts ~~the~~or ~~Fair~~non-personal ~~Housing~~time ~~Act~~deposits. ~~prohibit~~Specifically, ~~lenders~~for ~~from~~2013, ~~discriminating~~amounts in ~~their~~transaction ~~lending~~accounts ~~practices~~above on$12.4 ~~the~~million ~~basis~~and ofup ~~characteristics~~to ~~specified~~$79.5 inmillion ~~those~~must ~~statutes.~~have Areserves ~~savings~~held ~~association’s failure~~against tothem ~~comply~~in ~~with~~ the ~~provisions~~ratio of ~~the~~three ~~Community~~percent ~~Reinvestment~~of ~~Act~~the ~~could,~~amount. atAmounts aabove ~~minimum,~~$79.5 ~~result~~million require inreserves ~~denial~~ of ~~certain~~$2,013,000 ~~corporate~~plus ~~applications~~10 ~~such~~percent asof ~~branches~~the oramount ~~mergers, or~~ in ~~restrictions~~excess onof ~~its~~$79.5 ~~activities~~million. The ~~failure~~Maryland toreserve ~~comply~~requirements ~~with~~may ~~the~~be ~~Equal Credit~~used ~~Opportunity~~to ~~Act~~satisfy ~~and~~ the ~~Fair~~requirements ~~Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department~~ of ~~Justice~~Regulation D. Fairmount Bank ~~received~~is ain ~~“satisfactory”~~compliance ~~Community~~with ~~Reinvestment Act rating in~~ its ~~most~~reserve ~~recent federal examination~~requirements. ~~The Community Reinvestment Act requires all Federal Deposit Insurance – insured institutions to publicly disclose their ratings.~~

~~Transactions~~Loans ~~with~~to ~~Related~~One ~~Parties~~Borrower. With Acertain ~~federal savings association’s authority to engage in transactions with its affiliates is~~ limited ~~by federal regulations by Sections 23A and 23B of the Federal Reserve Act~~exceptions, ~~and~~a byMaryland ~~Regulation~~banking Winstitution ~~promulgated~~may bylend ~~the~~to ~~Board of Governors of the Federal Reserve Board. An affiliate is~~ a ~~company~~single ~~that controls, is controlled by,~~ or ~~is under common control with an insured depository institution such as~~ ~~Fairmount~~related ~~Bank.~~group ~~Fairmount Bancorp, Inc. is an affiliate~~ of ~~Fairmount~~borrowers ~~Bank. In general, loan transactions between~~ an ~~insured~~amount ~~depository~~equal ~~institution and its affiliates are subject~~ to ~~certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10~~15% of ~~the~~its ~~institution’s~~ unimpaired capital and ~~unimpaired~~ surplus. ~~for~~An ~~transactions~~additional ~~with~~amount ~~any~~may ~~one~~be ~~affiliate~~lent, ~~and~~equal 20to 10% of unimpaired capital and ~~unimpaired~~ surplus, ~~for~~if ~~transactions~~such inloan ~~the~~is ~~aggregate~~secured ~~with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided~~ by ~~affiliates~~readily inmarketable ~~order to receive loans from the savings association. In addition~~collateral, ~~federal~~which ~~regulations~~is ~~prohibit~~defined ~~a savings association from lending~~ to include ~~any~~certain ofsecurities ~~its~~and ~~affiliates~~bullion, ~~that~~but ~~are~~generally ~~engaged~~does ~~in activities that are~~ not ~~permissible~~include ~~for~~real ~~bank~~estate. ~~holding~~As ~~companies and from purchasing the securities~~ of ~~any affiliate~~September 30, ~~other than a subsidiary. Finally~~2013, ~~transactions~~the ~~with~~Bank ~~affiliates~~was ~~must~~in becompliance ~~consistent~~ with ~~safe~~these ~~and~~limitations. ~~sound~~See ~~banking~~“ ~~practices,~~– ~~not~~Lending ~~involve~~Activities ~~low-quality~~– ~~assets~~Loans ~~and be on terms that are as favorable~~ to ~~the~~One ~~institution as comparable transactions with non-affiliates~~Borrower. ~~Savings associations are required to maintain detailed records of all transactions with affiliates.~~ ”

~~Fairmount~~Community ~~Bank’s~~Reinvestment ~~authority~~Act toand ~~extend~~Fair ~~credit~~Lending toLaws. Under ~~its~~the ~~directors,~~Community ~~executive~~Reinvestment ~~officers~~Act of ~~and~~1977 ~~10% stockholders~~(“CRA”), as ~~well~~the asFDIC is required to ~~entities~~assess ~~controlled~~the byrecord ~~such~~of ~~persons,~~all isfinancial ~~currently~~institutions ~~governed~~regulated by it to determine if such institutions are meeting the ~~requirements~~credit needs of ~~Sections 22~~the community (g)including low and ~~22(h~~moderate income neighborhoods) which they serve. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. Fairmount Bank has a CRA rating of “Satisfactory.” In addition, the ~~Federal~~Equal ~~Reserve~~Credit Opportunity Act and ~~Regulation~~the OFair ofHousing Act prohibit lenders from discriminating in their lending practices on the ~~Federal~~basis ~~Reserve~~of ~~Board~~characteristics specified in those statutes. ~~Among~~The ~~other~~failure ~~things~~to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, ~~these~~the ~~provisions~~Department ~~generally~~of Housing and Urban ~~require~~Development, ~~that~~and ~~extensions~~the Department of ~~credit~~Justice, toand ~~insiders:~~in private civil actions by borrowers.

Transactions with Related Parties. Transactions between banks and their related parties or affiliates are limited by federal regulation Sections 23A and 23B of the Federal Reserve Act, and by Regulation W promulgated by the Board of Governors of the Federal Reserve Board. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Fairmount Bank. Fairmount Bancorp, Inc. is an affiliate of Fairmount Bank. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Savings associations are required to maintain detailed records of all transactions with affiliates.

The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

•

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

•

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Fairmount Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by ~~Fairmount~~the Bank’s board of directors.

Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

~~Prompt~~Insurance ~~Corrective~~of ~~Action~~Deposit ~~Regulations~~Accounts. ~~Under~~ ~~the~~The ~~prompt~~Dodd-Frank ~~corrective~~Act ~~action~~permanently ~~regulations,~~increased the ~~OCC~~maximum isamount ~~required~~of ~~and~~deposit insurance ~~authorized~~for tobanks, ~~take~~savings ~~supervisory~~institutions ~~actions~~and ~~against~~credit ~~undercapitalized~~unions ~~savings~~to ~~associations. For this purpose~~$250,000 aper ~~savings~~depositor. ~~association~~Non-interest isbearing ~~placed~~transaction inaccounts ~~one~~have ofunlimited ~~the~~deposit ~~following~~insurance ~~five~~through ~~categories based~~December 31, on2012. Under the ~~savings association~~FDIC’s ~~capital:~~risk-based assessment

• well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued under certain statues and regulations, to maintain a specific capital level for any capital measure);

• adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

• undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);

• significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and

• critically undercapitalized (less than 2% tangible capital).

Recently proposed rules that would increase regulatory capital requirements would, if adopted, adjust the prompt corrective actions categories accordingly.

Generally, the banking regulator is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings association receives notice that it is

~~“undercapitalized~~system,” ~~“significantly~~insured ~~undercapitalized”~~institutions orare ~~“critically~~assigned ~~undercapitalized.”~~to ~~The~~one ~~criteria for an acceptable capital restoration plan include, among other things, the establishment~~ of ~~the~~four ~~methodology~~risk ~~and~~categories ~~assumptions~~based ~~for attaining adequately capitalized status~~ on ansupervisory ~~annual basis~~evaluations, ~~procedures~~regulatory ~~for~~capital ~~ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and~~ levels ~~of activities in which the savings association will engage while the capital restoration plan is in effect,~~ and ~~assurances~~certain ~~that~~other ~~the capital restoration plan will not appreciably increase the current~~ risk ~~profile of the savings association~~factors. ~~Any~~An ~~holding~~institution ~~company~~is ~~for~~assigned ~~the savings association required to submit a capital restoration plan must guarantee the lesser of~~ an ~~amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be~~ ~~undercapitalized~~assessment byrate ~~the~~from ~~OCC, or the amount necessary to restore the savings association to adequately capitalized status~~7.00 This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to ~~require payment and collect payment under the guarantee~~77.5 ~~Failure~~basis bypoints abased ~~holding~~upon ~~company to provide~~ the ~~required~~risk ~~guarantee~~category ~~will result in certain operating restrictions on the savings association, such as restrictions on the ability~~ to ~~declare~~which ~~and~~it ~~pay~~is ~~dividends, pay executive compensation and management fees, and increase assets or expand operations~~assigned. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

AtThe FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the Deposit Insurance Fund increase from 1.15% to 1.35% of insured deposits by September 30, ~~2012,~~2020. weBanks ~~met~~with ~~the~~assets ~~criteria~~of ~~for~~less ~~being~~than ~~considered~~$10 ~~“well-capitalized~~billion are exempt from any additional assessments necessary to increase the reserve fund above 1.”15%.

Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. An institution is assigned an assessment rate from 7.00 to 77.5 basis points based upon the risk category to which it is assigned.

The FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the Deposit Insurance Fund increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the reserve fund above 1.15%. As part of a plan to restore the reserve ratios to 1.15%, in June 2009 the FDIC imposed a special assessment on all insured institutions equal to five basis points of assets less Tier I capital as of June 30, 2009, payable on September 30, 2009, in order to cover losses to the Deposit Insurance Fund resulting from bank failures. Fairmount Bank recorded an expense of $28,000 during the quarter ended September 30, 2009, to reflect the special assessment. In addition, the FDIC increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated.

In addition, in lieu of further special assessments, the FDIC required all insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base is assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, the Company prepaid $217,000 in estimated assessment fees for the fourth quarter of 2009 through 2012. Because the prepaid assessments represent the prepayment of future expense, they do not affect regulatory capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

In February 2011, as required by the Dodd-Frank Act, the FDIC revised the assessment base to consist of average consolidated total assets during the assessment period minus the average tangible equity during the assessment period. In addition, the revisions eliminated the adjustment for secured borrowings and make certain other changes to the impact of unsecured borrowings and brokered deposits on an institution’s deposit insurance assessment. The rule also revised the assessment rate schedule to provide assessments ranging from 5 to 45 basis points.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. The Bank does not believe it is taking or is subject to any action, condition or violation that could lead to termination of the Bank’s deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2013, the annualized FICO assessment was equal to 66 basis points for each $100 of an institution’s assets less tangible capital.

Maryland Regulatory Assessment. The Office of the Commissioner of Financial Regulation of the State of Maryland annually assesses state banking institutions to cover the expense of regulating banking institutions. The Bank’s asset size determines the amount of the assessment.

Federal Home Loan Bank System. Fairmount Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Atlanta, we are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of September 30, 2013, we were in compliance with this requirement.

Dodd-Frank Act. The Dodd-Frank Act has changed bank regulatory structure and is affecting the lending, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated the Company’s former primary federal regulator, the Office of Thrift Supervision (“OTS”) and required the Bank to be regulated by the OCC, the primary federal regulator for national banks, as of July 21, 2011. The Dodd-Frank Act also authorizes the FRB to supervise and regulate all savings and loan holding companies in addition to the bank holding companies that it previously regulated. The Dodd-Frank Act also requires the FRB to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. Additionally, the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.

The Dodd-Frank Act also created the Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadened the base for FDIC insurance assessments. Assessments are now based on an institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250 thousand per depositor. The legislation also required rules governing retention of a portion of credit risk by originators of certain securitized

In loans, ~~addition~~stipulated toregulatory ~~the~~rate-setting ~~FDIC~~for ~~assessments~~certain debit card interchange fees, repealed restrictions on the ~~Financing~~payment ~~Corporation~~of ~~(“FICO”)~~interest ison ~~authorized~~commercial todemand ~~impose~~ deposits and ~~collect,~~contained ~~with~~a ~~the~~number ~~approval~~ of ~~the~~reforms related ~~Federal~~to ~~Deposit~~mortgage ~~Insurance~~originations. ~~Corporation,~~The ~~assessments~~Dodd-Frank ~~for~~Act ~~anticipated~~increased ~~payments,~~stockholder ~~issuance~~influence ~~costs~~over ~~and~~boards ~~custodial~~of ~~fees~~directors by requiring companies to give stockholders a non-binding vote on ~~bonds~~executive ~~issued~~compensation byand ~~the~~so-called ~~FICO~~“golden inparachute” payments and authorizing the ~~1980s~~SEC to ~~recapitalize~~promulgate ~~the~~rules ~~former~~that ~~Federal~~would ~~Savings~~allow stockholders to nominate and ~~Loan Insurance~~solicit ~~Corporation~~votes for their own candidates using a company’s proxy materials. The ~~bonds~~legislation ~~issued~~directed by the ~~FICO~~FRB ~~are~~to ~~due~~promulgate rules prohibiting excessive compensation paid to ~~mature~~bank inholding ~~2017~~company ~~through~~executives, ~~2019~~regardless of whether the company is publicly traded or not. ~~For~~The Dodd-Frank Act provided for originators of certain securitized loans to retain a percentage of the ~~quarter~~risk ~~ended~~for ~~September 30~~transferred loans, ~~2012,~~directed the ~~annualized~~FRB ~~FICO~~to ~~assessment~~regulate ~~was~~pricing ~~equal~~of tocertain 66debit ~~basis~~card ~~points~~interchange ~~for~~fees ~~each~~and ~~$100~~contained a number of anreforms ~~institution’s~~related ~~assets~~to ~~less tangible~~mortgage ~~capital~~origination.

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. Fairmount Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Atlanta, we are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of September 30, 2012, we were in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted by us are subject to state usury laws and federal laws concerning interest rates. Our operations are also subject to federal laws applicable to credit transactions, such as the:

•

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

•

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

•

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

•

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

•

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

•

Truth in Savings Act; and

•

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

Our operations also are subject to the:

•

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

•

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

•

Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

•

The USA PATRIOT which require banks operating in the United States, among other things, to develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

•

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

• The USA PATRIOT Act and the related regulations of the Office of the Comptroller of the Currency, which require savings associations operating in the United States, among other things, to develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

• The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. ~~After~~Upon completion of the Bank’s conversion~~, Fairmount~~ ~~Bancorp,~~to ~~Inc.~~a ~~became~~Maryland achartered state non-~~diversified~~member ~~savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such~~bank, Fairmount Bancorp, Inc. iswas ~~registered~~approved ~~with~~by the Federal Reserve ~~Board~~as ~~and~~a ~~subject~~bank toholding ~~Federal~~company ~~Reserve Board~~under ~~regulations,~~the ~~examinations,~~BHC ~~supervision and reporting requirements~~Act. InAs ~~addition~~such, the ~~Federal~~Company ~~Reserve~~is ~~has~~subject ~~enforcement~~to ~~authority~~Federal ~~over~~Reserve ~~Fairmount Bancorp~~regulation, ~~Inc.~~examination and ~~its~~reporting ~~subsidiaries~~requirements. ~~Among~~The ~~other~~Company ~~things,~~is ~~this~~required ~~authority~~to ~~permits~~file with the Federal Reserve ~~Board~~ toan ~~restrict~~annual orreport ~~prohibit~~and ~~activities~~such additional ~~that~~information ~~are~~as ~~determined to be a serious risk to~~ the ~~subsidiary~~Federal ~~savings~~Reserve ~~institution.~~may ~~Like~~require ~~bank~~pursuant ~~holding companies, federal savings and loan holding companies are now subject~~ to ~~any regulatory capital requirements or to supervision by~~ the ~~Federal~~BHC ~~Reserve Board~~Act.

Acquisition of Control. ~~Under~~Among ~~the~~other ~~federal~~things, ~~Change~~the inBHC ~~Bank~~Act requires ~~Control~~regulatory ~~Act,~~filings by a ~~notice must~~stockholder beor ~~submitted~~other toparty ~~the~~that ~~Federal~~seeks ~~Reserve~~to ~~Board~~acquire ifdirect ~~any~~or ~~person~~indirect ~~(including~~“control” aof ~~company),~~an orFDIC-insured ~~group~~depository ~~acting~~institution. inThe ~~concert,~~determination ~~seeks~~whether toan ~~acquire~~investor “~~control~~controls” a depository institution is based on all of athe ~~savings~~facts and ~~loan~~circumstances ~~holding~~surrounding ~~company~~the orinvestment. ~~savings~~As ~~association.~~a Angeneral ~~acquisition~~matter, ofa “party is deemed to control~~” can~~ ~~occur~~a ~~upon~~depository institution or other company if the ~~acquisition~~party ofcontrols 1025% or more of ~~the~~any class of voting stock. ofSubject to rebuttal, a ~~savings~~party ~~and~~may ~~loan~~be ~~holding~~presumed ~~company~~to orcontrol ~~savings~~a depository institution or asother ~~otherwise~~company ~~defined~~if by the ~~Federal~~investor ~~Reserve~~owns ~~Board.~~or ~~Under~~controls ~~the~~10% ~~Change~~or inmore ~~Control~~of ~~Act,~~any ~~the~~class ~~Federal~~of ~~Reserve~~voting ~~Board~~stock. ~~has~~Ownership ~~60 days~~by ~~from~~affiliated ~~the~~parties, ~~filing~~or ofparties aacting ~~complete~~in ~~notice~~concert, tois ~~act,~~typically ~~taking~~aggregated for ~~into~~these ~~consideration~~purposes. ~~certain~~If ~~factors,~~a ~~including~~party’s ~~the~~ownership ~~financial~~of ~~and~~the ~~managerial~~Company ~~resources~~were ofto ~~the~~exceed ~~acquirer~~certain ~~and~~thresholds, the ~~anti-trust~~investor ~~effects~~could ofbe ~~the~~deemed ~~acquisition.~~to ~~Any~~“control” ~~company~~the ~~that~~Company sofor ~~acquires~~regulatory ~~control~~purposes. ~~would then~~This becould subject tothe ~~regulation~~investor asto aregulatory ~~savings~~filings ~~and~~or ~~loan~~other regulatory ~~holding company~~consequences.

Permissible Activities. ~~Under~~Pursuant ~~present~~to ~~law,~~provisions ~~the business activities~~ of the ~~Company~~BHC ~~will~~Act beand ~~generally~~regulations ~~limited~~promulgated toby ~~those~~the ~~activities~~Federal ~~permissible~~Reserve thereunder, ~~for financial holding companies under Section 4(k) of~~ the ~~Bank Holding~~ Company ~~Act~~may ofonly ~~1956,~~engage asin ~~amended,~~ or ~~for~~own ~~multiple~~companies ~~savings~~that ~~and~~engage ~~loan~~in ~~holding~~activities ~~companies.~~deemed ~~A financial~~by ~~holding~~the ~~company~~Federal ~~may~~Reserve ~~engage~~to inbe ~~activities~~so ~~that~~closely ~~are~~related ~~financial~~to inthe ~~nature,~~business ~~including~~of ~~underwriting~~banking ~~equity~~or ~~securities~~managing ~~and~~or ~~insurance~~controlling asbanks ~~well~~ as ~~activities~~to ~~that~~be ~~are~~a ~~incidental~~proper toincident ~~financial~~thereto, ~~activities~~and orthe holding ~~complementary~~company tomust aobtain ~~financial~~permission ~~activity.~~from ~~A multiple~~the ~~savings~~Federal ~~and~~Reserve ~~loan~~prior ~~holding~~to ~~company~~engaging isin ~~generally~~most ~~limited~~new tobusiness activities. ~~permissible~~In ~~for~~addition, bank holding companies ~~under~~like ~~Section 4(c)(8) of~~ the ~~Bank Holding~~ Company ~~Act,~~must ~~subject~~be towell ~~the~~capitalized ~~prior~~and ~~approval~~well ofmanaged ~~the~~in ~~Federal~~order ~~Reserve~~to ~~Board,~~engage ~~and~~in ~~certain~~the expanded ~~additional~~financial activities ~~authorized~~permissible byonly ~~Federal~~for ~~Reserve~~a ~~Board~~financial ~~regulations~~holding company.

Capital. Federal ~~law~~banking ~~prohibits~~regulators ahave ~~savings~~adopted ~~and~~risk-based capital ~~loan~~guidelines for bank holding ~~company~~companies. Currently, ~~including~~ the ~~Company,~~required ~~directly~~minimum orratio ~~indirectly,~~of ortotal ~~through~~capital ~~one~~to orrisk-weighted ~~more~~assets ~~subsidiaries,~~(including ~~from~~off-balance ~~acquiring~~sheet ~~more~~activities, ~~than~~such ~~5.0%~~as ofstandby ~~another~~letters ~~savings~~of ~~institution~~credit) oris ~~holding~~8%. ~~company~~At ~~thereof,~~least ~~without~~half ~~prior written approval~~ of the ~~Federal~~total ~~Reserve~~capital ~~Board.~~is required Itto ~~also~~be ~~prohibits~~Tier ~~the acquisition~~1 orcapital, ~~retention~~consisting principally of, ~~with~~common ~~certain~~stockholders’ ~~exceptions~~equity, ~~more~~non-cumulative ~~than~~perpetual ~~5.0%~~preferred ofstock, a ~~nonsubsidiary~~limited ~~company~~amount ~~engaged~~of incumulative ~~activities~~perpetual ~~that~~preferred ~~are~~stock ~~not~~and ~~closely~~minority ~~related~~interests ~~to banking or financial~~ in ~~nature,~~the orequity ~~acquiring~~accounts ~~or retaining control~~ of ~~an institution that is not~~ ~~federally~~consolidated ~~insured. In evaluating applications by holding companies to acquire savings institutions~~subsidiaries, ~~the~~less ~~Federal~~goodwill. ~~Reserve~~The ~~Board~~remainder ~~must~~(Tier ~~consider~~2 ~~the~~capital) ~~financial~~may ~~and~~consist ~~managerial~~of ~~resources,~~a ~~future~~limited ~~prospects~~amount of ~~the~~subordinated ~~company~~debt and ~~institution~~intermediate-term ~~involved~~preferred stock, ~~the~~certain ~~effect of~~hybrid ~~the~~capital ~~acquisition~~instruments onand ~~the~~other ~~risk~~debt ~~to the federal deposit insurance fund~~securities, ~~the~~perpetual ~~convenience~~preferred stock and ~~needs~~a limited amount of the ~~community~~general ~~and~~loan ~~competitive~~loss ~~factors~~allowance.

