Madison Bancorp (MDSN) 10-Q 2011 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period endedDecember 31, 2010

OR

o 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:0-54081

MADISON BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	27-258073
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
9649 Belair Road, Suite 300, Baltimore, Maryland	21236
(Address of principal executive offices)	(Zip Code)

(410) 529-7400

(Registrant’s telephone number, including area code)

Not Applicable

(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. Yeso Noþ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yeso Noo

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of February 10, 2011, there were 608,116 shares of the registrant’s common stock outstanding.

MADISON BANCORP, INC.

Table of Contents

	Page
	No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of December 31, 2010 (unaudited) and March 31, 2010		2
Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2010 and 2009 (unaudited)		3
Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended December 31, 2010 (unaudited)		4
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and 2009 (unaudited)		5
Notes to Unaudited Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
Part II. Other Information
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3. Defaults Upon Senior Securities		24
Item 4.[Removed and Reserved]		24
Item 5. Other Information		24
Item 6. Exhibits		24
Signatures		25
EX-31.1
EX-32.0

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2010 and March 31, 2010

	December 31,			March 31,
	2010			2010
	(Unaudited)			(Audited)
Assets
Assets
Cash and cash equivalents	$	11,442,859		$	13,354,975
Certificates of deposit		1,448,715			956,972
Investment securities available-for-sale		48,038,395			33,480,669
Investment securities held-to-maturity		0			2,283,707
Federal Home Loan Bank stock, at cost		242,500			242,500
Loans receivable, net		86,619,908			90,336,475
Property and equipment, net		3,860,966			3,983,182
Ground rents, net		464,625			477,273
Other real estate owned		434,000			0
Accrued interest receivable		424,836			430,549
Deferred income taxes		117,630			5,828
Prepaid expenses and other assets		975,611			1,337,364
Total Assets	$	154,070,045		$	146,889,494
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing	$	6,178,379		$	5,267,672
Interest bearing		133,585,327			131,697,595
Total Deposits		139,763,706			136,965,267
Advances from borrowers for taxes and insurance		221,311			557,686
Other liabilities		265,572			303,514
Total Liabilities		140,250,589			137,826,467
Shareholders’ Equity
Common Stock, $.01 par value, 10,000,000 shares authorized. Issued: 608,116 shares at December 31, 2010 and 0 at March 31, 2010		6,081			0
Additional paid-in capital		5,335,052			0
Retained earnings		8,887,797			8,903,564
Unearned ESOP shares		(397,300	)		0
Accumulated other comprehensive income (loss)		(12,174	)		159,463
Total Shareholders’ Equity		13,819,456			9,063,027
Total Liabilities and Shareholders’ Equity	$	154,070,045		$	146,889,494

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

2

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended December, 2010 and 2009

	Three Months Ended					Nine Months Ended
	December 31					December 31
	2010		2009			2010			2009
Interest Revenue
Interest and fees on loans	$	1,251,278	$	1,296,674		$	3,814,392		$	3,844,980
Investment securities available-for-sale		230,231		228,305			665,370			649,429
Investment securities held-to-maturity		15,699		72,614			63,334			306,315
Interest-bearing deposits		14,185		14,633			41,306			34,097
Other		6,289		6,438			21,255			22,122
Total Interest Revenue		1,517,682		1,618,664			4,605,657			4,856,943
Interest Expense
Interest on deposits:
Time		525,558		683,402			1,658,317			2,242,214
Savings		14,670		21,318			43,301			83,539
NOW and money market demand accounts		8,769		12,898			31,449			39,863
Other interest expense		3		15			42			64
Total Interest Expense		549,000		717,633			1,733,109			2,365,680
Net Interest Income		968,682		901,031			2,872,548			2,491,263
Provision for Loan Losses		78,832		91,074			190,507			201,074
Net Interest Income after Provision for Loan Losses		889,850		809,957			2,682,041			2,290,189
Noninterest Revenue
Gain (Loss) on disposal of property		0		(185	)		0			(1,367	)
Gain on sale of investment securities		62,261		0			118,639			0
Other than temporary impairment of securities		0		(39,350	)		0			(193,407	)
Other		65,876		51,563			217,063			166,920
Total Noninterest Revenue		128,137		12,028			335,702			(27,854	)
Noninterest Expenses
Salaries and employee benefits		463,273		468,624			1,419,270			1,477,417
Occupancy & equipment expense		278,074		264,947			824,309			777,292
Advertising		2,731		3,118			6,277			9,473
Audit and accounting		37,581		19,388			104,571			60,223
FDIC premiums and OTS assessments		100,097		69,000			297,495			294,376
Data processing		44,246		53,264			142,332			150,487
Stationary and postage		16,623		21,387			54,044			64,917
Other operating expenses		73,801		43,691			185,212			162,383
Total Noninterest Expenses		1,016,426		943,419			3,033,510			2,996,568
Income (Loss) Before Income Taxes		1,561		(121,434	)		(15,767	)		(734,233	)
Income Tax Expense (Benefit)		0		0			0			0
Net Income (Loss)	$	1,561	$	(121,434	)	$	(15,767	)	$	(734,233	)
Basic earnings per common share	$	0.00		N/A		$	(0.03	)		N/A
Diluted earnings per common share		0.00		N/A			(0.03	)		N/A

