UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2013

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

For the transition period from to .

Commission file number: 000-53996

Fairmount Bancorp, Inc.

(Exact Name of Registrant as specified in its charter)


Maryland		27-1783911
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

( 410 ) 866-4500

(Registrant’s Telephone Number, Including Area Code)

None

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

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

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

As of February 13, 2014, the number of shares of common stock outstanding was 484,839.

FAIRMOUNT BANCORP, INC.

FORM 10-Q

Table of Contents


	Page No.

Part I – Financial Information

Item 1 – Financial Statements (Unaudited)

Consolidated Balance Sheets at December 31, 2013 (Unaudited) and September 30, 2013		3

Consolidated Statements of Income for the Three Months Ended December 31, 2013 and 2012 (Unaudited)		4

Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2013 and 2012 (Unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2013 and 2012 (Unaudited)		6

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2013 and 2012 (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		8-30

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		31-35

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		35

Item 4 – Controls and Procedures		35

Part II – Other Information

Item 1 – Legal Proceedings		35

Item 1A – Risk Factors		35

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 3 – Defaults Upon Senior Securities		36

Item 4 – Mine Safety Disclosures		36

Item 5 – Other Information		36

Item 6 – Exhibits		36

Signatures		37

Exhibit 31.1		38
Exhibit 31.2		39
Exhibit 32.0		40

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2013 and September 30, 2013


	December 31, 2013			September 30, 2013
	(Unaudited)
Assets
Cash and due from banks	$	299,478		$	850,941
Interest-bearing deposits in other banks		794,812			858,746
Federal funds sold		2,862,991			2,141,774


Cash and cash equivalents		3,957,281			3,851,461


Certificates of deposit		3,784,029			3,783,568
Securities available for sale, at fair value		5,565,890			5,791,725
Securities held to maturity, at amortized cost		3,756,142			3,756,238
Federal Home Loan Bank stock, at cost		453,700			453,700
Loans, net of allowances for loan and lease losses of 827,120 at December 31, 2013 and $733,451 at September 30, 2013		54,750,106			55,375,365
Accrued interest receivable		238,974			233,680
Premises and equipment, net		3,120,358			3,155,062
Foreclosed assets		20,000			20,000
Deferred income tax asset		290,777			287,746
Prepaid expenses and other assets		251,080			319,604


Total assets	$	76,188,337		$	77,028,149


Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing deposits	$	686,240		$	561,563
Interest-bearing demand deposits		3,920,878			4,075,532
Savings deposits		15,991,813			16,850,314
Certificates of deposit		34,406,032			34,442,370


Total deposits		55,004,963			55,929,779

Federal Home Loan Bank advances		8,000,000			8,000,000
Accrued interest payable		44,287			42,503
Accounts payable and other liabilities		71,413			52,638


Total liabilities		63,120,663			64,024,920


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 outstanding at December 31, 2013 and September 30, 2013, respectively		5,003			5,003
Additional paid in capital		4,040,748			4,040,748
Unearned common stock held by:
Employee Stock Ownership Plan		(209,736	)		(209,736	)
Recognition and Retention Plan		(245,145	)		(245,145	)
Retained earnings		9,403,732			9,334,634
Accumulated other comprehensive income		73,072			77,725


Total stockholders’ equity		13,067,674			13,003,229


Total liabilities and stockholders’ equity	$	76,188,337		$	77,028,149

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

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

Three Months Ended December 31, 2013 and 2012

(Unaudited)


	Three Months Ended December 31,
	2013		2012
Interest and dividend income:
Interest on loans	$	788,438	$	817,179
Interest and dividends on investments		71,048		82,156


Total interest income		859,486		899,335


Interest expense:
Interest on deposits		104,473		132,346
Interest on borrowings		67,555		67,555


Total interest expense		172,028		199,901


Net interest income		687,458		699,434

Provision for loan and lease losses		105,000		125,000


Net interest income after provision for loan and lease losses		582,458		574,434


Non-interest income:
Service fees on deposit accounts		1,807		742
Other service charges, commissions and fees		15,825		19,266
Gain on disposal of assets		—		117,117
Other non-interest income		1,320		1,111


Total non-interest income		18,952		138,236


Non-interest expense:
Salaries, fees and employment		301,946		281,317
Premises and equipment		54,501		50,765
Professional fees		34,240		70,128
Data processing		28,668		31,135
FDIC insurance premiums and regulatory assessment		25,940		24,508
Insurance and bond premiums		7,598		7,694
Stationery, printing and supplies		4,451		8,874
Other operating expenses		30,468		26,372


Total non-interest expense		487,812		500,793


Income before income taxes		113,598		211,877

Income taxes		44,500		74,000


Net income	$	69,098	$	137,877


Basic and dilutive earnings per common share:
Net income, basic	$	0.15	$	0.31


Basic weighted average shares outstanding		450,599		444,552


Net income, dilutive	$	0.15	$	0.31


Dilutive weighted average shares outstanding		462,067		451,085

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

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Three Months Ended December 31, 2013 and 2012

(Unaudited)


	Three Months Ended December 31,
	2013			2012

Net income	$	69,098		$	137,877

Other comprehensive income, net of tax:

Unrealized gain (loss) on investment securities available for sale		(7,684	)		51,997

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


Other comprehensive income (loss) before income taxes		(7,684	)		(64,483	)

Income tax relating to investment securities available for sale		3,031			25,439


Other comprehensive income (loss), net of tax		(4,653	)		(39,044	)


Comprehensive income	$	64,445		$	98,833

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

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended December 31, 2013 and 2012

(Unaudited)


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

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

Net income		—		—		—			—			137,877		—			137,877

Other comprehensive income (loss)		—		—		—			—			—		(39,044	)		(39,044	)

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


Balance, December 31, 2012 (unaudited)	$	5,003	$	3,721,789	$	(251,607	)	$	(37,168	)	$	9,215,041	$	167,885		$	12,820,943


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

Net income		—		—		—			—			69,098		—			69,098

Other comprehensive income (loss)		—		—		—			—			—		(4,653	)		(4,653	)