In addition to the risk-based capital guidelines, the federal banking regulators have established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

The above risk-based and leverage ratio guidelines apply on a consolidated basis to any bank holding company with consolidated assets of $500 million or more. These guidelines also apply on a consolidated basis to any bank holding company with consolidated assets of less than $500 million if such holding company (i) is engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) conducts significant off-balance sheet activities; or (iii) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. As of September 30, 2013, Fairmount Bancorp, Inc. had consolidated assets of less than $500 million and did not satisfy the nonbanking, off-balance sheet, or debt requirements that would make it subject to the risk-based or leverage ratio requirements discussed above. However, under the Federal Reserve Board Policy for Small Holding Companies it must continue to serve as a source of strength for its subsidiary bank.

The Federal Reserve has issued a policy statement regarding the payment of dividends and the repurchase of shares of capital stock by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes

~~Capital. Savings and loan holding companies are not currently subject to specific regulatory~~ ~~capital requirements~~undercapitalized. The ~~Dodd-Frank~~policy ~~Act,~~statement ~~however,~~also ~~requires~~provides ~~the~~for ~~Federal~~regulatory ~~Reserve~~review ~~Board~~prior to ~~promulgate~~a ~~consolidated capital requirements for depository institution~~ holding ~~companies~~company ~~that~~redeeming ~~are~~or norepurchasing ~~less~~common ~~stringent,~~or ~~both~~perpetual ~~quantitatively and in terms of components of capital, than those applicable to depository institutions themselves. Instruments such as cumulative~~ preferred stock ~~and~~that ~~trust~~would ~~preferred~~result ~~securities~~in ~~will~~a nonet reduction ~~longer be includable~~ as ~~Tier~~of 1the ~~capital,~~end asof isa ~~currently~~quarter ~~permitted~~in ~~for~~the ~~bank holding~~amount ~~companies.~~of ~~There~~such isequity ainstruments ~~five-year~~outstanding ~~transaction~~compared ~~period~~with ~~(from~~ the ~~July~~beginning ~~21, 2010 effective date~~ of the ~~Dodd-Frank~~quarter ~~Act)~~in ~~before~~which the ~~capital~~redemption ~~requirements~~or ~~should~~repurchase ~~apply to savings and loan holding companies~~occurred. ~~However,~~These ~~the recent proposed rule that would establish such~~ regulatory ~~capital~~policies ~~requirements~~could ~~for~~affect ~~savings and loan holding companies failed to acknowledge either~~ the ~~grandfather~~ability ~~for trust preferred securities or the five-year transition period for application~~ of the ~~capital~~Company ~~requirements~~ to ~~savings~~pay ~~and~~dividends, ~~loan~~repurchase ~~holding~~shares ~~companies.~~of Itcommon isstock ~~therefore~~or ~~uncertain~~otherwise ~~whether~~engage ~~the~~in ~~Federal~~capital ~~Reserve Board will implement the statutory grandfather and transitional period~~distributions.

~~Dividends and Repurchases.~~ The Federal Reserve’s ~~Board~~policies ~~has~~also ~~issued~~require athat ~~policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank~~a ~~holding~~bank ~~companies that it has made applicable to savings and loan~~ holding ~~companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding~~ company ~~appears~~serve consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as ~~where the~~a ~~company’s~~source ~~net income for the past four quarters, net~~ of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial ~~condition.~~strength ~~The ability of a holding company~~ to ~~pay~~its ~~dividends may be restricted if a~~ subsidiary ~~bank~~banks ~~becomes~~by ~~undercapitalized.~~standing ~~The~~ready ~~policy~~to ~~statement~~use ~~also~~available ~~provides~~resources ~~for regulatory review prior~~ to aprovide ~~holding~~adequate ~~company redeeming~~capital orfunds ~~repurchasing~~to ~~common~~those ~~stock~~banks orduring ~~perpetual~~periods ~~preferred stock that would result in a net reduction as~~ of ~~the~~financial ~~end~~stress ofor aadversity ~~quarter~~and inby ~~the~~maintaining ~~amount of such equity instruments outstanding compared with~~ the ~~beginning of the quarter in which the~~ ~~redemption~~financial orflexibility ~~repurchase~~and ~~occurred.~~capital-raising ~~These~~capacity ~~regulatory policies could affect the ability of the Company~~ to ~~pay~~obtain ~~dividends,~~additional ~~repurchase~~resources ~~shares~~for ofassisting ~~common~~its ~~stock~~subsidiary orbanks ~~otherwise~~where ~~engage in capital distributions~~necessary.

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Federal Securities Laws

The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934. Fairmount Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The Company’s common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of ~~Fairmount~~the ~~Bancorp,~~Company ~~Inc.~~ is able to sell in the public market, without registration, a limited of shares in any three-month period.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We will be subject to further reporting and audit requirements beginning with the fiscal year ending September 30, ~~2012~~2013 under the requirements of the Sarbanes-Oxley Act. We have prepared and will prepare policies, procedures and systems designed to ensure compliance with these regulations.

TAXATION

Federal Taxation

General. Fairmount Bancorp, Inc. and Fairmount Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. For federal income tax purposes, Fairmount Bancorp files a consolidated federal income tax return with its wholly owned subsidiary, Fairmount Bank, on a fiscal year basis. The applicable federal income tax expense or benefit is properly allocated to each subsidiary based upon taxable income or loss calculated on a separate company basis. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Fairmount Bancorp, Inc. and Fairmount Bank.

Method of Accounting. For federal income tax purposes, income and expenses are reported on the accrual method of accounting and Fairmount Bancorp will file its federal income tax return using a September 30 fiscal year end.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.

Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At September 30, 2012, we had no minimum tax credit carry forward.

~~Net~~Alternative ~~Operating~~Minimum ~~Loss Carryovers~~Tax. AThe ~~financial~~Internal ~~institution~~Revenue ~~may~~Code ~~carry~~of ~~back~~1986, ~~net~~as ~~operating~~amended, ~~losses~~imposes toan alternative ~~the~~minimum ~~preceding~~tax ~~two~~at ~~taxable~~a ~~years~~rate ~~and~~of ~~forward~~20% toon ~~the~~a ~~succeeding~~base 20of regular taxable ~~years.~~income Atplus ~~September 30,~~certain ~~2012~~tax preferences, wereferred ~~had~~to aas ~~net~~“alternative ~~operating~~minimum ~~loss~~taxable ~~carryforward~~income.” ~~for~~The ~~income~~alternative minimum tax ~~purposes~~is ~~from~~payable to the ~~Fullerton~~extent ~~acquisition~~alternative minimum taxable income is in ~~the~~excess of an exemption amount. ofNet ~~$420~~operating losses can,~~000.~~ ~~Approximately $42~~in general,~~000~~ offset no more than 90% of ~~the~~alternative ~~carryforward~~minimum ~~was~~taxable income. Certain payments of alternative minimum tax may be used toas ~~offset~~credits ~~current~~against ~~year~~regular ~~income~~tax ~~with~~liabilities ~~the~~in ~~remainder~~future years. ofAt ~~$378~~September 30,~~000~~ ~~being~~2013, ~~carried~~we ~~forward~~had tono ~~offset~~minimum ~~potential~~tax ~~future~~credit ~~income~~carry forward.

Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At September 30, 2013, we had a net operating loss carryforward for income tax purposes from the Fullerton acquisition in the amount of $378,000. Approximately $43,000 of the carryforward was used to offset current year income with the remainder of $335,000 being carried forward to offset potential future income.

Corporate Dividends. We may exclude from our income 100% of dividends received from Fairmount Bank as a member of the same affiliated group of corporations.

Audit of Tax Returns. Our federal income tax returns have not been audited during the last five-year period.

Maryland Taxation

Fairmount Bancorp, Inc. is subject to Maryland’s Corporation Business Tax at the rate of 8.25% on its taxable income, before net operating loss deductions and special deductions for federal income tax purposes. Fairmount Bank is required to file Maryland income tax returns. For this purpose, “taxable income” generally means federal taxable income subject to certain adjustments (including addition of interest income on state and municipal obligations).

Item 1A.

Risk Factors

Not applicable to a smaller reporting company.

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties

We conduct our operations from our ~~offices~~ office located at 8216 Philadelphia Road, Baltimore, Maryland 21237 ~~and at 7527 Belair Road, Baltimore, Maryland, 21236 (the former office of Fullerton)~~. The net book value of the premises, land and equipment at 8216 Philadelphia Road was $2,~~519~~451,000 at September 30, ~~2012~~2013. The ~~net book value of the premises at 7527 Belair Road was $556,000. The~~ Company believes that its properties are maintained in good operating condition and are suitable and adequate for its purposes.

We continue to own the premises at 7527 Belair Road and the current book value of the premises, land and equipment is $542,000. We also own a property contiguous our home office that may be used for expansion and/or developed and sold. At September 30, ~~2012~~2013, the book value of this property was $162,000.

Item 3.

Legal Proceedings

We are not presently involved in legal proceedings of a material nature. Occasionally, we are a party to legal proceedings incidental to our business to enforce security interest in collateral pledged to secure loans made by us.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market, Holder and Dividend Information. Fairmount Bancorp, Inc.’s common stock is quoted on the OTC Bulletin Board under the symbol “FMTB”. The common stock commenced trading on June 3, 2010. As of September 30, 2012, there were 477,514 shares of common stock outstanding. As of December 21, 2012, there were 469,714 shares of common stock outstanding. At that date, the Company had approximately 108 holders of record of common stock. The figure of shareholders of record does not reflect the number of persons whose shares are in nominee or street name accounts through brokers.

~~The~~PART ~~quarterly~~II high and low sales price of the Company’s common stock for the past two fiscal years is presented in the table below. These prices may include dealer mark-up, mark-down and/or commission and may not necessarily represent actual transactions.

Fiscal Year 2012:	High Bid		Low Bid		Close
September 30, 2012	$	17.00	$	17.00	$	17.00
June 30, 2012		14.42		14.42		14.42
March 31, 2012		16.04		15.20		15.20
December 31, 2011		14.10		14.10		14.10

Fiscal Year 2011:
September 30, 2011	$	17.00	$	16.50	$	16.50
June 30, 2011		18.00		15.75		17.00
March 31, 2011		20.00		15.00		16.00
December 31, 2010		20.00		15.00		20.00

(a)

Market, Holder and Dividend Information. The Company’s common stock is quoted on the OTC Bulletin Board under the symbol “FMTB”. The common stock commenced trading on June 3, 2010. As of September 30, 2013, there were 484,839 shares of common stock outstanding. As of December 23, 2013, there were 484,839 shares of common stock outstanding. At that date, the Company had approximately 110 holders of record of common stock. The figure of shareholders of record does not reflect the number of persons whose shares are in nominee or street name accounts through brokers.

The ~~Board~~quarterly ofhigh ~~Directors~~and ~~has~~low ~~the~~sales ~~authority~~price ~~to declare cash dividends on shares~~ of Fairmount’s common stock, ~~subject~~for ~~to statutory and regulatory requirements. However, no decision has been made with respect to~~ the ~~payment~~past oftwo ~~cash~~fiscal ~~dividends.~~years Inis ~~determining~~presented ~~whether and~~ in ~~what amount to pay a cash dividend,~~ the ~~Board~~table isbelow. ~~expected~~These toprices ~~take into account a number of factors, including~~may ~~capital~~include ~~requirements,~~dealer ~~our consolidated financial condition and results of operations~~mark-up, ~~tax~~mark-down ~~considerations, statutory~~ and/or ~~regulatory~~commission ~~limitations~~ and ~~general~~may ~~economic conditions. No assurances can be given that any cash dividends will be paid or that, if paid, will~~ not benecessarily ~~reduced~~represent oractual ~~eliminated in the future~~transactions.

Dividend payments by the Company are dependent primarily on dividends it receives from Fairmount Bank, because the Company will have no source of income other than dividends from the Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by the Company, and interest payments with respect to the Company’s loan to the ESOP. Federal law imposes limitations on dividends by Federal stock savings banks. See “Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”


Fiscal Year 2013:	High Bid		Low Bid		Close
September 30, 2013	$	20.00	$	20.00	$	20.00
June 30, 2013		21.00		21.00		21.00
March 31, 2013		23.00		23.00		23.00
December 31, 2012		17.05		17.05		17.05

Fiscal Year 2012:
September 30, 2012	$	17.00	$	17.00	$	17.00
June 30, 2012		14.42		14.42		14.42
March 31, 2012		16.04		15.20		15.20
December 31, 2011		14.10		14.10		14.10

~~(b)~~The ~~Sales~~Board of ~~Unregistered~~Directors ~~Securities~~has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements. ~~Not~~However, ~~applicable~~no decision has been made with respect to the payment of cash dividends. In determining whether and in what amount to pay a cash dividend, the Board is expected to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any cash dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

~~(c)~~Dividend ~~Use~~payments by the Company are dependent primarily on dividends it receives from Fairmount Bank, because the Company will have no source of ~~Proceeds~~income other than dividends from the Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by the Company, and interest payments with respect to the Company’s loan to the ESOP. ~~Not~~See ~~applicable~~“Supervision and Regulation—Banking Regulation—Capital Distributions.”

(db) ~~Securities~~Sales ~~Authorized~~of ~~for~~Unregistered ~~Issuance Under Equity Compensation Plans~~Securities. ~~The~~Not following table sets forth the information as of September 30, 2012 with respect to compensation plans (other than the Company’s employee stock ownership plan) under which securities of the registrant are authorized for issuanceapplicable.

	Equity Compensation Plan Information
	Number of securities tobe issued upon exerciseof outstanding options,warrants and rights		Weighted-averageexercise price ofoutstanding options,warrants and rights(1)		Number of securitiesremaining available forfuture issuance under stockbased compensation plans(excluding securitiesreflected in firstcolumn)
Equity compensation plans approved by stockholders		52,864	$	14.10		9,300
Equity compensation plans not approved by stockholders		N/A		N/A		N/A
Total		52,864	$	14.10		9,300

(c)

Use of Proceeds. Not applicable.

(1d) ~~Reflects~~Securities ~~weighted~~Authorized ~~average~~for ~~price~~Issuance Under Equity Compensation Plans. The following table sets forth the information as of September 30, 2013 with respect to compensation plans (other than the Company’s employee stock ~~options~~ownership ~~only~~plan) under which securities of the registrant are authorized for issuance.


	Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights⁽¹⁾		Number of securities remaining available for future issuance under stock based compensation plans (excluding securities reflected in first column)
Equity compensation plans approved by stockholders		52,864	$	14.10		9,300
Equity compensation plans not approved by stockholders		N/A		N/A		N/A


Total		52,864	$	14.10		9,300

~~Table~~(1) Reflects weighted average price of ~~Contents~~stock options only

~~(e)~~32 Stock repurchases. On September 7, 2012, the Board of Directors authorized the repurchase of up to 25,000 shares of the Company’s outstanding common stock. The repurchase program is equal to approximately 5% of the total shares outstanding. On October 4, 2012, the Board of Directors approved an increase in its current stock repurchase program from 25,000 to 40,000 shares, which is equal to approximately 8% of the total shares outstanding. The repurchase program began on September 10, 2012 and will occur over a period of six months. The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the period listed.

Period		TotalNumber ofSharesPurchased				AveragePricePaid perShare				Total Number ofSharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms				MaximumNumber ofSharesThat May Yet BePurchasedUnder thePlan
September 1–30, 2012			22,800			$	17.07				22,800				17,200

33(e) Stock repurchases. On September 7, 2012, the Board of Directors authorized the repurchase of up to 25,000 shares of the Company’s outstanding common stock. The repurchase program is equal to approximately 5% of the total shares outstanding. On October 4, 2012, the Board of Directors approved an increase in its current stock repurchase program from 25,000 to 40,000 shares, which is equal to approximately 8% of the total shares outstanding. The repurchase program began on September 10, 2012 and ran for a period of six months through February 2013. The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the periods listed.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plan
September 1-30, 2012		22,800	$	17.07		22,800		17,200
October 1-31, 2012		6,000		17.05		28,800		11,200
November 1-30, 2012		1,800		17.10		30,600		9,400
December 1-31, 2012		—		—		30,600		9,400
January 1-31, 2013		—		—		30,600		9,400
February 1-28, 2013		—		—		30,600		9,400

~~Item 6.~~33 ~~Selected Financial Data~~

	At September 30,
	2012		2011
	(In thousands)
Selected Financial Conditional Data:
Total assets	$	79,044	$	72,787
Cash and cash equivalents		514		619
Federal funds sold and interest-bearing deposits in other banks		3,849		5,571
Certificates of deposit		3,532		—
Investment securities		11,441		7,805
Federal Home Loan Bank stock		480		604
Loans receivable, net		54,650		53,758
Deposits		58,026		50,947
Borrowed funds		8,000		10,000
Equity		12,855		11,477

Item 6.

Selected Financial Data

	For the Years EndedSeptember 30,
	2012		2011
	(In thousands)
Selected Operating Data:
Interest and dividend income	$	3,714	$	3,764
Interest expense		920		1,101
Net interest income		2,794		2,663
Provision for loan losses		200		455
Net interest income after provision for loan losses		2,594		2,208
Non-interest income		91		226
Non-interest expense		2,245		1,671
Income before income taxes		440		763
Provision for income taxes		114		274
Income before extraordinary gain		326		489
Extraordinary item, gain on business combination		1,022		—
Net income	$	1,348	$	489

The following tables contain certain information concerning our consolidated financial position and results of operations, which is derived in part from our consolidated financial statements. The following is only a summary and should be read in conjunction with the consolidated financial statements and notes beginning on page 48 this annual report.


	At September 30,
	2013		2012
	(In thousands)
Selected Financial Conditional Data:

Total assets	$	77,028	$	79,044
Cash and cash equivalents		851		514
Federal funds sold and interest-bearing deposits in other banks		3,000		3,849
Certificates of deposit		3,784		3,532
Investment securities		9,548		11,441
Federal Home Loan Bank stock		454		480
Loans receivable, net		55,375		54,650
Deposits		55,930		58,026
Borrowed funds		8,000		8,000
Equity		13,003		12,855

	For the Years Ended September 30,
	2013		2012
	(In thousands)
Selected Operating Data:

Interest and dividend income	$	3,418	$	3,714
Interest expense		733		920


Net interest income		2,685		2,794
Provision for loan losses		500		200


Net interest income after provision for loan losses		2,185		2,594
Non-interest income		248		91
Non-interest expense		1,995		2,245


Income before income taxes		438		440
Provision for income taxes		181		114


Income before extraordinary gain		257		326

Extraordinary item, gain on business combination		—		1,022


Net income	$	257	$	1,348

~~Table~~34 ~~of Contents~~

	At or for the YearsEndedSeptember 30,
	2012			2011
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)(1)		1.70	%		0.67	%
Return on equity (ratio of net income to average equity)(1)		10.12	%		4.40	%
Interest rate spread(2)		3.64	%		3.69	%
Net interest margin(3)		3.81	%		3.89	%
Efficiency ratio(4)		77.80	%		57.85	%
Non-interest expense to average total assets		2.84	%		2.31	%
Average interest-earning assets to average interest-bearing liabilities		113.15	%		112.92	%
Loans to deposits		94.18	%		105.52	%
Asset Quality Ratios:
Non-performing assets to total assets(5)		2.75	%		3.22	%
Non-performing loans to total loans		3.39	%		2.67	%
Allowance for loan losses to non-performing loans		32.90	%		45.67	%
Allowance for loan losses to total loans		1.12	%		1.22	%
Net chargeoffs as a percentage of average loans outstanding		0.45	%		0.23	%
Capital Ratios:
Average equity to average assets		16.56	%		15.11	%
Equity to total assets at end of period		16.26	%		15.77	%
Total capital to risk-weighted assets		27.33	%		24.75	%
Tier 1 capital to risk-weighted assets		26.07	%		23.50	%
Tier 1 capital to average assets		13.74	%		13.12	%
Per Share Data(6):
Net income, basic(1)	$	2.86		$	1.18
Net income, dilutive(1)	$	2.82		$	1.18
Book value	$	26.92		$	25.85
Market price	$	17.00		$	16.50
Average shares outstanding		472,278			415,083
Other Data:
Number of full service offices		2			1
Number of employees		14			12

(1) Net income includes extraordinary item, gain on business combination


	At or for the Years Ended September 30,
	2013			2012

Selected Financial Ratios and Other Data:

Performance Ratios:

Return on assets (ratio of net income to average total assets) ⁽¹⁾		0.33	%		1.70	%
Return on equity (ratio of net income to average equity) ⁽¹⁾		2.01	%		10.12	%
Interest rate spread⁽²⁾		3.54	%		3.64	%
Net interest margin⁽³⁾		3.66	%		3.81	%
Efficiency ratio⁽⁴⁾		68.01	%		77.80	%
Non-interest expense to average total assets		2.55	%		2.84	%
Average interest-earning assets to average interest-bearing liabilities		112.72	%		113.15	%
Loans to deposits		99.01	%		94.18	%

Asset Quality Ratios:
Non-performing assets to total assets⁽⁵⁾		3.12	%		2.75	%
Non-performing loans to total loans		4.31	%		3.39	%
Allowance for loan losses to non-performing loans		30.74	%		32.90	%
Allowance for loan losses to total loans		1.31	%		1.12	%
Net chargeoffs as a percentage of average loans outstanding		0.69	%		0.45	%

Capital Ratios:
Average equity to average assets		16.15	%		16.56	%
Equity to total assets at end of period		16.88	%		16.26	%
Total capital to risk-weighted assets		28.24	%		27.33	%
Tier 1 capital to risk-weighted assets		26.98	%		26.07	%
Tier 1 capital to average assets		14.70	%		13.74	%

Per Share Data ⁽⁶⁾:
Net income, basic ⁽¹⁾	$	0.58		$	2.86
Net income, dilutive ⁽¹⁾	$	0.56		$	2.82
Book value	$	26.82		$	26.51
Market price	$	20.00		$	17.00
Average shares outstanding		445,643			472,278

Other Data:
Number of full service offices		1			2
Number of employees		12			14

(21) ~~Represents~~Net ~~the~~income ~~difference~~includes ~~between~~extraordinary ~~the~~item, ~~weighted-average~~gain ~~yield~~ on ~~interest-earning~~business ~~assets and the weighted-average cost of interest-bearing liabilities for the period.~~combination

(32) ~~The~~Represents ~~net~~the ~~interest~~difference ~~margin~~between ~~represents~~the ~~net~~weighted-average ~~interest~~yield ~~income~~on asinterest-earning aassets ~~percent~~and ofthe weighted-average cost of interest-~~earning~~bearing ~~assets~~liabilities for the period.