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

3

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

Nine Months Ended December 31, 2010

											Accumulated
			Additional					Unearned			Other
	Common		Paid-in		Retained			ESOP			Comprehensive			Total
	Stock		Capital		Earnings			Shares			Income			Equity
Balance March 31, 2010	$	0	$	0	$	8,903,564		$	0		$	159,463		$	9,063,027
Comprehensive income:
Net (Loss)						(15,767	)								(15,767	)
Net unrealized gain on available for sale securities, net of tax effect of $(111,802)												(171,637	)		(171,637	)
Total comprehensive income															(187,404	)
Issuance of common stock		6,081		5,333,987											5,340,068
Acquisition of unearned ESOP shares									(425,680	)					(425,680	)
ESOP shares released for allocation				1,065					28,380						29,445
Balance December 31, 2010	$	6,081	$	5,335,052	$	8,887,797		$	(397,300	)	$	(12,174	)	$	13,819,456

4

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended December 31, 2010 and 2009

	December 31, 2010			December 31, 2009
Cash flows from Operating Activities
Net loss	$	(15,767	)	$	(734,233	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization (accretion) of investment securities		62,358			(156,636	)
Decrease in net deferred loan costs		(19,636	)		23,986
Provision for loan losses		190,507			201,074
Loss on sale of ground rents		6,548			0
(Gain) on sale of investment securities		(118,639	)		0
Other than temporary impairment charge		0			193,407
Loss on disposal of property and equipment		0			1,367
Depreciation and amortization		174,315			201,657
Changes in operating assets and liabilities:
Accrued interest receivable		5,713			15,750
Prepaid expenses and other assets		361,753			(883,411	)
Other liabilities		(37,942	)		(157,928	)
Net Cash provided by (used in) operating activities		609,210			(1,294,967	)
Cash flows from Investing Activities
Decrease (increase) in loans receivable, net		3,111,696			(936,710	)
(Increase) in investment certificates of deposit, net		(491,743	)		(953,715	)
Activity in held-to-maturity securities:
Sales		687,875			0
Maturities and repayments		430,089			636,484
Activity in available-for-sale securities:
Sales		5,381,794			0
Maturities, repayments and calls		16,763,090			15,160,602
Purchases		(36,160,260	)		(21,804,732	)
Purchase of property and equipment		(52,099	)		(133,780	)
Proceeds from sale of ground rents		6,100			15,750
Net cash (used in) investing activities		(10,323,458	)		(8,016,101	)
Cash flow from Financing Activities
Increase in deposits, net		2,798,439			8,242,693
(Decrease) in advances from borrowers, net		(336,375	)		(365,615	)
Net Proceeds from the issuance of common stock		5,340,068			0
Net cash provided by financing activities		7,802,132			7,877,078
(Decrease) in Cash and Cash Equivalents		(1,912,116	)		(1,433,990	)
Cash and Cash Equivalents, Beginning of Period		13,354,975			16,321,326
Cash and Cash Equivalents, End of Period	$	11,442,859		$	14,887,336
Supplemental disclosure of cash flow information:
Loans transferred to other real estate owned	$	434,000		$	0
Cash paid for interest on deposits	$	554,159		$	722,465

5

Note 1: Activities and Summary of Significant Accounting Policies

Madison Bancorp, Inc. (Company) was incorporated on May 20, 2010 to be the holding company for Madison Square Federal Savings Bank (Bank) in conjunction with the Bank’s plan of conversion from mutual to stock form of ownership. On October 6, 2010, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 608,116 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of $5,340,068, net of offering expenses of $741,091. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (ESOP) which subscribed for 7% of the sum of the number of shares, or 42,568 shares of common stock sold in the offering. Accordingly, the reported results for the three months and nine months ended December 31, 2010 relates to the consolidated holding company and the results for the three months and nine months ended December 31, 2009 related solely to the operations of the Bank. All material intercompany accounts and transaction have been eliminated in consolidation.

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

Madison Square Federal Savings Bank (the “Bank”) was incorporated in 1870 under the laws of the State of Maryland. The Bank is a federally chartered savings bank engaged in banking and related services primarily in the Baltimore Metropolitan area. Significant accounting policies followed by the Bank are presented below.

The foregoing consolidated financial statements are unaudited; however, in the opinion of management we have included all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim period. We derived the balances as of March 31, 2010 from audited financial statements. These statements should be read in conjunction with Madison Bancorp’s financial statements and accompanying notes included in Madison Bancorp’s Registration Statement on Form S-1, as amended, with the US Securities and Exchange Commission which was declared effective August 12, 2010. We have made no significant changes to Madison Bancorp’s accounting policies as disclosed in the Form S-1.

Principles of consolidation: The consolidated financial statements include the accounts of the Company and the Bank and its subsidiary, Madison Financial Services Corporation (MFSC). MFSC is engaged in the business of insurance brokerage services primarily in the Baltimore Metropolitan area. All significant accounts and intercompany transactions have been eliminated.

Reclassification— Certain amounts in prior period’s financial statements have been reclassified to conform to the current period’s presentation. The reclassifications had no effect on the Company’s financial condition or results of operations.

Subsequent Events —We evaluated subsequent events after December 31, 2010 through February 10, 2011, the date this report was available to be issued.