Balance, December 31, 2013 (unaudited)	$	5,003	$	4,040,748	$	(209,736	)	$	(245,145	)	$	9,403,732	$	73,072		$	13,067,674

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

Fairmount Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Three Months Ended December 31, 2013 and 2012

(Unaudited)


	For the Three Months Ended December 31,
	2013			2012
Cash flows from operating activities:
Net income	$	69,098		$	137,877
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		36,000			31,100
Amortization and accretion of securities		9,251			25,861
Provision for loan and lease losses		105,000			125,000
Other (gains) and losses, net		—			(117,117	)
(Increase) decrease in accrued interest receivable		(5,294	)		33,260
(Increase) decrease in prepaid expenses and other assets		68,524			17,558
Increase (decrease) in accrued interest payable		1,784			1,546
Increase (decrease) in accounts payable and other liabilities		18,775			(8,005	)


Net cash provided (used) by operating activities		303,138			247,080


Cash flows from investing activities:
Proceeds from sales of available for sale securities		—			1,753,845
Proceeds from maturities, payments and calls of available for sale securities		208,535			833,734
Proceeds from maturities, payments and calls of held to maturity securities		—			1,000,000
(Purchases) maturities of certificates of deposit		—			249,000
Net (increase) decrease in loans		520,259			(101,840	)
Proceeds from disposal of foreclosed assets		—			79,387
(Purchases) disposals of premises and equipment		(1,296	)		(6,931	)


Net cash provided (used) by investing activities		727,498			3,807,195


Cash flows from financing activities:
Net increase (decrease) in deposits		(924,816	)		(870,684	)
Repurchase of common stock		—			(133,080	)


Net cash provided (used) by financing activities		(924,816	)		(1,003,764	)


Net increase (decrease) in cash and cash equivalents		105,820			3,050,511

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


Cash and cash equivalents, ending balance	$	3,957,281		$	7,413,697


Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest	$	170,244		$	702,739
Income taxes		80,000			—
Supplemental schedule of noncash investing and financing activities:
Change in unrealized gain on securities available for sale – net of tax effect of $3,031 and $25,439, respectively	$	(4,653	)	$	(39,044	)

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

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1.

Summary of Significant Accounting Policies

Basis of Presentation

Fairmount Bancorp, Inc., a Maryland corporation (the “Company”) was incorporated on November 30, 2009, to serve as the holding company for Fairmount Bank (the “Bank”), a federally chartered savings bank. On June 2, 2010, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a Maryland state chartered 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. Approximately 50% of the net proceeds of the offering, or $1,900,000, were contributed by the Company to the Bank in return for 100% of the issued and outstanding shares of common stock of the Bank. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 35,523 shares of common stock sold in the offering.

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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three months ended December 31, 2013, are not necessarily indicative of the results that may be expected for the year ending September 30, 2014, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1.

Summary of Significant Accounting Policies (Continued)

Nature of Operations

The Bank is a community-oriented commercial bank, which provides a variety of financial services to individuals and corporate customers through its office in Baltimore County, Maryland, and is subject to competition from other financial institutions. The Bank’s primary deposit products are interest-bearing savings, certificates of deposit and individual retirement accounts. The Bank’s primary lending products are single-family residential mortgage loans. The Bank is subject to the regulation of certain Federal agencies and undergoes periodic examination by those regulatory authorities. The accounting policies of the Bank conform to accounting principles generally accepted in the United States of America and general practices within the banking industry.

Principles of Consolidation

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

Estimates

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

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

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1.

Summary of Significant Accounting Policies (Continued)

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 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.

In February 2013, the FASB issued ASU 2013 -02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements. Other than the disclosures contained within these statements, the Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings By Creditors (Subtopic 310-40)– Reclassification of residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies the circumstances under which an in substance repossession or foreclosure is deemed to occur determining when all or a portion of the loan should be derecognized and the real estate property received should be recognized. The amendment is effective for annual and interim periods beginning after December 15, 2014. Early adoption is permitted.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 2.

Securities

The amortized cost and estimated fair value of securities classified as available for sale and held to maturity at December 31, 2013 and September 30, 2013, are as follows:


	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Residential Mortgage-Backed Securities	$	3,678,659	$	156,338	$	—	$	3,834,997
Collateralized Mortgage Obligations		496,341		—		4,963		491,378
State and Municipal Securities		1,270,209		—		30,694		1,239,515


Total securities available for sale	$	5,445,209	$	156,338	$	35,657	$	5,565,890


Securities Held to Maturity
U.S. Government and Federal Agency Obligations	$	3,756,142	$	5,487	$	149,004	$	3,612,625


	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
Residential Mortgage-Backed Securities	$	3,855,067	$	166,298	$	—	$	4,021,365
Collateralized Mortgage Obligations		535,148		—		5,409		529,739
State and Municipal Securities		1,273,145		—		32,524		1,240,621


Total securities available for sale	$	5,663,360	$	166,298	$	37,933	$	5,791,725


Securities Held to Maturity
U.S. Government and Federal Agency Obligations	$	3,756,238	$	4,991	$	158,526	$	3,602,703

The amortized cost and estimated market value of securities at December 31, 2013 and September 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	December 31, 2013
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		542,403		542,388		1,741,332		1,728,380
Due five years to ten years		487,182		472,320		2,014,810		1,884,245
Due after ten years		4,415,624		4,551,182		—		—


	$	5,445,209	$	5,565,890	$	3,756,142	$	3,612,625

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 2.

Securities (Continued)


	September 30, 2013
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		550,169		549,536		1,740,850		1,724,203
Due five years to ten years		490,391		475,290		2,015,388		1,878,500
Due after ten years		4,622,800		4,766,899		—		—


	$	5,663,360	$	5,791,725	$	3,756,238	$	3,602,703

There were no sales during the three months ending December 31, 2013. During the three months ended December 31, 2012, the Company sold its state and municipal securities portfolio at a gain. Proceeds from the sale of available for sale securities totaled $1,753,845, realizing gross gains of $116,480 for the three months ended December 31, 2012.