(43) The ~~efficiency~~net ~~ratio~~interest margin represents ~~non-~~net interest ~~expense~~income ~~divided~~as bya ~~the~~percent ~~sum~~ of ~~net~~average interest-earning ~~income~~assets ~~and~~for ~~non-interest~~the ~~income~~period.

(54) ~~Non-performing~~The ~~assets~~efficiency ~~consist~~ratio ofrepresents non-~~performing~~interest ~~loans~~expense ~~and~~divided ~~real~~by ~~estate~~the ~~owned~~sum of net interest income and non-interest income.

(65) ~~Book~~Non-performing ~~value~~assets ~~per~~consist ~~share is calculated using the number~~ of ~~shares~~non-performing ofloans ~~common stock outstanding of 477,514~~ and ~~444,038~~real asestate ~~of September 30, 2012 and 2011, respectively~~owned.

35(6) Book value per share is calculated using the number of shares of common stock outstanding of 477,514 as of September 30, 2013 and 2012, respectively.

~~Table~~35 ~~of Contents~~

~~Overview~~Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our results of operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we pay on our deposits and borrowings. Results of operations are also affected by provisions for loan losses and noninterest income. Our noninterest expense consists primarily of compensation and employee benefits, office occupancy and general administrative and data processing expenses. Overview

Our results of operations ~~are~~depend ~~significantly~~mainly ~~affected~~on byour net ~~general~~interest ~~economic~~income, ~~and~~which ~~competitive~~is ~~conditions,~~the ~~particularly with~~difference ~~respect~~between tothe ~~changes~~interest inincome we earn on our loan and investment portfolios and the interest ~~rates,~~expense ~~government~~we ~~policies~~pay on our deposits and ~~actions~~borrowings. Results of ~~regulatory~~operations ~~authorities~~are also affected by provisions for loan losses and noninterest income. ~~Future~~Our ~~changes~~noninterest inexpense ~~applicable~~consists ~~law,~~primarily ~~regulations~~of orcompensation ~~government~~and ~~policies~~employee ~~may~~benefits, ~~materially~~office ~~affect~~occupancy ~~our~~and ~~financial~~general ~~condition~~administrative and ~~results~~data ofprocessing ~~operations~~expenses.

~~Historically,~~Our ~~our~~results ~~business has consisted primarily~~ of ~~originating~~operations ~~one-to~~are ~~four-family~~significantly ~~real~~affected ~~estate loans secured~~ by ~~property~~general ineconomic ~~our market area~~ and ~~investing~~competitive inconditions, ~~mortgage-backed~~particularly ~~and~~with ~~investment~~respect ~~securities. Typically, one-~~to ~~four-family~~changes ~~loans~~in ~~involve~~interest ~~a lower degree of risk and carry a lower yield than commercial real estate~~rates, ~~construction and consumer loans. Our loans are primarily funded by~~ ~~certificates~~government ofpolicies ~~deposit~~ and, toactions ~~a lesser extent, savings accounts and Federal Home Loan Bank~~ of ~~Atlanta~~regulatory ~~advances~~authorities. ~~Certificates~~Future ofchanges ~~deposit~~in ~~typically~~applicable ~~have~~law, aregulations ~~higher~~or ~~interest~~government ~~rate~~policies ~~than~~may ~~savings~~materially ~~accounts.~~affect ~~The combination of these factors, along with~~ our ~~capital~~ ~~level,~~financial ~~has~~condition ~~resulted in low interest rate spreads~~ and ~~returns~~results onof ~~equity~~operations.

~~Critical~~Historically, ~~Accounting~~our ~~Policies~~business has consisted primarily of originating one-to four-family real estate loans secured by property in our market area and investing in mortgage-backed and investment securities. Typically, one-to four-family loans involve a lower degree of risk and carry a lower yield than commercial real estate, construction and consumer loans. Our loans are primarily funded by certificates of deposit and, to a lesser extent, savings accounts and Federal Home Loan Bank of Atlanta advances. Certificates of deposit typically have a higher interest rate than savings accounts. The combination of these factors, along with our capital level, has resulted in low interest rate spreads and returns on equity.

InCritical ~~reviewing~~Accounting ~~and~~Policies understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the Notes to the Consolidated Financial Statements. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Management believes that evaluation of the allowance for loan losses is the most critical accounting policy to aid in fully understanding and evaluating our reported financial results. This policy requires numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

~~The~~In ~~allowance~~reviewing ~~for~~and ~~loan losses~~understanding isour ~~established~~financial ~~through~~information, ayou ~~provision~~are ~~for~~encouraged ~~loan~~to ~~losses~~read ~~charged~~and tounderstand ~~expense.~~the ~~Loans~~significant ~~are~~accounting ~~charged~~policies ~~against~~used ~~the~~in ~~allowance~~preparing ~~for~~our financial ~~loan~~statements. ~~losses~~These ~~when~~policies ~~management~~are ~~believes~~described ~~that~~in ~~the~~Note ~~collectability~~1 of the ~~principal~~Notes isto ~~unlikely.~~the ~~Subsequent~~Consolidated ~~recoveries~~Financial ~~are~~Statements. ~~added~~Our ~~to the~~accounting ~~allowance.~~and ~~The~~financial ~~allowance~~reporting ispolicies anconform ~~amount~~to ~~that~~accounting ~~represents~~principles ~~the~~generally ~~amount~~accepted ofin ~~probable~~the ~~and~~United ~~reasonably~~States ~~estimable~~of ~~known~~ America and ~~inherent~~to ~~losses~~general inpractices within the ~~loan~~banking ~~portfolio~~industry. Accordingly, ~~based~~the onfinancial ~~evaluations~~statements ofrequire ~~the~~certain ~~collectability~~estimates, ofjudgments, ~~loans.~~and ~~The~~assumptions, ~~evaluations~~which ~~take~~are ~~into~~believed ~~consideration such~~to ~~factors~~be asreasonable, ~~changes~~based inupon the ~~types~~information ~~and~~available. ~~amount~~These ofestimates ~~loans~~and assumptions inaffect the ~~loan~~reported ~~portfolio,~~amounts ~~historical~~of ~~loss~~assets ~~experience,~~and ~~adverse~~liabilities ~~situations~~at ~~that~~the ~~may~~date ~~affect~~of the ~~borrower’s~~financial ~~ability~~statements toand ~~repay,~~the ~~estimated~~reported ~~value~~amounts of ~~any~~income ~~underlying~~and ~~collateral,~~expenses ~~estimated~~during ~~losses relating~~the toperiods ~~specifically~~presented. ~~identified~~Management ~~loans,~~believes ~~and~~that ~~current~~evaluation ~~economic~~of ~~conditions.~~the ~~This~~allowance ~~evaluation~~for loan losses is ~~inherently~~the ~~subjective~~most ascritical itaccounting ~~requires~~policy ~~material~~to ~~estimates~~aid ~~including,~~in ~~among~~fully ~~others,~~understanding ~~exposure~~and atevaluating ~~default,~~our ~~the~~reported ~~amount~~financial ~~and~~results. ~~timing~~This ofpolicy ~~expected~~requires ~~future~~numerous ~~cash~~estimates ~~flows on~~or ~~impacted~~economic ~~loans,~~assumptions ~~value~~that ofmay ~~collateral,~~prove ~~estimated~~inaccurate ~~losses~~or onmay ~~our~~be ~~loan~~subject ~~portfolios~~to asvariations which ~~well~~may assignificantly ~~consideration~~affect ofour ~~general~~reported ~~loss~~results ~~experience.~~and ~~All~~financial ofcondition ~~these~~for ~~estimates~~the ~~may~~period beor ~~susceptible~~in tofuture ~~significant change~~periods.

~~While~~The ~~management~~allowance ~~uses~~for ~~the~~loan ~~best~~losses ~~information~~is established ~~available~~through toa ~~make~~provision for loan ~~loss~~losses ~~allowance~~charged ~~evaluations,~~to ~~adjustments~~expense. toLoans are charged against the allowance ~~may~~for beloan ~~necessary~~losses ~~based~~when ~~on changes~~management inbelieves ~~economic~~that ~~and~~the ~~other~~collectability ~~conditions~~of orthe ~~changes~~principal inis ~~accounting guidance~~unlikely. InSubsequent ~~addition,~~recoveries are added to the allowance. ~~OCC,~~The asallowance is an ~~integral~~amount ~~part~~that represents the amount of ~~its~~probable ~~examination~~and ~~processes,~~reasonably ~~periodically~~estimable ~~reviews~~known ~~the~~and ~~Bank’s~~inherent ~~allowance~~losses ~~for~~in the loan ~~losses~~portfolio, based on evaluations of the collectability of loans. The ~~OCC~~evaluations ~~may~~take ~~require~~into ~~the~~consideration ~~recognition~~such offactors ~~adjustments~~as tochanges in the ~~allowance~~types ~~for~~and amount of loans in the loan ~~losses~~portfolio, ~~based~~historical onloss ~~its~~experience, ~~judgment~~adverse situations that may affect the borrower’s ability to repay, estimated value of ~~information~~any ~~available~~underlying collateral, estimated losses relating to itspecifically atidentified ~~the~~loans, ~~time~~and ofcurrent ~~its~~economic ~~examinations~~conditions. ToThis ~~the~~evaluation ~~extent~~is ~~that~~inherently ~~actual~~subjective ~~outcomes~~as ~~differ~~it ~~from~~requires ~~management’s~~material estimates including, ~~additional~~among ~~provisions~~others, toexposure at default, the ~~allowance~~amount and timing of expected future cash flows on ~~for~~impacted ~~loan~~loans, value of collateral, estimated losses ~~may~~on beour ~~required~~loan ~~that~~portfolios ~~would~~as ~~adversely~~well ~~impact~~as ~~earnings~~consideration inof ~~future~~general ~~periods~~loss experience. All of these estimates may be susceptible to significant change.

36While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Office of the Commissioner of Financial Regulation of the State of Maryland, as an integral part of its examination processes, periodically reviews the Bank’s allowance for loan losses and may require the recognition of adjustments to the allowance for loan losses based on its judgment of information available to it at the time of its examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

~~Table~~36 ~~of Contents~~

~~Highlights~~Business ofStrategy ~~our business strategy are as follows:~~

•Highlights ~~Growing~~of ~~and Diversifying~~ our ~~Loan~~business ~~Portfolio.~~strategy We will pursue loan portfolio diversification with an emphasis on credit risk management to increase our origination of loans that provide higher returns. These loans provide higher returns than loans secured by one-to four-family residential real estate. These loans are ~~generally~~as ~~originated~~follows: with rates that are fixed for seven years or less or adjust periodically, which assists us in managing our interest rate risk. We also intend to increase our origination of commercial real estate and construction loans when market conditions improve.

• ~~Continuing~~Growing toand ~~Emphasize~~Diversifying ~~Residential~~our ~~Real~~Loan ~~Estate Lending~~Portfolio. ~~Historically,~~We wewill ~~have~~pursue ~~emphasized~~loan ~~one-to~~portfolio ~~four-family,~~diversification ~~fixed-rate~~with ~~residential~~an ~~lending~~emphasis ~~within~~on ~~our~~credit ~~market~~risk ~~area.~~management Asto ofincrease ~~September~~our ~~30,~~origination ~~2012,~~of ~~$43,953,000,~~loans orthat 79provide higher returns.~~49%,~~ ofThese ~~our~~loans ~~total~~provide ~~loan~~higher ~~portfolio~~returns ~~consisted~~than ofloans secured by one-to four-family residential ~~mortgage~~real ~~loans~~estate. ~~During~~These ~~the~~loans ~~year~~are ~~ended~~generally ~~September~~originated ~~30,~~with ~~2012,~~rates wethat ~~originated~~are ~~$3,098,000~~fixed offor ~~one-to~~seven ~~four-family~~years ~~residential~~or ~~mortgage~~less ~~loans~~or ~~and~~adjust ~~$420~~periodically,~~000~~ ofwhich ~~one-to~~assists ~~four-family~~us ~~non-owner~~in ~~occupied~~managing ~~loans~~our interest rate risk. InWe ~~addition,~~also intend to aincrease ~~lesser~~our ~~extent,~~origination weof ~~originate~~commercial real estate and construction~~/permanent~~ loans ~~and~~when ~~second~~market ~~mortgage~~conditions ~~loans~~improve.

• Continuing to ~~Maintain~~Emphasize ~~Strong~~Residential ~~Asset~~Real ~~Quality~~Estate ~~Through Conservative Underwriting Standards~~Lending. WeHistorically, ~~believe~~we ~~that maintaining high asset quality is a key to long-term financial success. We~~ have ~~sought~~emphasized one-to ~~maintain favorable asset quality reflected primarily by a low level of nonperforming assets~~four-family, ~~low charge~~fixed-~~offs~~rate ~~and~~residential ~~adequacy~~lending ofwithin ~~loan~~our ~~loss~~market ~~reserves~~area. WeAs ~~use~~of ~~underwriting standards that we believe are conservative, and we diligently monitor collection efforts. At~~ September 30, ~~2012~~2013, $243,~~173~~845,000, or 278.7504%, of our total ~~assets,~~loan ~~was~~portfolio ~~nonperforming.~~consisted ~~Although~~of weone-to ~~intend~~four-family toresidential ~~diversify~~mortgage ~~our~~loans. ~~lending~~During ~~activities~~the ~~into~~year ~~commercial~~ended ~~real~~September ~~estate~~30, ~~loans~~2013, ~~construction~~we ~~loans~~originated ~~and consumer loans~~$4,840,000 weof ~~intend~~ one-to ~~maintain~~four-family ~~our~~residential ~~conservative~~mortgage ~~approach to underwriting~~ loans. Weand ~~do not offer~~$530,000 ~~and~~of ~~do not intend~~ one-to ~~offer, “interest only,” “Option ARM,” “sub~~four-~~prime”~~family ~~or Alt~~non-A”owner ~~loans,~~occupied ~~nor does it hold any securities backed by these mortgages~~loans. ~~Total~~In ~~net~~addition, ~~charge-offs~~to ~~for~~a ~~the~~lesser ~~year ended September 30~~extent, ~~2012,~~we ~~were~~originate ~~$248,000,~~construction/permanent orloans ~~0.45%,~~and ofsecond ~~average~~mortgage loans ~~outstanding~~.

• ~~Building~~Continuing ~~Lower~~to ~~Cost~~Maintain ~~Deposits~~Strong Asset Quality Through Conservative Underwriting Standards. We ~~currently~~believe ~~offer~~that ~~NOW~~maintaining ~~accounts~~high asset quality is a key to long-term financial success. We have sought to maintain favorable asset quality reflected primarily by a low level of nonperforming assets, ~~savings~~low ~~accounts~~charge-offs and ~~certificates~~adequacy of ~~deposit~~loan loss reserves. We use underwriting standards that we believe are conservative, and we diligently monitor collection efforts. At September 30, ~~2012~~2013, ~~certificates~~$2,406,000, ofor ~~deposit represented 64~~3.5012% of our total ~~deposits~~assets, was nonperforming. WeAlthough we intend to ~~introduce~~diversify ~~new~~our ~~commercial~~lending ~~checking~~activities ~~accounts~~into ~~and~~commercial ~~focus~~real onestate ~~growing~~loans, ~~transaction~~construction ~~deposit~~loans ~~accounts.~~and ~~Checking~~consumer ~~accounts~~loans, ~~NOW~~we ~~accounts~~intend ~~and~~to ~~savings~~maintain ~~accounts~~our ~~are~~conservative ~~generally~~approach ~~lower-cost~~to ~~sources~~underwriting ofloans. ~~funds~~We ~~than~~do ~~certificate~~not ofoffer, ~~deposits~~ and ~~are~~do ~~less~~not ~~sensitive~~intend to ~~withdrawal~~offer, ~~when~~ “interest ~~rates~~only,” ~~fluctuate.~~“Option AsARM,” we“sub-prime” ~~grow~~or ~~our~~Alt-A” ~~commercial loan portfolio~~loans, wenor ~~expect~~does toit ~~attract~~hold ~~core~~any ~~deposits~~securities ~~from~~backed ~~our~~by ~~new~~these ~~commercial loan customers~~mortgages. WeTotal ~~also~~net ~~expect~~charge-offs ~~additional~~for ~~core~~the ~~deposits~~year ~~from~~ended ~~internet~~September ~~banking~~30, ~~which~~2013, ~~was~~were ~~implemented~~$384,000, ~~during~~or ~~fiscal~~0.69% ~~year~~of ~~2012~~average loans outstanding.

• ~~Maintaining~~Building aLower ~~Strong~~Cost ~~Capital~~Deposits. ~~Position~~We ~~Through~~currently ~~Disciplined~~offer ~~Growth~~NOW accounts, savings accounts and ~~Earnings~~certificates of deposit. ~~Our~~At ~~policy~~September ~~has~~30, ~~always~~2013, ~~been~~certificates of deposit represented 61.58% of our total deposits. We intend to ~~protect~~introduce ~~the~~new ~~safety~~commercial checking accounts and ~~soundness~~focus ofon ~~the~~growing ~~institution~~transaction ~~through~~deposit ~~conservative~~accounts. ~~risk~~Checking ~~management~~accounts, ~~sound~~NOW ~~operations~~accounts and asavings ~~strong~~accounts ~~capital~~are ~~position.~~generally Welower-cost ~~have~~sources ~~consistently~~of ~~maintained~~funds ~~capital~~than incertificate ~~excess~~ of ~~regulatory~~deposits ~~requirements~~and are less sensitive to withdrawal when interest rates fluctuate. ~~Our~~As ~~equity~~we grow our commercial loan portfolio, we expect to ~~total~~attract ~~assets~~core ~~ratio~~deposits ~~was~~from 16our new commercial loan customers.~~26%~~ atWe ~~September~~also 30expect additional core deposits from internet banking, ~~2012~~which was implemented during fiscal year 2013.

• ~~Offering~~Maintaining ~~New~~a ~~and~~Strong ~~Better~~Capital ~~Products~~Position ~~and~~Through ~~Services.~~Disciplined WeGrowth ~~intend to utilize technology to increase productivity~~ and ~~provide~~Earnings. ~~new~~Our ~~and~~policy ~~better~~has ~~products~~always ~~and~~been ~~services We implemented our internet banking service in fiscal year 2012 and we expect~~ to ~~begin~~protect ~~offering~~the ~~debit~~safety ~~cards in early 2013. We expect that these new products~~ and ~~services~~soundness ~~will~~of ~~help~~the toinstitution ~~maintain~~through ~~and~~conservative ~~increase~~risk ~~our deposit base~~management, ~~will~~sound ~~attract~~operations ~~business~~ and ~~retail~~a ~~customers~~strong ~~and~~capital ~~will increase productivity~~position. We ~~will~~have ~~analyze~~consistently ~~the~~maintained ~~profitability~~capital ofin ~~products~~excess ~~and~~of ~~services~~regulatory ~~and~~requirements. ~~allocate~~Our ~~our~~equity ~~resources~~ to ~~those~~total ~~areas~~assets weratio ~~believe~~was ~~offer~~16.88% ~~the~~at ~~greatest~~September ~~future~~30, ~~potential~~2013.

• ~~Expanding~~Offering ~~Our~~New ~~Branch~~and ~~Network~~Better Products and Services. We intend to ~~evaluate~~utilize technology to increase productivity and ~~pursue~~provide ~~opportunities~~new toand ~~expand~~better products and services We implemented our ~~franchise~~internet banking service in ~~our~~fiscal ~~market~~year ~~area~~2013 ~~through~~and ~~the~~we ~~enhanced~~also ~~presence~~began offering debit cards in ~~the~~fiscal ~~community~~year ~~provided~~2013. byWe ~~our~~expect ~~new~~that ~~office~~these ~~facility~~new products and byservices ~~opening~~will ~~additional~~help ~~banking~~to ~~offices~~maintain and, ~~possibly~~increase our deposit base, ~~through~~will ~~acquisitions~~attract ofbusiness ~~other~~and ~~financial~~retail ~~institutions~~customers and ~~banking~~will ~~related~~increase ~~businesses~~productivity. ~~Other~~We ~~than~~will analyze the ~~acquisition~~profitability of ~~Fullerton~~products ~~which~~and ~~occurred~~services inand ~~October~~allocate ~~2011,~~our weresources ~~have~~to nothose ~~current~~areas ~~arrangements~~we tobelieve ~~acquire~~offer ~~other~~the ~~financial~~greatest ~~institutions~~future potential.