6

Note 2: Supplemental Disclosure for Earnings per Share

When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Because the mutual to stock conversion was not completed until October 6, 2010, per share earnings data is not meaningful for prior comparative periods and therefore is not presented. The end of period shares outstanding is being used for the earnings per share calculation assuming for calculation purposes that the shares were outstanding for the entire period and not since the issue date of October 6, 2010.

	Three Months ended,		Nine Months ended,
	December 31, 2010		December 31, 2010
Net Income (loss)	$	1,561	$	(15,767	)
Average common shares outstanding		568,430		568,430
Earnings per common share, basic	$	0.00	$	(0.03	)

7

Note 3: Investment Securities

On December 31, 2010, the company reclassified the entire held-to-maturity portfolio to available-for-sale. The amortized cost and estimated fair value of investment securities at December 31 and March 31, 2010 are summarized as follows:

			Gross		Gross
			Unrealized		Unrealized		Estimated
	Amortized Cost		Gains		Losses		Fair Value
	December 31, 2010
Investment securities available-for-sale:
U.S. government agencies	$	9,976,042	$	2,279	$	65,079	$	9,913,242
Brokered certificates of deposit		4,534,261		2,360		20,167		4,516,454
Mortgage-backed securities (Agency)		30,269,562		424,876		356,078		30,338,360
Collateralized mortgage obligations (Agency)		2,802,486		31,360		5,503		2,828,343
Collateralized mortgage obligations (Nonagency)		476,147		47,149		81,300		441,996
	$	48,058,498	$	508,024	$	528,127	$	48,038,395

			Gross		Gross
			Unrealized		Unrealized		Estimated
	Amortized Cost		Gains		Losses		Fair Value
	March 31, 2010
Investment securities available-for-sale:
U.S. government agencies	$	4,499,222	$	15,793	$	1,150	$	4,513,865
Brokered certificates of deposit		2,670,928		0		6,425		2,664,503
Mortgage-backed securities (Agency)		26,010,952		341,079		49,730		26,302,301
	$	33,181,102	$	356,872	$	57,305	$	33,480,669
Investment securities held-to-maturity:
Mortgage-backed securities (Agency)	$	1,177,893	$	34,377	$	6,606	$	1,205,664
Mortgage-backed securities (Nonagency)		1,105,814		86,774		174,963		1,017,625
	$	2,283,707	$	121,151	$	181,569	$	2,223,289

8

Note 3: Investment Securities (Continued)

The following is a summary of maturities of securities available-for-sale as of December 31, 2010:

	Available-for-sale
	Amortized
	Cost		Fair Value
Amounts maturing in:
One year or less	$	731,261	$	731,895
After one year through five years		8,804,811		8,764,225
After five years through ten years		1,080,581		1,080,756
After ten years		3,893,650		3,852,820
		14,510,303		14,429,696
Mortgage-backed securities (Agency)		30,269,562		30,338,360
Collateralized mortgage obligations (Agency)		2,802,486		2,828,343
Collateralized mortgage obligations (Nonagency)		476,147		441,996
	$	48,058,498	$	48,038,395

Proceeds from sales of investment securities were $6.1 million and $0 during the nine months ended December 30, 2010 and 2009, respectively. During the three month period ended December 31, 2010, we transferred securities with a fair market value of $1.2 million and book value of $1.2 million from the held-to-maturity classification to the available-for-sale classification. The unrealized loss of $10,000 was recorded in accumulated other comprehensive income at the time of the transfer.

9

Note 4: Loans Receivable

Loans receivable consist of the following at December 31, 2010 and March 31, 2010, respectively:

	December 31,			March 31,
	2010			2010
Loans secured by mortgages:
Residential
1-4 Single family	$	57,060,172		$	62,875,698
Multifamily		1,686,019			1,736,945
Commercial		11,716,469			11,597,811
Land		5,783,793			4,849,495
Lines of credit		1,673,656			1,407,436
Residential construction		3,564,183			2,395,528
		81,484,292			84,862,913
Consumer		877,165			1,203,106
Commercial		4,753,283			4,755,553
Total loans receivable		87,114,740			90,821,572
Net deferred costs		100,268			119,903
Allowance for loan losses		(595,100	)		(605,000	)
Loans receivable, net	$	86,619,908		$	90,336,475

Note 5: Allowance for Loan Losses

The activity in the allowance for loan losses and information regarding nonaccrual loans is as follows:

	Nine Months						Nine Months
	Ended						Ended
	December 31,			Year Ended			December 31,
	2010			March 31, 2010			2009
Balance — Beginning of Period	$	605,000		$	379,500		$	379,500
Provision for loan losses		190,507			242,074			201,074
Recoveries:
Residential1-4 Single family		1,641			0			0
Charge Offs:
Residential1-4 Single family		(28,232	)		(16,574	)		(16,574	)
Residential construction		(173,816	)
Balance — End of Period	$	595,100		$	605,000		$	564,000

	December 31,			March 31,
	2010			2010
Nonaccrual loans:
Residential1-4 Single family	$	269,181		$	72,297
Residential construction		0			607,815
Allowance for loan losses as percentage of nonaccrual loans		221.08	%		88.96	%
Foregone interest on nonaccrual loans	$	15,087		$	22,705

10

Note 6: Fair Value Measurements

Accounting guidance defines fair value to be 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. These standards have also established a three-level hierarchy for fair value measurements based upon the inputs to the valuation of an asset or liability.

• Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

• Level 2 — Valuation is determined from quoted prices for similar assets or 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.

• Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Bank’s own estimates about the assumptions that market participants would use to value the asset or liability.

Investment securities available-for-sale are the only financial assets measured at fair value on a recurring basis. As of December 31, 2010 and March 31, 2010, the fair values were measured using the following methodologies:

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale	$	11,335,920	$	36,099,528	$	602,947	$	48,038,395

	March 31, 2010
	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale	$	956,772	$	32,520,274	$	3,623	$	33,480,669

As of March 31, 2010, the Bank owned a mortgage backed agency security measured using a Level 3 methodology. During the quarter ended December 31, 2010, the Bank purchased a U.S. government security measured using a Level 3 methodology. The change in the unrealized gain on the security was recorded in comprehensive income. It was not recorded in the net loss for the year.

The Bank measures its other real estate owned, on a nonrecurring basis, at fair value less cost to sell. As of December 31, 2010, the fair value of other real estate owned was based on offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The Bank has categorized its foreclosed real estate as level three. The Bank does not measure the fair value of its other financial assets or liabilities on a recurring or nonrecurring basis.

11

Note 6: Fair Value Measurements (Continued)

The estimated fair values of financial instruments at December 31, 2010 and March 31, 2010 are as follows:

	December 31, 2010				March 31, 2010
	(in thousands)				(in thousands)
	Book		Fair		Book		Fair
	Value		Value		Value		Value
Assets:
Cash and cash equivalents	$	11,443	$	11,443	$	13,355	$	13,355
Certificates of deposit		1,449		1,449		957		957
Investment securities		48,038		48,038		35,764		35,704
Loans, net		86,620		86,698		90,336		90,249
Total financial assets	$	147,550	$	147,628	$	140,412	$	140,265

	December 31, 2010				March 31, 2010
	(in thousands)				(in thousands)
	Book		Fair		Book		Fair
	Value		Value		Value		Value
Liabilities:
Deposits	$	139,764	$	141,604	$	136,965	$	140,111
Advanced payments by borrowers for taxes and insurance		221		221		558		558
Total financial liabilities	$	139,985	$	141,825	$	137,523	$	140,669

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of December 31, 2010 and March 31, 2010:

Cash and cash equivalents: The amounts reported at cost approximate the fair value of these assets.

Investment securities held-to-maturity: The fair values are based on the quoted market values or values of securities with similar rates and terms. The fair values are provided to the Bank by a third party.

Loans, net: We estimate the fair value of loans by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories.

Deposits: The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposits using the rates currently offered for deposits of similar remaining maturities.

Note 7: Accounting Standards Updates

Accounting Standards Updates (ASU) No. 2009-16, “Transfers and Servicing (Topic- 860)-Accounting for Transfers of Financial Assets” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvement with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on our consolidated results of operations or financial position.

12

ASU No. 2009-17, “Consolidations (Topic 810)-Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” amends prior guidance to change how a company determines when an entity that is sufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. As further discussed below, ASU No. 2010-10, “Consolidations (Topic 810),” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and they did not have a material impact on our consolidated results of operations or financial position.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures About Fair Value Measurements” requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between the levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) companies should provide fair value measurement disclosures for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. ASU No. 2010-06 requires the disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective on January 1, 2010.

ASU No. 2010-10, “Consolidations (Topic 810)-Amendments for Certain Investment Funds” defers the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a company’s interest in an entity (i) that has all of the attributes of an investment company, as specified under ASC Topic 946, “Financial Services-Investment Companies,” or (ii) for which it is industry practice to apply measurement principles of financial reporting that are consistent with those in ASC Topic 946. As a result of the deferral, companies are not required to apply the ASU 2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest held by a related party should be treated as though it is an entity’s own interest when evaluating the criteria for determining whether such interest represents a variable interest.

ASU 2010-10 also clarifies that companies should not use a quantitative calculation as the sole basis for evaluating whether a decision maker’s or service provider’s fee is variable interest. The provisions of ASU 2010-10 became effective as of January 1, 2010 and did not have a material impact on our consolidated results of operations or financial position.

ASU No. 2010-11, “Derivatives and Hedging (Topic 815)-Scope Exception Related to Embedded Credit Derivatives” clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirement are those that relate to the subordination of one financial instrument to another. Entities that have contracts containing an embedded credit derivative feature in a form other than subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 became effective on July 1, 2010. This standard did not have a material impact on our consolidated results of operations or financial position.

13

ASU No. 2010-20, “Receivables (Topic 310)-Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systemic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a carry forward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans, and credit quality indicators. ASU 2010-20 will become effective for financial statements as of December 31, 2010 as it relates to disclosures required as of the end of the reporting period. Disclosures that relate to activity during a reporting period will be required for financial statements that include periods beginning on January 1, 2011.

Note 8: Commitment and Financial Instruments with Off-Balance-Sheet Credit Risk

In the normal course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Mortgage loan commitments generally have fixed interest rates, fixed expiration dates, and may require payment of a fee. Other loan commitments generally have fixed interest rates. Commitments to purchase loans do not represent future cash requirements, as it is unlikely all loans will be closed prior to the expiration of the commitment. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party.

