Madison Bancorp (MDSN) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 endedDecember 31, 2012

OR

¨ 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)
8615 Ridgely’s Choice Drive, Suite 111, 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. Yesx No¨

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). Yesx 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 definition 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  ¨	Smaller reporting companyx
(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).

Yes¨ Nox

As of February 8, 2013, 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
	Consolidated Statements of Financial Condition as of December 31, 2012 (unaudited) and March 31, 2012 (audited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2012 and 2011 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2012 and 2011 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended December 31, 2012 and 2011 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2012 and 2011 (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Part II. Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Signatures		36

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2012 and March 31, 2012

	December 31, 2012			March 31, 2012
	(Unaudited)			(Audited)
Assets
Cash and cash equivalents	$	6,369,611		$	10,735,213
Certificates of deposit		497,847			737,975
Investment securities available-for-sale		57,417,586			53,389,337
Federal Home Loan Bank stock, at cost		228,400			234,500
Loans receivable, net		82,561,167			84,986,411
Premises and equipment, net		3,588,559			3,753,712
Ground rents, net		0			290,000
Foreclosed real estate		57,000			0
Accrued interest receivable		379,940			428,042
Prepaid expenses and other assets		599,990			689,937
Total Assets	$	151,700,100		$	155,245,127
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing	$	5,728,897		$	6,582,554
Interest bearing		130,874,014			133,598,673
Total Deposits		136,602,911			140,181,227
Advances from borrowers for taxes and insurance		322,335			542,598
Deferred income taxes		64,708			105,065
Other liabilities		369,325			261,519
Total Liabilities		137,359,279			141,090,409
Shareholders’ Equity
Common Stock, $.01 par value, 10,000,000 shares authorized. Issued: 608,116 shares at December 31, 2012 and March 31, 2012		6,081			6,081
Additional paid-in capital		5,358,840			5,345,251
Retained earnings		9,042,449			8,835,984
Unearned ESOP shares		(334,296	)		(362,300	)
Accumulated other comprehensive income		267,747			329,702
Total Shareholders’ Equity		14,340,821			14,154,718
Total Liabilities and Shareholders’ Equity	$	151,700,100		$	155,245,127

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

3

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended December 31, 2012 and 2011

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
Interest Revenue
Loans, including fees	$	1,071,782	$	1,170,312	$	3,310,257	$	3,561,320
Investment securities available-for-sale		180,877		256,922		605,574		786,727
Interest-bearing deposits		5,261		5,144		17,374		19,760
Other		1,399		5,283		5,239		21,050
Total Interest Revenue		1,259,319		1,437,661		3,938,444		4,388,857
Interest Expense
Interest on deposits:
Time		370,692		476,468		1,195,430		1,467,424
Savings		9,243		11,167		27,299		36,526
NOW and Money Market		5,643		8,116		17,235		25,303
Borrowings		0		0		15		0
Total Interest Expense		385,578		495,751		1,239,979		1,529,253
Net Interest Income		873,741		941,910		2,698,465		2,859,604
Provision for Loan Losses		61,000		90,000		230,000		211,099
Net Interest Income after Provision for Loan Losses		812,741		851,910		2,468,465		2,648,505
Noninterest Revenue
Gain on sale of investment securities		126,269		53,990		286,115		92,465
Gain on sale of land		0		0		71,144		0
Other		48,038		44,042		141,468		132,847
Total Noninterest Revenue		174,307		98,032		498,727		225,312
Noninterest Expenses
Salaries and employee benefits		485,028		508,154		1,485,864		1,525,009
Occupancy and equipment expense		210,370		212,708		625,806		664,551
Advertising		3,447		2,413		7,102		9,328
Professional services		50,727		38,668		143,641		129,463
FDIC premiums and regulatory assessments		43,050		45,000		133,050		149,174
Data processing		50,751		51,888		156,772		158,024
Stationery and postage		15,865		16,408		50,125		59,093
Other operating expenses		55,569		56,683		158,367		157,671
Total Noninterest Expense		914,807		931,922		2,760,727		2,852,313
Income Before Income Taxes		72,241		18,020		206,465		21,504
Income Tax Expense		0		0		0		0
Net Income	$	72,241	$	18,020	$	206,465	$	21,504
Income per common share - basic	$	0.13	$	0.03	$	0.36	$	0.04
Income per common share - diluted	$	0.13	$	0.03	$	0.36	$	0.04

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

4

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Nine Months Ended December 31, 2012 and 2011

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
Net income	$	72,241		$	18,020		$	206,465		$	21,504
Other comprehensive income (loss):
Securities available-for-sale:
Net unrealized gain / (loss) during the period		(327,060	)		(52,304	)		183,803			873,739
Reclassification adjustment for (gains) / losses in net income		(126,269	)		(53,990	)		(286,115	)		(92,465	)
		(453,329	)		(106,294	)		(102,312	)		781,274
Deferred tax expense (benefit):
Securities available-for-sale:
Net unrealized gain / (loss) during the period		(129,009	)		(20,631	)		72,501			344,647
Reclassification adjustment for (gains) / losses in net income		(49,807	)		(21,297	)		(112,858	)		(36,473	)
		(178,816	)		(41,928	)		(40,357	)		308,174
Other comprehensive income (loss), net of tax		(274,513	)		(64,366	)		(61,955	)		473,100
Comprehensive income (loss)	$	(202,272	)	$	(46,346	)	$	144,510		$	494,604

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

5

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine Months Ended December 31, 2012 and 2011