Securities with gross unrealized losses at December 31, 2013 and September 30, 2013 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:


	December 31, 2013
	Less than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Securities Available for Sale
Residential Mortgage-Backed Securities	$	—	$	—	$	—	$	—	$	—	$	—
Collateralized Mortgage Obligations		—		—		491,378		4,963		491,378		4,963
State and Municipal Securities		1,239,515		30,694		—		—		1,239,515		30,694


	$	1,239,515	$	30,694	$	491,378	$	4,963	$	1,730,893	$	35,657

Securities Held to Maturity
U.S. Government and Federal Agency Obligations	$	2,859,075	$	149,004	$	—	$	—	$	2,859,075	$	149,004


	September 30, 2013
	Less than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Securities Available for Sale
Residential Mortgage-Backed Securities	$	—	$	—	$	—	$	—	$	—	$	—
Collateralized Mortgage Obligations		—		—		529,739		5,409		529,739		5,409
State and Municipal Securities		1,240,621		32,524		—		—		1,240,621		32,524


	$	1,240,621	$	32,524	$	529,739	$	5,409	$	1,770,360	$	37,933

Securities Held to Maturity
U.S. Government and Federal Agency Obligations	$	2,849,720	$	158,526	$	—	$	—	$	2,849,720	$	158,526

At December 31, 2013, the Company held eight investments with gross unrealized losses totaling $179,174. At September 30, 2013, the Company held eight investments with gross unrealized losses totaling $196,459. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Mortgage-backed securities are invested in U.S. Government Agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent an ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 2.

Securities (Continued)

Market Risks

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

Note 3.

Loans and Allowance for Loan and Leases Losses

The Bank makes loans to customers primarily in the counties of Baltimore and Harford and in the City of Baltimore Maryland. The principal categories of the loan portfolio at December 31, 2013 and September 30, 2013, were as follows:


	December 31, 2013			September 30, 2013
Real estate loans
One-to four-family owner occupied	$	25,924,797		$	26,363,952
One-to four-family non-owner occupied		16,540,923			17,480,953
Home equity		2,373,020			2,243,716
Mobile home		1,658,650			1,785,854
Secured by other properties		2,686,447			2,783,794
Construction and land development		4,918,046			3,911,156


Total real estate loans		54,101,883			54,569,425


Other loans
Secured commercial		1,553,527			1,603,318
Savings		3,953			9,159


Total other loans		1,557,480			1,612,477


Total loans		55,659,363			56,181,902


Unamortized premiums and loan fees		235,485			250,880
Unearned income on loans		(317,622	)		(323,966	)
Allowance for loan and lease losses		(827,120	)		(733,451	)


Total loans, net	$	54,750,106		$	55,375,365

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

The Company’s loan portfolio is segregated into the following portfolio segments.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

Credit Quality of Financing Receivables and the Allowance for Loan Losses

One-to Four-Family Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in our market area.

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

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

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

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

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

Loans are generally carried at the amount of unpaid principal, less the allowance for loan losses and adjusted for deferred loan fees, which are amortized over the term of the loan using the interest method. Interest on loans is accrued based on the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when the

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

principal or interest is delinquent for 90 days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Cash collections on such loans are applied as reductions of the loan principal and no interest income is recognized on those loans until the principal balance has been collected. The carrying value of impaired loans is based on the present value of the loan’s expected future cash flows or, alternatively, the observable market price of the loan or the fair value of the collateral.

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

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

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

Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process by portfolio segment includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Office of 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 allowance generally consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

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

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

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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


	As of December 31, 2013
	One-to Four-Family Owner Occupied		One-to Four-Family Non-Owner Occupied			Mobile Home			Secured by Other Properties			Construction and Land Development		Other Loans			Unallocated		Total
Allowance for Credit Losses:
Beginning Balance	$	80,563	$	475,584		$	80,943		$	22,365		$	30,805	$	4,031		$	39,160	$	733,451
Charge-offs		—		(11,331	)		—			—			—		—			—		(11,331	)
Recoveries		—		—			—			—			—		—			—		—
Provision		14,852		73,219			(2,776	)		(1,082	)		8,306		(137	)		12,618		105,000


Ending Balance	$	95,415	$	537,472		$	78,167		$	21,283		$	39,111	$	3,894		$	51,778	$	827,120


Ending balance: individually evaluated for impairment	$	13,000	$	253,161		$	488		$	—		$	—	$	—		$	—	$	266,649


Ending balance: collectively evaluated for impairment	$	82,415	$	284,311		$	77,679		$	21,283		$	39,111	$	3,894		$	51,778	$	560,471


Ending balance: loans acquired with deteriorated credit quality	$	—	$	—		$	—		$	—		$	—	$	—		$	—	$	—


Financing receivables: Ending balance	$	28,297,817	$	16,540,923		$	1,658,650		$	2,686,447		$	4,918,046	$	1,557,480				$	55,659,363


Ending balance: individually evaluated for impairment	$	435,531	$	1,627,906		$	104,705		$	211,632		$	370,350	$	—				$	2,750,124


Ending balance: collectively evaluated for impairment	$	27,471,821	$	14,913,017		$	1,553,945		$	2,474,815		$	4,547,696	$	1,557,480				$	52,518,774


Ending balance: loans acquired with deteriorated credit quality	$	390,465	$	—		$	—		$	—		$	—	$	—				$	390,465

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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


	As of September 30, 2013
	One-to Four-Family Owner Occupied			One-to Four-Family Non-Owner Occupied			Mobile Home			Secured by Other Properties			Construction and Land Development			Other Loans		Unallocated			Total
Allowance for Credit Losses:

Beginning Balance	$	85,217		$	273,683		$	95,613		$	30,442		$	80,327		$	3,057	$	49,135		$	617,474
Charge-offs		—			(363,842	)		(23,921	)		—			—			—		—			(387,763	)
Recoveries		—			3,740			—			—			—			—		—			3,740
Provision		(4,654	)		562,003			9,251			(8,077	)		(49,522	)		974		(9,975	)		500,000


Ending Balance	$	80,563		$	475,584		$	80,943		$	22,365		$	30,805		$	4,031	$	39,160		$	733,451