The Bank’s maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss to be incurred by funding these loan commitments.

At December 31, 2010 the Bank had outstanding firm commitments to originate or purchase loans as follows:

Mortgage loans commitments —fixed rate	$	2,397,000
Mortgage loans commitments —variable rate		3,153,000
Commitments to originate nonmortgage loans		98,000
Commitments to purchase loans		737,000
Unused equity lines of credit (variable rate)		1,744,000
Commercial and consumer lines of credit		814,000
Standby letters of credit		473,000
Total	$	9,416,000

As of December 31, 2010 the Bank had a commitment to sell a loan in the amount of $450,000.

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

Safe Harbor Statement for 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 Bank’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed beginning on page 13 of the Company’s prospectus dated August 12, 2010 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

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses.The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Fair Value of Investments.Securities are characterized as available-for-sale or held-to-maturity based on management’s ability and intent regarding such investment at acquisition. On an ongoing basis, management must estimate the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered an other-than-temporary impairment and recorded in non-interest revenue as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience.

15

Comparison of Financial Condition at December 31, 2010 and March 31, 2010

Assets.Total assets increased from $146.9 million at March 31, 2010 to $154.1 million at December 31, 2010. The increase was primarily due to an increase in investment securities available-for-sale, which were partially offset by decreases in cash and cash equivalents, loans receivable and investment securities held-to-maturity which were transferred to investments available-for-sale at the end of the period.

Loans.Net loans receivable decreased by $3.7 million, or 4.1%, from $90.3 million at March 31, 2010 to $86.6 million at December 31, 2010, primarily as a result of the net effect of a $5.8 million decrease in residential mortgage loans, a $119,000 increase in commercial real estate loans, a $934,000 increase in land loans, a $1.2 million increase in residential construction loans, a $326,000 decrease in consumer loans, a $2,000 decrease in commercial loans and a $266,000 increase in home equity lines of credit. The decrease in residential mortgage loans was primarily a result of borrowers refinancing loans elsewhere and normal principal reductions.

Cash and Cash Equivalents.Cash and cash equivalents decreased by $1.9 million, or 14.3%, from $13.4 million at March 31, 2010 to $11.4 million at December 31, 2010, as excess liquidity was invested in investment securities.

Securities.Our available-for-sale securities increased by $14.6 million, or 43.5%, from $33.5 million at March 31, 2010 to $48.0 million at December 31, 2010. The increase in available-for-sale securities is the result of purchases of $36.2 million of U.S. Agency mortgage backed securities and collateralized mortgage obligations and brokered certificates of deposits which were partially funded by the proceeds from the conversion, and the redeploying of available cash and cash equivalents. We also transferred the remaining securities in the held-to-maturity portfolio to the available-for-sale portfolio. The increase in available-for-sale securities were partially offset by $16.8 million of securities being called, having matured, or repayments and $5.4 million of sales of selected securities. Before the transfer to the available-for-sale portfolio, our held-to-maturity securities decreased by $1.1 million, or 49.0%, to $1.2 million at December 31, 2010 from $2.3 million at March 31, 2010. The decrease in the held-to-maturity securities reflects repayments on mortgage-backed securities of $430,000 and the sales of certain downgraded securities of $688,000. Proceeds from the sale of available-for-sale securities and held-to-maturity securities were $5.4 million and $688,000 during the nine months ended December 31, 2010, resulting in gross gains of $148,000 and gross losses of $30,000, respectively. At December 31, 2010, we also held a $243,000 investment in the common stock of the Federal Home Loan Bank of Atlanta.

Ground Rent.Our balance in ground rents decreased by $13,000 from $477,000 at March 31, 2010 to $464,000 at December 31, 2010.

Deposits.Total deposits increased by $2.8 million to $139.8 million at December 31, 2010 from $137.0 million at March 31, 2010. Balances of noninterest-bearing deposits increased to $6.2 million at December 31, 2010 from $5.3 million at March 31, 2010. Interest-bearing deposits increased by $1.9 million to $133.6 million at December 31, 2010 compared to $131.7 million at March 31, 2010. The majority of the increase was in certificates of deposits which increased by $1.9 million from $101.1 at March 31, 2010 to $103.0 at December 31, 2010.

Borrowings.We had no borrowings at December 31, 2010 or March 31, 2010.

Results of Operations for the Three Months Ended December 31, 2010 and 2009

Overview.Our net income was $2,000 for the three months ended December 31, 2010, compared to a net loss of $121,000 for the three months ended December 31, 2009. The net income for the 2010 quarter included improvements in many categories including an increase in net interest income and gains on sales of available-for-sale securities.

Net Interest Income.Net interest income increased to $969,000 for the three months ended December 31, 2010 as compared to $901,000 for the three months ended December 31, 2009, due to a decrease in the cost of funds for deposits, partially offset by a decrease in balances and yield on earning assets. Our interest rate spread was 2.46% for the three months ended December 31, 2010 compared to 2.38% for the three months ended December 31, 2009 and our net interest margin increased to 2.61% for the three months ended December 31, 2010 from 2.51% for the three months ended December 31, 2019.

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Interest on loans decreased by $45,000. The average balance of loans decreased by $2.0 million to $88.2 million for the three months ended December 31, 2010 from $90.2 million for the three months ended December 31, 2009. The average yield on loans decreased to 5.63% for the three months ended December 31, 2010 from 5.70% for the three months ended December 31, 2009.