											Accumulated
			Additional					Unearned			Other			Total
	Common		Paid-in			Retained		ESOP			Comprehensive			Shareholders’
	Stock		Capital			Earnings		Shares			Income			Equity
Balance March 31, 2011	$	6,081	$	5,335,052		$	8,846,531	$	(397,300	)	$	(151,333	)	$	13,639,031
Comprehensive Income:
Net income							21,504								21,504
Net unrealized gain on available-for-sale securities, net of tax effect of $308,174												473,100			473,100
ESOP shares allocated for release				(5,250	)				35,000						29,750
Balance December 31, 2011	$	6,081	$	5,329,802		$	8,868,035	$	(362,300	)	$	321,767		$	14,163,385
Balance March 31, 2012	$	6,081	$	5,345,251		$	8,835,984	$	(362,300	)	$	329,702		$	14,154,718
Comprehensive Income:
Net income							206,465								206,465
Net unrealized loss on available-for-sale securities, net of tax effect of $40,357												(61,955	)		(61,955	)
Stock-based compensation				10,751					(376	)					10,375
ESOP shares allocated for release				2,838					28,380						31,218
Balance December 31, 2012	$	6,081	$	5,358,840		$	9,042,449	$	(334,296	)	$	267,747		$	14,340,821

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

6

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended December 31, 2012 and 2011

	2012			2011
Cash flows from Operating Activities
Net income	$	206,465		$	21,504
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net amortization of investment securities		259,342			132,690
(Increase) decrease in net deferred loan costs		(43,368	)		9,778
Provision for loan losses		230,000			211,099
Provision for ground rent losses		0			26,000
Gain on sale of investment securities		(286,115	)		(92,465	)
Gain on sale of land		(71,144	)		0
Loss on sale and write-down of foreclosed real estate		0			19,948
Depreciation and amortization		156,812			170,134
ESOP expense		31,218			29,750
Stock based compensation		10,375			0
Changes in operating assets and liabilities:
Accrued interest receivable		48,102			(11,512	)
Prepaid expenses and other assets		89,947			149,489
Other liabilities		107,806			13,243
Net cash provided by operating activities		739,440			679,658
Cash flows from Investing Activities
Decrease in loans receivable, net		2,181,612			1,609,244
Decrease (increase) in investment certificates of deposit, net		240,128			(253,297	)
Activity in available-for-sale securities:
Sales		17,469,413			21,716,249
Maturities, repayments and calls		15,043,992			14,037,695
Purchases		(36,617,193	)		(37,923,293	)
Purchase of property and equipment		(20,367	)		(106,161	)
Proceeds from sale of property and equipment		99,852			448
Redemption of FHLB stock		6,100			8,000
Proceeds from sale of foreclosed real estate		0			414,052
Proceeds from sale of ground rents		290,000			7,900
Net cash (used in) provided by investing activities		(1,306,463	)		(489,163	)
Cash flow from Financing Activities
Decrease in deposits, net		(3,578,316	)		(1,847,034	)
Decrease in advances from borrowers, net		(220,263	)		(307,507	)
Net cash used by financing activities		(3,798,579	)		(2,154,541	)
Net Change in Cash and Cash Equivalents		(4,365,602	)		(1,964,046	)
Cash and Cash Equivalents, Beginning of Period		10,735,213			8,183,156
Cash and Cash Equivalents, End of Period	$	6,369,611		$	6,219,110
Supplemental disclosure:
Interest paid	$	1,253,420		$	1,528,901
Loans transferred to foreclosed real estate		57,000			0

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

7

MADISON BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2012

Note 1.  Activities and Summary of Significant Accounting Policies

Madison Bancorp, Inc., the “Company”, was incorporated on May 20, 2010, to be the holding company for Madison Square Federal Savings Bank, the “Bank”, in conjunction with the Bank’s conversion from the 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 $741,092. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan, the “ESOP”, which subscribed for 7% of the number of shares sold in the offering, or 42,568 shares of common stock. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with applicable regulations governing the conversion, 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 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.

Summary of Significant Accounting Policies

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, 2012 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 Form 10-K for the year ended March 31, 2012. We have made no significant changes to Madison Bancorp’s accounting policies as disclosed in the Form 10-K.

The accounting and reporting policies of Madison Bancorp, Inc. and Subsidiaries (collectively “Madison”) conform to accounting principles generally accepted in the United States of America, “U.S. GAAP”, and to general practices in the banking industry. The more significant policies follow:

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the parent company and its wholly owned subsidiary, Madison Square Federal Savings Bank and its wholly owned subsidiary, Madison Financial Services Corporation, “MFSC”. MFSC is engaged in the business of insurance and brokerage services primarily in the Baltimore area. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications.Certain prior year amounts have been reclassified to conform to current period classifications. The reclassifications had no effect on net income or the net change in cash and cash equivalents and are not material to previously issued financial statements.

Use of Estimates.The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred income tax valuation allowances, the fair value of investment securities, and other than temporary impairment of investment securities.

8

Subsequent Events.We evaluated subsequent events after December 31, 2012 through February 8, 2013, the date this report was available to be issued. No significant subsequent events were identified which would affect the presentation of the financial statements.

Recently Adopted Accounting Guidance

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 became effective for the Bank on April 1, 2012 and is not expected to have a significant impact on our financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for the Bank on April 1, 2012 and is not expected to have a significant impact on our financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. ASU 2011-05 became effective for the Bank on April 1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12“Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below. In connection with the application of ASU 2011-05, our financial statements include separate statements of comprehensive income.

ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” ASU 2011-08 amends Topic 350, “Intangibles – Goodwill and Other,” to give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 became effective for the Bank on April 1, 2012 and is not expected to have a significant impact on our financial statements.

ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on April 1, 2013, and is not expected to have a significant impact on our financial statements.

ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 became effective for the Bank on April 1, 2012 and is not expected to have a significant impact on our financial statements.

9

Note 2. Earnings per Share

Basic earnings per share are computed by dividing income available to common shareholders 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. Both the basic and diluted earnings per share for the three and nine months ended December 31, 2012 and 2011 are summarized below:

	Three Months Ended December 31				Nine Months Ended December 31
	2012		2011		2012		2011
Net income	$	72,241	$	18,020	$	206,465	$	21,504
Average common shares outstanding		571,917		568,424		571,896		568,399
Stock option adjustment		3,841		0		2,318		0
Average common shares outstanding - diluted		575,758		568,424		574,214		568,399
Earnings per common share - basic	$	0.13	$	0.03		0.36		0.04
Earnings per common share - diluted	$	0.13	$	0.03		0.36		0.04

Note 3. Cash and Cash Equivalents

Cash and cash equivalents consist of the following:

	December 31,		March 31,
	2012		2012
Cash and due from banks	$	1,629,784	$	2,178,530
Federal funds sold		173,450		173,185
FHLB overnight deposits		1,083,460		1,080,711
Federal Reserve Bank balances		3,482,917		7,302,787
Total	$	6,369,611	$	10,735,213

As of December 31, 2012, the Company had approximately $831,000 invested in a money market account at a brokerage that is not covered by deposit insurance.

Financial institutions are required to carry noninterest-bearing cash reserves at specific percentages of deposit balances. The Bank’s normal amount of cash on hand and on deposit with other banks is sufficient to satisfy the reserve requirement.

10

Note 4. Investment Securities

The amortized cost and estimated fair value of investment securities at December 31, 2012 and March 31, 2012, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2012
Investment securities available-for-sale:
U.S. government agencies	$	14,012,899	$	10,912	$	16,607	$	14,007,204
Brokered certificates of deposit		8,180,000		30,320		977		8,209,343
Mortgage-backed securities (Agency)		20,011,261		345,193		346		20,356,108
Collateralized mortgage obligations (Agency)		14,771,272		89,957		16,298		14,844,931
	$	56,975,432	$	476,382	$	34,228	$	57,417,586

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2012
Investment securities available-for-sale:
U.S. government agencies	$	2,000,282	$	6,888	$	5,405	$	2,001,765
Brokered certificates of deposit		6,886,898		6,883		13,752		6,880,029
Mortgage-backed securities (Agency)		31,800,333		530,374		10,230		32,320,477
Collateralized mortgage obligations (Agency)		12,157,358		41,346		11,638		12,187,066
	$	52,844,871	$	585,491	$	41,025	$	53,389,337

The Bank has arranged for two lines of credit with large financial institutions for liquidity to meet expected and unexpected cash needs. One line of credit is unsecured and the other is collateralized by brokered certificates of deposit if any advances are disbursed. As of December 31, 2012 and March 31, 2012, there were no borrowings or securities pledged under these lines of credit.

11

The following is a summary of contractual maturities of securities available-for-sale as of December 31, 2012:

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
Amounts maturing in:
One year or less	$	3,709,000	$	3,717,368
After one year through five years		8,069,529		8,094,310
After five years through ten years		9,416,219		9,407,901
After ten years		998,151		996,968
		22,192,899		22,216,547
Mortgage-backed securities (Agency)		20,011,261		20,356,108
Collateralized mortgage obligations (Agency)		14,771,272		14,844,931
	$	56,975,432	$	57,417,586

Proceeds from the sale of investment securities were $17.5 million and $21.7 million during the nine months ended December 31, 2012 and 2011, respectively, with gains of $303,000 and losses of $17,000 for the nine months ended December 31, 2012 and gains of $394,000 and losses of $302,000 for the nine months ended December 31, 2011.

The following table presents Madison’s investments’ gross unrealized losses and the corresponding fair values by investment category and length of time that the securities have been in a continuous unrealized loss position at December 31, 2012.

	Less than 12 Months				12 Months or More				Total
December 31, 2012	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Investment securities available-for-sale:
U.S. Government agencies	$	3,686,687	$	16,607	$	0	$	0	$	3,686,687	$	16,607
Brokered certificates of deposit		1,686,023		977		0		0		1,686,023		977
Mortgage-backed securities (Agency)		246,773		346		0		0		246,773		346
Collateralized mortgage obligations (Agency)		3,057,575		13,035		883,281		3,263		3,940,856		16,298
	$	8,677,058	$	30,965	$	883,281	$	3,263	$	9,560,339	$	34,228

The gross unrealized losses are not considered by management to be other-than-temporary impairments. Management has the intent and ability to hold these securities until maturity. In most cases, temporary impairment is caused by market interest rate fluctuations.