Ending balance: individually evaluated for impairment	$	—		$	201,267		$	488		$	—		$	—		$	—	$	—		$	201,755


Ending balance: collectively evaluated for impairment	$	80,563		$	274,317		$	80,455		$	22,365		$	30,805		$	4,031	$	39,160		$	531,696


Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—


Financing receivables: Ending balance	$	28,607,668		$	17,480,953		$	1,785,854		$	2,783,794		$	3,911,156		$	1,612,477				$	56,181,902


Ending balance: individually evaluated for impairment	$	436,317		$	1,635,383		$	105,940		$	213,099		$	370,411		$	—				$	2,761,150


Ending balance: collectively evaluated for impairment	$	27,780,213		$	15,845,570		$	1,679,914		$	2,570,695		$	3,540,745		$	1,612,477				$	53,029,614


Ending balance: loans acquired with deteriorated credit quality	$	391,138		$	—		$	—		$	—		$	—		$	—				$	391,138

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

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

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

The following tables are a summary of the loan portfolio quality indicators by loan class recorded investment as of December 31, 2013 and September 30, 2013:


	December 31, 2013
	One-to Four-Family		One-to Four-Family						Secured by		Construction
	Owner		Non-Owner		Home		Mobile		Other		and Land
	Occupied		Occupied		Equity		Home		Properties		Development
Grade:

Pass	$	25,098,801	$	14,361,789	$	2,373,020	$	1,529,752	$	2,474,815	$	4,547,696
Special Mention		—		—		—		—		—		—
Substandard		825,996		1,834,481		—		128,898		211,632		370,350
Doubtful		—		344,653		—		—		—		—


	$	25,924,797	$	16,540,923	$	2,373,020	$	1,658,650	$	2,686,447	$	4,918,046


	Secured Commercial		Savings
Grade:
Pass	$	1,553,527	$	3,953
Special Mention		—		—
Substandard		—		—
Doubtful		—		—


	$	1,553,527	$	3,953

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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


	September 30, 2013
	One-to Four-Family		One-to Four-Family						Secured by		Construction
	Owner		Non-Owner		Home		Mobile		Other		and Land
	Occupied		Occupied		Equity		Home		Properties		Development
Grade:
Pass	$	25,536,497	$	15,291,094	$	2,243,716	$	1,655,013	$	2,570,695	$	3,540,745
Special Mention		—		—		—		—		—		—
Substandard		827,455		1,845,206		—		130,841		213,099		370,411
Doubtful		—		344,653		—		—		—		—


	$	26,363,952	$	17,480,953	$	2,243,716	$	1,785,854	$	2,783,794	$	3,911,156


	Secured Commercial		Savings
Grade:
Pass	$	1,603,318	$	9,159
Special Mention		—		—
Substandard		—		—
Doubtful		—		—


	$	1,603,318	$	9,159

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

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

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

The following tables set forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of December 31, 2013 and September 30, 2013:


	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Real estate loans:
One-to four-family owner occupied	$	—	$	—	$	690,301	$	690,301	$	25,234,496	$	25,924,797	$	—
One-to four-family non-owner occupied		68,367		—		1,627,906		1,696,273		14,844,650		16,540,923		—
Home equity		—		—		—		—		2,373,020		2,373,020		—
Mobile home		30,554		—		—		30,554		1,628,096		1,658,650		—
Secured by other properties		—		—		—		—		2,686,447		2,686,447		—
Construction and land development		—		—		—		—		4,918,046		4,918,046		—


Total real estate loans		98,921		—		2,318,207		2,417,128		51,684,755		54,101,883		—


Other loans:
Secured commercial		—		—		—		—		1,553,527		1,553,527		—
Savings accounts		—		—		—		—		3,953		3,953		—


Total other loans		—		—		—		—		1,557,480		1,557,480		—


Total loans	$	98,921	$	—	$	2,318,207	$	2,417,128	$	53,242,235	$	55,659,363	$	—


	September 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Real estate loans:

One-to four-family owner occupied	$	—	$	—	$	690,975	$	690,975	$	25,672,977	$	26,363,952	$	—
One-to four-family non-owner occupied		—		—		1,635,383		1,635,383		15,845,570		17,480,953		—
Home equity		—		—		—		—		2,243,716		2,243,716		—
Mobile home		73,774		—		—		73,774		1,712,080		1,785,854		—
Secured by other properties		—		—		—		—		2,783,794		2,783,794		—
Construction and land development		—		—		—		—		3,911,156		3,911,156		—


Total real estate loans		73,774		—		2,326,358		2,400,132		52,169,293		54,569,425		—


Other loans:
Secured commercial		—		—		—		—		1,603,318		1,603,318		—
Savings accounts		—		—		—		—		9,159		9,159		—


Total other loans		—		—		—		—		1,612,477		1,612,477		—


Total loans	$	73,774	$	—	$	2,326,358	$	2,400,132	$	53,781,770	$	56,181,902	$	—

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

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


	December 31,		September 30,
	2013		2013

Real estate loans:
One-to four-family owner occupied	$	690,301	$	690,975
One-to four-family non-owner occupied		1,627,906		1,635,383
Home equity		—		—
Mobile home		59,135		59,554
Secured by other properties		—		—
Construction and land development		—		—


Total real estate loans		2,377,342		2,385,912


Other loans:
Secured commercial		—		—
Savings accounts		—		—


Total other loans		—		—


Total loans	$	2,377,342	$	2,385,912

At December 31, 2013 and September 30, 2013, there were no loans 90 days past due and still accruing interest. At December 31, 2013, the Company had twenty-eight loans on non-accrual status with foregone interest in the amount of $289,472. At September 30, 2013, the Company had twenty-nine loans on non-accrual status with foregone interest in the amount of $251,798.