Interest on securities available-for-sale increased by $2,000 for the three months ended December 31, 2010 as compared to the three months ended December 31, 2009, caused by a 93 basis point decrease in the average yield offset by an $11.6 million increase in the average balance of investment securities available-for-sale. On December 31, 2010 the entire held-to-maturity investment portfolio of $1.2 million was transferred to available-for-sale. Interest on securities held-to-maturity was $16,000 for the three months ended December 31, 2010 as compared to $73,000 for the three months ended December 31, 2009, due to a $1.4 million decrease in the average balance.

Interest on interest-bearing due from banks was $14,000 for the three months ended December 31, 2010 as compared to $15,000 for the three months ended December 31, 2009, as a result of a $3.3 million decrease in average balances offset by a slight increase in the average yield.

Interest on total deposits decreased to $549,000 for the three months ended December 31, 2010 from $718,000 for the three months ended December 31, 2009, as a 51 basis point decrease in the average cost of interest-bearing deposits offset a $627,000 increase in the average balance of interest-bearing deposits. Interest on certificates of deposits decreased $158,000 to $526,000 for the three months ended December 31, 2010 as a result of the decrease in average cost of deposits offset by an increase in balances of $1.3 million. Interest on savings deposits decreased $7,000 to $15,000 for the three months ended December 31, 2010 as a result of the decrease in average cost of deposits offset by an increase in balances of $92,000. Interest on NOW and money market deposit accounts decreased by $4,000 to $9,000 for the three months ended December 31, 2010 due to a decrease in the average cost of the deposits and a decrease in balances of $797,000.

Average Balance and Yields. The following table for the three months ended December 31, 2010 presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Amortization of net deferred loan fees is included in interest income on loans and is insignificant. Non-accruing loans have been included in the table as loans carrying a zero yield. No tax equivalent adjustments were made.

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	Three Months Ended
	December 31
	2010							2009
			Interest							Interest
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Cost			Balance		Dividends		Cost
Assets:
Interest-bearing due from banks	$	17,102,278	$	14,185		0.33	%	$	20,425,202	$	14,633		0.28	%
Investment securities available-for-sale		39,626,202		230,231		2.31	%		28,033,544		228,305		3.23	%
Investment securities held-to-maturity		1,458,393		15,699		4.27	%		2,854,799		72,614		10.09	%
Loans receivable, net		88,189,793		1,251,278		5.63	%		90,187,568		1,296,674		5.70	%
Other interest-earning assets		712,715		6,289		3.50	%		724,852		6,438		3.52	%
Total interest-earning assets		147,089,381	$	1,517,682		4.09	%		142,225,965	$	1,618,664		4.52	%
Non-interest-earning assets		8,934,506							6,036,610
Total assets	$	156,023,887						$	148,262,575
Liabilities and shareholders’ equity:
Time deposits	$	103,389,085	$	525,558		2.02	%	$	102,057,270	$	683,402		2.66	%
Savings		22,829,955		14,670		0.25	%		22,737,880		21,318		0.37	%
NOW and money market accounts		7,277,376		8,769		0.48	%		8,074,483		12,898		0.63	%
Total interest-bearing deposits		133,496,416		548,997		1.63	%		132,869,633		717,618		2.14	%
Other interest-bearing liabilities		391,361		3		0.00	%		373,040		15		0.02	%
Total interest-bearing liabilities		133,887,777		549,000		1.63	%		133,242,673		717,633		2.14	%
Non-interest-bearing deposits		6,987,958							5,233,464
Other non-interest-bearing liabilities		504,825							469,478
Total liabilities		141,380,560							138,945,615
Total shareholders’ equity		14,643,327							9,316,960
Total liabilities and shareholders’ equity	$	156,023,887						$	148,262,575
Net interest income			$	968,682						$	901,031
Interest rate spread						2.46	%						2.38	%
Net interest margin						2.61	%						2.51	%
Average interest-earning assets to average interest-bearing liabilities						109.86	%						106.74	%

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Provision for Loan Losses.Our provision for loan losses decreased from $91,000 for the three months ended December 31, 2009 to $79,000 for the three months ended December 31, 2010. At December 31, 2010, the allowance for loan losses was $595,000, or 0.68% of the total end of period loan portfolio, compared to $605,000, or 0.67% of the total end of period loan portfolio, at March 31, 2010. Nonaccrual loans amounted to $269,000, of primarily 1-4 family residential mortgages at December 31, 2010 and $680,000 of primarily residential construction at March 31, 2010.

Noninterest Revenue.Noninterest revenue increased for the three months ended December 31, 2010 to $128,000 as compared to $12,000 for the three months ended December 31, 2009. The increase during the 2010 period was primarily due to the gain on sale of certain non-agency and available-for-sale securities of $62,000 and increased fee income from the sale of non-deposit products. In addition, the results for the three months ended December 31, 2009 included a loss on other than temporary impairment of $39,000.

Noninterest Expenses.Noninterest expense increased by $73,000 or 7.7% from $943,000 for the three months ended December 31, 2009 to $1.0 million for the three months ended December 31, 2010, primarily due to increases in occupancy and equipment expenses, audit and accounting expenses, and FDIC premiums, which were partially offset by decreases in compensation expense, data processing expenses, and stationary and postage.