37• Expanding Our Branch Network. We intend to evaluate and pursue opportunities to expand our franchise in our market area through the enhanced presence in the community provided by our new office facility and by opening additional banking offices and, possibly, through acquisitions of other financial institutions and banking related businesses. Other than the acquisition of Fullerton which occurred in October 2011, we have no current arrangements to acquire other financial institutions.

~~Table~~37 ~~of Contents~~

~~Total~~Comparison ~~assets~~of ~~increased~~Financial byCondition ~~$6,257,000, or 8.60%, to $79,044,000~~ at September 30, ~~2012,~~2013 ~~from~~and ~~$72,787,000 at~~ September 30, ~~2011.~~2012 ~~The increase was primarily the result of the acquisition of Fullerton in October 2011. A total of $8,544,000 in assets were acquired in the transaction.~~

~~Cash and~~Total ~~cash~~assets ~~equivalents~~ decreased by $12,~~826~~016,000, or 292.5055%, to $477,~~363~~028,000 at September 30, ~~2012~~2013, from $679,~~189~~044,000 at September 30, ~~2011~~2012. ~~This~~The decrease was primarily the result of ~~decreases~~a decrease in ~~interest-bearing~~securities ~~deposits~~available for sale in ~~other~~the ~~banks~~amount ~~and decreases~~of $2,012,000, a decrease in federal funds sold of $1,370,000 offset by an increase in net loans of $725,000.

~~Certificates~~Cash ofand ~~deposit~~cash ~~increased~~equivalents decreased by $512,000, or 11.74%, to $3,~~532~~851,000 at September 30, ~~2012.~~2013, ~~The~~from ~~increase~~$4,363,000 ~~was~~at ~~due~~September 30, to2012. ~~the~~This ~~investment~~decrease ofwas ~~available~~primarily ~~liquidity~~the inresult ~~FDIC insured certificates~~ of ~~deposits~~decreases ~~with~~in ~~maturities~~federal ~~greater~~funds ~~than one year~~sold.

~~Investment~~Certificates ~~securities~~ of deposit increased by $3252,~~636,~~000, ~~or 46.59%, to $11,441,000~~ at September 30, ~~2012, from $7,805,000 at September 30, 2011~~2013. The increase was due to the ~~result~~investment of ~~$7,478,000~~available liquidity in ~~purchases~~FDIC ~~offset~~insured bycertificates ~~$4,531,000~~of indeposits with maturities, ~~payments~~greater ~~and~~than ~~calls~~one year.

~~Total~~Investment securities ~~net~~decreased ~~loans~~by ~~increased~~$1,893,000, ~~from~~or 16.55%, to $539,~~758~~548,000 at September 30, ~~2011~~2013, tofrom $5411,~~650~~441,000 at September 30, 2012. ~~This represented an increase of $892,000, or 1.66%.~~ The ~~change~~decrease was ~~primarily~~the ~~attributable~~result ~~to loans added~~ of $25,~~415~~034,000 in ~~association~~purchases ~~with the Fullerton acquisition and an increase in secured by other properties loans of $830,000 or 46.53%,~~ offset by ~~decreases of~~ $16,~~234~~740,000, ~~or 27.44%,~~ in ~~construction and land development loans and decreases of $888~~sales,~~000,~~ ~~or 2.09%~~maturities, inpayments ~~one-to four-family residential first mortgage loans. For related party loan information see Note 4 of the accompanying Notes to the Consolidated Financial~~and ~~Statements~~calls.

~~Foreclosed~~Total ~~real~~net ~~estate,~~loans ~~which~~increased isfrom ~~described below~~$54,650,000 ~~decreased~~at bySeptember 30, ~~$588~~2012,~~000~~ ~~from~~to $~~884~~55,375,000 at September 30, ~~2011~~2013. toThis represented an increase of $~~296~~725,000, ~~at September 30~~or 1.33%. The change was primarily an increase of $649,000, ~~2012:~~or 19.88%, in construction and land development loans and an increase of $391,000, or 32.23%, in secured commercial loans. For related party loan information see Note 4 of the accompanying Notes to the Consolidated Financial Statements.

•Foreclosed ~~One~~assets ~~commercial~~decreased ~~borrower with one loan secured~~ by ~~five residential condominium units in Ocean City, Maryland and one commercial business property in Anne Arundel County with an outstanding balance of~~ $~~770~~276,000. ~~This relationship is the result of a loan participation whereby we purchased 35% of the loan~~ from the lead lender. On May 23, 2011, along with the lead lender, we took a deed in lieu of foreclosure on the five condominium units and have hired a management company to maintain the properties and collect the rents. During the current fiscal year we sold four condominium units and recorded a loss on the transactions of $18296,000. Weat ~~also recorded a write down in the valuation of the remaining unit of $14,000 and recorded its fair value of $79,000 as of~~ September 30, 2012. ~~We believe we adequately recorded the fair value of the remaining unit~~ to ~~enable recovery through the liquidation of the property and avoid future additional losses on this property. We have a remaining loan balance of~~ $~~216~~20,000 at ~~with~~September 30, ~~the commercial borrower secured by the commercial business property~~2013. ~~This~~The ~~loan~~foreclosed ~~was~~asset ~~restructured and~~ is ~~considered~~ a ~~troubled~~mobile ~~debt~~home ~~restructuring.~~that ~~Based~~is oncurrently ~~the~~for ~~appraisal~~sale ofand ~~the~~has ~~commercial~~been ~~property,~~written andown ~~additional~~to ~~allowance~~its ~~was~~fair ~~not required for the remaining loan~~value.

•Total liabilities ~~One~~at ~~commercial~~September 30, ~~borrower~~2013 ~~with~~were ~~one loan secured by seven single family land lots ranging in size from one acre to twenty two acres~~$64,025,000, ~~in Talbot County. This relationship is the result of~~ a ~~participation~~decrease ~~whereby we purchased 35%~~ of ~~the loan from the lead lender. On May 13~~$2, ~~2011~~164, ~~along with the lead lender~~000, weor ~~purchased the lots at a foreclosure sale~~3.27%, Wefrom ~~originally recorded foreclosed real estate in the amount of~~ $~~390~~66,189,000 ~~relating~~at toSeptember 30, ~~the seven single-family land lots~~2012. ~~Based~~The ondecrease awas ~~recent~~primarily ~~appraisal,~~attributable weto ~~recorded~~ a ~~write~~reduction ~~down~~ in ~~the~~deposits ~~valuation~~ of ~~the property of~~ $~~190~~2,096,000 ~~and~~from ~~recorded its fair value of~~ $~~200~~58,026,000 ~~as of~~ at September 30, 2012. ~~We believe we adequately recorded the fair value of the foreclosed asset~~ to ~~enable~~$55,930,000 ~~recovery~~at ~~through~~September 30, ~~the liquidation of the properties~~2013.

~~Total~~Deposits ~~liabilities~~decreased to $55,930,000 at September 30, ~~2012~~2013, ~~were~~from $6658,~~189~~026,000 at September 30, an2012. ~~increase~~This represented a decrease of $42,~~879~~096,000, or 73.9661%,. ~~from~~The ~~$61,310,000~~decreases atwere ~~September 30,~~primarily ~~2011.~~the ~~The~~result ~~increase~~of ~~was~~decreases ~~primarily~~in ~~attributable~~certificates toof ~~deposits~~deposit ~~added~~ of $72,~~333~~986,000, inor ~~association~~7.98%, ~~with the Fullerton acquisition~~ offset by ~~repayments~~increases in savings of $21,~~000~~388,000, inor ~~Federal~~8.98%. ~~Home~~For related ~~Loan~~party ~~Bank~~deposit ~~overnight~~information ~~advances~~see Note 8 of the accompanying Notes to the Consolidated Financial Statements.

~~Deposits~~Borrowed ~~increased~~funds, towhich were exclusively Federal Home Loan Bank advances remained unchanged at $588,~~026~~000,000 at September 30, ~~2012,~~2013 from ~~$50,947,000 at~~ September 30, 2012. ~~This~~At ~~represented~~September 30, ~~an increase of $7~~2013,~~079,000,~~ ~~or 13.89%. The increases were primarily~~ the ~~result~~weighted ofaverage ~~increases~~rate ~~in savings deposits~~ of ~~$5,033,000,~~the oradvances 48was 3.2635%,. ~~and~~The ~~increases~~balance inof ~~certificates~~borrowed offunds ~~deposit~~may offluctuate depending $1on,~~490,000,~~ oramong ~~4.15%.~~other ~~For~~things, ~~related~~our ~~party~~ability ~~deposit~~to ~~information~~attract ~~see~~deposits, ~~Note~~the 8relative pricing of ~~the~~advances ~~accompanying~~compared ~~Notes~~ to ~~the~~deposits, ~~Consolidated~~and ~~Financial~~its ~~Statements~~liquidity needs.

38Stockholders’ equity was $13,003,000, or 16.88%, of total assets at September 30, 2013, compared to $12,855,000, or 16.26%, of total assets at September 30, 2012. The primary reason for the $148,000, or 1.15%, increase in equity was net income of $257,000 for the fiscal year ending September 30, 2013. The increase was offset by several factors including a decrease of $129,000 in other comprehensive income related to the interest rate fluctuations on the Company’s available for sale securities portfolio, a release of shares for the ESOP of $72,000, recording of stock based compensation of $81,000 relating to RRP shares and stock options. In September 2012, the Company instituted a stock repurchase program which resulted in a decrease of $133,000 in stockholders’ equity in fiscal year 2013 due to the repurchase of 7,800 shares of common stock.

~~Table~~38 ~~of Contents~~

~~Stockholders’~~Comparison ~~equity was $12,855,000, or 16.26%,~~ of ~~total~~Operating ~~assets~~Results ~~at September 30, 2012, compared to $11,477,000, or 15.77%, of total assets at September 30, 2011. The primary reason~~ for the ~~$1,378,000,~~ orYears ~~12.01%,~~Ended 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. In September 2012, the Company instituted a stock repurchase program which resulted in a decrease of $389,000 in stockholders’ equity due to the repurchase of 22,800 shares of common stock. Several other factors also contributed to the changes in stockholders’ equity including net income before extraordinary gain of $326,000 for the year ended September 30, ~~2012,~~2013 ~~offset by deductions for ESOP shares of $63,000~~ and ~~RRP~~2012 shares of $37,000, a release of shares for the ESOP of $59,000 as well as an increase of $8,000 in other comprehensive income related to the interest rate fluctuations on the Company’s available for sale securities portfolio.

~~Comparison~~Overview. Net income decreased by $1,091,000 to $257,000 for the year ended September 30, 2013, from $1,348,000 for the year ended September 30, 2012. This decrease in net income included an extraordinary gain of ~~Operating~~$1,022,000 ~~Results~~recorded in 2012 in association with the acquisition of Fullerton. Net interest income decreased $109,000, or 3.90%, to $2,685,000 for the ~~Years~~year ~~Ended~~ended September 30, 2013, from $2,794,000 for the year ended September 30, 2012. Provision for loan and ~~2011~~lease losses increased by $300,000 to $500,000 for the year ended September 30, 2013, from $200,000 for the year ended September 30, 2012. Non-interest income increased by $157,000 from $91,000 for the year ended September 30, 2012, to $248,000 for the year ended September 30, 2013. Non-interest expenses decreased by $250,000, or 11.14%, from $2,245,000 for the year ended September 30, 2012, to $1,995,000 for the year ended September 30, 2013. Income taxes increased $67,000, or 58.77%, from $114,000 for the year ended September 30, 2012 to $181,000 for the year ended September 30, 2013.

~~Overview~~Net Interest Income. Net interest income ~~increased~~decreased by $~~859~~109,000, or 3.90%, to $12,~~348~~685,000 for the year ended September 30, ~~2012~~ 2013, from $~~489~~2,794,000 for the year ended September 30, ~~2011~~2012. ~~This~~The ~~increase~~decrease inprimarily ~~net~~resulted ~~income~~from ~~included~~the ancombined ~~extraordinary~~effects ~~gain~~ of ~~$1,022,000~~a ~~recorded~~decrease ~~in association with the acquisition~~ of ~~Fullerton. Net interest income increased~~ $~~131~~296,000, or 47.9297%, in interest and dividend income to $23,~~794~~418,000 for the year ended September 30, ~~2012~~2013, from $23,~~663~~714,000 ~~for~~in the year ended September 30, ~~2011.~~2012, ~~Provision for loan~~ and ~~lease~~a ~~losses~~decrease ~~decreased~~of by $~~255~~187,000, orin ~~56.04%,~~interest expense to $~~200~~733,000 for the year ended September 30, ~~2012~~2013, from $~~455~~920,000 for the year ended September 30, ~~2011~~2012. ~~Non-~~The decrease in interest ~~income~~and ~~decreased~~dividend byincome ~~$135,000,~~was ordue ~~59.73%,~~to ~~from~~a ~~$226,000~~decrease ~~for~~in the ~~year~~average ~~ended~~rates ~~September 30,~~earned ~~2011,~~on tointerest-bearing ~~$91,000~~assets ~~for~~from ~~the~~5.06% ~~year~~at ~~ended~~ September 30, 2012. ~~Non-interest~~to ~~expenses increased by $574,000, or 34~~4.3567%, ~~from~~at $1September 30,~~671,000~~ ~~for~~2013. ~~the~~Interest ~~year~~expense ~~ended~~decreased ~~September 30,~~due ~~2011,~~ to ~~$2,245,000~~a ~~for~~decrease in the average ~~year~~rates ~~ended~~paid ~~September 30,~~on ~~2012.~~deposits ~~Income~~and ~~taxes~~borrowings ~~decreased~~to ~~$160,000, or 58~~1.3913%, ~~from~~at ~~$274,000 for the year ended~~ September 30, ~~2011~~ ~~to $114~~2013,~~000~~ ~~for~~from ~~the~~1.42% ~~year~~at ~~ended~~ September 30, 2012.

~~Net~~For ~~Interest~~the ~~Income.~~year ~~Net~~ended September 30, ~~interest~~2013, ~~income~~the ~~increased~~average byyield ~~$131,000,~~on orinterest-earning assets was 4.9267%, to ~~$2,794,000~~compared ~~for~~to ~~the~~5.06% ~~year ended September 30, 2012, from $2,663,000~~ for the year ended September 30, ~~2011~~2012. The ~~increase~~average ~~primarily~~cost ~~resulted from the combined effects~~ of ainterest-bearing ~~decrease~~liabilities ofwas ~~$50,000, or~~ 1.3313%, ~~in interest and dividend income to $3,714,000~~ for the year ended September 30, ~~2012~~2013, compared ~~from~~to ~~$3,764,000~~1.42% infor the year ended September 30, ~~2011,~~2012. ~~and~~The aaverage ~~decrease~~balance of interest-earnings assets decreased by $~~181~~90,000, inor ~~interest~~0.12%, ~~expense~~ to $~~920~~73,275,000 for the year ended September 30, ~~2012~~2013, ~~from~~compared to $173,~~101~~365,000 for the year ~~ended~~ ended September 30, ~~2011~~2012. The ~~increase in interest and dividend income was due to a combination of a $4,995,000 increase in the~~ average balance of interest-bearing ~~earning~~liabilities ~~assets~~increased ~~from~~by ~~September 30~~$163, ~~2011~~000, toor ~~September 30, 2012, offset by a decrease in the average rates earned on interest-bearing assets from 5~~0.5125% ~~at September 30~~, ~~2011~~ to ~~5.06% at September 30~~$65,004,000 ~~2012.~~for ~~Interest expense decreased due to a combination of a decrease in~~ the ~~average~~year ~~rates~~ended ~~paid on deposits and borrowings to 1.42% at~~ September 30, ~~2012~~2013, from ~~1.82% at September 30, 2011, offset by an increase in interest-bearing liabilities of~~ $464,~~293~~841,000 ~~from~~for ~~September 30,~~the ~~2011~~year toended September 30, 2012.

~~For the year ended September 30, 2012, the average yield on interest-earning assets was 5.06%, compared to 5.51% for the year ended September 30, 2011.~~ The average ~~cost of~~ interest~~-bearing~~ ~~liabilities~~rate spread was 13.4254% for the year ended September 30, ~~2012~~2013, compared to 13.8264% for the year ended September 30, ~~2011~~2012. The average ~~balance~~net of interest~~-earnings~~ ~~assets~~margin ~~increased by~~was ~~$4,995,000, or 7~~3.31661%, ~~to $73,365,000~~ for the year ended September 30, ~~2012~~2013, compared to ~~$68,370,000 for the year ended September 30, 2011~~3. ~~The average balance of interest-bearing liabilities increased by $4,293,000, or 7.09~~81%, ~~to $64,841,000~~ for the year ended September 30, 2012~~, from $60,548,000 for the year ended September 30, 2011~~.

39Provision for Loan and Lease Losses. The Company establishes a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan and leases losses at a level the Company considers necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan and lease losses, the Company considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan and lease losses as required in order to maintain the allowance.

~~Table~~The provision for loan and lease losses increased $300,000 to $500,000 for the year ended September 30, 2013, from $200,000 for the year ended September 30, 2012. The Company recorded net charge-offs of ~~Contents~~$384,000 and $248,000 for the fiscal years ended September 30, 2013 and 2012, respectively. Non-performing loans totaled $2,386,000 at September 30, 2013 compared to $1,877,000 at September 30, 2012. The increase of $509,000 was the result of an increase of $914,000 in non-performing one-to four-family non-owner occupied loans. The Company’s non-performing loans to total loans increased to 4.31% at September 30, 2013, from 3.39% at September 30, 2012. The increase in the provision was necessary due to increases in non-performing and impaired loans during the fiscal year ended September 30, 2013. The Company has provided for all losses that are both probable and reasonably estimable at September 30, 2013.

~~The~~Non-performing ~~average~~assets, ~~interest~~not ~~rate~~including ~~spread~~non-performing ~~was~~loans, ~~3.64%~~totaled ~~for~~$20,000 ~~the~~and ~~year~~$296,000 ~~ended~~at September 30, ~~2012,~~2013 ~~compared~~and ~~to 3.69% for the year ended September 30~~2012, ~~2011~~respectively. The ~~average~~Company ~~net~~sold other ~~interest~~real ~~margin~~estate ~~was~~owed ~~3.81%~~of ~~for~~$296,000 during the fiscal year ended September 30, ~~2012~~2013, ~~compared~~recording toa ~~3.89%~~loss ~~for~~of ~~the year ended September 30~~$24, ~~2011~~000.

~~Provision~~39 for Loan and Lease Losses. The Company establishes a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan and leases losses at a level the Company considers necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan and lease losses, the Company considers past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates and actual losses may vary from such estimates as more information becomes available or economic conditions change. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan and lease losses as required in order to maintain the allowance.

~~Non-Interest~~The ~~Income.~~Company ~~Non-interest~~had ~~income~~classified ~~was~~as ~~$91~~impaired,~~000~~ ~~for~~loans ~~the~~that ~~year~~are ~~ended~~90 ~~September 30,~~days ~~2012,~~or ~~which~~more ~~was~~delinquent aor ~~decrease~~troubled ofdebt restructurings. ~~$135,000,~~The oramount ~~59.73%,~~of ~~from~~impaired loans of $~~226~~3,152,000 ~~for~~was ~~the~~comprised ~~year~~of ~~ended~~fifteen ~~September 30, 2011~~loan relationships. ~~The~~Of ~~primary~~the ~~reason~~fifteen ~~for~~loan ~~the~~relationships, ~~decrease~~four ~~was~~relationships ~~that~~were ~~the~~secured ~~Company~~by ~~sold~~one-to ~~its~~four-family ~~previous~~owner ~~headquarters~~occupied ~~location~~residential ~~and~~properties ~~recorded~~in athe ~~gain~~amount of $~~127~~827,000, onseven ~~the~~relationships ~~sale~~were ~~during~~secured ~~fiscal~~by ~~year~~one-to ~~2011.~~four-family ~~Service~~non-owner ~~charges~~occupied ~~and~~residential ~~fees~~properties ~~decreased~~in bythe ~~$21~~amount of 1,635,000, ortwo ~~23.86%~~loans ~~from~~were ~~$88,000~~secured ~~for~~by ~~the year~~mobile ~~ended~~homes ~~September 30,~~in ~~2011,~~the toamount of $67106,000, ~~for~~one ~~the~~loan ~~year~~was ~~ended~~secured ~~September 30,~~by ~~2012.~~other ~~This~~properties ~~decrease~~ in ~~service~~the amount ~~fees~~of $213,000 and ~~charges~~one ~~was~~loan ~~primarily~~of ~~due~~$370,000 towas asecured ~~decrease~~by inconstruction ~~loan~~and ~~settlements~~land ~~during the fiscal year~~development.