12

Note 5. Loans Receivable and Allowance for Loan Losses

Loans receivable consist of the following at December 31, 2012 and March 31, 2012:

	December 31, 2012			March 31, 2012
Loans secured by mortgages:
Residential:
1-4 Single family	$	54,361,448		$	53,002,752
Multifamily		1,534,702			1,593,173
Lines of credit		2,593,189			2,247,787
Commercial		14,458,926			14,885,346
Land		4,503,413			6,568,154
Residential Construction		1,374,796			1,203,508
		78,826,474			79,500,720
Consumer		525,217			612,326
Commercial		3,982,240			5,624,473
Total loans receivable		83,333,931			85,737,519
Net deferred costs		129,323			85,955
Allowance for loan losses		(902,087	)		(837,063	)
Loans receivable, net	$	82,561,167		$	84,986,411

Credit Quality Indicators

Management considers all aspects of the loan: among other things, the overall risk involved; the nature of the collateral; the character, capacity, financial responsibility and record of the borrower; and the probability of repayment or orderly liquidation in accordance with the loan terms.

Asset quality ratings are divided into three groups: Pass (unclassified), Special Mention, and Classified (adverse classification).

Pass - A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral.

Special Mention- The purpose of the special mention category is to identify assets that do not warrant adverse classification, but do possess credit deficiencies or other potential weaknesses.

Loans that would primarily fall into this notational category could have been previously classified adversely, but the deficiencies have since been corrected. Management should closely monitor recent payment history of the loan and value of the collateral.

Loans that are designated as special mention will include loans that are 60-89 days delinquent. Single family residential loans, construction loans that are under contract of sale, and consumer loans that are designated special mention will not require separate fair value calculations and will not warrant increases in the general valuation allowance “GVA”. If adverse circumstances warrant additional GVA or specific reserves, an analysis will be performed on a case-by-case basis.

Other loans designated as special mention will require analysis to determine if the value of the loan is equal to or greater than the Bank’s recorded investment. If necessary, additional GVA’s may be allocated to a specific loan category that has special mention loans that have a deficiency in the value of the collateral as compared to the Bank’s recorded investment.

13

Substandard- Loans classified as substandard are inadequately protected by the current net worth or paying capacity of the borrower or the value of pledged collateral. Substandard loans are characterized by the possibility that the Bank estimates that it will be unable to collect all amounts due as required in the loan documents and therefore determines it may sustain losses if deficiencies are not corrected. This will be the measurement for determining if a loan is impaired.

Loans classified as substandard may exhibit one or more of the following characteristics:

· Collateral has deteriorated.

· The primary source of repayment is gone and the Bank is relying upon a secondary source.

· A loss does not seem likely but significant problems exist, leading the Bank to go to great lengths to protect its investment.

· Borrowers are unable to generate enough cash flow for debt reduction.

· Flaws in documentation exist, leaving the Bank as a lender in a subordinated or unsecured position.

· The feasibility of an orderly and prompt sale of the collateral is not possible.

· Slow payment history.

Loans classified as substandard will require calculations to determine the fair value on the particular loan. In determining the general valuation allowance, loans of similar characteristics will be analyzed on a pool basis. Examples of these types of loans include single-family residential loans and certain consumer loans such as car loans or home equity loans. When a loan is classified and is part of these loan types, the general valuation allowance on this particular type may be increased to reflect the potential for loss.

Construction loans, land acquisition and development, commercial real estate and 5 or more dwelling units that are deemed impaired will require calculations to determine the fair value on the particular asset when the loan is classified as substandard. If the calculation yields a value below the recorded investment of the asset and the loan is determined to have collectability issues that result in a deficiency, the deficiency amount will be charged off.

Doubtful- Loans classified as doubtful have all the weaknesses of loans classified as substandard, but in addition, on the basis of current facts, collection or liquidation in full is questionable and improbable. A loan classified as doubtful exhibits loss potential. However, there is still sufficient reason to permit the loan to remain on the books. A doubtful classification could reflect the deterioration of the primary source of repayment and serious doubt exists as to the quality of the secondary source of repayment.

Doubtful classifications should be used only when a distinct and known possibility of loss exists. When identified, adequate loss should be recorded for specific assets. The entire asset should not be classified as doubtful if a partial recovery is expected, such as a liquidation of the collateral or the probability of a private mortgage insurance payment is likely.

Loss - Loans classified as loss are considered uncollectable and of such little value that their continuance as loans is unjustified. A loss classification does not mean a loan has absolutely no value; partial recoveries may be received in the future.

When loans or portions of a loan are considered a “loss”, it will be the policy of the Company to write-off the amount designated as loss. Recoveries will be treated as additions to the general valuation allowance.

14

The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans as of December 31, 2012 and March 31, 2012.

Commercial Credit Exposure	Commercial,  Not Real Estate Secured				Commercial Real Estate
	December 31,  2012		March 31,  2012		December 31,  2012		March 31,  2012
Grade:
Pass	$	3,584,272	$	4,925,036	$	10,617,165	$	13,298,287
Special Mention		397,968		699,437		3,461,718		1,587,059
Substandard		0		0		380,043		0
Doubtful		0		0		0		0
Loss		0		0		0		0
	$	3,982,240	$	5,624,473	$	14,458,926	$	14,885,346

Other Credit Exposure	Residential Real Estate Construction and Land				Residential Real Estate Other (1)				Consumer
	December 31,  2012		March 31, 2012		December 31,  2012		March 31, 2012		December 31,  2012		March 31, 2012
Grade:
Pass	$	3,021,670	$	5,592,390	$	57,386,805	$	54,941,070	$	525,217	$	612,326
Special Mention		2,715,337		1,946,770		762,649		736,182		0		0
Substandard		141,202		232,502		339,885		1,166,460		0		0
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
	$	5,878,209	$	7,771,662	$	58,489,339	$	56,843,712	$	525,217	$	612,326

(1) Residential real estate other includes 1-4 family residential, multifamily residential and home equity lines of credit.

