Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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)
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x
As of August 14, 2013, the number of shares of common stock outstanding was 484,839.
Table of Contents
FAIRMOUNT BANCORP, INC.
FORM 10-Q
Page No. | ||||
Part I – Financial Information | ||||
Item 1 – Financial Statements (Unaudited) | ||||
Consolidated Balance Sheets at June 30, 2013 (Unaudited) and September 30, 2012 | 3 | |||
4 | ||||
5 | ||||
6 | ||||
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2013and 2012 (Unaudited) | 7 | |||
8-31 | ||||
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32-36 | |||
Item 3 – Quantitative and Qualitative Disclosures About Market Risk | 36 | |||
37 | ||||
37 | ||||
37 | ||||
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds | 37 | |||
37 | ||||
37 | ||||
37 | ||||
37 | ||||
38 | ||||
Exhibit 31.1 | ||||
Exhibit 31.2 | ||||
Exhibit 32.0 |
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
June 30, 2013 and September 30, 2012
June 30, 2013 | September 30, 2012 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 214,523 | $ | 513,787 | ||||
Interest-bearing deposits in other banks | 922,717 | 337,379 | ||||||
Federal funds sold | 5,315,840 | 3,512,020 | ||||||
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Cash and cash equivalents | 6,453,080 | 4,363,186 | ||||||
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Certificates of deposit | 3,533,436 | 3,531,991 | ||||||
Securities available for sale, at fair value | 6,355,878 | 7,803,575 | ||||||
Securities held to maturity, at amortized cost | 3,008,399 | 3,636,972 | ||||||
Federal Home Loan Bank stock, at cost | 453,700 | 479,700 | ||||||
Loans, net of allowances for loan and lease losses of $701,315 at June 30, 2013 and $617,474 at September 30, 2012 | 54,975,570 | 54,650,111 | ||||||
Accrued interest receivable | 245,223 | 290,304 | ||||||
Premises and equipment, net | 3,185,893 | 3,236,995 | ||||||
Foreclosed real estate | — | 295,750 | ||||||
Cash surrender value of life insurance | 72,658 | 70,736 | ||||||
Deferred income tax asset | 291,328 | 211,099 | ||||||
Prepaid expenses and other assets | 272,798 | 473,334 | ||||||
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Total assets | $ | 78,847,963 | $ | 79,043,753 | ||||
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Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing deposits | $ | 981,504 | $ | 780,336 | ||||
Interest-bearing demand deposits | 4,062,782 | 4,355,762 | ||||||
Savings deposits | 16,880,659 | 15,461,977 | ||||||
Certificates of deposit | 35,945,412 | 37,427,659 | ||||||
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Total deposits | 57,870,357 | 58,025,734 | ||||||
Federal Home Loan Bank advances | 8,000,000 | 8,000,000 | ||||||
Accrued interest payable | 44,451 | 42,962 | ||||||
Deferred compensation liability | — | 8,170 | ||||||
Accounts Payable and other liabilities | 82,889 | 111,697 | ||||||
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Total liabilities | 65,997,697 | 66,188,563 | ||||||
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Commitments and contingencies | — | — | ||||||
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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 and 484,839 outstanding at June 30, 2013 and September 30, 2012, respectively | 5,003 | 5,003 | ||||||
Additional paid in capital | 3,995,888 | 3,979,972 | ||||||
Unearned common stock held by: | ||||||||
Employee Stock Ownership Plan | (251,607 | ) | (251,607 | ) | ||||
Recognition and Retention Plan | (245,145 | ) | (162,271 | ) | ||||
Retained earnings | 9,262,338 | 9,077,164 | ||||||
Accumulated other comprehensive income | 83,789 | 206,929 | ||||||
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Total stockholders’ equity | 12,850,266 | 12,855,190 | ||||||
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Total liabilities and stockholders’ equity | $ | 78,847,963 | $ | 79,043,753 | ||||
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The notes to consolidated financial statements are an integral part of these consolidated statements.
3
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
Three and Nine Months Ended June 30, 2013 and 2012
(Unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Interest on loans | $ | 786,820, | $ | 801,976 | $ | 2,361,047 | 2,513,058 | |||||||||
Interest and dividends on investments | 62,730 | 104,551 | 207,071 | 298,299 | ||||||||||||
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Total interest income | 849,550 | 906,527 | 2,568,118 | 2,811,357 | ||||||||||||
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Interest expense: | ||||||||||||||||
Interest on deposits | 110,847 | 151,356 | 360,485 | 498,389 | ||||||||||||
Interest on borrowings | 66,821 | 67,806 | 200,462 | 205,896 | ||||||||||||
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Total interest expense | 177,668 | 219,162 | 560,947 | 704,285 | ||||||||||||
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Net interest income | 671,882 | 687,365 | 2,007,171 | 2,107,072 | ||||||||||||
Provision for loan and lease losses | 150,000 | 45,000 | 400,000 | 225,000 | ||||||||||||
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Net interest income after provision for loan and lease losses | 521,882 | 642,365 | 1,607,171 | 1,882,072 | ||||||||||||
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Non-interest income: | ||||||||||||||||
Service fees on deposit accounts | 1,501 | 724 | 4,519 | 3,526 | ||||||||||||
Other service charges, commissions and fees | 28,457 | 16,102 | 66,517 | 55,420 | ||||||||||||
Gain on disposal of assets | — | — | 116,480 | 4,737 | ||||||||||||
Other non-interest income | 7,469 | 10,083 | 9,576 | 13,108 | ||||||||||||
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Total non-interest income | 37,427 | 26,909 | 197,092 | 76,791 | ||||||||||||
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Non-interest expense: | ||||||||||||||||
Salaries, fees and employment | 314,914 | 282,547 | 877,868 | 832,074 | ||||||||||||
Premises and equipment | 51,639 | 45,568 | 155,413 | 143,878 | ||||||||||||
Professional fees | 45,907 | 67,616 | 156,181 | 168,663 | ||||||||||||
Data processing | 34,076 | 26,719 | 95,531 | 85,209 | ||||||||||||
FDIC premiums and regulatory assessments | 27,816 | 24,809 | 76,895 | 72,536 | ||||||||||||
Insurance and bond premiums | 12,583 | 14,957 | 27,804 | 27,704 | ||||||||||||
Stationery, printing and supplies | 4,022 | 6,759 | 19,441 | 29,323 | ||||||||||||
Other operating expenses | 28,215 | 52,399 | 118,956 | 120,718 | ||||||||||||
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Total non-interest expense | 519,172 | 521,374 | 1,528,089 | 1,480,105 | ||||||||||||
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Income before income taxes | 40,137 | 147,900 | 276,174 | 478,758 | ||||||||||||
Income taxes | 6,000 | 47,000 | 91,000 | 155,000 | ||||||||||||
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Income before extraordinary item | 34,137 | 100,900 | 185,174 | 323,758 | ||||||||||||
Extraordinary item, gain on business combination | — | — | — | 1,022,074 | ||||||||||||
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Net income | $ | 34,137 | $ | 100,900 | $ | 185,174 | $ | 1,345,832 | ||||||||
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Basic and dilutive earnings per common share: | ||||||||||||||||
Net income before extraordinary item, basic | $ | 0.08 | $ | 0.21 | $ | 0.42 | $ | 0.69 | ||||||||
Extraordinary item, gain on business combination, basic | — | — | — | 2.19 | ||||||||||||
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Net income, basic | $ | 0.08 | $ | 0.21 | $ | 0.42 | $ | 2.88 | ||||||||
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Basic weighted average shares outstanding | 446,597 | 470,176 | 445,322 | 468,203 | ||||||||||||
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Net income before extraordinary item, dilutive | $ | 0.07 | $ | 0.21 | $ | 0.40 | $ | 0.69 | ||||||||
Extraordinary item, gain on business combination, dilutive | — | — | — | 2.17 | ||||||||||||
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Net income, dilutive | $ | 0.07 | $ | 0.21 | $ | 0.40 | $ | 2.86 | ||||||||
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Dilutive weighted average shares outstanding | 459,004 | 472,909 | 457,729 | 470,936 | ||||||||||||
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The notes to consolidated financial statements are an integral part of these consolidated statements.