Non-Interest ~~Expense~~Income. Non-interest ~~expense~~income ~~increased by~~ was $~~574~~248,000, ~~or 34.35% to $2,245,000~~ for the year ended September 30, ~~2012~~2013, which was an increase of $157,000 from $191,~~671,~~000 for the year ended September 30, ~~2011~~2012. The ~~largest~~primary ~~increases~~reason ~~occurred~~for inthe ~~salaries,~~increase ~~fees~~was ~~and~~that ~~employment~~the ~~expenses,~~Company ~~professional~~sold ~~fees~~securities and ~~provision~~recorded ~~for~~gains ~~losses~~of ~~and~~$117,000 on ~~costs~~the onsales ~~real~~during ~~estate~~the ~~acquired~~fiscal ~~through~~year ~~foreclosure~~ended September 30, 2013. ~~Salaries~~Service ~~fees~~charges and ~~employment~~ ~~expense~~fees increased by $8719,000, or 828.6936%, from $167,~~001,~~000 for the year ended September 30, ~~2011~~2012, to $186,~~088,~~000 for the year ended September 30, ~~2012~~2013. ~~The~~This increase in ~~salaries,~~service fees and ~~employment~~charges ~~expenses~~was ~~can~~primarily bedue ~~attributed~~ to ~~the additional~~an ~~personnel~~increase ~~associated~~in ~~with~~loan ~~the~~settlements ~~Fullerton~~during ~~acquisition~~the ~~that~~fiscal ~~occurred in October 2011~~year. ~~Professional~~Other ~~fees~~income also increased from $~~134~~14,000 ~~for~~at ~~the year ended~~ September 30, ~~2011,~~2012 to $~~284~~40,000 ~~for~~at ~~the year ended~~ September 30, ~~2012~~2013. This increase of ~~$150,000, or 111.94%,~~ 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. The Company recorded~~ an ~~expense~~increase ~~of $252,000 related to losses and costs on real estate acquired through foreclosure. The expense of $252,000 included a write down~~ in the ~~fair~~cash surrender value of ~~foreclosed~~a ~~real~~life ~~estate~~insurance ofpolicy ~~$222,000 and losses on the sale~~ of ~~foreclosed~~a ~~real~~former ~~estate~~president of ~~$18,000.~~ The Company also experienced increases in premises and equipment of $24,000, or 13.95%, data processing of $34,000, or 42.50%, and other operating expenses of $18,000 or 14.75%. The increase in each category can be attributed to the ~~Fullerton~~ ~~acquisition and the additional expenses associated with an additional bank branch~~Bank.

~~Income~~Non-Interest ~~Taxes~~Expense. ~~The~~Non-interest ~~provision for income~~expense ~~taxes~~ decreased by $~~160~~250,000, or 5811.3914%, to $~~114~~1,995,000 for the year ended September 30, ~~2012~~2013, from $~~274~~2,245,000 for the year ended September 30, ~~2011~~2012. The ~~decrease~~primary inreason ~~provision~~ for ~~income~~the ~~taxes~~overall decrease in non-interest expenses was due to ~~the~~an ~~decrease~~increase in salaries, ~~the~~fees ~~Company’s~~and ~~income before~~employment, ~~income~~offset ~~taxes~~by decreases in Salaries, fees and ~~extraordinary~~employment ~~gain~~expense ofincreased $~~323~~63,000, or 425.3379%, from $~~763~~1,088,000 for the year ended September 30, ~~2011~~2012 to $~~440~~1,151,000 for the year ended September 30, ~~2012~~2013. AsThe increase in salaries, fees and employment expenses can be attributed the recording of stock based compensation for the fiscal year ended September 30, 2013. Professional fees decreased from $284,000 for the year ended September 30, 2012, to $198,000 for the ~~Company~~year ~~had~~ended ~~net~~September 30, ~~operating~~2013. ~~loss carryforwards~~This decrease of $~~420~~86,000, ~~associated~~or ~~with~~30.28%, was the ~~acquisition~~result of several factors including a consulting agreement with a former Fullerton. ~~The~~employee ~~Company~~that ~~utilized~~was ~~approximately~~paid ~~$42,000~~out fully in ~~net~~December ~~loss~~2012 ~~carryforwards~~and tothe increased ~~offset~~reporting ~~current~~requirements ~~year~~associated ~~taxable~~with ~~income~~the Company’s public company status. The ~~remaining~~Company ~~net~~recorded ~~loss~~an ~~carryforwards~~expense of ~~approximately~~ $~~378~~252,000, ~~which begin~~during tothe ~~expire~~fiscal inyear ~~2031~~ended September 30, ~~may~~2012 berelated ~~used~~ to ~~offset~~losses ~~future~~and ~~income~~costs ~~taxes~~on ~~payable.~~real ~~The~~estate ~~Company~~acquired ~~however~~through foreclosure. ~~may~~The beexpense ~~subject~~of to$252,000 ~~alternative~~included ~~minimum~~a ~~tax~~write ~~and~~down in the ~~realization~~fair value of ~~the~~foreclosed ~~net~~real ~~loss~~estate ~~carryforwards~~of is$222,000 ~~dependent~~and losses on ~~future~~the ~~taxable~~sale ~~income~~of ~~and~~foreclosed ~~may~~real beestate ~~subject~~of ~~to limits under IRC Section 382~~$18,000.

40Income Taxes. The provision for income taxes increased $67,000, or 58.77%, to $181,000 for the year ended September 30, 2013, from $114,000 for the year ended September 30, 2012. Although income before income taxes and extraordinary items was comparable from September 30, 2012 to September 30, 2013, a decrease in the deferred tax asset was recognized during the fiscal year which increased the overall tax liability. As of September 30, 2013, the Company had net operating loss carryforwards of $378,000 associated with the acquisition of Fullerton. The Company utilized approximately $43,000 in net loss carryforwards to offset current year taxable income. The remaining net loss carryforwards of approximately $335,000, which begin to expire in 2031, may be used to offset future income taxes payable. The Company however may be subject to alternative minimum tax and the realization of the net loss carryforwards is dependent on future taxable income and may be subject to limits under IRC Section 382.

~~Table~~Extraordinary Item. The Company recognized $1,022,000 of ~~Contents~~extraordinary income during the year ended September 30, 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.

~~Extraordinary~~Total ~~Item~~Comprehensive Income. ~~The~~Total ~~Company~~comprehensive ~~recognized~~income $1for the years ended September 30,~~022~~ 2013 and 2012,~~000~~ consisted of ~~extraordinary~~net income ~~during~~and the ~~year~~change ~~ended~~in ~~September 30~~unrealized gains on investment securities available for sale, ~~2012~~net ~~relating~~of totax. Total comprehensive income was $128,000 and $1,356,000 for the ~~acquisition~~years ofended ~~Fullerton~~September 30, 2013 and 2012, respectively. The ~~extraordinary~~decrease in total comprehensive income of $1,228,000 ~~also~~resulted ~~defined~~from asan ~~negative~~decrease ~~goodwill~~of $1,091,000 ~~was~~in ~~the~~net ~~result~~income, ofincluding the ~~sum~~extraordinary gain of ~~the~~$1,022,000 ~~fair~~and ~~values~~a decrease of ~~assets~~$137,000 ~~acquired~~in ~~less~~adjustments ~~the~~to ~~liabilities~~accumulated ~~assumed~~other ~~exceeding~~comprehensive income from the ~~acquisition~~change in unrealized gains (losses) on ~~cost.~~securities available for sale.

~~Total~~40 Comprehensive Income. Total comprehensive income for the years ended September 30, 2012 and 2011, consisted of net income and the change in unrealized gains on investment securities available for sale, net of tax. Total comprehensive income was $1,356,000 and $556,000 for the years ended September 30, 2012 and 2011, respectively. The increase in total comprehensive income resulted from an increase of $859,000 in net income, including the extraordinary gain of $1,022,000 and a decrease of $59,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

~~The~~Average ~~following~~Balances ~~table sets forth average balance sheets, average yields~~ and ~~costs,~~Yields and certain other information at the date and for the periods indicated. All average balances are based on daily averages, unless otherwise noted. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

	Years Ended,
	September 30, 2012							September 30, 2011
	AverageOutstandingBalance		InterestIncomeExpense		Yield/Rate			AverageOutstandingBalance		InterestIncomeExpense		Yield/Rate
	(Dollars in thousands)
Interest earning assets
Loans	$	54,468	$	3,319		6.09	%	$	54,542	$	3,381		6.20	%
Federal funds sold and interest- bearing deposits in other banks		5,171		5		0.09			3,760		25		0.67
Certificates of deposit		2,493		41		1.63			—		—		—
Investment securities		10,661		342		3.21			9,460		354		3.74
Federal Home Loan Bank Stock		572		7		1.31			608		4		0.68
Total interest earning assets	$	73,365	$	3,714		5.06	%	$	68,370	$	3,764		5.51	%
Non interest earning assets		6,051							4,282
Total assets	$	79,416						$	72,652
Interest bearing liabilities
Interest bearing deposits	$	4,044	$	18		0.45	%	$	4,038	$	29		0.72	%
Savings deposits		14,151		97		0.68			9,578		75		0.78
Certificates of deposit		37,400		532		1.42			36,370		719		1.98
Borrowed funds		9,246		273		2.96			10,562		278		2.64
Total interest bearing liabilities	$	64,841	$	920		1.42	%	$	60,548	$	1,101		1.82	%
Non-interest bearing liabilities		1,247							1,007
Total liabilities	$	66,088						$	61,555
Stockholders’ equity		13,328							11,097
Total liabilities and stockholders’ equity	$	79,416						$	72,652
Net interest income(3)			$	2,794						$	2,663
Net interest rate spread						3.64	%						3.69	%
Net interest earning assets	$	8,524						$	7,822
Net interest margin(4)						3.81	%						3.89	%
Average of interest earning assets to interest bearing liabilities						113.15	%						112.92	%

The following table sets forth average balance sheets, average yields and costs, and certain other information at the date and for the periods indicated. All average balances are based on daily averages, unless otherwise noted. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	Years Ended,
	September 30, 2013							September 30, 2012
	Average Outstanding Balance		Interest Income Expense		Yield/ Rate			Average Outstanding Balance		Interest Income Expense		Yield/ Rate
	(Dollars in thousands)
Interest earning assets
Loans	$	54,754	$	3,147		5.75	%	$	54,468	$	3,319		6.09	%
Federal funds sold and interest-bearing deposits in other banks		5,523		6		0.11			5,171		5		0.09
Certificates of deposit		3,411		51		1.50			2,493		41		1.63
Investment securities		9,120		203		2.22			10,661		342		3.21
Federal Home Loan Bank Stock		467		11		2.44			572		7		1.31


Total interest earning assets	$	73,275	$	3,418		4.67	%	$	73,365	$	3,714		5.06	%


Non interest earning assets		5,337							6,051


Total assets	$	78,612						$	79,416


Interest bearing liabilities
Interest bearing deposits	$	4,279	$	10		0.24	%	$	4,044	$	18		0.45	%
Savings deposits		16,620		65		0.39			14,151		97		0.68
Certificates of deposit		36,105		390		1.08			37,400		532		1.42
Borrowed funds		8,000		268		3.35			9,246		273		2.96


Total interest bearing liabilities	$	65,004	$	733		1.13	%	$	64,841	$	920		1.42	%


Non-interest bearing liabilities		768							1,247


Total liabilities	$	65,772						$	66,088

Stockholders’ equity		12,840							13,328


Total liabilities and stockholders’ equity	$	78,612						$	79,416


Net interest income⁽³⁾			$	2,685						$	2,794

Net interest rate spread						3.54	%						3.64	%
Net interest earning assets	$	8,270						$	8,524

Net interest margin⁽⁴⁾						3.66	%						3.81	%


Average of interest earning assets to interest bearing liabilities						112.72	%						113.15	%

~~Table~~(1) Average loan balances include nonaccrual loans. Calculated net of ~~Contents~~deferred fees and discounts, loans in process and allowance for loan losses.

(12) ~~Average~~Yields ~~loan~~are ~~balances~~based ~~include~~on ~~nonaccrual~~historical ~~loans~~costs. ~~Calculated~~Yields ~~net~~on oftax ~~deferred~~exempt ~~fees~~obligations ~~and~~have ~~discounts,~~not ~~loans~~been incomputed ~~process~~on ~~and~~a ~~allowance~~tax ~~for~~equivalent ~~loan losses~~basis.

(23) Yields are based on the historical ~~costs~~cost balances of the related assets and do not give effect to changes in fair value that are included as a component of equity. Yields on tax exempt obligations have not been computed on a tax equivalent basis.

(34) ~~Yields~~Equals ~~are~~net ~~based~~interest onincome ~~the~~divided ~~historical~~by ~~cost~~average ~~balances~~earning ~~of the related~~ assets ~~and do not give effect to changes in fair value that are included as a component of equity~~. ~~Yields on tax exempt obligations have not been computed on a tax equivalent basis.~~

~~(4)~~41 ~~Equals net interest income divided by average earning assets.~~

~~The~~Rate/Volume ~~following~~Analysis table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (1) changes in volume, which is the change in volume multiplied by prior year rate, and (2) changes in rate, which is the change in rate multiplied by prior year volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to volume and the change due to rate.

	Years Ended September 30,2012 vs. 2011									Years Ended September 30,2011 vs. 2010
	Increase (Decrease)Due to						TotalIncrease(Decrease)			Increase (Decrease)Due to						TotalIncrease(Decrease)
	Volume			Rate						Volume			Rate
	(In thousands)
Interest-earning assets:
Loans	$	(5	)	$	(57	)	$	(62	)	$	202		$	(182	)	$	20
Federal funds sold and interest- bearing deposits in other banks		3			(1	)		2			(2	)		(1	)		(3	)
Certificates of deposit		10			—			10			9			—			9
Investment securities		42			(53	)		(11	)		85			(44	)		41
Federal Home Loan Bank stock		—			4			4			—			2			2
Total interest-earning assets	$	50		$	(107	)	$	(57	)	$	294		$	(225	)	$	69
Interest-bearing liabilities:
Interest-bearing deposits	$	—		$	(11	)	$	(11	)	$	—		$	(12	)	$	(12	)
Saving deposits		33			(12	)		21			1			(27	)		(26	)
Certificates of deposit		18			(204	)		(186	)		44			(234	)		(190	)
Borrowed funds		(37	)		31			(6	)		(7	)		5			(2	)
Total interest bearing liabilities	$	14		$	(196	)	$	(182	)	$	38		$	(268	)	$	(230	)
Change in net interest income	$	36		$	89		$	125		$	256		$	43		$	299

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (1) changes in volume, which is the change in volume multiplied by prior year rate, and (2) changes in rate, which is the change in rate multiplied by prior year volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to volume and the change due to rate.

Management of Market Risk


	Years Ended September 30, 2013 vs. 2012									Years Ended September 30, 2012 vs. 2011
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	17		$	(189	)	$	(172	)	$	(5	)	$	(57	)	$	(62	)
Federal funds sold and interest-bearing deposits in other banks		—			1			1			3			(1	)		2
Certificates of deposit		14			—			14			10			—			10
Investment securities		(42	)		(98	)		(140	)		42			(53	)		(11	)
Federal Home Loan Bank stock		(2	)		6			4			—			4			4

Total interest-earning assets	$	(13	)	$	(280	)	$	(293	)	$	50		$	(107	)	$	(57	)


Interest-bearing liabilities:

Interest-bearing deposits	$	1		$	(9	)	$	(8	)	$	—		$	(11	)	$	(11	)
Saving deposits		13			(44	)		(31	)		33			(12	)		21
Certificates of deposit		(16	)		(127	)		(143	)		18			(204	)		(186	)
Borrowed funds		(39	)		34			(5	)		(37	)		31			(6	)

Total interest bearing liabilities	$	(41	)	$	(146	)	$	(187	)	$	14		$	(196	)	$	(182	)


Change in net interest income	$	28		$	(134	)	$	(106	)	$	36		$	89		$	125

~~General.~~Management ~~Because the net present value~~ of ~~the~~Market ~~majority~~Risk of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The board of directors is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

WeGeneral. ~~have~~Because the ~~emphasized~~net ~~the~~present ~~origination~~value of ~~fixed-rate~~the ~~mortgage~~majority ~~loans~~of in our ~~portfolio~~assets inand ~~order~~liabilities are sensitive to ~~maximize~~changes in interest rates, our ~~net~~most ~~interest income~~significant ~~and~~form ~~control~~of ~~credit~~market risk is interest rate risk. We ~~accept~~are ~~increased~~vulnerable ~~exposure~~to an increase in interest rates to the extent that our interest-bearing ~~rate~~liabilities ~~fluctuations~~mature asor areprice ~~result~~more ofquickly than our ~~investment~~interest-earning inassets. ~~such~~As ~~loans.~~a Inresult, a ~~period~~principal part of ~~rising~~our ~~interest~~business ~~rates,~~strategy ~~our~~is ~~net~~to manage interest rate ~~spread~~risk and limit the exposure of our net interest income ~~may~~to bechanges ~~negatively~~in ~~affected~~market interest rates. InThe ~~addition,~~board weof ~~have~~directors ~~sought~~is toresponsible ~~manage~~for evaluating the interest rate risk inherent in our assets and ~~mitigate~~liabilities, for determining the level of risk that is appropriate, given our ~~exposure~~business tostrategy, ~~interest~~operating ~~rate~~environment, capital, ~~risks~~liquidity inand performance objectives, and for managing this risk consistent with the ~~following~~guidelines ~~ways:~~approved by the board of directors.

•We have emphasized the origination of fixed-rate mortgage loans in our portfolio in order to maximize our net interest income and control credit risk. We ~~maintain~~accept ~~relatively~~increased ~~high~~exposure ~~levels~~to interest rate fluctuations as a result of ~~short-term~~our ~~liquid~~investment ~~assets~~in such loans. AtIn a ~~September~~period ~~30,~~of ~~2012~~rising interest rates, our ~~short-term~~net ~~liquid~~interest ~~assets~~rate ~~totaled~~spread ~~$4,363,000~~and net interest income may be negatively affected. In addition, we have sought to manage and mitigate our exposure to interest rate risks in the following ways:

42• We maintain relatively high levels of short-term liquid assets. At September 30, 2013, our short-term liquid assets totaled $3,851,000.

~~Table~~• We lengthen the weighted average maturity of ~~Contents~~our liabilities through retail deposit pricing strategies and the use of Federal Home Loan Bank advances;

• We ~~lengthen~~invest ~~the~~in ~~weighted~~shorter ~~average~~to ~~maturity~~medium-term ofsecurities ~~our~~and ~~liabilities~~in ~~through~~securities ~~retail~~with ~~deposit~~step-up ~~pricing~~rate ~~strategies~~features ~~and~~providing ~~the~~for ~~use~~increased ofinterest ~~Federal~~rates ~~Home~~prior ~~Loan~~to ~~Bank~~maturity ~~advances~~according to a predetermined schedule; and

• We ~~invest~~maintain inhigh ~~shorter~~levels toof ~~medium-term securities and in securities with step-up rate features providing for increased interest rates prior to maturity according to a predetermined schedule; and~~capital.

•In Wethe ~~maintain~~future, ~~high~~we ~~levels~~intend to take additional steps to reduce interest rate risk, including originating construction loans and lines of ~~capital~~credit and selling a portion of the one-to four-family non-owner occupied investor loans we originate.

InInterest ~~the~~Rate ~~future,~~Risk weAnalysis. ~~intend~~We toanalyze ~~take~~our ~~additional~~sensitivity ~~steps~~ to ~~reduce~~changes in interest ~~rate~~rates ~~risk,~~through ~~including~~our ~~originating~~net ~~construction~~interest ~~loans~~income simulation model and ~~lines~~our economic value of ~~credit~~equity ~~and~~model, ~~selling~~which ais ~~portion~~provided ofto us by an independent third party. Net interest income is the ~~one-to~~difference ~~four-family~~between ~~non~~the interest income we earn on our interest-~~owner occupied~~earning ~~investor~~assets, such as loans and securities, and the interest we ~~originate~~pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate our

~~Interest~~42 Rate Risk Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model and our economic value of equity model, which is provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate our net interest income for a one-year period based on current interest rates. We then calculate the net interest income for the same period under different interest rate assumptions. We also estimate the impact over a two-year time horizon. The analysis of our economic value of equity measures the difference between predicted changes in the present value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates.

~~The~~ net ~~following~~interest ~~tables~~income ~~show~~for ~~the~~a ~~estimated~~one-year ~~impact~~period based on ~~our~~current interest rates. We then calculate the net interest income for the ~~one-year~~same period ~~beginning~~under ~~September 30,~~different ~~2012~~interest ~~and~~rate ~~changes~~assumptions. inWe ~~our~~also ~~economic~~estimate ~~value~~the ofimpact ~~equity~~over ata ~~September 30,~~two-year ~~2012~~time ~~that~~horizon. ~~would~~The ~~occur~~analysis inof ~~the~~our ~~event~~economic value of anequity ~~immediate~~measures ~~change~~the difference between predicted changes in ~~interest~~the ~~rates~~present asvalue ~~described~~of ~~above,~~our ~~with~~assets noand ~~effect~~predicted ~~given~~changes toin ~~any~~the ~~steps~~present ~~that~~value weof ~~might~~our ~~take~~liabilities assuming tovarious ~~counteract~~changes ~~that~~in ~~change~~current interest rates.

Change in Interest Rates (basis points)	Net InterestIncome Year OneForecast		% Change YearOne from Level			EconomicValue of Equity		% Change inEquity fromLevel
	(dollars in thousands)
+400 bp	$	2,871		3.66	%	$	8,179		(32.06	)%
+300 bp		2,854		3.06			9,019		(25.09	)
+200 bp		2,870		3.62			10,182		(15.42	)
+100 bp		2,835		2.35			11,269		(6.40	)
Level		2,770		—			12,039		—
-100 bp		2,731		(1.39	)		12,821		6.50
-200 bp		2,674		(3.45	)		13,715		13.92

These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income and economic value of equity. Although the table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and our economic value of equity and will differ from actual results.

~~Liquidity~~The following tables show the estimated impact on our net interest income for the one-year period beginning September 30, 2013 and ~~Capital~~changes ~~Resources~~in our economic value of equity at September 30, 2013 that would occur in the event of an immediate change in interest rates as described above, with no effect given to any steps that we might take to counteract that change

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities of securities. In addition, we have the ability to borrow funds from the Federal Home Loan Bank of Atlanta, and we have a 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.