Income Tax Expense.For the three months ended December 31, 2010, and 2009 we incurred no income tax expense.

Results of Operations for the Nine Months Ended December 31, 2010 and 2009

Overview.Our net loss was $16,000 for the nine months ended December 31, 2010, compared to a net loss of $734,000 for the nine months ended December 31, 2009. The net loss for the 2010 year to date period included improvements in many categories but primarily from increases in net interest income, gains on sales of securities available-for sale and increase in other noninterest income.

Net Interest Income.Our net interest income benefited from falling interest rates during the nine months ended December 31, 2010. Net interest income increased to $2.9 million for the nine months ended December 31, 2010 as compared to $2.5 million for the nine months ended December 31, 2009. The increase in net interest income is primarily attributable to a 33 basis point increase in our interest rate spread from 2.19% for the nine months ended December 31, 2009 to 2.52% for the nine months ended December 31, 2010, as we continued to take advantage of decreasing market interest rates to reduce our cost of funds while limiting the decrease in yields earned on our assets. Also contributing to the increase in net interest income was a $4.1 million increase in the average balance of interest-earning assets from deploying the proceeds of our conversion.

Interest on loans decreased by $31,000, primarily due to a decrease in the average balance of loans, and due to a slight decrease in the average yield. The average balance of loans decreased by $153,000 to $89.3 million for the nine months ended December 31, 2010 from $89.4 million for the nine months ended December 31, 2009. The average yield on loans decreased to 5.67% for the nine months ended December 31, 2010 from 5.71% for the nine months ended December 31, 2009.

Interest on securities available-for-sale increased by $16,000 for the nine months ended December 31, 2010 as compared to the nine months ended December 31, 2009, caused by a $7.4 million increase in the average balance of investment securities available-for-sale offset by a 61 basis point decrease in the average yield. On December 31, 2010 the entire held-to-maturity investment portfolio of $1.2 million was transferred to available-for-sale. Interest on securities held-to-maturity was $63,000 for the nine months ended December 31, 2010 as compared to $306,000 for the nine months ended December 31, 2009 due to the recognition of approximately $150,000 of discount accretion on our investment securities held-to-maturity during the nine months ended December 31, 2009. We did not accrete the discount on the securities received in the redemption in kind for several months of 2009 as we evaluated the portfolio. The decreased yield during the nine months ended December 31, 2010 was related to slower accretion of the discount related to these securities.

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Interest on interest-bearing due from banks was $41,000 for the nine months ended December 31, 2010 as compared to $34,000 for the nine months ended December 31, 2009, as a result of an increase in average balances of investment certificates of deposits of $380,000 offset by a decreases in the average balance of other interest-bearing due from banks and a slight increase in the average yield.

Interest on total deposits decreased by $633,000 from $2.4 million for the nine months ended December 31, 2009 to $1.7 million for the nine months ended December 31, 2010 as a 71 basis point decrease in the average cost of interest-bearing deposits more than offset the $4.2 million increase in the average balance of interest-bearing deposits. Interest on certificates of deposits decreased $584,000 to $1.7 million for the nine months ended December 31, 2010 as a result of the decrease in average cost of certificates of deposits offset by an increase in average balances of $3.4 million. Interest on savings deposits decreased $40,000 to $43,000 for the three months ended December 31, 2010 as a result of an increase in average balances of $1.1 million offset by a decrease in cost of savings deposits of 25 basis points. Interest on NOW and money market accounts decreased by $8,000 to $31,000 for the nine months ended December 31, 2010 due to a decrease in the average cost of the deposits and a decrease in average balance of $317,000.

Average Balance and Yields. The following table for the nine months ended December 31, 2010 and 2009 presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Amortization of net deferred loan fees is included in interest income on loans and is insignificant. Non-accruing loans have been included in the table as loans carrying a zero yield. No tax equivalent adjustments were made.

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	Nine Months Ended
	December 31
	2010							2009
			Interest							Interest
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Cost			Balance		Dividends		Cost
Assets:
Interest-bearing balances due from banks	$	17,623,415	$	41,306		0.31	%	$	19,546,250	$	34,097		0.23	%
Investment securities available-for-sale		34,672,885		665,370		2.55	%		27,297,341		649,429		3.16	%
Investment securities held-to-maturity		1,802,920		63,334		4.66	%		2,958,639		306,315		13.74	%
Loans receivable, net		89,271,062		3,814,392		5.67	%		89,423,671		3,844,980		5.71	%
Other interest-earning assets		716,805		21,255		3.94	%		731,216		22,122		4.02	%
Total interest-earning assets		144,087,087	$	4,605,657		4.24	%		139,957,117	$	4,856,943		4.61	%
Non-interest-earning assets		7,103,855							4,810,827
Total assets	$	151,190,942						$	144,767,944
Liabilities and shareholders’ equity:
Time deposits	$	102,851,672	$	1,658,317		2.14	%	$	99,495,982	$	2,242,214		2.99	%
Savings		23,209,295		43,301		0.25	%		22,091,257		83,539		0.50	%
NOW and money market accounts		7,551,915		31,449		0.55	%		7,868,993		39,863		0.67	%
Total interest-bearing deposits		133,612,882		1,733,067		1.72	%		129,456,232		2,365,616		2.43	%
Other interest-bearing liabilities		473,608		42		0.01	%		453,309		64		0.02	%
Total interest-bearing liabilities		134,086,490		1,733,109		1.72	%		129,909,541		2,365,680		2.42	%
Non-interest-bearing deposits		5,982,406							4,941,600
Other non-interest-bearing liabilities		456,261							485,675
Total liabilities		140,525,157							135,336,816
Total shareholders’ equity		10,665,785							9,431,128
Total liabilities and shareholders’ equity	$	151,190,942						$	144,767,944
Net interest income			$	2,872,548						$	2,491,263
Interest rate spread						2.52	%						2.19	%
Net interest margin						2.65	%						2.36	%
Average interest-earning assets to average interest-bearing liabilities						107.46	%						107.73	%