The Company accounts for impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Company classifies a problem asset as impaired, it may provide a specific reserve for that portion of the asset that is deemed uncollectible based on the present value of the expected future cash flows discounted at the loan’s original effective interest rate, or based on the loan’s observable market price or fair value of the collateral if the loan is collateral dependent.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

The following tables are a summary of impaired loans by class of loans as of December 31, 2013 and September 30, 2013:


	December 31, 2013
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One-to four-family owner occupied	$	540,785	$	526,160	$	—	$	540,785	$	3,841
One-to four-family non-owner occupied		241,513		200,518		—		241,513		—
Secured by other properties		225,053		211,632		—		225,053		2,075
Construction and land development		370,350		370,350		—		370,350		5,838
Mobile home		59,269		59,135		—		59,269		622

With an allowance recorded:
One-to four-family owner occupied	$	358,945	$	299,836	$	13,000	$	358,945	$	—
One-to four-family non-owner occupied		1,614,215		1,427,388		253,161		1,614,215		3,523
Mobile home		45,877		45,570		488		45,877		540

Total
One-to four-family owner occupied	$	899,730	$	825,996	$	13,000	$	899,730	$	3,841
One-to four-family non-owner occupied		1,855,728		1,627,906		253,161		1,855,728		3,523
Secured by other properties		225,053		211,632		—		225,053		2,075
Construction and land development		370,350		370,350		—		370,350		5,838
Mobile home		105,146		104,705		488		105,146		1,162


	September 30, 2013
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
One-to four-family owner occupied	$	904,113	$	827,455	$	—	$	904,113	$	31,184
One-to four-family non-owner occupied		609,362		507,227		—		609,362		13,288
Secured by other properties		226,434		213,099		—		226,434		684
Construction and land development		370,411		370,411		—		370,411		20,043
Mobile home		59,627		59,554		—		59,627		4,078

With an allowance recorded:
One-to four-family non-owner occupied	$	1,217,512		1,128,156	$	201,267	$	1,217,512	$	21,255
Mobile home		46,508		46,386		488		46,508		3,097

Total
One-to four-family owner occupied	$	904,113	$	827,455	$	—	$	904,113	$	31,184
One-to four-family non-owner occupied		1,867,709		1,635,383		201,267		1,867,709		34,543
Secured by other properties		226,434		213,099		—		226,434		684
Construction and land development		370,411		370,411		—		370,411		20,043
Mobile home		106,135		105,940		488		106,135		7,175

Loans may be periodically modified in a troubled debt restructuring (a “TDR”) to make concessions to help a borrower remain current on the loan and/or to avoid foreclosure. Generally we do not forgive principal or interest on a loan or modify the interest rate on loans that are below market rates. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or a charge-off to the allowance. At December 31, 2013, we had ten loans that were restructured. One loan was secured by a one-to four-family owner occupied property in the amount of $135,695. Five loans to the same borrower in the amount of $783,503 were secured by one-to four-family non-owner occupied properties. One loan was secured by other properties in the amount of

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.

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

$211,632. One loan was secured by construction and land development in the amount of $370,350 and two loans were secured by mobile homes in the amount of $104,705. At September 30, 2013, we had ten loans that were restructured. One loan was secured by a one-to four-family owner occupied property in the amount of $136,481. Five loans to the same borrower in the amount of $783,503 were secured by one-to four-family non-owner occupied properties. One loan was secured by other properties in the amount of $213,099 and one loan was secured by construction and land development in the amount of $370,411 and two loans were secured by mobile homes in the amount of $105,940.

The following table is a summary of impaired loans that were modified due to a TDR by class as for the three months ended December 31, 2013 and 2012:

Modifications for the three months ended December 31, 2013

Number
of
contracts

Pre-Modification
Outstanding Recorded
Investments

Post-Modification
Outstanding
Recorded
Investments

Troubled Debt Restructuring

—

Recorded Investment

Troubled Debt Restructuring that subsequently defaulted

—

Modifications for the three months ended December 31, 2012

Number
of
contracts

Pre-Modification
Outstanding Recorded
Investments

Post-Modification
Outstanding
Recorded
Investments

Troubled Debt Restructuring

—

Recorded Investment

Troubled Debt Restructuring that subsequently defaulted

—

Note 5.

Fair Value Measurements

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

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

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

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

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5.

Fair Value Measurements (Continued)

The following table presents a summary of financial assets and liabilities measured at fair value at December 31, 2013 and September 30, 2013:


	Level 1		Level 2		Level 3		Total		Total Losses
December 31, 2013
Securities available for sale:
Mortgage-backed securities invested in Government Agencies	$	—	$	3,834,997	$	—	$	3,834,997	$	—
Collateralized mortgage obligations invested in Government Agencies				491,378				491,378
State and Municipal Securities				1,239,515				1,239,515
Impaired loans		—		—		1,506,145		1,506,145		—
Foreclosed assets						20,000		20,000		—

September 30, 2013
Securities available for sale:
Mortgage-backed securities invested in Government Agencies	$	—	$	4,021,365	$	—	$	4,021,365	$	—
Collateralized mortgage obligations invested in Government Agencies				529,739				529,739
State and Municipal Securities				1,240,621				1,240,621
Impaired loans		—		—		972,787		972,787		—
Foreclosed assets		—		—		20,000		20,000

In accordance with generally accepted accounting principles concerning accounting for Loan and Lease Losses, there were no losses for the three months ended December 31, 2013 or the year ended September 30, 2013, respectively, recognized as charges to the Allowance for Loan and Lease Losses at the time the foreclosed real estate was acquired based on an independent appraisal of the property’s fair value.

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

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

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

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

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

Loans Receivable (Carried at Cost). The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5.

Fair Value Measurements (Continued)

inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.

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

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

Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal

to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair value for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.

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

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

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

The following table presents quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a non-recurring basis for December 31, 2013 and September 30, 2013:


	Quantitative Information about Level 3 Fair Value Measurements for December 31, 2013 and September 30, 2013
	Valuation Techniques	Unobservable Input	Range
Assets:
Impaired loans	Discounted appraised value	Selling costs	6-12%
Foreclosed assets	Discounted appraised value	Selling costs	6-12%

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5.