Change in Interest Rates (basis points)	Net Interest Income Year One Forecast		% Change Year One from Level			Economic Value of Equity		% Change in Equity from Level
	(dollars in thousands)
+400 bp	$	2,864		1.08	%	$	7,187		(38.20	)%
+300 bp		2,706		1.93			8,148		(29.94	)
+200 bp		2,751		3.60			9,382		(19.33	)
+100 bp		2,745		3.39			10,609		(8.78	)
Level		2,655		—			11,630		—
-100 bp		2,567		(3.32	)		12,392		6.55
-200 bp		2,470		(6.97	)		13,290		14.27

43Liquidity and Capital Resources

~~Table~~Liquidity is the ability to meet current and future financial obligations of ~~Contents~~a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities of securities. In addition, we have the ability to borrow funds from the Federal Home Loan Bank of Atlanta, and we have a 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 our 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. We believe that it has enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, ~~2012~~2013.

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

Our most liquid assets are cash and cash equivalents and certificates of deposit. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, ~~2012~~2013, cash and cash equivalents totaled $43,~~363~~851,000. Certificates of deposit and securities classified as available-for-sale, which provide additional sources of liquidity, totaled $3,~~532~~784,000 and $75,~~804~~792,000, respectively at September 30, ~~2012~~2013.

At September 30, ~~2012~~2013, we had ~~$851,000 in~~ no mortgage loan commitments outstanding. ~~In addition~~However, at that date, we had unfunded commitments under lines of credit, including letters of credit of $45,~~130~~654,000. Certificates of deposit due within one year of September 30, ~~2012~~2013 totaled $2317,~~094~~426,000, or 3931.8016%, of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pays on the certificates of deposit due on or before September 30, ~~2012~~2013. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

~~The~~43 Bank’s primary investing activity is loan origination. In the years ended September 30, 2012 and 2011, the Bank originated $5,265,000 and $8,857,000 in loans, respectively. The Company purchased $3,434,000 in certificates of deposit during the fiscal year ending September 30, 2012. Also during the years ended September 30, 2012 and 2011, the Bank purchased $7,478,000 and $2,389,000 of investment securities, respectively.

WeThe ~~are~~Bank’s ~~subject~~primary toinvesting ~~various~~activity ~~regulatory~~is ~~capital~~loan ~~requirements,~~origination. ~~including~~In athe ~~risk-based~~years ~~capital~~ended ~~measure.~~September 30, ~~The~~2013 ~~risk-based capital guidelines~~and ~~include~~2012, ~~both~~the aBank ~~definition~~originated of$9,588,000 ~~capital~~ and a$5,265,000 ~~framework~~in ~~for~~loans, ~~calculating~~respectively. ~~risk-weighted~~The ~~assets~~Company bypurchased ~~assigning~~$499,000 ~~balance~~in ~~sheet~~certificates ~~assets~~of ~~and~~deposit ~~off-balance~~during ~~sheet~~the ~~items~~fiscal toyear ~~broad~~ending ~~risk categories. At~~ September 30, ~~2012,~~2013. weAlso ~~exceeded~~during ~~all~~the ~~regulatory~~years ~~capital requirements~~ended ~~and~~September 30, we2013 ~~were considered “well capitalized” under regulatory guidelines. See “Supervision~~ and 2012, ~~Regulation~~the –Bank ~~Federal~~purchased ~~Banking~~$5,034,000 ~~Regulation – Capital Requirements”~~ and ~~Note~~$7,478,000 16 of ~~the~~investment ~~Notes~~securities, ~~to the Consolidated Financial Statements~~respectively.

WeFinancing ~~have~~activities ~~the~~consist ~~capacity~~primarily toof ~~borrow~~activity upin todeposit accounts. ~~$23,600,000~~We ~~with~~experienced ~~the~~a ~~Federal~~net ~~Home~~decrease ~~Loan~~in ~~Bank~~total deposits of ~~Atlanta.~~$2,096,000 ~~Our~~for ~~outstanding borrowings with~~ the ~~Federal~~year ~~Home~~ended ~~Loan Bank of Atlanta at~~ September 30, ~~2012~~2013. ~~were~~Deposit ~~$8,000,000.~~flows Weare ~~also~~affected ~~have~~by athe ~~credit~~overall ~~availability~~level of $1interest rates,~~500,000~~ ~~with~~the ainterest ~~correspondent~~rates ~~bank.~~and ~~There~~products ~~were~~offered noby ~~borrowings~~us ~~outstanding~~and atour ~~September 30~~local competitors, ~~2012,~~and ~~under~~by ~~this~~other ~~facility~~factors.

OnWe ~~September 7,~~are ~~2012,~~subject ~~the~~to ~~Company~~various ~~announced~~regulatory ~~that~~capital ~~its~~requirements, ~~Board~~including ~~of Directors had adopted~~ a ~~stock~~risk-based ~~repurchase~~capital ~~program~~measure. ~~Under~~The ~~the repurchase~~risk-based ~~program,~~capital ~~the~~guidelines ~~Company~~include ~~could~~both ~~repurchase~~a updefinition ~~to 25,000 shares~~ of ~~its~~capital ~~common~~and ~~stock,~~a orframework ~~approximately~~for 5%calculating ofrisk-weighted ~~the~~assets ~~current~~by ~~outstanding~~assigning ~~shares.~~balance Onsheet ~~October 4,~~assets ~~2012,~~and ~~the~~off-balance ~~Company~~sheet ~~announced~~items ~~that~~to ~~the~~broad ~~Board~~risk ofcategories. ~~Directors~~At ~~approved~~September 30, an2013, ~~increase~~we inexceeded ~~its current~~all ~~stock~~regulatory ~~repurchase~~capital ~~program~~requirements toand ~~40,000~~we ~~shares,~~were orconsidered ~~approximately~~“well 8%capitalized” ofunder ~~the~~regulatory ~~current~~guidelines. ~~outstanding~~See ~~shares.~~“Supervision Asand ofRegulation—Banking ~~September 30,~~Regulation—Capital ~~2012,~~Requirements” ~~the~~and ~~Company~~Note ~~had~~16 ~~repurchased~~of ~~22,800~~the ~~shares~~Notes ofto ~~common~~the Consolidated ~~stock~~Financial Statements.

~~The~~We ~~repurchase~~have ~~program~~the ~~permits~~capacity ~~shares~~ to beborrow ~~repurchased~~up into ~~open market or private transactions~~$23, ~~through block trades~~100,000 ~~and~~with ~~pursuant~~the toFederal ~~any~~Home ~~trading~~Loan ~~plan~~Bank ~~that~~of ~~may~~Atlanta. beOur ~~adopted~~outstanding borrowings ~~in accordance~~ with ~~Rule 10b5-1 of~~ the ~~Securities~~Federal ~~and~~Home ~~Exchange~~Loan ~~Commission.~~Bank ~~The~~of ~~repurchase~~Atlanta ~~program~~at ~~may~~September 30, be2013 ~~suspended,~~were ~~terminated~~$8,000,000. orWe ~~modified~~also athave ~~any~~a ~~time~~credit ~~for~~availability ~~any~~of ~~reason~~$1,500,000 ~~including~~with ~~market~~a ~~conditions,~~correspondent ~~the~~bank. ~~cost~~There ofwere ~~repurchasing~~no ~~shares,~~borrowings ~~availability~~outstanding ofat ~~alternative~~September 30, ~~investment opportunities~~2013, ~~liquidity,~~ ~~and~~under ~~other factors deemed appropriate~~this facility.

44On September 7, 2012, the Company announced that its Board of Directors had adopted a stock repurchase program. Under the repurchase program, the Company could repurchase up to 25,000 shares of its common stock, or approximately 5% of the current outstanding shares. On October 4, 2012, the Company announced that the Board of Directors approved an increase in its current stock repurchase program to 40,000 shares, or approximately 8% of the current outstanding shares. The purchase program began on September 10, 2012 and continued for six months through February 2013. As of September 30, 2013, the Company had repurchased 30,600 shares of common stock.

~~Table~~The repurchase program permited shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of ~~Contents~~the Securities and Exchange Commission. The repurchase program may be suspended, terminated, or modified at any time for any reason, including market conditions, the cost of repurchasing shares, availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

Off-Balance Sheet Arrangements and Commitments

As a financial services provider, we routinely are a 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 we make. For additional information, see Note 14 of the Notes to the Financial Statements.

Impact of Inflation and Changing Prices

Our financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Expense and Tax Allocation

Fairmount Bank entered into an agreement with Fairmount Bancorp, Inc. to provide it with certain administrative support services, whereby Fairmount Bank will be compensated at not less than the fair market value of the services provided. In addition, Fairmount Bank and Fairmount Bancorp, Inc. entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.

~~Impact~~44 ~~of Recent Accounting Pronouncements~~

InImpact 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~~Recent ~~efforts~~Accounting byPronouncements the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In ~~June~~December 2011, the FASB issued ASU 2011-0511, “~~Comprehensive~~Balance ~~Income~~Sheet (Topic ~~220~~210) – ~~Presentation~~Disclosures ~~of Comprehensive~~about ~~Income.”~~Offsetting ~~The~~Assets ~~objective~~and ofLiabilities.” ~~this~~This ASU requires isentities to ~~improve~~disclose ~~the~~both ~~comparability,~~gross ~~consistency~~information and ~~transparency~~net ofinformation ~~financial~~about ~~reporting~~both instruments and totransactions ~~increase~~eligible ~~the~~for ~~prominence~~offset ~~of items reported~~ in ~~other comprehensive income by eliminating~~ the ~~option~~balance ~~to present~~sheet ~~components~~and ofinstruments ~~other~~and ~~comprehensive~~transactions ~~income~~subject asto ~~part~~an ofagreement ~~the~~similar ~~statement~~to ofa ~~changes~~master ~~in stockholders’ equity~~netting arrangement. ~~The~~An ~~amendments~~entity ~~require~~is ~~that~~required ~~all~~to ~~non-owner~~apply ~~changes~~the inamendments ~~stockholders’~~for ~~equity~~annual bereporting ~~presented~~periods ~~either~~beginning inon aor ~~single~~after ~~continuous~~January 1, ~~statement~~2013, ~~of comprehensive~~and ~~income~~interim orperiods inwithin ~~two~~those ~~separate~~annual ~~but~~periods. ~~consecutive~~An ~~statements.~~entity ~~The~~should ~~single~~provide ~~statement~~the ofdisclosures ~~comprehensive~~required ~~income~~by ~~should~~those amendments ~~include~~retrospectively ~~the~~for ~~components~~all ofcomparative ~~net~~periods ~~income,~~presented. aThe ~~total~~Company ~~for~~does ~~net~~not ~~income,~~expect the ~~components~~adoption of ~~other~~ASU ~~comprehensive~~2011-11 ~~income,~~to have a ~~total~~material ~~for~~impact ~~other comprehensive~~on ~~income,~~its ~~and~~consolidated afinancial ~~total~~statements. ~~for comprehensive~~

45In 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 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.

~~Table~~In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.” The objective of ~~Contents~~this amendment is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived tangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance in Subtopic 350-30 required an entity to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. In accordance with the amendments in this ASU, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued.

~~income.~~ In ~~the~~February ~~two-statement approach~~2013, the ~~first~~FASB ~~statement~~issued ~~should~~ASU 2013 ~~present~~-02, ~~total~~“Comprehensive ~~net~~Income ~~income~~(Topic ~~and~~220): ~~its~~Reporting ~~components~~of ~~followed~~Amounts ~~consecutively~~Reclassified byOut aof ~~second~~Accumulated ~~statement~~Other ~~that~~Comprehensive ~~should~~Income”. ~~present~~The ~~all~~amendments ~~the~~in ~~components of~~this ~~other~~ASU ~~comprehensive~~require ~~income,~~an aentity ~~total~~to ~~for~~present ~~other~~(either ~~comprehensive~~on ~~income,~~the ~~and~~face aof ~~total~~the ~~for~~statement ~~comprehensive~~where net income. ~~The~~is presented ~~amendments~~or doin ~~not~~the ~~change~~notes) the ~~items~~effects ~~that~~on ~~must~~the beline ~~reported~~items inof ~~other~~net ~~comprehensive~~ income, ~~the~~of ~~option~~significant ~~for~~amounts anreclassified ~~entity~~out ~~to present components~~ of accumulated other comprehensive income. ~~either~~In ~~net~~addition, ofthe ~~related~~amendments ~~tax~~require ~~effects~~a orcross-reference ~~before~~to ~~related~~other ~~tax~~disclosures ~~effects,~~currently orrequired for ~~the~~other ~~calculation~~reclassification oritems ~~reporting~~to ofbe ~~earnings~~reclassified ~~per~~directly ~~share.~~to ~~The~~net ~~amendments~~income in ~~this~~their ~~ASU~~entirety ~~should~~in bethe ~~applied~~same ~~retrospectively~~reporting period. ~~The~~Companies ~~amendments~~should ~~are~~apply ~~effective~~these amendments for fiscal years, and interim periods within those years, beginning ~~after~~on or after December 15, ~~2011~~2012. ~~Early adoption is permitted since compliance with the amendments is already permitted.~~ The ~~amendments do not require transition disclosures. The~~ Company ~~is currently~~has ~~assessing~~included the ~~impact~~required ~~that~~disclosures from ASU ~~2011~~2013-0502 ~~will~~in ~~have~~the ~~on its~~ consolidated financial statements.

In ~~September~~July ~~2011~~2013, the FASB issued ASU ~~2011~~ 2013-0811, “~~Intangible-Goodwill~~Income ~~and~~Taxes ~~Other~~ (Topic ~~350~~740): –Presentation ~~Testing~~of ~~Goodwill for Impairment.” The amendments in this ASU permit~~ an ~~entity~~Unrecognized toTax ~~first~~Benefit ~~access~~When ~~qualitative~~a ~~factors~~Net ~~related~~Operating toLoss ~~goodwill~~Carryforward, toa ~~determine~~Similar ~~whether~~Tax itLoss, isor ~~more likely that not that the fair value of the reporting unit is less than its carrying amount as~~ a ~~basis~~Tax ~~for~~Credit ~~determining~~Carryforward ~~whether it is necessary to perform the two-step goodwill test described in Topic 350~~Exists.” The ~~more-likely-than-not~~amendments ~~threshold~~in isthis ~~defined~~update ~~as having a~~provide ~~likelihood~~guidance ofon ~~more that 50 percent. Under~~ the ~~amendments~~financial instatement ~~this~~presentation ~~ASU,~~of an ~~entity~~unrecognized istax ~~not~~benefit ~~required~~when toa ~~calculate~~net ~~the~~operating ~~fair~~loss ~~value~~carryforward, ofsimilar atax ~~reporting~~loss, ~~unit~~or ~~unless~~tax ~~the~~credit ~~entity~~carryforward ~~determines~~exists. ~~that~~An itunrecognized istax ~~more~~benefit, ~~likely~~or ~~than~~a ~~not~~portion ~~that~~of ~~its~~an ~~fair~~unrecognized ~~value~~tax ~~is less than its~~benefit, ~~carrying~~should ~~amount.~~be ~~The~~presented ~~amendments~~ in ~~this~~the ~~ASU~~financial ~~are~~statements ~~effective~~as ~~for~~a ~~annual~~reduction ~~and~~to ~~interim~~a ~~goodwill~~deferred ~~impairment~~tax ~~tests~~asset ~~performed~~ for ~~fiscal~~a ~~years~~net ~~beginning~~operating ~~after~~loss ~~December 15~~carryforward, ~~2011.~~a ~~Early~~similar ~~adoption~~tax ~~is permitted~~loss, ~~including~~or ~~for annual and interim goodwill impairment tests performed as of~~ a ~~date~~tax ~~before~~credit ~~September 15~~carryforward, ~~2011,~~except ifas ~~an entity’s financial statements for the most recent annual or interim period have not yet been issued~~follows. ~~The~~To ~~Company is currently assessing~~ the ~~impact~~extent ~~that~~a ~~ASU 2011-08~~net ~~will have on its consolidated financial statements.~~

In45 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 operating ~~July~~loss ~~2012~~carryforward, ~~the~~a ~~FASB~~similar ~~issued~~tax ~~ASU 2012-02~~loss, ~~“Intangibles~~ –or ~~Goodwill~~a ~~and~~tax ~~Other~~credit ~~(Topic~~carryforward ~~350)~~is –not ~~Testing~~available ~~Indefinite-Lived~~at ~~Intangible~~the ~~Assets~~reporting ~~for~~date ~~Impairment.”~~under ~~The~~the ~~objective~~tax law of ~~this~~applicable ~~amendment~~jurisdiction is to ~~reduce~~settle ~~the~~any ~~cost~~additional ~~and~~income taxes ~~complexity~~that ofwould ~~performing~~result anfrom ~~impairment~~the ~~test~~disallowance ~~for indefinite-lived~~of ~~intangible~~a ~~assets~~tax byposition ~~simplifying~~or ~~how~~the antax ~~entity~~law ~~tests~~of ~~those~~the ~~assets~~applicable ~~for~~jurisdiction ~~impairment~~does ~~and~~not require the entity to ~~improve~~use, ~~consistency~~and inthe ~~impairment~~entity ~~testing~~does ~~guidance~~not ~~among~~intend ~~long-lived~~to ~~asset~~use, ~~categories.~~the ~~The~~deferred ~~amendments~~tax ~~permit~~asset anfor ~~entity~~such ~~first~~purpose, tothe ~~assess~~unrecognized tax ~~qualitative~~benefit ~~factors~~should tobe ~~determine~~presented ~~whether~~in itthe isfinancial ~~more~~statements ~~likely~~as ~~than~~a ~~not~~liability ~~that~~and anshould ~~indefinite-lived~~not ~~tangible~~be ~~asset~~combined iswith ~~impaired~~deferred astax aassets. ~~basis~~The ~~for~~amendments ~~determining~~in ~~whether~~this itASU isare ~~necessary~~effective tofor ~~perform~~fiscal ~~the~~years, ~~quantitative~~and ~~impairment~~interim ~~test~~periods inwithin ~~accordance~~those ~~with~~years, ~~Subtopic~~beginning after ~~350-30~~December 15, ~~Intangibles~~2013. –Early ~~Goodwill~~adoption ~~and~~is ~~Other~~permitted. –The ~~General~~amendments ~~Intangibles~~should ~~Other~~be ~~than~~applied ~~Goodwill.~~prospectively ~~The~~to ~~more-likely-than-not~~all ~~threshold~~unrecognized istax ~~defined~~benefits asthat ~~having~~exist aat ~~likelihood~~the ofeffective ~~more~~date. ~~than~~Retrospective 50application ~~percent~~is permitted. ~~Previous~~The adoption of the new guidance indid ~~Subtopic~~not have ~~350-30~~a ~~required~~material animpact ~~entity~~on ~~to test~~the ~~indefinite-lived~~Company’s ~~intangible~~consolidated ~~assets~~financial ~~for~~statements.

46Item 7A. Quantitative and Qualitative Disclosures about Market Risk

~~Table~~Information required by this item is included in “Item 7. Management’s Discussion and Analysis of ~~Contents~~Financial Condition and Results of Operations,” above.

~~impairment,~~46 on at least an annual basis, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. In accordance with the amendments in this ASU, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued.

Item 7A 8. ~~Quantitative~~Financial Statements and ~~Qualitative~~Supplementary ~~Disclosures about Market Risk~~ Data

~~Information~~INDEX ~~required~~TO byCONSOLIDATED ~~this item is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of~~FINANCIAL ~~Operations,”~~STATEMENTS ~~above.~~OF

47FAIRMOUNT BANCORP, INC. AND SUBSIDIARY


	Page

Report of Independent Registered Public Accounting Firm		48

Consolidated Balance Sheets at September 30, 2013 and 2012		49

Consolidated Statements of Income for the years ended September 30, 2013 and 2012		50

Consolidated Statements of Comprehensive Income for the years ended September 30, 2013 and 2012		51

Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2013 and 2012		52

Consolidated Statements of Cash Flows for the years ended September 30, 2013 and 2012		53

Notes to Consolidated Financial Statements		55

~~Item 8.~~47 ~~Financial Statements and Supplementary Data~~

LOGO

~~FAIRMOUNT~~REPORT ~~BANCORP,~~OF ~~INC.~~INDEPENDENT ~~AND~~REGISTERED ~~SUBSIDIARY~~PUBLIC ACCOUNTING FIRM

	Page
Report of Independent Registered Public Accounting Firm		49
Consolidated Balance Sheets at September 30, 2012 and 2011		50
Consolidated Statements of Income for the years ended September 30, 2012 and 2011		51
Consolidated Statements of Comprehensive Income for the years ended September 30, 2012 and 2011		52
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2012 and 2011		53
Consolidated Statements of Cash Flows for the years ended September 30, 2012 and 2011		54
Notes to Consolidated Financial Statements		55

To the Board of Directors and

48Stockholders of Fairmount Bancorp, Inc.

~~Table~~Baltimore, ofMaryland ~~Contents~~

~~REPORT~~We OFhave audited ~~INDEPENDENT~~the ~~REGISTERED~~accompanying ~~PUBLIC~~consolidated ~~ACCOUNTING~~balance ~~FIRM~~sheets of Fairmount Bancorp, Inc. and its wholly-owned subsidiary (Fairmount Bank) as of September 30, 2013 and 2012, and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in stockholders’ equity, and consolidated statements of cash flows for each of the years in the two-year period then ended. Fairmount Bancorp, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

ToWe conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of ~~Directors~~material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~Stockholders~~In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fairmount Bancorp, Inc. and its wholly-owned subsidiary as of September 30, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the two-year period then ended in conformity with accounting principles generally accepted in the United States of America.

Baltimore, Maryland


		/s/ Smith Elliott Kearns & Company, LLC
		SMITH ELLIOTT KEARNS & COMPANY, LLC

Chambersburg, Pennsylvania
December 23, 2013

We48 have audited the accompanying consolidated balance sheets of Fairmount Bancorp, Inc. and its wholly-owned subsidiary (Fairmount Bank) as of September 30, 2012 and 2011, and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in stockholders’ equity, and consolidated statements of cash flows for each of the years in the two-year period then ended. Fairmount Bancorp, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

~~In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of~~ Fairmount Bancorp, Inc. and ~~its~~Subsidiary wholly-owned subsidiary as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period then ended in conformity with accounting principles generally accepted in the United States of America.