4
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended June 30, 2013 and 2012
(Unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | $ | 34,137 | $ | 100,900 | $ | 185,174 | $ | 1,345,832 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Change in fair value of securities available for sale | (71,020 | ) | 34,067 | (6,660 | ) | (7,644 | ) | |||||||||
Amount of unrealized (gains) and losses on available for sale securities reclassified from accumulated other comprehensive income | — | — | (116,480 | ) | — | |||||||||||
Amortization of unrealized loss for investment securities transferred to held to maturity from available for sale | — | 80 | — | 240 | ||||||||||||
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Total other comprehensive income (loss), net of tax, $46,271, $22,246, $80,229 and $4,825 for the three and nine months ended June 30, 2013 and 2012, respectively | (71,020 | ) | 34,147 | (123,140 | ) | (7,404 | ) | |||||||||
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Comprehensive income (loss) | $ | (36,883 | ) | $ | 135,047 | $ | 62,034 | $ | 1,338,428 | |||||||
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The notes to consolidated financial statements are an integral part of these consolidated statements.
5
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended June 30, 2013 and 2012
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Unearned | Unearned | Other | Total | ||||||||||||||||||||||||
Common | Paid-In | ESOP | RRP | Retained | Comprehensive | Stockholders’ | ||||||||||||||||||||||
Stock | Capital | Share | Shares | Earnings | Income | Equity | ||||||||||||||||||||||
Balance, September 30, 2011 | $ | 4,440 | $ | 3,774,574 | $ | (230,000 | ) | $ | — | $ | 7,728,798 | $ | 199,525 | $ | 11,477,337 | |||||||||||||
Net income | — | — | — | — | 1,345,832 | — | 1,345,832 | |||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (7,404 | ) | (7,404 | ) | |||||||||||||||||||
Issuance of common stock | 563 | 451,656 | — | — | — | — | 452,219 | |||||||||||||||||||||
Acquisition of unearned ESOP shares | — | — | (63,478 | ) | — | — | — | (63,478 | ) | |||||||||||||||||||
Acquisition of unearned RRP shares | — | — | — | (37,168 | ) | — | — | (37,168 | ) | |||||||||||||||||||
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Balance, June 30, 2012 (unaudited) | $ | 5,003 | $ | 4,226,230 | $ | (293,478 | ) | $ | (37,168 | ) | $ | 9,074,630 | $ | 192,121 | $ | 13,167,338 | ||||||||||||
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Balance, September 30, 2012 | $ | 5,003 | $ | 3,979,972 | $ | (251,607 | ) | $ | (162,271 | ) | $ | 9,077,164 | $ | 206,929 | $ | 12,855,190 | ||||||||||||
Net income | — | — | — | — | 185,174 | — | 185,174 | |||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (123,140 | ) | (123,140 | ) | |||||||||||||||||||
Repurchase of common stock for RRP | — | — | — | (133,080 | ) | — | — | (133,080 | ) | |||||||||||||||||||
RRP shares released for allocation | — | (50,206 | ) | — | 50,206 | — | — | — | ||||||||||||||||||||
Stock based compensation | 66,122 | — | — | — | — | 66,122 | ||||||||||||||||||||||
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Balance, June 30, 2013 (unaudited) | $ | 5,003 | $ | 3,995,888 | $ | (251,607 | ) | $ | (245,145 | ) | $ | 9,262,338 | $ | 83,789 | $ | 12,850,266 | ||||||||||||
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The notes to consolidated financial statements are an integral part of these consolidated statements.
6
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2013 and 2012
(Unaudited)
For the Nine Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 185,174 | $ | 1,345,832 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Gain on business combination | — | (1,022,074 | ) | |||||
Depreciation and amortization | 96,000 | 91,659 | ||||||
Amortization and accretion of securities | 71,719 | 34,010 | ||||||
Provision for loan and lease losses | 400,000 | 225,000 | ||||||
Loss on write-down in value of foreclosed assets | — | 18,000 | ||||||
Other (gains) and losses, net | (92,757 | ) | (4,187 | ) | ||||
(Increase) decrease in accrued interest receivable | 45,081 | (12,641 | ) | |||||
(Increase) decrease in cash surrender value of life insurance | (1,922 | ) | (1,927 | ) | ||||
(Increase) decrease in prepaid expenses and other assets | 200,536 | 83,507 | ||||||
Increase (decrease) in accrued interest payable | 1,489 | (147 | ) | |||||
Increase (decrease) in accounts payable and other liabilities | (28,808 | ) | (310,259 | ) | ||||
Stock based compensation | 66,122 | — | ||||||
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Net cash provided (used) by operating activities | 942,634 | 446,773 | ||||||
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Cash flows from investing activities: | ||||||||
Cash acquired in business combination, net of merger expenses | — | 4,113,398 | ||||||
Proceeds from sales of available for sale securities | 1,753,845 | 189,692 | ||||||
Proceeds from maturities, payments and calls of available for sale securities | 2,449,267 | 1,268,850 | ||||||
Proceeds from maturities, payments and calls of held to maturity securities | 2,000,000 | 1,142,857 | ||||||
Purchases of available for sale securities | (1,278,086 | ) | (1,027,656 | ) | ||||
Purchases of held to maturity securities | (3,008,434 | ) | (4,499,000 | ) | ||||
(Purchases) maturities of certificates of deposit | (375 | ) | (2,689,978 | ) | ||||
(Purchases) redemptions of Federal Home Loan Bank stock | 26,000 | 101,800 | ||||||
Net (increase) decrease in loans | (725,459 | ) | 2,219,443 | |||||
Proceeds from disposal of foreclosed assets | 272,027 | 87,450 | ||||||
Proceeds from disposal of equipment | — | 342,325 | ||||||
(Purchases) disposals of premises and equipment | (44,898 | ) | (15,346 | ) | ||||
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Net cash provided (used) by investing activities | 1,443,887 | 1,233,835 | ||||||
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Cash flows from financing activities: | ||||||||
Net increase (decrease) in deposits | (155,377 | ) | (114,467 | ) | ||||
Net increase (decrease) in borrowings | — | (2,000,000 | ) | |||||
Proceeds from issuance of common stock | — | 351,573 | ||||||
Payments on accrued deferred compensation obligation | (8,170 | ) | — | |||||
Repurchase of common stock | (133,080 | ) | — | |||||
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Net cash provided (used) by financing activities | (296,627 | ) | (1,762,894 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | 2,089,894 | (82,286 | ) | |||||
Cash and cash equivalents, beginning balance | 4,363,186 | 6,189,026 | ||||||
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Cash and cash equivalents, ending balance | $ | 6,453,080 | $ | 6,106,740 | ||||
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Supplemental disclosure of cash flows information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 559,458 | $ | 704,432 | ||||
Income taxes | — | 510,301 | ||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||
Change in unrealized gain on securities available for sale—net of tax effect of $80,229 and $4,825, respectively | $ | (123,140 | ) | $ | (7,404 | ) |
On October 31, 2011, the Company loaned $63,478 to the Employee Stock Ownership Plan, which was used to acquire 4,502 shares of common stock. The loan is secured by the shares purchased and is shown as Unearned ESOP shares in the consolidated balance sheets. See Note 2 for assets acquired and liabilities assumed in business combination.
The notes to consolidated financial statements are an integral part of these consolidated statements.
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Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Fairmount Bancorp, Inc., 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 federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 444,038 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $3,742,000, net of offering expenses of approximately $699,000. 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 Comptroller of the Currency (the “OCC”) regulations, upon the completion of each of the conversions, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the nine months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending September 30, 2013, 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, 2012.
Nature of Operations
The Bank is a community-oriented federal savings bank, which provides a variety of financial services to individuals and corporate customers through its office in Baltimore County, Maryland, and is subject to competition from other financial institutions. The Bank’s primary deposit products are interest-bearing
8
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies (Continued)
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.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period method of presentations. Such reclassifications have no effect on net income.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.
9
Table of Contents
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
10
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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.