Fair Value Measurements (Continued)

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


	Impaired Loans			Foreclosed Assets
Balance, September 30, 2012		940,717			295,750
Purchases, settlements and charge-offs		(294,140	)		(295,750	)
Transfers in and/or out of Level 3		326,210			20,000


Balance, September 30, 2013		972,787			20,000
Purchases, settlements and charge-offs (unaudited)		—			—
Transfers in and/or out of Level 3 (unaudited)		533,358			—


Balance, December 31, 2013 (unaudited)	$	1,506,145		$	20,000

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


			Fair Value Measurements at December 31, 2013 Using
	Carrying Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	3,957	$	3,957	$	—	$	—	$	3,957
Certificates of deposit		3,784		3,784		—		—		3,784
Securities available for sale		5,566		—		5,566		—		5,566
Securities held to maturity		3,756		—		3,603		—		3,603
Federal Home Loan Bank stock		454		—		454		—		454
Loans receivable, net		54,750		—		53,845		1,506		55,351
Foreclosed assets		20		—		—		20		20
Accrued interest receivable		239		—		239		—		239
Financial liabilities:
Deposits		55,005		—		55,012		—		55,012
Federal Home Loan Bank advances		8,000		—		8,363		—		8,363
Accrued interest payable		44		—		44		—		44
Off-Balance sheet financial instruments		—		—				—		—

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5.

Fair Value Measurements (Continued)


			Fair Value Measurements at September 30, 2013 Using
	Carrying Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	3,851	$	3,851	$	—	$	—	$	3,851
Certificates of Deposit		3,784		3,784		—				3,784
Securities available for sale		5,792		—		5,792		—		5,792
Securities held to maturity		3,756		—		3,603		—		3,603
Federal Home Loan Bank stock		454		—		454		—		454
Loans receivable, net		55,375		—		55,058		973		56,031
Foreclosed real estate		20		—		—		20		20
Accrued interest receivable		234		—		234		—		234
Financial liabilities:
Deposits		55,930		—		56,178		—		56,178
Federal Home Loan Bank advances		8,000		—		8,698		—		8,698
Accrued interest payable		43		—		43		—		43
Off-Balance sheet financial instruments		—		—				—		—

Note 6.

Employee Stock Ownership Plan

In connection with the conversion to stock form in June 2010, the Company established an Employee Stock Ownership Plan (“ESOP”) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in the amount of $355,230, which was sufficient to purchase 35,523 shares or 8% of the common stock issued and sold in the initial public offering in June 2010. The shares were acquired at a price of $10.00 per share. The ESOP borrowed additional funds from the Company in the amount of $63,478, which was sufficient to purchase 4,502 shares or 8% of the common stock issued and sold in the conversion merger of Fullerton in October 2011. The shares were acquired at a price of $14.10 per share.

The loans are secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 10-year terms of the loans with funds from Fairmount Bank’s contributions to the ESOP and dividends paid on the stock, if any. The interest rate on the ESOP loans is an adjustable rate equal to the lowest prime rate, as published in The Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the last business day of the fiscal year. The interest rate on the loan as of December 31, 2013, is 3.25%.

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

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. There was no ESOP compensation expense for the three months ended December 31, 2013 and 2012, respectively.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 6.

Employee Stock Ownership Plan (Continued)

A summary of ESOP shares is as follows:


	December 31, 2013		December 31, 2012
Shares committed for release		20,527		16,525
Unearned shares		19,498		23,500


Total ESOP shares		40,025		40,025


Fair value of unearned shares	$	394,835	$	400,675

Note 7.

Recognition and Retention Plan

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

The Board may make grants under the 2010 Recognition and Retention Plan to eligible participants based on the following factors. RRP participants will vest in their share awards at a rate no more rapid than 20% per year over a five year period, beginning on the date of the plan share award. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested share awards will Be forfeited. As of December 31, 2013, 15,104 shares have been awarded under the plan. No compensation expense has been recorded for the three months ended December 31, 2013 and 2012, respectively.

The Recognition and Retention Plan Trust (the “Trust”) has been established to acquire, hold, administer, invest and make distributions from the Trust in accordance with provisions of the Plan and Trust. The Company will contribute sufficient funds to the Trust so that the Trust can acquire 17,761 shares of common stock as part of the initial public offering, which are held in the Trust subject to the RRP’s vesting requirements. The RRP provides that grants to each employee and non-employee director shall not exceed 25% and 5% of the shares available under the Plan, respectively. Shares awarded to non-employee directors in the aggregate shall not exceed 30% of the shares available under the RRP.

Note 8.

Stock Option Plan

On December 15, 2010, the Board of Directors adopted the 2010 Stock Option Plan. The 2010 Stock Option Plan will provide Fairmount’s directors and key employees with a proprietary interest in Fairmount as an as incentive to contribute to its success. The Board of Directors of the Company may grant options to eligible employees and non-employee directors based on these factors. Plan participants will vest in their options at a rate of no more rapid than 20% per year over a five year period, beginning on the grant date of the option. Vested options will have an exercise period of ten years commencing on the date of grant. If service to the Company is terminated for any reason other than death, disability or change in control, the unvested options shall be forfeited. The Company recognizes compensation expense during the vesting period based on the fair value of the option on the date of the grant. As of December 31, 2013, 37,760 options have been granted to eligible employees and non-employee directors. For the three months ended December 31, 2013, the Company recognized $9,421 of compensation expense related to the stock options granted. No compensation expense had been recorded for the three months ended December 31, 2012.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 8.

Stock Option Plan (Continued)

A summary of the Stock Option Plan during the three months ended December 31, 2013:


	Number of Shares		Weighted Average Exercise Price
Outstanding at September 30, 2013		—		—
Granted		37,760	$	14.10


Outstanding at December 31, 2013		37,760	$	14.10


Options Exercisable at December 31, 2013		7,552		—

Note 9.

Stock Repurchases

On January 9, 2014, 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. The repurchase program began on January 13, 2014 and will occur over a period of six months.

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 was finalized in February 2013. The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the period 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

Note 10.

Earnings per Share

Earnings per common share on income before extraordinary income is computed by dividing income before extraordinary item by the weighted average number of common shares outstanding during the period and the earnings per share on the extraordinary items is computed by dividing the extraordinary item by the weighted average number of common shares outstanding during the period. Weighted average shares excludes unallocated ESOP shares and unearned RRP shares. Basic earnings per share excludes dilution and is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Dilutive earnings per share reflects the potential dilution that could occur if stock options were exercised and is computed by dividing net income by the dilutive weighted average number of common shares outstanding during the period.