Age Analysis of Past Due Loans as of December 31, 2012 and March 31, 2012

December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or  More Past  Due		Total Past Due		Current		Total Loans
Loans secured by mortgages:
Residential:
1-4 Single family	$	1,147,896	$	1,279,060	$	425,617	$	2,852,573	$	51,508,875	$	54,361,448
Multifamily		0		0		0		0		1,534,702		1,534,702
Lines of credit		28,428		0		0		28,428		2,564,761		2,593,189
Commercial		0		380,043		0		380,043		14,078,883		14,458,926
Land		0		0		0		0		4,503,413		4,503,413
Residential Construction		0		0		0		0		1,374,796		1,374,796
		1,176,324		1,659,103		425,617		3,261,044		75,565,430		78,826,474
Consumer		11,896		4,382		0		16,278		508,939		525,217
Commercial		0		218,955		0		218,955		3,763,285		3,982,240
	$	1,188,220	$	1,882,440	$	425,617	$	3,496,277	$	79,837,654	$	83,333,931

March 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days or  More Past  Due		Total Past Due		Current		Total Loans
Loans secured by mortgages:
Residential:
1-4 Single family	$	1,403,581	$	0	$	816,600	$	2,220,181	$	50,782,571	$	53,002,752
Multifamily		0		0		0		0		1,593,173		1,593,173
Lines of credit		0		0		0		0		2,247,787		2,247,787
Commercial		384,887		0		0		384,887		14,500,459		14,885,346
Land		0		0		0		0		6,568,154		6,568,154
Residential Construction		0		0		0		0		1,203,508		1,203,508
		1,788,468		0		816,600		2,605,068		76,895,652		79,500,720
Consumer		0		50		0		50		612,276		612,326
Commercial		31,194		0		0		31,194		5,593,279		5,624,473
	$	1,819,662	$	50	$	816,600	$	2,636,312	$	83,101,207	$	85,737,519

15

As of December 31, 2012, there were 15 nonaccrual 1-4 single family loans totaling $425,617 with forgone interest of $23,534.

As of March 31, 2012, there were nine nonaccrual 1-4 single family loans totaling $287,603, with forgone interest of $12,701. As of March 31, 2012, 1-4 single family loans totaling $606,624 were 90 days or more past due and accruing interest.

Impaired Loans as of and for the Nine Months Ended December 31, 2012

	Unpaid Contractual  Principal Balance		Recorded  Investment  with No  Allowance		Recorded  Investment  with  Allowance		Total  Recorded  Investment		Related  Allowance		Average  Recorded  Investment		Interest  Recognized		Nonaccrual  Interest Not  Accrued
Loans secured by mortgages:
Residential:
1-4 Single family	$	861,538	$	332,508	$	382,216	$	714,724	$	61,000	$	544,975	$	4,579	$	23,534
Multifamily		0		0		0		0		0		0		0		0
Lines of credit		0		0		0		0		0		0		0		0
Commercial		380,043		380,043		0		380,043		0		382,127		28,247		0
Land		230,702		141,202		0		141,202		0		221,583		7,495		0
Residential construction		0		0		0		0		0		0		0		0
		1,472,283		853,753		382,216		1,235,969		61,000		1,148,686		40,321		23,534
Consumer		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0
Total impaired loans	$	1,472,283	$	853,753	$	382,216	$	1,235,969	$	61,000	$	1,148,686	$	40,321	$	23,534

Impaired Loans as of and for the Year Ended March 31, 2012

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Recognized		Nonaccrual Interest Not Accrued
Loans secured by mortgages:
Residential:
1-4 Single family	$	1,252,549	$	778,480	$	387,980	$	1,166,460	$	53,000	$	1,228,377	$	58,003	$	12,701
Multifamily		0		0		0		0		0		0		0		0
Lines of credit		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0
Land		232,502		0		232,502		232,502		69,500		233,502		10,687		0
Residential construction		0		0		0		0		0		0		0		0
		1,485,051		778,480		620,482		1,398,962		122,500		1,461,879		68,690		12,701
Consumer		0		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0		0
Total impaired loans	$	1,485,051	$	778,480	$	620,482	$	1,398,962	$	122,500	$	1,461,879	$	68,690	$	12,701

We occasionally modify loans to extend the term to help borrowers stay current on their loan and to avoid foreclosure. At December 31, 2012, we had seven 1-4 single family mortgage loans totaling approximately $1.0 million that we had modified the terms either by extending the term or increasing the payments to allow the customer to become current. We did not forgive any principal or interest, or modify the interest rates on the loans. Four of these seven modified loans with balances totaling $407,000 were current and three of these seven with balances totaling $633,000 were 60-89 days delinquent at December 31, 2012. We also had two 1-4 single family mortgage loans totaling approximately $382,000 at December 31, 2012 which had received rate modifications to current market rates. One of these two loans in the amount of $7,000 is current at December 31, 2012 and is classified as substandard. The other loan of $375,000 has remained current through the nine months ended December 31, 2012 and is not adversely classified.

16

The following tables set forth for the nine months ended December 31, 2012 and 2011 and for the year ended March 31, 2012, 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.