Note 2. Business Combinations
On October 12, 2011, the Company completed an acquisition of Fullerton, a federally chartered mutual savings association with one office located at 7527 Belair Road in Baltimore, Maryland. Fullerton converted from the mutual to the stock form of organization and immediately issued all of its capital stock to the Company and merged with and into the Bank. In connection with the conversion merger, the Company issued and sold 56,276 shares of its common stock at a price of $14.10 per share, resulting in proceeds of approximately $452,000, net of offering expenses of approximately $341,000.
The Company recorded the following assets and liabilities as of October 12, 2011. These amounts represent the carrying value of Fullerton’s assets and liabilities adjusted to reflect the fair value at the date of the acquisition. The discounts and premiums resulting from the fair value adjustments will be accreted and amortized on a level yield basis over the anticipated lives of the underlying financial assets or liabilities. This amortization of premiums and discounts is not expected to have a material impact on the Company’s results of operations on future periods.
Assets Acquired | ||||
Assets | ||||
Cash and cash equivalents | $ | 4,224,279 | ||
Securities available for sale | 827,139 | |||
Loans receivable | 2,414,712 | |||
Federal Home Loan Bank stock, at cost | 15,300 | |||
Premises and equipment | 887,503 | |||
Other assets | 174,579 | |||
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| |||
Total assets acquired | $ | 8,543,512 | ||
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| |||
Liabilities Assumed | ||||
Liabilities | ||||
Deposits | $ | 7,333,130 | ||
Other liabilities | 77,427 | |||
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| |||
Total liabilities assumed | $ | 7,410,557 | ||
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The excess fair value of assets acquired over liabilities assumed, less transaction costs incurred, resulted in $1,022,074 in negative goodwill. This negative goodwill is reflected as an extraordinary item in the Company’s consolidated financial statements.
The primary purpose of the Fullerton acquisition was to expand the Bank’s deposit market share. The primary reasons for the stock offering by the Company were to:
• | provide a larger capital cushion for asset growth, which will primarily be realized through existing operations; |
• | support growth and diversification of operations, products and services to transition us into a full-service community bank; |
11
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 2. Business Combinations (Continued)
• | improve the Company’s overall capital and competitive position; |
• | increase the Bank’s loans to one borrower limit to allow the Bank to make larger loans, including larger commercial real estate loans; and |
• | provide additional financial resources to pursue branch expansion and possible future acquisition opportunities. |
Because the individual assets and liabilities of Fullerton have been absorbed into Fairmount operations, revenue and earnings of Fullerton since the acquisition date are not available and supplemental pro forma information is not able to be provided.
Note 3. Securities
The amortized cost and estimated fair value of securities classified as available for sale and held to maturity at June 30, 2013 and September 30, 2012, are as follows:
June 30, 2013 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities Available for Sale | ||||||||||||||||
Residential Mortgage-Backed Securities | $ | 4,193,937 | $ | 174,565 | $ | — | $ | 4,368,502 | ||||||||
Collateralized Mortgage Obligations | 747,525 | — | (8,246 | ) | 739,279 | |||||||||||
State and Municipal Securities | 1,276,036 | — | (27,939 | ) | 1,248,097 | |||||||||||
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Total securities available for sale | $ | 6,217,498 | $ | 174,565 | $ | (36,185 | ) | $ | 6,355,878 | |||||||
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Securities Held to Maturity | ||||||||||||||||
U.S. Government and Federal Agency Obligations | $ | 3,008,399 | $ | — | $ | (76,589 | ) | $ | 2,931,810 | |||||||
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Total securities held to maturity | $ | 3,008,399 | $ | — | $ | (76,589 | ) | $ | 2,931,810 | |||||||
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September 30, 2012 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities Available for Sale | ||||||||||||||||
Residential Mortgage-Backed Securities | $ | 5,629,774 | $ | 349,909 | $ | — | $ | 5,979,683 | ||||||||
Collateralized Mortgage Obligations | 1,832,052 | 538 | (8,698 | ) | 1,823,892 | |||||||||||
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Total securities available for sale | $ | 7,461,826 | $ | 350,447 | $ | (8,698 | ) | $ | 7,803,575 | |||||||
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Securities Held to Maturity | ||||||||||||||||
U.S. Government and Federal Agency Obligations | $ | 1,999,145 | $ | 11,784 | $ | — | $ | 2,010,929 | ||||||||
State and Municipal Securities | 1,637,827 | 155,142 | — | 1,792,969 | ||||||||||||
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Total securities held to maturity | $ | 3,636,972 | $ | 166,926 | $ | — | $ | 3,803,898 | ||||||||
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12
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 3. Securities (Continued)
The amortized cost and estimated market value of securities at June 30, 2013 and September 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 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 | 560,030 | 562,173 | 992,452 | 969,960 | ||||||||||||
Due five years to ten years | 497,445 | 479,723 | 2,015,947 | 1,961,850 | ||||||||||||
Due after ten years | 5,160,023 | 5,313,982 | — | — | ||||||||||||
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$ | 6,217,498 | $ | 6,355,878 | $ | 3,008,399 | $ | 2,931,810 | |||||||||
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September 30, 2012 | ||||||||||||||||
Securities Available for Sale | Securities Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due in one year or less | $ | — | $ | — | $ | — | $ | — | ||||||||
Due after one year through five years | 8,937 | 9,294 | 1,341,920 | 1,365,181 | ||||||||||||
Due five years to ten years | 123,457 | 130,580 | 774,789 | 837,603 | ||||||||||||
Due after ten years | 7,329,432 | 7,663,701 | 1,520,263 | 1,601,114 | ||||||||||||
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| |||||||||
$ | 7,461,826 | $ | 7,803,575 | $ | 3,636,972 | $ | 3,803,898 | |||||||||
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During the nine months ended June 30, 2013, the Company sold its state and municipal securities portfolio at a gain. These state and municipal securities were transferred from the held to maturity category to the available for sale category. Although our intention had been to hold held to maturity securities until maturity, a pre-refunding and notice of call on a municipal bond was an event that triggered our reassessment of the classification of our state and municipal withholdings. Proceeds from the sale of available for sale securities totaled $1,753,845, realizing gross gains of $116,480 for the nine months ended June 30, 2013. Proceeds from the sale of available for sale securities totaled $189,692, realizing gross gains of $896 for the year ended September 30, 2012.
Securities with gross unrealized losses at June 30, 2013 and September 30, 2012 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
June 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 | 739,279 | 8,246 | — | — | 739,279 | 8,246 | ||||||||||||||||||
State and Municipal Securities | 1,248,097 | 27,939 | — | — | 1,248,097 | 27,939 | ||||||||||||||||||
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| |||||||||||||
$ | 1,987,376 | $ | 36,185 | $ | — | $ | — | $ | 1,987,376 | $ | 36,185 | |||||||||||||
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Securities Held to Maturity | ||||||||||||||||||||||||
U.S. Government and Federal Agency Obligations | $ | 2,931,810 | $ | 76,589 | $ | — | $ | — | $ | 2,931,810 | $ | 76,589 | ||||||||||||
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| |||||||||||||
$ | 2,931,810 | $ | 76,589 | $ | — | $ | — | $ | 2,931,810 | $ | 76,589 | |||||||||||||
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13
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 3. Securities (Continued)
September 30, 2012 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||||||||
Securities Available for Sale | ||||||||||||||||||||||||
Residential Mortgage-Backed Securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Collateralized Mortgage Obligations | 1,435,900 | 8,698 | — | — | 1,435,900 | 8,698 | ||||||||||||||||||
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| |||||||||||||
$ | 1,435,900 | $ | 8,698 | $ | — | $ | — | $ | 1,435,900 | $ | 8,698 | |||||||||||||
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Securities Held to Maturity | ||||||||||||||||||||||||
U.S. Government and Federal Agency Obligations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
State and Municipal Securities | — | — | — | — | — | — | ||||||||||||||||||
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$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
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At June 30, 2013, the Company held ten investments with gross unrealized losses totaling $112,774. At September 30, 2012, the Company held two investments with gross unrealized losses totaling $8,698.
The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Mortgage-backed securities are invested in U.S. Government Agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.
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.