Fairmount Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 10.

Earnings per Share (Continued)


	December 31, 2013		December 31, 2012
	(Unaudited)

Net income	$	69,098	$	137,877


Weighted average number of shares used in:
Basic earnings per share		450,599		444,552
Dilutive common stock equivalents:
Stock options		11,468		6,533


Dilutive earnings per share		462,067		451,085


Basic and dilutive earnings per common share:
Net income, basic	$	0.15	$	0.31


Net income, dilutive	$	0.15	$	0.31

Note 11.

Subsequent Events

The Company has evaluated events and transactions subsequent to December 31, 2013, through the date these financials were issued. Based on definitions and requirements of Generally Accepted Accounting Principles for “Subsequent Events”, the Company has not identified any events that require adjustment to or disclosure in the financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed beginning on page 9 of the Company’s prospectus dated August 12, 2011 under the section titled “Risk Factors”. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the three month period ended December 31, 2013, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s audited consolidated financial statements and related footnotes for the year ended September 30, 2013 included in the Company’s Annual Report on 10-K.

Federal Reserve Notices of Proposed Rulemaking

In July 2013, the U.S. banking regulatory agencies, including the Federal Reserve Board, approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision or “Basel III”, and to address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Company and the Bank will become subject to the new rule on January 1, 2015, and certain provisions of the new rule will be phased in from that date to January 1, 2019.

The final rule:

•

Permits banking organizations that had less than $15 billion in total consolidated assets as of December 31, 2009, to include as Tier 1 capital trust preferred securities and cumulative perpetual preferred stock that were issued and included as Tier 1 capital prior to May 19, 2010, subject to a limit of 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.

•

Establishes new qualifying criteria for regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights.

•

Requires a minimum of ratio of common equity Tier 1, or CET1, capital to risk-weighted assets of 4.5%.

•

Increases the minimum Tier 1 capital to risk-weighted assets ratio requirements from 4% to 6%.

•

Retains the minimum total capital to risk-weighted assets ratio requirement of 8%.

•

Establishes a minimum leverage ratio requirement of 4%.

•

Retains the existing regulatory capital framework for 1-4 family residential mortgage exposures.

•

Implements a new capital conservation buffer requirement for a banking organization to maintain a CET1 capital ratio more than 2.5% above the minimum CET1 capital, Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625%, and will be fully phased in at 2.50% by January 1, 2019. A banking organization with a buffer of less than the required amount would be subject to increasingly stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5% or less at the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, next of any distributions and associated tax effects not already reflected in net income.

•

Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term commitments and securitization exposures.

•

Expands the recognition of collateral and guarantors in determining risk-weighted assets.

•

Removes references to credit ratings consistent with the Dodd-Frank Act and establishes due diligence requirements for securitization exposures.

Management is currently evaluating the provisions of the final rule and their expected impact on the Company and the Bank. Management believes that at December 31, 2013, the Company and the Bank would have met all new capital adequacy requirements on a fully phased in basis if such requirements were then effective. There can be no assurance that the Basel III capital rules will not be revised before the effective date and expiration of the phase in periods.

Comparison of Financial Condition at December 31, 2013 and September 30, 2013

Total assets decreased by $840,000, or 1.09%, to $76,188,000 at December 31, 2013 from $77,028,000 at September 30, 2013. The decrease was primarily due to the decrease in total net loans of $625,000 or 1.13%.

Cash and cash equivalents increased from $3,851,000 at September 30, 2013 to $3,957,000 at December 31, 2013. This was an increase of $106,000, or 2.75%.

Investment securities decreased by $226,000, or 2.37%, to $9,322,000, at December 31, 2013, from $9,548,000 at September 30, 2013. The decrease was primarily the result of $208,000 in maturities, payments and calls.

Total net loans decreased from $55,375,000 at September 30, 2013 to $54,750,000 at December 31, 2013. This represented a decrease of $625,000, or 1.13%. The change was primarily attributable to decreases in one-to four-family mortgage loans of $1,379,000, or 3.15% offset by increases in construction and land development loans of $1,007,000, or 25.74%.

Total liabilities at December 31, 2013 were $63,120,000, a decrease of $905,000, or 1.41%, from $64,025,000 at September 30, 2013. The decrease was primarily attributable to a decrease of $925,000, or 1.65% in deposits.

Deposits decreased from $55,930,000 at September 30, 2013 to $55,005,000 at December 31, 2013. The decrease of $925,000, or 1.65% was primarily attributable to decreases in savings accounts of $858,000, or 5.09%, from $16,850,000 at September 30, 2013 to $15,992,000 at December 31, 2013.

Stockholders’ equity was $13,068,000, or 17.15%, of total assets at December 31, 2013, compared to $13,003,000, or 16.88%, of total assets at September 30, 2013. The Company recorded net income of $69,000 for the three months ending December 31, 2013. Comprehensive income decreased by $4,000 related to the interest rate fluctuations on the Company’s available for sale securities portfolio.

Results of Operations for the Three Months Ended December 31, 2013 and 2012

Overview. Net income decreased by $69,000, to $69,000 for the three months ended December 31, 2013 from $138,000 for the three months ended December 31, 2012. Net interest income increased by $11,000, or 1.57%, to $688,000 for the three months ended December 31, 2013 from $699,000 for the three months ended December 31, 2012. Provision for loan and lease losses decreased by $20,000, or 16.00%, to $105,000 for the three months ended December 31, 2013 from $125,000 for the three months ended December 31, 2012. Non-interest income decreased $119,000 from $138,000 for the three months ended December 31, 2012 to $19,000 for the three months ended December 31, 2013. Non-interest expense decreased $12,000, or 2.40%, to $488,000 for the three months ended December 31, 2013 from $500,000 for the three months ended December 31, 2012.