For the Nine months ended December 31, 2012:

	Allowance 3/31/2012		Charge- offs		Recoveries		Provision			Allowance 12/31/2012
Loans secured by mortgages:
Residential:
1-4 Single family	$	372,404	$	75,712	$	0	$	47,580		$	344,272
Multifamily		18,705		0		0		(596	)		18,109
Lines of credit		13,817		0		0		446			14,263
Commercial		188,199		0		0		47,968			236,167
Land		152,621		89,500		0		23,632			86,753
Residential construction		16,417		0		0		6,126			22,543
		762,163		165,212		0		125,156			722,107
Consumer		3,103		0		0		390			3,493
Commercial		71,149		0		236		(13,605	)		57,780
Unallocated		648		0		0		118,059			118,707
Total	$	837,063	$	165,212	$	236	$	230,000		$	902,087

	Allowance				Loan Balance
	Individually Evaluated for Impairment		Collectively  Evaluated  for  Impairment		Individually Evaluated for Impairment		Collectively  Evaluated  for  Impairment		Ending Loan Balance
Loans secured by mortgages:
Residential:
1-4 Single family	$	61,000	$	283,272	$	714,724	$	53,646,724	$	54,361,448
Multifamily		0		18,109		0		1,534,702		1,534,702
Lines of credit		0		14,263		0		2,593,189		2,593,189
Commercial		0		236,167		380,043		14,078,883		14,458,926
Land		0		86,753		141,202		4,362,211		4,503,413
Residential construction		0		22,543		0		1,374,796		1,374,796
		61,000		661,107		1,235,969		77,590,505		78,826,474
Consumer		0		3,493		0		525,217		525,217
Commercial		0		57,780		0		3,982,240		3,982,240
Unallocated		0		118,707		0		0		0
Total	$	61,000	$	841,087	$	1,235,969	$	82,097,962	$	83,333,931

17

For the Nine months ended December 31, 2011:

	Allowance 3/31/2011		Charge- offs		Recoveries		Provision			Allowance 12/31/2011
Loans secured by mortgages:
Residential:
1-4 Single family	$	185,114	$	60,500	$	3,366	$	114,526		$	242,506
Multifamily		17,417		0		0		2,166			19,583
Lines of credit		8,441		0		0		3,505			11,946
Commercial		141,331		0		0		89,388			230,719
Land		73,355		0		0		99,174			172,529
Residential construction		95,779		0		0		(71,424	)		24,355
		521,437		60,500		3,366		237,335			701,638
Consumer		5,848		0		0		(1,668	)		4,180
Commercial		63,745		13,202		0		6,242			56,785
Unallocated		44,505		0		0		(30,810	)		13,695
Total	$	635,535	$	73,702	$	3,366	$	211,099		$	776,298

	Allowance				Loan Balance
	Individually  Evaluated  for  Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively  Evaluated  for  Impairment		Ending Loan Balance
Loans secured by mortgages:
Residential:
1-4 Single family	$	55,352	$	187,154	$	599,265	$	51,927,693	$	52,526,958
Multifamily		0		19,583		0		1,612,603		1,612,603
Lines of credit		0		11,946		0		2,049,572		2,049,572
Commercial		0		230,719		0		15,848,117		15,848,117
Land		71,833		100,696		233,102		6,453,877		6,686,979
Residential construction		0		24,355		0		1,567,758		1,567,758
		127,185		574,453		832,367		79,459,620		80,291,987
Consumer		0		4,180		8,101		603,874		611,975
Commercial		0		56,785		0		4,136,809		4,136,809
Unallocated		0		13,695		0		0		0
Total	$	127,185	$	649,113	$	840,468	$	84,200,303	$	85,040,771

18

For the year ended March 31, 2012:

	Allowance 3/31/2011		Charge- offs		Recoveries		Provision			Allowance 3/31/2012
Loans secured by mortgages:
Residential:
1-4 Single family	$	185,114	$	80,800	$	3,366	$	264,724		$	372,404
Multifamily		17,417		0		0		1,288			18,705
Lines of credit		8,441		0		0		5,376			13,817
Commercial		141,331		0		0		46,868			188,199
Land		73,355		0		0		79,266			152,621
Residential construction		95,779		0		0		(79,362	)		16,417
		521,437		80,800		3,366		318,160			762,163
Consumer		5,848		0		0		(2,745	)		3,103
Commercial		63,745		13,202		65		20,541			71,149
Unallocated		44,505		0		0		(43,857	)		648
Total	$	635,535	$	94,002	$	3,431	$	292,099		$	837,063

	Allowance				Loan Balance
	Individually  Evaluated  for  Impairment		Collectively Evaluated for Impairment		Individually  Evaluated  for  Impairment		Collectively Evaluated for Impairment		Ending Loan Balance
Loans secured by mortgages:
Residential:
1-4 Single family	$	53,000	$	319,404	$	1,166,460	$	51,836,292	$	53,002,752
Multifamily		0		18,705		0		1,593,173		1,593,173
Lines of credit		0		13,817		0		2,247,787		2,247,787
Commercial		0		188,199		0		14,885,346		14,885,346
Land		69,500		83,121		232,502		6,335,652		6,568,154
Residential construction		0		16,417		0		1,203,508		1,203,508
		122,500		639,663		1,398,962		78,101,758		79,500,720
Consumer		0		3,103		0		612,326		612,326
Commercial		0		71,149		0		5,624,473		5,624,473
Unallocated		0		648		0		0		0
Total	$	122,500	$	714,563	$	1,398,962	$	84,338,557	$	85,737,519

Madison recorded a partial charge-off on twelve residential 1-4 single family mortgage loans and one residential mortgage land loan, writing them down to their net realizable value for the nine months ended December 31, 2012.