14
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 4. 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 June 30, 2013 and September 30, 2012, were as follows:
June 30, 2013 | September 30, 2012 | |||||||
Real estate loans | ||||||||
One-to four-family owner occupied | $ | 25,209,744 | $ | 26,097,798 | ||||
One-to four-family non-owner occupied | 17,286,603 | 17,855,304 | ||||||
Home equity | 2,462,511 | 2,172,247 | ||||||
Mobile home | 1,952,121 | 2,068,672 | ||||||
Secured by other properties | 2,917,522 | 2,613,025 | ||||||
Construction and land development | 4,472,229 | 3,262,452 | ||||||
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Total real estate loans | 54,300,730 | 54,069,498 | ||||||
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Other loans | ||||||||
Secured commercial | 1,422,499 | 1,212,534 | ||||||
Savings | 4,665 | 10,290 | ||||||
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Total other loans | 1,427,164 | 1,222,824 | ||||||
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Total loans | 55,727,894 | 55,292,322 | ||||||
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Unamortized premiums and loan fees | 265,212 | 319,713 | ||||||
Unearned income on loans | (316,221 | ) | (344,450 | ) | ||||
Allowance for loan and lease losses | (701,315 | ) | (617,474 | ) | ||||
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Total loans, net | $ | 54,975,570 | $ | 54,650,111 | ||||
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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.
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses
The Company’s loan portfolio is segregated into the following portfolio segments.
One-to Four-Family Owner Occupied Loans.This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in our market area.
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.
15
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
Secured by Other Properties.This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to four-family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.
Construction and Land Development Loans.This portfolio segment includes construction loans to individuals and builders, primarily for the construction of residential properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties. In addition, many of these borrowers have more than one outstanding loan, so an adverse development with respect to one loan or credit relationship can expose the Company to significantly greater risk of non-payment and loss.
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 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.
16
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
The allowance for loan losses is established through a provision for loan losses. The Company maintains the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate at each reporting date.
Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process by portfolio segment includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.
The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is a likelihood that different amounts would be reported under different conditions or assumptions. The Comptroller of the Currency, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.
The allowance generally consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.
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.
17
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
As of June 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 | — | (309,019 | ) | (7,140 | ) | — | — | — | — | (316,159 | ) | |||||||||||||||||||||
Recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Provision | (4,687 | ) | 447,332 | (27,208 | ) | 1,723 | 2,233 | 511 | (19,904 | ) | 400,000 | |||||||||||||||||||||
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Ending Balance | $ | 80,530 | $ | 411,996 | $ | 61,265 | $ | 32,165 | $ | 82,560 | $ | 3,568 | $ | 29,231 | $ | 701,315 | ||||||||||||||||
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| |||||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 145,071 | $ | 502 | $ | — | $ | 30,000 | $ | — | $ | — | $ | 175,573 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 80,530 | $ | 266,925 | $ | 60,763 | $ | 32,165 | $ | 52,560 | $ | 3,568 | $ | 29,231 | $ | 525,742 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Financing receivables: Ending balance | $ | 27,672,255 | $ | 17,286,603 | $ | 1,952,121 | $ | 2,917,522 | $ | 4,472,229 | $ | 1,427,164 | $ | 55,727,894 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 436,837 | $ | 1,898,818 | $ | 107,220 | $ | 214,555 | $ | 396,223 | $ | — | $ | 3,053,653 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 26,843,316 | $ | 15,387,785 | $ | 1,844,901 | $ | 2,702,967 | $ | 4,076,006 | $ | 1,427,164 | $ | 52,282,139 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 392,102 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 392,102 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
As of September 30, 2012 | ||||||||||||||||||||||||||||||||
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 | $ | 64,547 | $ | 382,023 | $ | 52,719 | $ | 25,702 | $ | 91,135 | $ | 3,907 | $ | 45,256 | $ | 665,289 | ||||||||||||||||
Charge-offs | (72,815 | ) | (175,000 | ) | — | — | — | — | — | (247,815 | ) | |||||||||||||||||||||
Recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Provision | 93,485 | 66,660 | 42,894 | 4,740 | (10,808 | ) | (850 | ) | 3,879 | 200,000 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending Balance | $ | 85,217 | $ | 273,683 | $ | 95,613 | $ | 30,442 | $ | 80,327 | $ | 3,057 | $ | 49,135 | $ | 617,474 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 30,901 | $ | 36,517 | $ | — | $ | — | $ | — | $ | — | $ | 67,418 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 85,217 | $ | 242,782 | $ | 59,096 | $ | 30,442 | $ | 80,327 | $ | 3,057 | $ | 49,135 | $ | 550,056 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Financing receivables: Ending balance | $ | 28,270,045 | $ | 17,855,304 | $ | 2,068,672 | $ | 2,613,025 | $ | 3,262,452 | $ | 1,222,824 | $ | 55,292,322 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 437,872 | $ | 1,577,271 | $ | 152,256 | $ | 216,000 | $ | — | $ | — | $ | 2,383,399 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 27,434,223 | $ | 16,278,033 | $ | 1,916,416 | $ | 2,397,025 | $ | 3,262,452 | $ | 1,222,824 | $ | 52,510,973 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | 397,950 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 397,950 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.
When assets are classified as either substandard or doubtful, the Company allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, Comptroller of the Currency, which can require that we establish additional loss allowances. The Company regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
The following tables are a summary of the loan portfolio quality indicators by loan class recorded investment as of June 30, 2013 and September 30, 2012:
June 30, 2013 | ||||||||||||||||||||||||
One-to Four-Family Owner Occupied | One-to Four-Family Non-Owner Occupied | Home Equity | Mobile Home | Secured by Other Properties | Construction and Land Development | |||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 24,380,805 | $ | 14,830,693 | $ | 2,462,511 | $ | 1,819,190 | $ | 2,702,967 | $ | 4,030,188 | ||||||||||||
Special Mention | — | — | — | — | — | — | ||||||||||||||||||
Substandard | 828,939 | 2,111,257 | — | 132,931 | — | 442,041 | ||||||||||||||||||
Doubtful | — | 344,653 | — | — | 214,555 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 25,209,744 | $ | 17,286,603 | $ | 2,462,511 | $ | 1,952,121 | $ | 2,917,522 | $ | 4,472,229 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Secured Commercial | Savings | |||||||
Grade: | ||||||||
Pass | $ | 1,422,499 | $ | 4,665 | ||||
Special Mention | — | — | ||||||
Substandard | — | — | ||||||
Doubtful | — | — | ||||||
|
|
|
| |||||
$ | 1,422,499 | $ | 4,665 | |||||
|
|
|
|
20
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
September 30, 2012 | ||||||||||||||||||||||||
One-to Four-Family Owner Occupied | One-to Four-Family Non-Owner Occupied | Home Equity | Mobile Home | Secured by Other Properties | Construction and Land Development | |||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 25,261,976 | $ | 15,904,215 | $ | 2,172,247 | $ | 1,814,197 | $ | 2,397,025 | $ | 2,820,472 | ||||||||||||
Special Mention | — | — | — | 74,743 | — | — | ||||||||||||||||||
Substandard | 835,822 | 1,951,089 | — | 179,732 | — | 441,980 | ||||||||||||||||||
Doubtful | — | — | — | — | 216,000 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
$ | 26,097,798 | $ | 17,855,304 | $ | 2,172,247 | $ | 2,068,672 | $ | 2,613,025 | $ | 3,262,452 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Secured Commercial | Savings | |||||||
Grade: | ||||||||
Pass | $ | 1,212,534 | $ | 10,290 | ||||
Special Mention | — | — | ||||||
Substandard | — | — | ||||||
Doubtful | — | — | ||||||
|
|
|
| |||||
$ | 1,212,534 | $ | 10,290 | |||||
|
|
|
|
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. Loans are charged off when the Company believes that the recovery of principal is improbable. A summary report of all loans 30 days or more past due is provided to the board of directors of the Company each month.
Loans are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent.