~~/s/~~Consolidated ~~Smith~~Balance ~~Elliott~~Sheets ~~Kearns & Company, LLC SMITH ELLIOTT KEARNS & COMPANY, LLC~~

~~Chambersburg~~September 30, ~~Pennsylvania~~2013 and September 30, 2012

December 21, 2012


	September 30,			September 30,
	2013			2012
Assets
Cash and due from banks	$	850,941		$	513,787
Interest-bearing deposits in other banks		858,746			337,379
Federal funds sold		2,141,774			3,512,020


Cash and cash equivalents		3,851,461			4,363,186


Certificates of deposit		3,783,568			3,531,991
Securities available for sale, at fair value		5,791,725			7,803,575
Securities held to maturity, at amortized cost		3,756,238			3,636,972
Federal Home Loan Bank stock, at cost		453,700			479,700
Loans, net of allowances for loan and lease losses of $733,451 at September 30, 2013 and $617,474 at September 30, 2012		55,375,365			54,650,111
Accrued interest receivable		233,680			290,304
Premises and equipment, net		3,155,062			3,236,995
Foreclosed assets		20,000			295,750
Cash surrender value of life insurance		—			70,736
Deferred income tax assets		287,746			211,099
Prepaid expenses and other assets		319,604			473,334


Total assets	$	77,028,149		$	79,043,753


Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	561,563		$	780,336
Interest-bearing deposits		4,075,532			4,355,762
Savings deposits		16,850,314			15,461,977
Certificates of deposit		34,442,370			37,427,659


Total deposits		55,929,779			58,025,734

Federal Home Loan Bank advances		8,000,000			8,000,000
Accrued interest payable		42,503			42,962
Deferred compensation liability		—			8,170
Accounts payable and other liabilities		52,638			111,697


Total liabilities		64,024,920			66,188,563


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; 500,314 issued; 484,839 shares outstanding at September 30, 2013 and 2012, respectively		5,003			5,003
Additional paid in capital		4,040,748			3,979,972
Unearned common stock held by:
Employee Stock Ownership Plan		(209,736	)		(251,607	)
Recognition and Retention Plan		(245,145	)		(162,271	)
Retained earnings		9,334,634			9,077,164
Accumulated other comprehensive income		77,725			206,929


Total stockholders’ equity		13,003,229			12,855,190


Total liabilities and stockholders’ equity	$	77,028,149		$	79,043,753

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

~~Fairmount~~49 ~~Bancorp, Inc. and Subsidiary~~

~~September 30~~Fairmount Bancorp, ~~2012~~Inc. and ~~September 30,~~Subsidiary ~~2011~~

	September 30,2012			September 30,2011
Assets
Cash and due from banks	$	513,787		$	618,683
Interest-bearing deposits in other banks		337,379			1,417,777
Federal funds sold		3,512,020			4,152,566
Cash and cash equivalents		4,363,186			6,189,026
Certificates of deposit		3,531,991			—
Securities available for sale, at fair value		7,803,575			6,168,351
Securities held to maturity, at amortized cost		3,636,972			1,636,563
Federal Home Loan Bank stock, at cost		479,700			604,200
Loans, net of allowances for loan and lease losses of $617,474 at September 30, 2012 and $665,289 at September 30, 2011		54,650,111			53,758,286
Accrued interest receivable		290,304			246,588
Premises and equipment, net		3,236,995			2,775,306
Foreclosed real estate		295,750			884,000
Cash surrender value of life insurance		70,736			68,809
Deferred income tax assets		211,099			110,415
Prepaid expenses and other assets		473,334			345,295
Total assets	$	79,043,753		$	72,786,839
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	780,336		$	626,354
Interest-bearing deposits		4,355,762			3,953,516
Savings deposits		15,461,977			10,429,075
Certificates of deposit		37,427,659			35,938,465
Total deposits		58,025,734			50,947,410
Federal Home Loan Bank advances		8,000,000			10,000,000
Accrued interest payable		42,962			42,448
Deferred compensation liability		8,170			15,950
Accounts payable and other liabilities		111,697			303,694
Total liabilities		66,188,563			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; 500,314 issued; 477,514 and 444,038 shares outstanding at September 30, 2012 and 2011, respectively		5,003			4,440
Additional paid in capital		3,854,869			3,774,574
Unearned common stock held by:
Employee Stock Ownership Plan		(251,607	)		(230,000	)
Recognition and Retention Plan		(37,168	)		—
Retained earnings		9,077,164			7,728,798
Accumulated other comprehensive income		206,929			199,525
Total stockholders’ equity		12,855,190			11,477,337
Total liabilities and stockholders’ equity	$	79,043,753		$	72,786,839

Consolidated Statements of Income

~~The~~Years ~~notes~~Ended toSeptember 30, ~~consolidated~~2013 ~~financial~~and ~~statements~~2012 ~~are an integral part of these consolidated statements.~~


	2013		2012
Interest and dividend income:
Interest on loans	$	3,147,659	$	3,319,533
Interest and dividends on investments		270,823		394,831


Total interest income		3,418,482		3,714,364


Interest expense:
Interest on deposits		465,117		646,636
Interest on borrowings		268,016		273,451


Total interest expense		733,133		920,087


Net interest income		2,685,349		2,794,277

Provision for loan and lease losses		500,000		200,000


Net interest income after provision for loan and lease losses		2,185,349		2,594,277


Non-interest income:
Service fees on deposit accounts		5,269		4,957
Other service charges, commissions and fees		86,448		67,613
Gain on sale of assets		116,480		4,737
Other non-interest income		39,555		14,330


Total non-interest income		247,752		91,637


Non-interest expense:
Salaries, fees and employment		1,150,622		1,088,001
Premises and equipment		212,934		196,358
Professional fees		198,059		283,632
Data processing		127,060		114,336
FDIC premiums and regulatory assessments		104,304		97,089
Insurance and bond premiums		31,983		37,962
Stationery, printing and supplies		25,675		35,704
Provision for losses and costs on real estate acquired through foreclosure		24,747		251,630
Other operating expenses		119,520		140,483


Total non-interest expense		1,994,904		2,245,195


Income before income taxes		438,197		440,719

Income taxes		180,727		114,427


Income before extraordinary item		257,470		326,292

Extraordinary item, gain on business combination		—		1,022,074


Net income	$	257,470	$	1,348,366


Basic and dilutive earnings per common share:
Net income before extraordinary item, basic	$	0.58	$	0.69
Extraordinary item, gain on business combination, basic		—		2.17

Net income, basic	$	0.58	$	2.86

Basic weighted average shares outstanding		445,643		472,278


Net income before extraordinary item, dilutive	$	0.56	$	0.68
Extraordinary item, gain on business combination, dilutive		—		2.14

Net income, dilutive	$	0.56	$	2.82

Dilutive weighted average shares outstanding		456,782		478,719

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

~~Fairmount~~50 ~~Bancorp, Inc. and Subsidiary~~

~~Years~~Fairmount ~~Ended September 30~~Bancorp, ~~2012~~Inc. and ~~2011~~Subsidiary

	2012		2011
Interest and dividend income:
Interest on loans	$	3,319,533	$	3,381,134
Interest and dividends on investments		394,831		383,000
Total interest income		3,714,364		3,764,134
Interest expense:
Interest on deposits		646,636		822,882
Interest on borrowings		273,451		278,687
Total interest expense		920,087		1,101,569
Net interest income		2,794,277		2,662,565
Provision for loan and lease losses		200,000		200,000
Net interest income after provision for loan and lease losses		2,594,277		2,207,565
Non-interest income:
Service fees on deposit accounts		4,957		5,574
Other service charges, commissions and fees		67,613		88,514
Gain on sale of assets		4,737		125,815
Other non-interest income		14,330		6,665
Total non-interest income		91,637		226,568
Non-interest expense:
Salaries, fees and employment		1,088,001		1,001,297
Premises and equipment		196,358		172,393
Professional fees		283,632		133,880
Data processing		114,336		79,806
FDIC premiums and regulatory assessments		97,089		104,705
Insurance and bond premiums		37,962		26,187
Stationery, printing and supplies		35,704		30,712
Provision for losses and costs on real estate acquired through foreclosure		251,630		—
Other operating expenses		140,483		122,296
Total non-interest expense		2,245,195		1,671,276
Income before income taxes		440,719		762,857
Income taxes		114,427		196,297
Income before extraordinary item		326,292		488,809
Extraordinary item, gain on business combination		1,022,074		—
Net income	$	1,348,366	$	488,809
Basic and dilutive earnings per common share:
Net income before extraordinary item, basic	$	0.69	$	1.18
Extraordinary item, gain on business combination, basic		2.17		—
Net income, basic	$	2.86	$	1.18
Basic weighted average shares outstanding		472,278		415,083
Net income before extraordinary item, dilutive	$	0.68	$	1.18
Extraordinary item, gain on business combination, dilutive		2.14		—
Net income, dilutive	$	2.82	$	1.18
Dilutive weighted average shares outstanding		478,719		415,083

Consolidated Statements of Comprehensive Income

~~The~~Years ~~notes~~Ended toSeptember 30, ~~consolidated~~2013 ~~financial~~and ~~statements~~2012 ~~are an integral part of these consolidated statements.~~


	2013			2012

Net income	$	257,470		$	1,348,366

Other comprehensive income, net of tax:

Unrealized gain (loss) on investment securities available for sale		(329,864	)		8,806

Reclassification adjustment for realized gain on investment securities available for sale included in net income		(116,480	)		(896	)


Total investment securities available for sale		(213,384	)		7,910


Total other comprehensive income (loss), net of tax of $84,180 and $506, respectively		(129,204	)		7,404


Comprehensive income	$	128,266		$	1,355,770

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

~~Fairmount~~51 ~~Bancorp, Inc. and Subsidiary~~

~~Years~~Fairmount ~~Ended September 30~~Bancorp, ~~2012~~Inc. ~~and 2011~~

	2012		2011
Net income	$	1,348,366	$	488,809
Other comprehensive income, net of tax:
Change in fair value of securities available for sale		4,789		66,635
Amortization of unrealized loss for investment securities transferred to held to maturity from available for sale		2,615		320
Total other comprehensive income (loss), net of tax, $506 and $43,093, for the years ended September 30, 2012 and 2011, respectively		7,404		66,955
Comprehensive income	$	1,355,770	$	555,764

Consolidated Statements of Changes in Stockholders’ Equity

~~The~~Years ~~notes~~Ended toSeptember 30, ~~consolidated~~2013 ~~financial~~and ~~statements~~2012 ~~are an integral part of these consolidated statements.~~


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

Balance, September 30, 2011	$	4,440	$	3,774,574		$	(230,000	)	$	—		$	7,728,798	$	199,525		$	11,477,337

Net income		—		—			—			—			1,348,366		—			1,348,366

Other comprehensive income		—		—			—			—			—		7,404			7,404


Total comprehensive income							—			—			—		—			1,355,770

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	)

Repurchase of common stock		—		(264,137	)		—			(125,103	)		—		—			(389,240	)

ESOP shares released for allocation		—		17,879			41,871			—			—		—			59,750


Balance, September 30, 2012	$	5,003	$	3,979,972		$	(251,607	)	$	(162,271	)	$	9,077,164	$	206,929		$	12,855,190

Net income		—		—			—			—			257,470		—			257,470

Other comprehensive income		—		—			—			—			—		(129,204	)		(129,204	)


Total comprehensive income																		128,266

Repurchase of common stock		—		—			—			(133,080	)		—		—			(133,080	)

ESOP shares released for allocation		—		29,805			41,871			—			—		—			71,676

RRP shares released for allocation		—		(50,206	)		—			50,206			—		—			—

Stock based compensation		—		81,177			—			—			—		—			81,177


Balance, September 30, 2013	$	5,003	$	4,040,748		$	(209,736	)	$	(245,145	)	$	9,334,634	$	77,725		$	13,003,229

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

~~Fairmount~~52 ~~Bancorp, Inc.~~

~~Years~~Fairmount ~~Ended September 30~~Bancorp, ~~2012~~Inc. and ~~2011~~Subsidiary

	CommonStock		AdditionalPaid-InCapital			UnearnedESOPShares			UnearnedRRPShares			RetainedEarnings		AccumulatedOtherComprehensiveIncome		TotalStockholders’Equity
Balance, September 30, 2010	$	4,440	$	3,744,182		$	(289,710	)	$	—		$	7,239,989	$	132,570	$	10,831,471
Net income		—		—			—			—			488,809		—		488,809
Other comprehensive income		—		—			—			—			—		66,955		66,955
ESOP shares released for allocation		—		30,392			59,710			—			—		—		90,102
Balance, September 30, 2011	$	4,440	$	3,774,574		$	(230,000	)	$	—		$	7,728,798	$	199,525	$	11,477,337
Net income		—		—			—			—			1,348,366		—		1,348,366
Other comprehensive income		—		—			—			—			—		7,404		7,404
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	)
Repurchase of common stock		—		(389,240	)		—			—			—		—		(389,240	)
ESOP shares released for allocation		—		17,879			41,871			—			—		—		59,750
Balance, September 30, 2012	$	5,003	$	3,854,869		$	(251,607	)	$	(37,168	)	$	9,077,164	$	206,929	$	12,855,190

Consolidated Statements of Cash Flows

~~The~~Years ~~notes~~Ended toSeptember 30, ~~consolidated~~2013 ~~financial~~and ~~statements~~2012 ~~are an integral part of these consolidated statements.~~


	For the Year Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	257,470		$	1,348,366
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on business combination		—			(1,022,074	)
Depreciation and amortization		132,010			123,727
Amortization and accretion of securities		88,993			53,932
Provision for loan and lease losses		500,000			200,000
Provision for loss on real estate acquired through foreclosure		—			222,000
Loss on sale of real estate acquired through foreclosure		—			18,404
(Gains) losses on sales of securities		(116,480	)		(896	)
(Gains) losses on sales of other real estate owned		23,723			(3,842	)
Deferred income taxes		7,533			(105,508	)
(Increase) decrease in accrued interest receivable		56,624			(43,716	)
(Increase) decrease in cash surrender value of life insurance		70,736			(1,927	)
(Increase) decrease in prepaid expenses and other assets		153,730			46,540
Increase (decrease) in accrued interest payable		(459	)		514
Increase (decrease) in accounts payable and other liabilities		(59,059	)		(269,424	)
Stock based compensation expense		81,177			—
Employee Stock Ownership Plan expense		71,676			59,750


Net cash provided (used) by operating activities		1,267,674			625,846


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		1,753,845			189,692
Proceeds from maturities, payments and calls of available for sale securities		2,986,012			1,841,381
Proceeds from maturities, payments and calls of held to maturity securities		2,000,000			2,500,000
Purchases of available for sale securities		(1,278,086	)		(2,979,375	)
Purchases of held to maturity securities		(3,756,411	)		(4,499,000	)
(Purchases) maturities of certificates of deposit		(250,250	)		(3,433,991	)
(Purchases) redemptions of Federal Home Loan Bank stock		26,000			139,800
Net (increase) decrease in loans		(1,225,254	)		1,322,887
Proceeds from disposal of foreclosed real estate		272,027			347,846
Proceeds from disposal of premises and equipment		—			342,325
Purchases of premises and equipment		(70,077	)		(36,396	)


Net cash provided (used) by investing activities		457,806			(151,433	)


Cash flows from financing activities:
Net increase (decrease) in deposits		(2,095,955	)		(254,806	)
Net increase (decrease) in borrowings		—			(2,000,000	)
Payments on accrued deferred compensation obligation		(8,170	)		(7,780	)
Proceeds from issuance of common stock		—			351,573
Repurchase of common stock		(133,080	)		(389,240	)


Net cash provided (used) by financing activities		(2,237,205	)		(2,300,253	)


Net increase (decrease) in cash and cash equivalents		(511,725	)		(1,825,840	)

Cash and cash equivalents, beginning balance		4,363,186			6,189,026


Cash and cash equivalents, ending balance	$	3,851,461		$	4,363,186


Supplemental disclosure of cash flows information:
Cash paid for interest	$	733,592		$	919,573
Cash paid for income taxes		—			637,084
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain on securities available for sale - net of tax effect of $84,180 and $506, respectively	$	129,204		$	7,404
Foreclosed assets acquired in settlement of loans		20,000			—

~~Table~~53 ~~of Contents~~

~~Consolidated~~On ~~Statements~~October 13, 2011, the Company loaned $63,478 to the ESOP which was used to acquire 4,502 shares of ~~Cash~~common ~~Flows~~stock. The loan is secured by the shares purchased and is shown as Unearned ESOP shares in the consolidated balance sheets.

~~Years~~The ~~Ended~~notes ~~September 30,~~to ~~2012~~consolidated ~~and~~financial ~~2011~~statements are an integral part of these consolidated statements.

	For the Year Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	1,348,366		$	488,809
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on business combination		(1,022,074	)		—
Depreciation and amortization		123,727			113,199
Amortization and accretion of securities		53,932			24,997
Provision for loan and lease losses		200,000			455,000
Provision for loss on real estate acquired through foreclosure		222,000			—
Loss on sale of real estate acquired through foreclosure		18,404			—
Other (gains) and losses, net		(4,738	)		(125,815	)
Deferred income taxes		(105,508	)		(172,102	)
(Increase) decrease in accrued interest receivable		(43,716	)		25,083
(Increase) decrease in cash surrender value of life insurance		(1,927	)		(1,927	)
(Increase) decrease in prepaid expenses and other assets		46,540			32,224
Increase (decrease) in accrued interest payable		514			(219	)
Increase (decrease) in accounts payable and other liabilities		(269,424	)		238,157
Employee Stock Ownership Plan expense		59,750			90,102
Net cash provided (used) by operating activities		625,846			1,167,508
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		1,841,381			957,545
Proceeds from maturities, payments and calls of held to maturity securities		2,500,000			3,000,000
Purchases of available for sale securities		(2,979,375	)		(1,522,222	)
Purchases of held to maturity securities		(4,499,000	)		(866,383	)
(Purchases) maturities of certificates of deposit		(3,433,991	)		—
(Purchases) redemptions of Federal Home Loan Bank stock		139,800			(25,600	)
Net (increase) decrease in loans		1,322,887			(1,668,999	)
Proceeds from disposal of foreclosed real estate		347,846			17,514
Proceeds from disposal of premises and equipment		342,325			204,020
Purchases of premises and equipment		(36,396	)		(893,329	)
Net cash provided (used) by investing activities		(151,433	)		(797,454	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(254,806	)		976,871
Net increase (decrease) in borrowings		(2,000,000	)		—
Payments on accrued deferred compensation obligation		(7,780	)		(7,410	)
Proceeds from issuance of common stock		351,573			—
Repurchase of common stock		(389,240	)		—
Net cash provided (used) by financing activities		(2,300,253	)		969,461
Net increase (decrease) in cash and cash equivalents		(1,825,840	)		1,339,515
Cash and cash equivalents, beginning balance		6,189,026			4,849,511
Cash and cash equivalents, ending balance	$	4,363,186		$	6,189,026
Supplemental disclosure of cash flows information:
Cash paid for interest	$	919,573		$	1,101,788
Cash paid for income taxes		637,084			200,760
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain on securities available for sale - net of tax effect of $506 and $43,093, respectively	$	7,404		$	66,955
Foreclosed assets acquired in settlement of loans		—			866,514

~~The notes~~Fairmount toBancorp, ~~consolidated~~Inc. ~~financial~~and ~~statements~~Subsidiary ~~are an integral part of these consolidated statements.~~

54Notes to Consolidated Financial Statements

~~Table~~Note of1. ~~Contents~~Significant Accounting Policies

~~Fairmount~~Nature ~~Bancorp,~~of ~~Inc.~~Operations ~~and Subsidiary~~

~~Notes~~Fairmount Bancorp, Inc., a Maryland corporation (the “Company”) was incorporated on November 30, 2009, to ~~Consolidated~~serve ~~Financial~~as ~~Statements~~the holding company for Fairmount Bank (the “Bank”), a federally chartered savings bank. On June 2, 2010, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to Maryland state chartered commercial 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.

~~Note~~On October 112, 2011, the Company completed the acquisition of Fullerton Federal Savings Association (“Fullerton”) in a conversion merger transaction. ~~Significant~~In ~~Accounting~~connection ~~Policies~~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.

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

Fairmount ~~Bancorp, Inc., a Maryland corporation (the “Company”) was incorporated on November 30, 2009, to serve as the holding company for Fairmount~~ Bank ~~(the~~is ~~“Bank”),~~ a ~~federally~~community-oriented ~~chartered~~commercial ~~savings~~ bank~~. On June 2~~, ~~2010,~~which inprovides ~~accordance with~~ a ~~Plan~~variety of ~~Conversion~~financial ~~adopted~~services byto ~~its~~individuals ~~Board of Directors~~ and ~~approved~~corporate bycustomers through its ~~members,~~home ~~the~~Baltimore ~~Bank~~County, ~~converted~~Maryland, ~~from~~and ~~a federal~~is ~~mutual~~subject ~~savings bank~~ to acompetition ~~federal~~from ~~stock~~other ~~savings~~financial ~~bank and become the wholly owned subsidiary of the Company~~institutions. The ~~conversion~~Bank’s ~~was~~primary ~~accomplished~~deposit ~~through~~products ~~the~~are ~~sale~~interest-bearing ~~and~~savings, ~~issuance~~certificates of ~~444~~deposit,~~038~~ ~~shares~~and ofindividual ~~common~~retirement ~~stock at a price of $10~~accounts.00 ~~per share,~~The ~~through~~Bank’s ~~which~~primary ~~the~~lending ~~Company~~products ~~received~~are ~~proceeds~~single-family ofresidential ~~approximately~~mortgage ~~$3,742,000, net of offering expenses of approximately $699,000~~loans. ~~Approximately~~The ~~50%~~Bank ofis ~~the~~subject ~~net proceeds of the offering, or $1,900,000, were contributed by the Company~~ to the ~~Bank~~regulations ~~in return for 100%~~ of ~~the~~certain ~~issued~~Federal agencies and ~~outstanding~~undergoes ~~shares~~periodic ofexaminations ~~common~~by ~~stock~~those ofregulatory ~~the Bank~~authorities. InThe ~~connection~~accounting ~~with~~policies ~~the~~of ~~conversion,~~ the Bank’s ~~Board~~conform ofto ~~Directors~~accounting ~~adopted~~principles angenerally ~~employee~~accepted ~~stock~~in ~~ownership plan (~~the ~~“ESOP”)~~United ~~which~~States ~~subscribed for 8%~~ of ~~the~~America ~~sum~~and ~~of the~~general ~~number~~practices ofwithin ~~shares, or 35,523 shares of common stock sold in~~ the ~~offering~~banking industry.