Note 6. Borrowings

At December 31, 2012, the Bank had the ability to borrow a total of approximately $30.9 million from the Federal Home Loan Bank of Atlanta, and the Bank has lines of credit totaling $7.4 million with two large financial institutions. The FHLB borrowing requires us to pledge mortgage loans as collateral, and the lines of credit require us to pledge brokered CDs or US Government Agency securities. At December 31, 2012, we had no Federal Home Loan Bank advances outstanding or borrowings on the lines of credit. The rates on the borrowing lines will be determined at the time of an advance.

19

Note 7. Commitments 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. 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.

The Bank had outstanding firm commitments to originate, fund, or purchase loans as follows:

	December 31, 2012		March 31, 2012
Mortgage loan commitments – fixed rate	$	883,000	$	1,077,534
Mortgage loan commitments – variable rate		7,355		3,546
Unused equity lines of credit (variable rate)		2,539,028		2,331,748
Commercial and consumer lines of credit		315,624		456,995
Standby letters of credit		555,455		675,023
Total	$	4,300,462	$	4,544,846

Note 8. 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.

20

Investment securities available-for-sale are the only financial assets measured at fair value on a recurring basis. As of December 31, 2012 and March 31, 2012, the fair values were measured using the following methodologies:

	December 31, 2012
		Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Government agencies	$	2,804,443	$	11,202,761	$	0	$	14,007,204
Brokered certificates of deposit		8,209,343		0		0		8,209,343
Mortgage-backed securities (Agency)		505,066		19,851,042		0		20,356,108
Collateralized mortgage obligations (Agency)		736,746		13,522,757		585,428		14,844,931
	$	12,255,598	$	44,576,560	$	585,428	$	57,417,586

	March 31, 2012
	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Government agencies	$	0	$	2,001,765	$	0	$	2,001,765
Brokered certificates of deposit		6,880,029		0		0		6,880,029
Mortgage-backed securities (Agency)		2,606,719		29,713,758		0		32,320,477
Collateralized mortgage obligations (Agency)		1,258,351		9,939,807		988,908		12,187,066
	$	10,745,099	$	41,655,330	$	988,908	$	53,389,337

The following table summarizes activity in securities valued using Level 3 inputs during the nine months ended December 31, 2012:

	December 31, 2012
Balance at beginning of the period	$	988,908
Purchases		585,428
Sales		0
Paydowns		0
Transfers in and/or out of Level 3		(988,908	)
Balance at the end of the period	$	585,428

The two securities included in the table above as transferred out of Level 3 were newly issued for the quarter ended March 31, 2012, and were therefore not yet valued by the third party valuation service. The securities were seasoned enough for the third party valuation service to provide fair values for the quarter ended June 30, 2012, and were transferred out of Level 3 at that time.

The Bank measures its foreclosed real estate on a nonrecurring basis at fair value less estimated cost to sell. Cost to sell the real estate is based on standard market factors. The Bank has categorized its foreclosed real estate as Level 3. During the nine months ended December 31, 2012, the bank had one 1-4 single family mortgage loan which was reclassified as foreclosed real estate in the amount of $57,000.

21

The Bank does not measure the fair value of its other financial assets or liabilities on a recurring basis. The estimated fair values of these financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows:

	December 31, 2012				March 31, 2012
(dollars in thousands)	Book		Estimated		Book		Estimated
	Value		Fair Value		Value		Fair Value
Financial assets
Level 1 inputs:
Cash and cash equivalents	$	6,370	$	6,370	$	10,735	$	10,735
Certificates of deposit		498		498		738		738
Level 2 inputs:
Accrued interest receivable		380		380		428		428
Level 3 inputs:
Federal Home Loan Bank stock		228		228		235		235
Loans, net		82,561		82,678		84,986		85,079
Foreclosed real estate		57		57		0		0
Financial liabilities
Level 2 inputs:
Noninterest-bearing deposits	$	5,729	$	5,729	$	6,583	$	6,583
Interest-bearing deposits		130,874		131,970		133,599		134,886
Advances from borrowers for taxes and insurance		322		322		543		543

Note 9. Regulatory Capital Ratios for Madison Square Federal Savings Bank

As of December 31, 2012, the most recent date of filing of the Consolidated Reports of Condition and Income with the Office of the Comptroller of the Currency, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action as disclosed in the table below. Management knows of no events or conditions that would change this classification:

						Minimum					To Be Well
	Actual					Requirements					Capitalized
(dollars in thousands)	Amount		%			Amount		%			Amount		%
As of December 31, 2012:
Total risk-based capital (to risk-weighted assets)	$	13,285		19.0	%	$	5,600		8.0	%	$	7,000		10.0	%
Tier I capital (to risk-weighted assets)		12,410		17.7			N/A		N/A			4,200		6.0
Tier I capital (to adjusted total assets)		12,410		8.2			6,059		4.0			7,574		5.0
As of March 31, 2012:
Total risk-based capital (to risk-weighted assets)	$	12,922		17.2	%	$	6,005		8.0	%	$	7,506		10.0	%
Tier I capital (to risk-weighted assets)		12,085		16.1			N/A		N/A			4,503		6.0
Tier I capital (to adjusted total assets)		12,085		7.8			6,200		4.0			7,750		5.0

22

Note 10. Stock Option Plans

The Company’s shareholders approved the 2011 Equity Incentive Plan, which reserves 79,054 shares for grant to officers and directors of the Company in the form of stock options (60,811 shares) and restricted stock (18,243 shares).