21
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
The following tables set forth certain information with respect to our loan portfolio delinquencies by loan class and amount as of June 30, 2013 and September 30, 2012:
June 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 | $ | — | $ | 226,614 | $ | 465,324 | $ | 691,938 | $ | 24,517,806 | $ | 25,209,744 | $ | — | ||||||||||||||
One-to four-family non-owner occupied | 113,316 | — | 1,898,818 | 2,012,134 | 15,274,469 | 17,286,603 | — | |||||||||||||||||||||
Home equity | — | — | — | — | 2,462,511 | 2,462,511 | — | |||||||||||||||||||||
Mobile home | 83,690 | 36,201 | — | 119,891 | 1,832,230 | 1,952,121 | — | |||||||||||||||||||||
Secured by other properties | — | — | 214,555 | 214,555 | 2,702,967 | 2,917,522 | — | |||||||||||||||||||||
Construction and land development | — | 396,223 | — | 396,223 | 4,076,006 | 4,472,229 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total real estate loans | 197,006 | 659,038 | 2,578,697 | 3,434,741 | 50,865,989 | 54,300,730 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other loans: | ||||||||||||||||||||||||||||
Secured commercial | — | — | — | — | 1,422,499 | 1,422,499 | — | |||||||||||||||||||||
Savings accounts | — | — | — | — | 4,665 | 4,665 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total other loans | — | — | — | — | 1,427,164 | 1,427,164 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total loans | $ | 197,006 | $ | 659,038 | $ | 2,578,697 | $ | 3,434,741 | $ | 52,293,153 | $ | 55,727,894 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables | Recorded Investment > 90 Days and Accruing | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
One-to four-family owner occupied | $ | — | $ | — | $ | 835,822 | $ | 835,822 | $ | 25,261,976 | $ | 26,097,798 | $ | — | ||||||||||||||
One-to four-family non-owner occupied | 228,229 | — | 721,392 | 949,621 | 16,905,683 | 17,855,304 | — | |||||||||||||||||||||
Home equity | — | — | — | — | 2,172,247 | 2,172,247 | — | |||||||||||||||||||||
Mobile home | 46,927 | — | 103,541 | 150,468 | 1,918,204 | 2,068,672 | — | |||||||||||||||||||||
Secured by other properties | — | — | 216,000 | 216,000 | 2,397,025 | 2,613,025 | — | |||||||||||||||||||||
Construction and land development | — | — | — | — | 3,262,452 | 3,262,452 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total real estate loans | 275,156 | — | 1,876,755 | 2,151,911 | 51,917,587 | 54,069,498 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other loans: | ||||||||||||||||||||||||||||
Secured commercial | — | — | — | — | 1,212,534 | 1,212,534 | — | |||||||||||||||||||||
Savings accounts | — | — | — | — | 10,290 | 10,290 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total other loans | — | — | — | — | 1,222,824 | 1,222,824 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total loans | $ | 275,156 | $ | — | $ | 1,876,755 | $ | 2,151,911 | $ | 53,140,411 | $ | 55,292,322 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
The following table is a summary of the recorded investment in non-accrual loans by loan class as of the dates indicated:
June 30, 2013 | September 30, 2012 | |||||||
Real estate loans: | ||||||||
One-to four-family owner occupied | $ | 828,939 | $ | 835,822 | ||||
One-to four-family non-owner occupied | 1,898,818 | 721,392 | ||||||
Home equity | — | — | ||||||
Mobile home | 60,200 | 103,541 | ||||||
Secured by other properties | 214,555 | 216,000 | ||||||
Construction and land development | 396,223 | — | ||||||
|
|
|
| |||||
Total real estate loans | 3,398,735 | 1,876,755 | ||||||
|
|
|
| |||||
Other loans: | ||||||||
Secured commercial | — | — | ||||||
Savings accounts | — | — | ||||||
|
|
|
| |||||
Total other loans | — | — | ||||||
|
|
|
| |||||
Total loans | $ | 3,398,735 | $ | 1,876,755 | ||||
|
|
|
|
At June 30, 2013 and September 30, 2012, there were no loans 90 days past due and still accruing interest. At June 30, 2013, the Company had thirty-six loans on non-accrual status with foregone interest in the amount of $282,815. At September 30, 2012, the Company had twenty-three loans on non-accrual status with foregone interest in the amount of $160,495.
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.
23
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. 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 June 30, 2013 and September 30, 2012:
June 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 | $ | 886,778 | $ | 828,939 | $ | — | $ | 886,778 | $ | 25,713 | ||||||||||
One-to four-family non-owner occupied | 896,099 | 697,391 | — | 896,099 | 7,925 | |||||||||||||||
Secured by other properties | 227,470 | 214,555 | — | 227,470 | — | |||||||||||||||
Mobile home | 60,213 | 60,200 | — | 60,213 | 2,992 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
One-to four-family non-owner occupied | $ | 1,258,347 | $ | 1,201,427 | $ | 145,071 | $ | 1,258,347 | $ | 22,242 | ||||||||||
Construction and land development | 400,995 | 396,223 | 30,000 | 400,995 | 12,335 | |||||||||||||||
Mobile home | 47,151 | 47,020 | 502 | 47,151 | 2,374 | |||||||||||||||
Total | ||||||||||||||||||||
One-to four-family owner occupied | $ | 886,778 | $ | 828,939 | $ | — | $ | 886,778 | $ | 25,713 | ||||||||||
One-to four-family non-owner occupied | 2,154,446 | 1,898,818 | 145,071 | 2,154,446 | 30,167 | |||||||||||||||
Secured by other properties | 227,470 | 214,555 | — | 227,470 | — | |||||||||||||||
Construction and land development | 400,995 | 396,223 | 30,000 | 400,995 | 12,335 | |||||||||||||||
Mobile home | 107,364 | 107,220 | 502 | 107,364 | 5,366 | |||||||||||||||
September 30, 2012 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
One-to four-family owner occupied | $ | 877,758 | $ | 835,822 | $ | — | $ | 877,758 | $ | 25,376 | ||||||||||
One-to four-family non-owner occupied | 896,218 | 721,392 | — | 896,218 | 15,792 | |||||||||||||||
Secured by other properties | 227,819 | 216,000 | — | 227,819 | — | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
One-to four-family non-owner occupied | $ | 856,752 | $ | 855,879 | $ | 30,901 | $ | 856,752 | $ | 47,446 | ||||||||||
Mobile home | 165,267 | 152,256 | 36,517 | 165,267 | 9,561 | |||||||||||||||
Total | ||||||||||||||||||||
One-to four-family owner occupied | $ | 877,758 | $ | 835,822 | $ | — | $ | 877,758 | $ | 25,376 | ||||||||||
One-to four-family non-owner occupied | 1,752,970 | 1,577,271 | 30,901 | 1,752,970 | 63,238 | |||||||||||||||
Secured by other properties | 227,819 | 216,000 | — | 227,819 | — | |||||||||||||||
Mobile home | 165,267 | 152,256 | 36,517 | 165,267 | 9,561 |
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 June 30, 2013, we had nine loans that were restructured. One loan was secured by a one-to four-family owner occupied property in the amount of $137,001. 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 $214,555 and two loans were secured by mobile home loans in the amount of $107,220. At September 30, 2012, we had eight loans that were restructured. One loan was secured by a one-to four-family owner occupied property in the amount of $138,035. Five loans to the same borrower in the amount of $855,879 were secured by one-to four-family non-owner occupied properties. One loan was secured by other properties in the amount of $216,000 and one loan was secured by a mobile home loan in the amount of $48,715.
24
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 5. Credit Quality of Financing Receivables and the Allowance for Loan Losses (Continued)
The following table is a summary of impaired loans that were modified due to a TDR by class for the nine months ended June 30, 2013:
Modifications for the three months ended June 30, 2013 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring | ||||||||||||
Mobile home | 1 | $ | 60,200 | $ | 60,213 | |||||||
Recorded Investment | ||||||||||||
Troubled Debt Restructuring that subsequently defaulted | ||||||||||||
One-to four-family non-owner occupied | 1 | 67,000 | ||||||||||
Modifications for the nine months ended June 30, 2013 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring | ||||||||||||
Mobile home | 1 | $ | 60,200 | $ | 60,213 | |||||||
Recorded Investment | ||||||||||||
Troubled Debt Restructuring that subsequently defaulted | ||||||||||||
One-to four-family owner occupied | 1 | $ | 67,000 |
Modifications for the three months ended June 30, 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 | — | |||||||||||
Modifications for the nine months ended June 30, 2012 | ||||||||||||
Number of contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | ||||||||||
Troubled Debt Restructuring | ||||||||||||
One-to four-family owner occupied | 1 | $ | 159,295 | $ | 146,827 | |||||||
One-to four-family non-owner occupied | 4 | 825,119 | 792,587 | |||||||||
Recorded Investment | ||||||||||||
Troubled Debt Restructuring that subsequently defaulted | — | — |
Note 6. 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.