OnPrinciples ~~October 12, 2011, the Company completed the acquisition~~ of ~~Fullerton~~Consolidation 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.

InThe ~~accordance~~consolidated ~~with~~financial ~~the~~statements ~~Office~~include ~~of Comptroller of~~ the ~~Currency~~accounts ~~(the “OCC”) regulations, upon the completion~~ of ~~the~~Fairmount ~~conversion~~Bancorp, ~~the Bank restricted retained earnings by establishing a liquidation account~~Inc., ~~The~~its ~~liquidation~~wholly ~~account~~owned ~~will~~subsidiary beFairmount ~~maintained for the benefit of eligible account holders who continue to maintain their accounts at the~~ Bank ~~after conversion~~. ~~The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore~~Material anintercompany ~~eligible~~accounts ~~account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank,~~ and ~~only~~transactions inhave ~~such~~been ~~event,~~eliminated ~~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~~consolidation. ~~The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.~~

~~Fairmount~~55 Bank is a community-oriented federal savings bank, which provides a variety of financial services to individuals and corporate customers through its home 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 regulations of certain Federal agencies and undergoes periodic examinations 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.

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

55Notes to Consolidated Financial Statements

~~Table~~Note of1. ~~Contents~~Significant Accounting Policies (Continued)

~~Fairmount~~Estimates ~~Bancorp, Inc. and Subsidiary~~

~~Notes~~The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to ~~Consolidated~~make ~~Financial~~estimates ~~Statements~~and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~Note 1~~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. ~~Significant~~In ~~Accounting~~connection ~~Policies~~with ~~(Continued)~~the determination of the allowances for losses on loans and leases and foreclosed real estate, management obtains independent appraisals for significant properties.

~~Estimates~~Cash and Cash Equivalents

~~The~~For ~~preparation~~purposes of ~~financial statements in conformity with accounting principles generally accepted in~~ the ~~United~~consolidated ~~States~~statements of ~~America~~cash ~~requires~~flows, ~~management~~cash ~~to make estimates~~ and ~~assumptions~~cash ~~that~~equivalents ~~affect~~include ~~the reported~~cash ~~amounts of assets~~ and ~~liabilities~~balances ~~and~~due ~~disclosure~~from ofbanks, ~~contingent~~interest-bearing deposits ~~assets~~in ~~and~~other ~~liabilities~~banks, atcertificates ~~the date~~ of ~~the~~deposit ~~financial~~less ~~statements~~than ~~and~~one ~~the~~year ~~reported amounts of revenues~~ and ~~expenses~~federal ~~during~~funds ~~the reporting period~~sold. ~~Actual results could differ from those estimates.~~

~~Material~~Securities 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.

~~Cash~~Management determines the appropriate classification of debt securities at the time of purchase and ~~Cash~~re-evaluates ~~Equivalents~~such designation as of each balance sheet date.

~~For~~Securities ~~purposes~~that of the ~~consolidated~~Company ~~statements~~has ofthe ~~cash~~positive ~~flows,~~intent ~~cash~~ and ~~cash~~ability ~~equivalents~~to ~~include~~hold ~~cash~~to ~~and~~maturity ~~balances~~are ~~due~~classified ~~from~~as ~~banks, interest-bearing~~held ~~deposits~~to inmaturity and ~~other~~are ~~banks,~~reported ~~certificates~~at ofamortized ~~deposit~~cost ~~less~~(including ~~than~~amortization ~~one~~of ~~year~~premium ~~and~~or ~~federal~~accretion ~~funds~~of ~~sold~~discount).

Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Realized gains and losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary, if any, are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

~~Management~~Federal ~~determines~~Home ~~the~~Loan ~~appropriate~~Bank ~~classification~~Stock ~~of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.~~

~~Securities~~Federal ~~that~~Home ~~the~~Loan ~~Company~~Bank ~~has~~of Atlanta (the ~~positive~~“FHLB”) ~~intent~~stock ~~and~~is ~~ability~~an toequity ~~hold~~interest toin ~~maturity~~the ~~are~~FHLB, ~~classified~~which asdoes not have a readily determinable ~~held~~fair value for purposes of Generally Accepted Accounting Standards related to ~~maturity~~Accounting for Certain Investments in Debt and ~~are~~Equity ~~reported~~Securities, atbecause ~~amortized~~its ~~cost~~ownership ~~(including~~is ~~amortization~~restricted and it lacks a market. FHLB stock can be sold back only at par value of ~~premium~~$100 per share and only to the FHLB or ~~accretion~~another member institution. As of ~~discount)~~September 30, 2013 and 2012, the Company owned shares totaling $453,700 and $479,700, respectively.

~~Securities classified~~The asCompany ~~available~~evaluates ~~for sale are those securities that~~ the ~~Company~~FHLB ~~intends~~stock ~~to hold~~ for animpairment ~~indefinite~~in ~~period~~accordance ofwith ~~time~~generally ~~but~~accepted ~~not~~accounting ~~necessarily to maturity~~principles. ~~Securities~~The ~~available for sale are carried at fair value. Unrealized gains and losses are~~Company’s ~~reported~~determination asof ~~increases~~whether orthis ~~decreases~~investment inis ~~other~~impaired ~~comprehensive~~is ~~income.~~based ~~Realized~~on ~~gains~~an ~~and~~assessment ~~losses,~~of ~~determined on~~ the ~~basis~~ultimate recoverability of ~~the~~its cost ofrather ~~the~~than ~~specific~~by ~~securities~~recognizing ~~sold,~~temporary ~~are~~declines ~~included~~ in ~~earnings~~value. ~~Premiums~~The ~~and~~determination ~~discounts~~of ~~are~~whether ~~recognized in interest income using~~ a ~~method~~decline ~~which~~in ~~approximates~~value ~~the~~affects ~~interest method over~~ the ~~terms~~ultimate recoverability of ~~the~~its ~~securities. Declines in the fair value of available for sale securities below their~~ cost ~~that~~is ~~are~~influenced ~~deemed~~by tocriteria besuch ~~other than temporary, if any, are reflected in earnings~~ as ~~realized~~ ~~losses. In estimating other-than-temporary impairment losses, management considers~~ (1) the ~~length~~significance of ~~time and~~ the ~~extent~~decline toin ~~which~~net ~~the~~assets ~~fair value has been less than cost, (2) the financial condition and near-term prospects~~ of the ~~issuer,~~ ~~and~~FHLB ~~(3) the~~as ~~intent~~compared ~~and ability of the Company~~ to ~~retain its investment in~~ the ~~issuer~~capital ~~for~~stock ~~a period of time sufficient to allow for any anticipated recovery in fair value.~~

~~Federal~~56 ~~Home Loan Bank Stock~~

~~The~~Fairmount ~~Company~~Bancorp, ~~evaluates the FHLB stock for impairment in accordance with generally accepted accounting principles~~Inc. ~~The~~and ~~Company’s determination~~Subsidiary of whether this investment is impaired is based on an assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline in value affects the ultimate recoverability of its cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock

56Notes to Consolidated Financial Statements

~~Table~~Note of1. ~~Contents~~Significant Accounting Policies (Continued)

~~Fairmount~~ amount ~~Bancorp~~for the FHLB and the length of time this situation has persisted, ~~Inc.~~(2) commitments by the FHLB to make payments required by law or regulation and ~~Subsidiary~~the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and accordingly on the customer base of the FHLB.

~~Notes~~Loans ~~to Consolidated Financial Statements~~

~~Note 1~~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. ~~Significant~~Interest ~~Accounting~~on ~~Policies~~loans ~~(Continued)~~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. The loan may be returned to accrual status if unpaid principal and interest are paid so that the loan is brought current and performing according to the contractual terms of the loan.

When a loan is 15 days past due, the Company will send the borrower ~~amount~~a ~~for~~late notice. The Company also contacts the ~~FHLB~~borrower ~~and~~by phone if the ~~length~~delinquency ofis ~~time~~not ~~this~~corrected ~~situation~~promptly after the notice has ~~persisted,~~been ~~(2) commitments~~sent. byWhen the ~~FHLB~~loan tois ~~make~~30 ~~payments~~days ~~required~~past bydue, ~~law~~the orCompany ~~regulation~~will ~~and~~send the ~~level~~borrower a letter reminding the borrower of ~~such~~the delinquency, ~~payments~~and attempts to contact the borrower personally to determine the reason for the delinquency in ~~relation~~ order to ensure that the ~~operating~~borrower ~~performance~~understands the terms of the ~~FHLB,~~loan and ~~(3)~~ the ~~impact~~importance of ~~legislative~~making payments on or before the due date. If necessary, subsequent delinquency notices are issued and ~~regulatory~~the ~~changes~~account will be monitored on ~~institutions~~a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and ~~accordingly~~may onrecommend foreclosure. Loans are charged off when the ~~customer~~Company ~~base~~believes that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the ~~FHLB~~board of directors of the Company each month.

~~Loans~~Allowance for Loan and Lease Losses

~~Loans~~The ~~are generally carried at the amount of unpaid principal, less the~~ allowance for loan losses ~~and~~is ~~adjusted~~established ~~for~~through ~~deferred~~a ~~loan~~provision ~~fees, which~~for ~~are amortized over the term of the~~ loan ~~using the interest method~~losses. ~~Interest~~The onCompany ~~loans~~maintains ~~is accrued based on~~ the ~~principal~~allowance ~~amounts~~at ~~outstanding.~~a Itlevel isbelieved, ~~the Company’s policy~~ to ~~discontinue~~ the ~~accrual~~best of ~~interest~~management’s ~~when~~knowledge, ~~a loan is specifically determined~~ to becover ~~impaired or when the principal or interest is delinquent for 90 days or more. When a loan is placed on nonaccrual status,~~ all ~~interest~~known ~~previously~~and ~~accrued~~inherent ~~but~~losses ~~not~~in ~~collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless~~ the ~~likelihood~~portfolio ofthat ~~further loss is remote. Cash collections on such loans~~ are ~~applied~~both asprobable ~~reductions of the loan principal~~ and noreasonable ~~interest~~to ~~income~~estimate isat ~~recognized~~each onreporting ~~those loans until the principal balance has been collected~~date. ~~The~~Subsequent ~~carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or~~recoveries, ~~alternatively, the observable market price of the loan or the fair value of the collateral. The loan may be returned to accrual status~~ if ~~unpaid~~any, ~~principal and interest~~ are ~~paid~~credited ~~so that the loan is brought current and performing according~~ to the ~~contractual terms of the loan~~allowance.

~~When~~The aallowance for loan losses is 15evaluated ~~days~~on ~~past~~no ~~due,~~less ~~the~~than ~~Company will send the borrower~~ a ~~late~~quarterly ~~notice.~~basis ~~The~~in ~~Company~~order ~~also~~to ~~contacts~~identify ~~the~~those ~~borrower~~inherent bylosses ~~phone~~and ifto assess the ~~delinquency~~overall iscollection ~~not~~probability ~~corrected~~for ~~promptly after~~ the ~~notice~~loan ~~has~~portfolio. ~~been~~The ~~sent.~~evaluation ~~When~~process ~~the~~by ~~loan~~portfolio issegment 30includes, ~~days~~among ~~past~~other ~~due~~things, ~~the~~an ~~Company~~analysis ~~will~~of ~~send~~delinquency ~~the~~trends, ~~borrower~~non-performing aloan ~~letter~~trends, ~~reminding~~ the ~~borrower~~level of ~~the~~charge-offs ~~delinquency,~~ and ~~attempts~~recoveries, toprior ~~contact the borrower personally to~~loss ~~determine~~experience, ~~the~~total ~~reason~~loans ~~for~~outstanding, the ~~delinquency~~volume inof ~~order~~loan tooriginations, ~~ensure that~~ the ~~borrower~~type, ~~understands~~size ~~the terms of the loan~~ and ~~the~~geographic ~~importance~~concentration of ~~making payments on or before~~ the ~~due date. If necessary~~loans, ~~subsequent delinquency notices are issued and~~ the ~~account will~~value beof ~~monitored~~collateral onsecuring ~~a regular basis thereafter. By~~ the ~~90th day of delinquency~~loan, the ~~Company will send the~~ borrower’s aability ~~final~~to ~~demand~~repay ~~for payment~~ and ~~may~~repayment ~~recommend~~performance, ~~foreclosure. Loans are charged off when~~ the ~~Company~~number ~~believes that the recovery~~ of ~~principal is improbable. A summary report of all~~ loans 30requiring ~~days~~heightened ormanagement ~~more~~oversight, ~~past~~local ~~due~~economic isconditions ~~provided~~and toindustry ~~the board of directors of the Company each month~~experience.

~~Allowance~~The establishment of the allowance for loan ~~Loan~~losses is significantly affected by management’s judgment and ~~Lease~~uncertainties, ~~Losses~~and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Office of the Commissioner of Financial Regulation of the State of Maryland 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~~57 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 portfolio that are both probable and reasonable to estimate at each reporting date. Subsequent recoveries, if any, are credited to the allowance.

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

57Notes to Consolidated Financial Statements

~~Table~~Note of1. ~~Contents~~Significant Accounting Policies (Continued)

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

~~Notes~~A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to ~~Consolidated~~collect ~~Financial~~the scheduled ~~Statements~~payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

~~Note~~Loans 1.may ~~Significant~~be ~~Accounting~~periodically ~~Policies~~modified in a troubled debt restructuring (~~Continued~~TDR) to make concessions to help a borrower remain current on the loan and 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.

The ~~Company’s~~allowance ~~policies~~consists of specific, ~~consistent~~general, ~~with~~and ~~regulatory~~unallocated ~~guidelines,~~components. ~~provide~~The ~~for~~specific ~~the~~component ~~classification~~relates ofto loans ~~and other assets~~ that are ~~considered~~classified ~~to be of lesser quality~~ as ~~substandard~~doubtful, ~~doubtful~~substandard, or ~~loss~~special ~~assets~~mention. AnFor ~~asset~~such isloans ~~considered~~that ~~substandard~~are ifalso itclassified isas ~~inadequately~~impaired, ~~protected~~a byspecific ~~the~~allowance ~~current~~is ~~net~~established ~~worth~~for ~~and~~that ~~paying~~portion ~~capacity~~ of the ~~obligor~~ orloan ofthat ~~the~~is ~~collateral~~deemed ~~pledged, if any~~uncollectible. ~~Substandard~~The ~~assets~~general component ~~include~~covers ~~those~~non-classified ~~assets~~loans ~~characterized~~and byis ~~the~~based ~~distinct~~on ~~possibility~~historical ~~that~~loss weexperience ~~will~~adjusted ~~sustain~~for ~~some~~qualitative ~~loss~~factors. ifAn ~~the~~unallocated ~~deficiencies~~component ~~are~~of ~~not~~the ~~corrected.~~allowance ~~Assets~~reflects ~~classified~~the asmargin ~~doubtful have all~~ of ~~the weaknesses~~imprecision inherent in ~~those classified substandard with~~ the ~~added~~underlying ~~characteristic~~assumptions ~~that~~used in the methodologies ~~weaknesses~~for ~~present~~estimating ~~make~~specific ~~collection~~and orgeneral ~~liquidation~~losses in ~~full, on~~ the ~~basis~~portfolio. ofDeterminations ~~currently~~as ~~existing~~to ~~facts,~~the ~~conditions~~classification ~~and~~of ~~values,~~assets ~~highly questionable~~ and ~~improbable.~~ ~~Assets~~the ~~(or~~amount ~~portions~~ of ~~assets) classified as~~ loss, allowances are ~~those~~subject ~~considered~~to ~~uncollectible~~review ~~and~~by ofour ~~such~~principal ~~little~~federal ~~value~~regulator, ~~that~~the ~~there~~Office ~~continuance~~of asthe ~~assets~~Commissioner of isFinancial ~~not~~Regulation ~~warranted.~~for ~~Assets~~the ~~that~~State doof ~~not~~Maryland, ~~expose~~which uscan torequire ~~risk~~that ~~sufficient~~we toestablish ~~warrant~~additional ~~classification in~~loss ~~one~~allowances. ofThe ~~the~~Company ~~aforementioned~~regularly ~~categories,~~reviews ~~but~~its ~~which~~asset ~~possess~~portfolio ~~potential~~to ~~weaknesses~~determine ~~that~~whether ~~deserve~~any ~~close~~assets ~~attention,~~require ~~are~~classification ~~required~~in toaccordance bewith ~~designated as special mention~~applicable regulations.

AThe ~~loan~~Company ismaintains ~~considered~~the ~~impaired~~allowance ~~when,~~for ~~based~~loan onand ~~current~~lease ~~information~~losses ~~and~~at ~~events,~~a itlevel isconsidered ~~probable~~adequate ~~that~~to ~~the~~provide ~~Company~~for ~~will~~losses beinherent in ~~unable~~the toloan ~~collect~~portfolio. While the ~~scheduled~~Company ~~payments~~utilizes ofavailable ~~principal~~information orto ~~interest~~recognize ~~when~~losses ~~due~~on ~~according~~loans, ~~to the~~future ~~contractual~~additions ~~terms~~to of the allowances for loan ~~agreement.~~and ~~Factors~~lease ~~considered~~losses bymay ~~management~~be innecessary ~~determining~~based ~~impairment~~on ~~include~~changes ~~payment~~in ~~status~~economic conditions, ~~collateral~~particularly ~~value,~~in ~~and~~its’ market area in the ~~probability~~state of ~~collecting~~Maryland. ~~scheduled~~In ~~principal~~addition, ~~and~~regulatory ~~interest~~agencies, ~~payments~~as ~~when~~an ~~due.~~integral ~~Impairment~~part ~~is measured~~of ontheir aexamination ~~loan~~process, byperiodically ~~loan~~review ~~basis~~the byCompany’s ~~either~~allowance ~~the~~for ~~present~~loan ~~value~~and oflease ~~expected~~losses. ~~future~~Such ~~cash~~agencies ~~flows~~may ~~discounted~~require at the ~~loan’s~~Company ~~effective~~to ~~interest~~recognize additions ~~rate,~~to the allowance for loan’s ~~obtainable~~and ~~market~~lease ~~price,~~losses orbased ~~the~~on ~~fair~~their ~~value~~judgments ofabout ~~the~~information ~~collateral~~available ifto them at the ~~loan~~time isof ~~collateral dependent~~their examination.

~~Loans~~Actual ~~may be periodically modified in a troubled debt restructuring (TDR) to make concessions to help a borrower remain current on the~~ loan ~~and~~losses tomay ~~avoid~~be ~~foreclosure.~~significantly ~~Generally~~more wethan ~~do not forgive principal or interest on a loan or modify~~ the ~~interest~~allowance ~~rate~~for ~~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 isand ~~less~~lease ~~than~~losses the ~~recorded~~Company ~~investment~~has ~~in the loan~~established, ~~impairment~~which iscould ~~recognized~~have ~~through~~ a material ~~specific~~negative ~~allowance~~effect ~~estimate~~on orits afinancial ~~charge-off to the allowance~~statements.

~~The~~58 allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, a specific allowance is established for that portion of the loan that is deemed uncollectible. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. The Company regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

~~Actual~~Fairmount ~~loan~~Bancorp, ~~losses~~Inc. ~~may be significantly more than the allowance for loan~~ and ~~lease~~Subsidiary ~~losses the Company has established, which could have a material negative effect on its financial statements.~~

58Notes to Consolidated Financial Statements

~~Table~~Note of1. ~~Contents~~Significant Accounting Policies (Continued)

~~Fairmount~~Premises ~~Bancorp, Inc.~~ and ~~Subsidiary~~Equipment

~~Notes~~Land is carried at cost. Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over estimated useful lives of assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to ~~Consolidated~~expense ~~Financial~~as ~~Statements~~incurred; significant renewals and betterments are capitalized.

~~Note~~Foreclosed Assets ~~1. Significant Accounting Policies (Continued)~~

~~Premises~~Assets acquired through, or in lieu of, foreclosure is initially recorded at the lower of cost (principal balance of the former mortgage loan plus costs of obtaining title and ~~Equipment~~possession) or fair value at the date of acquisition. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed.

~~Land~~Management isperiodically ~~carried~~performs atvaluations, ~~cost. Property~~ and ~~equipment~~an isallowance ~~carried~~for atlosses ~~cost~~is ~~less~~established ~~accumulated~~by ~~depreciation.~~a ~~Depreciation~~charge isto ~~computed~~operations onif the ~~straight-line~~ ~~method~~carrying ~~over~~value ~~estimated useful lives~~ of ~~assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the~~a ~~period.~~property ~~The~~exceeds ~~cost~~its ofestimated ~~maintenance~~net ~~and~~realizable ~~repairs is charged to expense as incurred; significant renewals and betterments are capitalized~~value.

~~Foreclosed~~Income

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

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