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Provision for Loan Losses.Our provision for loan losses decreased from $201,000 for the nine months ended December 31, 2009 to $191,000 for the nine months ended December 31, 2010. At December 31, 2010, the allowance for loan losses was $595,000, or 0.68% of the total end of period loan portfolio, compared to $605,000, or 0.67% of the total end of period loan portfolio, at March 31, 2010. Nonaccrual loans amounted to $269,000, of primarily 1-4 family residential mortgages at December 31, 2010 and $680,000 of primarily residential construction at March 31, 2010. There was one loan transferred to other real estate owned (OREO) in the nine months ended December 31, 2010 in the amount of $434,000 after a charge off of $174,000. The loan was classified as nonaccrual with a specific reserve at March 31, 2010. There was a recovery of $2,000 during the nine months ended December 31, 2010.

Noninterest Revenue.Noninterest revenue increased for the nine months ended December 31, 2010 to $336,000 as compared to a loss of $28,000 for the nine months ended December 31, 2009. The increase during the 2010 period was primarily due to the gain on sale of certain non-agency available-for-sale securities and increased fee income from the sale of non-deposit products. In addition, the results for the nine months ended December 31, 2009 included an other than temporary impairment charge of $193,000.

Noninterest Expenses.Noninterest expenses increased by $37,000 from $3.0 million for the nine months ended December 31, 2009 to $3.0 million for the nine months ended December 31, 2010, primarily due to increases in occupancy expense, audit, and accounting expenses and other operation expenses partially offset by reductions in compensation expense, and stationary and postage expense.

Income Tax Expense.For the nine months ended December 31, 2010 and 2009 we incurred no income tax expense.

Liquidity and Capital Resources

Liquidity Management.Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. 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.

We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At December 31, 2010, cash and cash equivalents totaled $11.4 million. Securities classified as available-for-sale, amounted to $48.0 million after the Company transferred the total portfolio of the held-to-maturity securities of $1.2 million to the available-for-sale portfolio at December 31, 2010. The interest-bearing deposits in banks of $1.4 million at December 31, 2010, provide additional sources of liquidity. Our liquidity has increased as customers have sought the safety of FDIC insured deposits. In addition, at December 31, 2010, we had the ability to borrow a total of approximately $30.7 million from the Federal Home Loan Bank of Atlanta. At December 31, 2010, we had no Federal Home Loan Bank advances outstanding.

At December 31, 2010 we had $9.4 million in commitments to extend credit outstanding. Certificates of deposit due within one year of December 31, 2010 totaled $45.8 million, or 44.4% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2011. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activity is the origination of deposit accounts. Deposit flows are affected by the overall level of interest rates, the interest rates and product offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

Capital Management.We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2010, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

The capital from our stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations were enhanced by the capital from the offering, resulting in increased net interest-earning assets and revenue. However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our return on equity. Following the offering, we may use capital management tools such as cash dividends and common share repurchases. However, under Office of Thrift Supervision regulations, we will not be allowed to repurchase any shares during the first year following the offering, except to fund the restricted stock awards under the equity benefit plan after its approval by shareholders, unless extraordinary circumstances exist, and we receive regulatory approval.

Off-Balance Sheet Arrangements.In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, and letters of credit. For information about our loan commitments, unused lines of credit, and letters of credit, see note 8 of the notes to unaudited consolidated financial statements set forth above in Item 1.

For the three months ended December 31, 2010, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

This item is not applicable as the Company is a smaller reporting company.

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 Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 12, 2010. As of December 31, 2010, the risk factors of the Company have not changed materially from those disclosed in the prospectus.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. [Removed and Reserved]

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits

3.1	Articles of Incorporation of Madison Bancorp, Inc. (1)
3.2	Bylaws of Madison Bancorp, Inc. (2)
4.0	Form of Stock Certificate of Madison Bancorp, Inc. (3)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer
32.0	Section 1350 Certification

(1)	Incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the Securities and Exchange Commission on June 11, 2010.
(2)	Incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the Securities and Exchange Commission on June 11, 2010.
(3)	Incorporated herein by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1 (File No. 333-167455), as amended, initially filed with the Securities and Exchange Commission on June 11, 2010.

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SIGNATURES

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

	MADISON BANCORP, INC.
Dated: February 10, 2011	By:	/s/ Michael P. Gavin
		Michael P. Gavin
		President and Chief Executive Officer (principal executive)
		/s/ Paul A. Lovelace
		Paul A. Lovelace
		Senior Vice President and Chief Financial Officer (principal financial and accounting officer)

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