25
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 6. Fair Value Measurements (Continued)
The following table presents a summary of financial assets and liabilities measured at fair value at June 30, 2013 and September 30, 2012:
Level 1 | Level 2 | Level 3 | Total | Total Losses | ||||||||||||||||
June 30, 2013 | ||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||
Mortgage-backed securities invested in Government Agencies | $ | — | $ | 4,368,502 | $ | — | $ | 4,368,502 | $ | — | ||||||||||
Collateralized mortgage obligations invested in Government Agencies | 739,279 | 739,279 | ||||||||||||||||||
State and Municipal Securities | 1,248,097 | 1,248,097 | ||||||||||||||||||
Impaired loans | — | — | 1,469,097 | 1,469,097 | — | |||||||||||||||
Foreclosed assets | — | — | — | |||||||||||||||||
September 30, 2012 | ||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||
Mortgage-backed securities invested in Government Agencies | $ | — | $ | 5,979,683 | $ | — | $ | 5,979,683 | $ | — | ||||||||||
Collateralized mortgage obligations invested in Government Agencies | 1,823,892 | 1,823,892 | ||||||||||||||||||
Impaired loans | — | — | 940,717 | 940,717 | — | |||||||||||||||
Foreclosed assets | — | 295,750 | 295,750 | — |
In accordance with generally accepted accounting principles concerning accounting for Loan and Lease Losses, there were no losses for the nine months ended June 30, 2013 or the year ended September 30, 2012, 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.
26
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 6. Fair Value Measurements (Continued)
Loans Receivable (Carried at Cost).The fair values of loans are estimated using discounted cash flow analyses, using market rates at the statement of condition date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (Generally Carried at Fair Value).Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at an observable market price (if available), or at fair value of the loan’s collateral (if the loan is collateral dependent). When the loan is dependent on collateral, fair value of collateral is determined by appraisal or independent valuation, which is then adjusted for the related cost to sell. Impaired loans allocated to the Allowance for Loan and Lease Losses are measured at the lower of cost or fair value on a nonrecurring basis.
Foreclosed Assets (Carried at Lower of Cost or Fair Value Less Estimated Selling Costs).Fair values of foreclosed assets are measured at fair value less cost to sell. The valuation of the fair value measurement follows GAAP. Foreclosed assets are measured on a nonrecurring basis.
Deposit Liabilities (Carried at Cost).The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair value for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.
Federal Home Loan Bank Advances (Carried at Cost).Fair values of FHLB advances are estimated using discounted cash flows analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
Accrued Interest Receivable and Payable (Carried at Cost).The carrying amounts of accrued interest approximate fair value.
Off Balance Sheet Credit-Related Instruments (Disclosures at Cost).Fair values for off balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.
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 June 30, 2013 and September 30, 2012:
Quantitative Information about Level 3 Fair Value Measurements for June 30, 2013 and September 30, 2012 | ||||||||||||
Valuation Techniques | Unobservable Input | Range | ||||||||||
Assets: | ||||||||||||
Impaired loans | Discounted appraised value | Selling costs | 6-12 | % | ||||||||
Foreclosed assets | Discounted appraised value | Selling costs | 6-12 | % |
27
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Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 6. 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, 2011 | $ | 717,648 | $ | 884,000 | ||||
Purchases, settlements and charge-offs | (230,000 | ) | (588,250 | ) | ||||
Transfers in and/or out of Level 3 | 453,069 | — | ||||||
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|
|
| |||||
Balance, September 30, 2012 | 940,717 | 295,750 | ||||||
Purchases, settlements and charge-offs (unaudited) | (287,000 | ) | (295,750 | ) | ||||
Transfers in and/or out of Level 3 (unaudited) | 815,380 | — | ||||||
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| |||||
Balance, June 30, 2013 (unaudited) | $ | 1,469,097 | $ | — | ||||
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|
|
The estimated fair values of the Company’s financial instruments were as follows:
Fair Value Measurements at June 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 | $ | 6,453 | $ | 6,453 | $ | — | $ | — | $ | 6,453 | ||||||||||
Certificates of deposit | 3,533 | 3,533 | — | — | 3,533 | |||||||||||||||
Securities available for sale | 6,356 | — | 6,356 | — | 6,356 | |||||||||||||||
Securities held to maturity | 3,008 | — | 2,932 | — | 2,932 | |||||||||||||||
Federal Home Loan Bank stock | 454 | — | 454 | — | 454 | |||||||||||||||
Loans receivable, net | 54,976 | — | 54,144 | 1,469 | 55,728 | |||||||||||||||
Foreclosed assets | — | — | — | — | — | |||||||||||||||
Accrued interest receivable | 245 | — | 245 | — | 245 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 57,870 | — | 57,787 | — | 57,787 | |||||||||||||||
Federal Home Loan Bank advances | 8,000 | — | 8,712 | — | 8,712 | |||||||||||||||
Accrued interest payable | 44 | — | 44 | — | 44 | |||||||||||||||
Off-Balance sheet financial instruments | — | — | — | — |
Fair Value Measurements at September 30, 2012 Using | ||||||||||||||||||||
Carrying Value | Quoted Prices in Active Market for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 4,363 | $ | 4,363 | $ | — | $ | — | $ | 4,363 | ||||||||||
Certificates of Deposit | 3,532 | 3,532 | 3,532 | |||||||||||||||||
Securities available for sale | 7,804 | — | 7,804 | — | 7,804 | |||||||||||||||
Securities held to maturity | 3,637 | — | 3,804 | — | 3,804 | |||||||||||||||
Federal Home Loan Bank stock | 480 | — | 480 | — | 480 | |||||||||||||||
Loans receivable, net | 54,650 | — | 54,580 | 941 | 55,521 | |||||||||||||||
Foreclosed assets | 296 | — | — | 296 | 296 | |||||||||||||||
Accrued interest receivable | 290 | — | 290 | — | 290 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 58,026 | — | 58,064 | — | 58,064 | |||||||||||||||
Federal Home Loan Bank advances | 8,000 | — | 8,987 | — | 8,987 | |||||||||||||||
Accrued interest payable | 43 | — | 43 | — | 43 | |||||||||||||||
Off-Balance sheet financial instruments | — | — | — | — |
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Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 7. 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 June 30, 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 nine months ended June 30, 2013 and 2012, respectively.
A summary of ESOP shares is as follows:
June 30, 2013 | June 30, 2012 | |||||||
Shares committed for release | 16,525 | 12,523 | ||||||
Unearned shares | 23,500 | 27,502 | ||||||
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Total ESOP shares | 40,025 | 40,025 | ||||||
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Fair value of unearned shares | $ | 493,500 | $ | 396,579 | ||||
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Note 8. 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
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Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 8. Recognition and Retention Plan (Continued)
be forfeited. As of June 30, 2013, 15,104 shares have been awarded under the plan. During the nine months ended June 30, 2013, 3,019 shares vested and were released leaving a balance of 12,085 awarded shares as of June 30, 2013. Compensation expense is being recognized over the vesting period. For the nine months ended June 30, 2013, the Company recognized $42,568 of compensation expense related to the Recognition and Retention Plan. No compensation expense has been recorded for the three and nine months ended June 30, 2012.
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. At June 30, 2013 all shares had been acquired by the Trust and there were no shares remaining to be purchased for the RRP. The RRP provides that grants to each employee and non-employee director shall not exceed 25% and 5% of the shares available under the Plan, respectively. Shares awarded to non-employee directors in the aggregate shall not exceed 30% of the shares available under the RRP.