Net Interest Income. Net interest income decreased $11,000, or 1.57%, to $688,000 for the three months ended December 31, 2013 from $699,000 for the three months ended December 31, 2012. The increase primarily resulted from the combined effects of a decrease of $39,000, or 4.34%, in interest and dividend income to $860,000 for the three months ended December 31, 2013 from $899,000 for the three months ended December 31, 2012, and a decrease of $28,000, or 14.00%, in interest expense to $172,000 for the three months ended December 31, 2013 from $200,000 for the three months ended December 31, 2012. The decrease in interest and dividend income was mainly the result of decreases in the average balances of loans and investments. Interest expense decreased due to a combination of a decrease in the average rates paid on deposits and borrowings and a decrease in average interest bearing liabilities.

Provision for Loan and Lease Losses. The provision for loan and lease losses decreased $20,000 to $105,000 for the three months ended December 31, 2013, from $125,000 for the three months ended December 31, 2012. The Company recorded $11,000 in charge-offs during the three months ended December 31, 2013. The Company did not record charge-offs during the three months ended December 31, 2012.

Non-performing loans totaled $2,377,000 at December 31, 2013 and $2,386,000 at September 30, 2013. The Company’s non-performing loans to total loans increased to 4.34% at December 31, 2013, from 4.31% at September 30, 2013.

Non-performing assets, not including non-performing loans, totaled $20,000 at December 31, 2013 and September 30, 2013.

The Company has classified as impaired, loans that are 90 days or more delinquent or troubled debt restructurings. The amount of impaired loans of $3,141,000 as of December 31, 2013, was comprised of fifteen loan relationships. Of the fifteen loan relationships, four relationships were secured by one-to four-family owner occupied residential properties in the amount of $826,000, seven relationships were secured by one-to four-family non-owner occupied residential properties in the amount of $1,628,000, two loans were secured by mobile homes in the amount of $105,000, one loan of $212,000 secured by other properties and one loan of $370,000 secured by construction and land development.

To the best of management’s knowledge, the allowance for loan and lease losses is maintained at a level believed to cover all known and inherent losses in the loan portfolio, both probable and reasonable to estimate.

Non-Interest Income. Non-interest income was $19,000 for the three months ended December 31, 2013, which was a decrease of $119,000 from $138,000 for the three months ended December 31, 2012. The primary reason for the increase was that the Company sold securities and recorded gains of $117,000 on the sales during the three months ended December 31, 2012.

Non-Interest Expense. Non-interest expense decreased by $12,000, or 2.40%, to $488,000 for the three months ended December 31, 2013 from $500,000 for the three months ended December 31, 2012. The decrease was primarily the result of a decrease in professional fees offset by an increase in salaries, fees and employment expenses. Decrease in professional fees of $36,000, or 51.43%, can be attributed to a consulting agreement with a former employee of Fullerton that was completed during the three months ended December 31, 2012 offset by increased costs associated with increased reporting requirements associated with the Company’s public company status. Salaries, fees and employment expenses increased by $21,000, or 7.47% and can be attributed to stock based compensation recorded for the three months ended December 2013 and normal pay scale adjustments.

Income Taxes. The provision for income taxes decreased by $29,000, or 39.19%, to $45,000 for the three months ended December 31, 2013 from $74,000 for the three months ended December 31, 2012. The decrease in provision for income taxes was due to the decrease in the Company’s income before income taxes of $98,000, or 46.23% from $212,000 for the three months ended December 31, 2012 to $114,000 for the three months ended December 31, 2013.

Total Comprehensive Income. Total comprehensive income for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $65,000 and $99,000 for the three months ended December 31, 2013 and 2012, respectively. The decrease in total comprehensive income resulted from a decrease of $69,000 in net income and an increase of $35,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.

Liquidity and Capital Resources

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

The Board of Directors is responsible for establishing and monitoring the Company’s liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of its customers as well as unanticipated contingencies. The Company believes that it has enough sources of liquidity to satisfy its short and long-term liquidity needs as of December 31, 2013.

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

The Company’s most liquid assets are cash and cash equivalents, which include federal funds sold and interest-bearing deposits in other banks. The levels of these assets are dependent on its operating, financing, lending and investing activities during any given period. At December 31, 2013, cash and cash-equivalents totaled $3,957,000. Certificates of deposit of $3,784,000 and securities classified as available for sale totaling $5,566,000, provide additional sources of liquidity. In addition, at December 31, 2013, the Company had the ability to borrow a total of approximately $22,800,000 from the Federal Home Loan Bank of Atlanta. At December 31, 2013, the Company had $8,000,000 in Federal Home Loan Bank advances outstanding. The Company also has a credit availability of $1,500,000 with a correspondent bank. There were no borrowings outstanding at December 31, 2013.

At December 31, 2013, the Company had $4,003,000 in unused lines of credit to borrowers and standby letters of credit. Certificates of deposit due within one year of December 31, 2013, totaled $21,621,000, or 39.31%, of total deposits. If these deposits do not remain with the Company, the Company will be required

to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, the Company may be required to pay higher rates on such deposits or borrowings than it currently pays on certificates of deposit on or before December 31, 2013. The Company believes, however, based on past experience that a significant portion of such deposits will remain with it. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of December 31, 2013, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tier 1 core, tier 1 risk-based, and total risk-based capital ratios of 15.11%, 27.25% and 28.51%, respectively. The regulatory requirements as of that date were 4.0%, 4.0% and 8.0% respectively.

The Company is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Commissioner, but with the prior notice to the Commissioner, cannot exceed net income for that year to date plus retained net income for the preceding two calendar years. At December 31, 2013, the Company had liquid assets of $1,171,000.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

For information regarding repurchase during the quarter ended December 31, 2013, see Note 10.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits


Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 32.0		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

Exhibit 101		Interactive Data File (XBRL) furnished herewith

SIGNATURES

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


						FAIRMOUNT BANCORP, INC.

						/s/ Joseph M. Solomon
Date: February 13, 2014						Joseph M. Solomon
						President and Chief Executive Officer

						/s/ Jodi L. Beal
Date: February 13, 2014						Jodi L. Beal
						Vice President and Chief Financial Officer

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Smaller Reporting Company

Fairmount Bancorp, Inc. 10-Q