Note 9. 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. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. As of June 30, 2013, 37,760 options have been granted to eligible employees and non-employee directors. For the three and nine months ended June 30, 2013, the Company recognized $14,094 and $23,553, respectively of compensation expense related to the stock options granted. No compensation expense has been recorded for the three and nine months ended June 30, 2012.
A summary of the Stock Option Plan during the nine months ended June 30, 2013:
Number of Shares | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | ||||||||||
Outstanding at September 30, 2012 | 37,760 | — | ||||||||||
Granted | — | $ | 14.10 | $ | 4.99 | |||||||
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Outstanding at June 30, 2013 | 37,760 | |||||||||||
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Options Exercisable at June 30, 2013 | 7,552 | $ | 14.10 | $ | 4.99 | |||||||
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Note 10. Stock Repurchases
On September 7, 2012, the Board of Directors authorized the repurchase of up to 25,000 shares of the Company’s outstanding common stock. The repurchase program is equal to approximately 5% of the total shares outstanding. On October 4, 2012, the Board of Directors approved an increase in its current stock repurchase program from 25,000 to 40,000 shares, which is equal to approximately 8% of the total shares outstanding. The repurchase program began on September 10, 2012 and was completed in February 2013.
30
Table of Contents
Fairmount Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 10. Stock Repurchases (Continued)
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 11. 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.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Unaudited) | ||||||||||||||||
Income before extraordinary item | $ | 34,137 | $ | 100,900 | $ | 185,174 | $ | 323,758 | ||||||||
Extraordinary item, gain on business combination | — | — | — | 1,022,074 | ||||||||||||
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Net income | $ | 34,137 | $ | 100,900 | $ | 185,174 | $ | 1,345,832 | ||||||||
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Weighted average number of shares used in: | ||||||||||||||||
Basic earnings per share | 446,597 | 470,176 | 445,322 | 468,203 | ||||||||||||
Dilutive common stock equivalents: | ||||||||||||||||
Stock options | 12,407 | 2,733 | 12,407 | 2,733 | ||||||||||||
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Dilutive earnings per share | 459,004 | 472,909 | 457,729 | 470,936 | ||||||||||||
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Basic and dilutive earnings per common share: | ||||||||||||||||
Income before extraordinary item, basic | $ | 0.08 | $ | 0.21 | $ | 0.42 | $ | 0.69 | ||||||||
Extraordinary item, gain on business combination, basic | — | — | — | 2.19 | ||||||||||||
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Net income, basic | $ | 0.08 | $ | 0.21 | $ | 0.42 | $ | 2.88 | ||||||||
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Income before extraordinary item, dilutive | $ | 0.07 | $ | 0.21 | $ | 0.40 | $ | 0.69 | ||||||||
Extraordinary item, gain on business combination, dilutive | — | — | — | 2.17 | ||||||||||||
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Net income, dilutive | $ | 0.07 | $ | 0.21 | $ | 0.40 | $ | 2.86 | ||||||||
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Note 12. Subsequent Events
The Company has evaluated events and transactions subsequent to June 30, 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.
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Table of Contents
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 nine month period ended June 30, 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, 2012 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 June 30, 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.
32
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Comparison of Financial Condition at June 30, 2013 and September 30, 2012
Total assets decreased by $196,000, or 0.25%, to $78,848,000 at June 30, 2013 from $79,044,000 at September 30, 2012.
Cash and cash equivalents increased from $4,363,000 at September 30, 2012 to $6,454,000 at June 30, 2013. This was an increase of $2,091,000, or 47.93%. The increase in cash and cash equivalents was primarily funded by decreases in the investment securities.
Certificates of deposit increased by $1,000, or 0.03% to $3,533,000 at June 30, 2013 from $3,532,000 at September 30, 2012.
Investment securities decreased by $2,077,000, or 18.15%, to $9,364,000, at June 30, 2013, from $11,441,000 at September 30, 2012. The decrease was primarily the result of $6,203,000 in sales, maturities, payments and calls offset by purchases of $4,286,000.
Total net loans increased from $54,650,000 at September 30, 2012 to $54,976,000 at June 30, 2013. This represented an increase of $326,000, or 0.60%. The change was primarily attributable to decreases in one-to four-family mortgage loans of $1,455,000, or 3.32% offset by increases in home equity loans of $290,000, or 13.36%, increase in loans secured by other properties of $304,000, or 11.65%, increases in construction and land development loans of $1,210,000, or 37.08% and increases in secured commercial loans of $210,000, or 17.32%.
Total liabilities at June 30, 2013 were $65,998,000, a decrease of $191,000, or 0.29%, from $66,189,000 at September 30, 2012.
Deposits decreased from $58,026,000 at September 30, 2012 to $57,870,000 at June 30, 2013. The decrease of $156,000, or 0.27% was primarily attributable to decreases in certificates of deposit of $1,483,000, or 3.96%, from $37,428,000 at September 30, 2012 to $35,945,000 at June 30, 2013 offset by increases in savings of $1,419,000, or 9.18% from $15,462,000 at September 30, 2012 to $16,881,000 at June 30, 2013.
Stockholders’ equity was $12,850,000, or 16.30%, of total assets at June 30, 2013, compared to $12,855,000, or 16.26%, of total assets at September 30, 2012. The Company recorded net income of $185,000 for the nine months ending June 30, 2013. In September 2012, the Company instituted a stock repurchase program, which resulted in a decrease of $133,000 for the nine months ending June 30, 2013 due the repurchase of 7,800 shares of common stock for the RRP Trust. Comprehensive income decreased by $123,000 related to the interest rate fluctuations on the Company’s available for sale securities portfolio. The Company also recorded stock based compensation of $66,000.
Results of Operations for the Three Months Ended June 30, 2013 and 2012
Overview. Net income decreased by $67,000, or 66.34%, to $34,000 for the three months ended June 30, 2013 from $101,000 for the three months ended June 30, 2012. Net interest income decreased by $16,000, or 2.33%, to $672,000 for the three months ended June 30, 2013 from $688,000 for the three months ended June 30, 2012. Provision for loan and lease losses increased by $105,000 to $150,000 for the three months ended June 30, 2013 from $45,000 for the three months ended June 30, 2012. Non-interest income increased $10,000 from $27,000 for the three months ended June 30, 2012 to $37,000 for the three months ended June 30, 2013. Non-interest expense decreased $3,000, or 0.57%, to $519,000 for the three months ended June 30, 2013 from $522,000 for the three months ended June 30, 2012.
Net Interest Income. Net interest income decreased $16,000, or 2.33%, to $672,000 for the three months ended June 30, 2013 from $688,000 for the three months ended June 30, 2012. The decrease primarily resulted from the combined effects of a decrease of $57,000, or 6.28%, in interest and dividend income to $850,000 for the three months ended June 30, 2013 from $907,000 for the three months ended June 30, 2012, and a decrease of $41,000, or 18.72%, in interest expense to $178,000 for the three months ended June 30, 2013 from $219,000 for the three months ended June 30, 2012. The decrease in interest and dividend income was the result of a decrease in the average rates earned on loans and investments. Interest expense decreased primarily as a result of decreases in the average rates paid on deposits and borrowings.
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Provision for Loan and Lease Losses. The provision for loan and lease losses increased $105,000 to $150,000 for the three months ended June 30, 2013, from $45,000 for the three months ended June 30, 2012. The Company recorded net charge-offs of $289,308 during the three months ended June 30, 2013. The Company did not record charge-offs during the three months ended June 30, 2012. 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 $37,000 for the three months ended June 30, 2013, an increase of $10,000 from $27,000 for the three months ended June 30, 2012. The increase was primarily the result of an increase in service charges and fees, which increased due to an increase in loan settlements during the comparable three month periods.
Non-Interest Expense. Non-interest expense decreased by $3,000, or 0.57%, to $519,000 for the three months ended June 30, 2013 from $522,000 for the three months ended June 30, 2012. The decrease was primarily the result of increases in salaries, fees and employment expenses offset by a decrease in professional fees and other operating expenses. Salaries, fees and employment expenses increased by $32,000, or 11.31%, to $315,000 for the three months ended June 30, 2013 from $283,000 for the three months ended June 30, 2012. The increase was the result of the expensing of stock based compensation. The decrease in professional fees of $21,000, or 31.34% can be attributed to a consulting agreement in place during the three months ended June 30, 2012 with a former employee of Fullerton. The decrease in other operating expenses of $24,000, or 46.15% related to a write down of $18,000 in other real estate owned during the three months ended June 30, 2012.
Income Taxes. The provision for income taxes decreased by $41,000, or 87.23%, to $6,000 for the three months ended June 30, 2013 from $47,000 for the three months ended June 30, 2012. The decrease in provision for income taxes was due to the decrease in the Company’s income before income taxes of $108,000, or 72.97% from $148,000 for the three months ended June 30, 2012 to $40,000 for the three months ended June 30, 2013.
Total Comprehensive Income (Loss). Total comprehensive income (loss) for the periods presented consisted of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. The Company reported a total comprehensive loss for the three months ended June 30, 2013 in the amount of $37,000 compared to a total comprehensive income of $135,000 for the three months ended June 30, 2012. The decrease in total comprehensive income resulted from a decrease of $67,000 in net income and a decrease of $105,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.
Results of Operations for the Nine Months Ended June 30, 2013 and 2012
Overview. Net income decreased by $1,161,000 from $1,346,000 for the nine months ended June 30, 2012 to $185,000 for the nine months ended June 30, 2013. This decrease in net income included an extraordinary gain of $1,022,000 recorded in association with the acquisition of Fullerton. Net interest income decreased by $100,000, or 4.75%, to $2,007,000 for the nine months ended June 30, 2013 from $2,107,000 for the nine months ended June 30, 2012. Provision for loan and lease losses increased by $175,000, or 77.78%, to $400,000 for the nine months ended June 30, 2013 from $225,000 for the nine months ended June 30, 2012. Non-interest income increased $120,000 from $77,000 for the nine months ended June 30, 2012 to $197,000 for the nine months ended June 30, 2013. Non-interest expense increased $48,000, or 3.24%, to $1,528,000 for the nine months ended June 30, 2013 from $1,480,000 for the nine months ended June 30, 2012.
Net Interest Income. Net interest income decreased $100,000, or 4.75%, to $2,007,000 for the nine months ended June 30, 2013 from $2,107,000 for the nine months ended June 30, 2012. The decrease primarily resulted from the combined effects of a decrease of $243,000, or 8.64%, in interest and dividend income to $2,568,000 for the nine months ended June 30, 2013 from $2,811,000 for the nine months ended June 30, 2012, and a decrease of $143,000, or 20.31%, in interest expense to $561,000 for the nine months
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ended June 30, 2013 from $704,000 for the nine months ended June 30, 2012. The decrease in interest and dividend income was mainly the result of decreases in the average rates earned on loans and investments. Interest expense decreased primarily as a result of decreases in the average rates paid on deposits and borrowings.
Provision for Loan and Lease Losses. Non-performing loans totaled $3,399,000 at June 30, 2013 and $1,877,000 at September 30, 2012. The increase of $1,522,000 was the result of an increase of $1,178,000 in non-performing one-to four-family non-owner occupied loans and an increase of $396,000 in construction and land development loans. The Company’s non-performing loans to total loans increased to 6.10% at June 30, 2013, from 3.39% at September 30, 2012.
Non-performing assets, not including non-performing loans, totaled $0 at June 30, 2013 and $296,000 at September 30, 2012. The Company sold other real estate owned during the nine months ended June 30, 2013, recording a loss of $24,000.
The Company has classified as impaired, loans that are 90 days or more delinquent or troubled debt restructurings. The amount of impaired loans of $3,446,000 as of June 30, 2013, was comprised of sixteen loan relationships. Of the sixteen loan relationships, four relationships were secured by one-to four-family owner occupied residential properties in the amount of $829,000, eight relationships were secured by one-to four-family non-owner occupied residential properties in the amount of $1,899,000, two loans were secured by mobile homes in the amount of $107,000, one loan of $215,000 secured by other properties and one loan of $396,000 secured by construction and land development.
For the nine months ended the Company recorded a provision for loan and lease losses in the amount of $400,000. This was an increase of $175,000, or 77.78%, from $225,000 for the nine months ended June 30, 2012. The increase in the provision was necessary due to increases in nonperforming and impaired loans during the nine months ended June 30, 2013. The Company has provided for all losses that are both probable and reasonably estimable at June 30, 2013.
Non-Interest Income. Non-interest income was $197,000 for the nine months ended June 30, 2013, which was an increase of $120,000 from $77,000 for the nine months ended June 30, 2012. The primary reason for the increase was that the Company sold securities and recorded gains of $117,000 on the sales during fiscal year ending September 30, 2013.
Non-Interest Expense. Non-interest expense increased by $48,000, or 3.24%, to $1,528,000 for the nine months ended June 30, 2013 from $1,480,000 for the nine months ended June 30, 2012. The increase was primarily the result of increases in salaries, fees and employment expenses. The increase in salaries, fees and employment expenses of $46,000, or 5.53%, can be attributed to the recording of stock based compensation.
Income Taxes. The provision for income taxes decreased by $64,000, or 41.29%, to $91,000 for the nine months ended June 30, 2013 from $155,000 for the nine months ended June 30, 2012. The decrease in provision for income taxes was due to the decrease in the Company’s income before income taxes and extraordinary gain of $203,000, or 42.38%, from $479,000 for the nine months ended June 30, 2012 to $185,000 for the nine months ended June 30, 2013.
Extraordinary Item. The Company recognized $1,022,000 of extraordinary income during the nine months ended June 30, 2012 relating to the acquisition of Fullerton. The extraordinary income, also defined as negative goodwill, was the result of the sum of the fair values of assets acquired less the liabilities assumed exceeding the acquisition cost.
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 $62,000 and $1,338,000 for the nine months ended June 30, 2013 and 2012, respectively. The decrease in total comprehensive income resulted from a decrease of $1,161,000 in net income, including the extraordinary gain of $1,022,000 and a decrease of $115,000 in adjustments to accumulated other comprehensive income from the change in unrealized gains (losses) on securities available for sale.
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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 June 30, 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 June 30, 2013, cash and cash-equivalents totaled $6,453,000. Certificates of deposit of $3,533,000 and securities classified as available for sale totaling $6,356,000 provided additional sources of liquidity. In addition, at June 30, 2013, the Company had the ability to borrow a total of approximately $23,700,000 from the Federal Home Loan Bank of Atlanta. At June 30, 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 June 30, 2013.
At June 30, 2013, the Company had $6,064,000 in unused lines of credit to borrowers and standby letters of credit. Certificates of deposit due within one year of June 30, 2013, totaled $18,577,000, or 32.10%, 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 OCC regulatory requirements. As of June 30, 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 14.14%, 25.92% and 27.18% respectively. The regulatory requirements as of that date were 4.0%, 4.0% and 8.0% respectively.
The Company is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the OCC but with the prior notice to the OCC, cannot exceed net income for that year to date plus retained net income for the preceding two calendar years. At June 30, 2013, the Company had liquid assets of $1,220,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For information regarding repurchase during the quarter ended June 30, 2013, see Note 10 of Notes to Consolidated Financial Statements (Unaudited)
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
The Bank has submitted an application to the Office of the Commissioner of Financial Regulation of the State of Maryland to convert from a federally chartered savings bank to a Maryland-chartered commercial bank. The Company expects to file shortly an application with the Board of Governors of the Federal Reserve System to become a bank holding company. The Company currently is a savings and loan holding company. The charter change and bank holding company formation will not have any significant financial or regulatory impact or affect the Company’s or the Bank’s current activities. Subject to receiving the required regulatory approvals, the charter change and bank holding company formation are expected to be completed in the fourth quarter of 2013.
Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
Exhibit 32.0 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
Exhibit 101 | Interactive Data File (XBRL) furnished herewith |
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FAIRMOUNT BANCORP, INC. | ||||||
/s/ Joseph M. Solomon | ||||||
Date: August 14, 2013 | Joseph M. Solomon | |||||
President and Chief Executive Officer | ||||||
/s/ Jodi L. Beal | ||||||
Date: August 14, 2013 | Jodi L. Beal | |||||
Vice President and Chief Financial Officer |
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