During the year ended March 31, 2012, the Company granted stock options for 24,170 shares, with an exercise price of $8.00 per share. The options are exercisable up to 10 years from the grant date. The options vest over a two-year period with one third vesting immediately and one third of the options vesting on the first and second anniversary date. Option expense recognized during the nine months ended December 31, 2012 was $10,695. There was no option expense during the nine months ended December 31, 2011. At December 31, 2012, there was $16,637 of total unrecognized compensation expense related to non-vested stock options to be recognized through February 28, 2014. The weighted average grant date fair value of the options granted during the year ended March 31, 2012 was $1.77.

There were no stock options granted during the quarters ended December 31, 2012 or 2011.

A summary of information regarding stock options outstanding as of December 31, 2012, is as follows:

Weighted Average Exercise Price		Outstanding  Shares		Average Remaining Life (Years)		Exercisable Shares
$	8.00		24,170		9.17		8,057
	Intrinsic value	$	72,510			$	24,171

There are 36,641 options available for future grant.

23

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 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 in item 1A. Risk Factors of the Company’s Annual Report on Form 10-K filed on June 27, 2012. 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 the Comptroller of the Currency, 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 noninterest revenue as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience.

24

Comparison of Financial Condition at December 31, 2012 and March 31, 2012

Assets.Total assets decreased $3.5 million, or 2.3%, from $155.2 million at March 31, 2012, to $151.7 million at December 31, 2012 due to a $4.4 million, or 40.7%, decrease in cash and cash equivalents and a $2.4 million, or 2.9%, decrease in net loans receivable, partially offset by a $4.0 million, or 7.6%, increase in investment securities available for sale.

Loans. Net loans receivable decreased by $2.4 million, or 2.9%, from $85.0 million at March 31, 2012 to $82.6 million at December 31, 2012, primarily as a result of the net effect of a $2.1 million decrease in mortgages secured by land, $1.6 million decrease in commercial loans, a $426,000 decrease in commercial mortgages, partially offset by a $1.4 million increase in 1-4 single family loans, a $345,000 increase in residential lines of credit and a $171,000 increase in residential construction loans. The decrease in mortgages secured by land was primarily the result of the payoffs of two loans and normal principal reductions. The increase in residential mortgage loans was primarily the result of our increased emphasis on residential mortgage lending.

Cash andCash Equivalents. Cash and cash equivalents decreased by $4.4 million, or 40.7%, from $10.7 million at March 31, 2012 to $6.4 million at December 31, 2012, due to the reinvestment of excess liquidity into investment securities.

Securities. Available-for-sale securities increased by $4.0 million, or 7.6%, from $53.4 million at March 31, 2012 to $57.4 million at December 31, 2012. The net increase in available-for-sale securities is the result of the purchase of $33.0 million of U.S. Government Agency bonds, mortgage backed securities, collateralized mortgage obligations, and $3.6 million of Brokered Investment CDs. These purchases were offset by the sale of mortgage backed securities, collateralized mortgage obligations and agency securities with proceeds of $17.5 million with $303,000 in gains $17,000 in losses on the sale, and $15.0 million of securities being called, having matured, or repayments. At December 31, 2012, we also held a $228,000 investment in the common stock of the Federal Home Loan Bank of Atlanta.

Ground Rents.Our ground rent portfolio decreased by $290,000 to zero at December 31, 2012. The entire ground rent portfolio was sold as of May 1, 2012 at the value recorded at March 31, 2012.

Deposits. Total deposits decreased by $3.6 million, or 2.6%, to $136.6 million at December 31, 2012 from $140.2 million at March 31, 2012. Balances of noninterest-bearing deposits decreased by $854,000, or 13.0%, to $5.7 million at December 31, 2012, from $6.6 million at March 31, 2012. NOW and money market deposit accounts increased by $642,000, or 8.1%, to $8.5 million at December 31, 2012 from $7.9 million at March 31, 2012. Savings deposits increased $1.6 million, or 6.9%, from $22.8 million at March 31, 2012, to $24.3 million at December 31, 2012, and certificates of deposits decreased by $4.9 million, or 4.8%, from $102.9 million at March 31, 2012, to $98.0 million at December 31, 2012.

Borrowings.We had no borrowings at December 31, 2012, or March 31, 2012.

Shareholders’ Equity. Shareholders’ equity increased by $186,000, or 1.3%, from $14.2 million at March 31, 2012 to $14.3 million at December 31, 2012 due to net income of $206,000 added to retained earnings, partially offset by a decrease of $62,000 in accumulated other comprehensive income due to a reduction in net unrealized gains on available-for-sale securities for the nine month period ended December 31, 2012.

25

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

Overview.Net income was $72,000 for the three months ended December 31, 2012, compared to $18,000 for the three months ended December 31, 2011. The increase in net income for the current quarter was primarily the result of an increase in noninterest revenue resulting from the gain on the sale of investment securities and reductions to noninterest expense. These increases to income were partially offset by a decrease in net interest income.

Net Interest Income. Net interest income decreased by $68,000 to $874,000 for the three months ended December 31, 2012, as compared to $942,000 for the three months ended December 31, 2011, due to a decrease in the yield on earning assets, partially offset by an increase in the average balance of interest-earning assets and a decrease in the cost of funds for deposits. Our interest rate spread was 2.23% for the three months ended December 31, 2012, compared to 2.40% for the three months ended December 31, 2011, and our net interest margin decreased by 19 basis points to 2.35% for the three months ended December 31, 2012, from 2.54% for the three months ended December 31, 2011.

Interest on loans decreased by $99,000 for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011. The average balance of loans decreased by $216,000 to $83.1 million for the three months ended December 31, 2012, from $83.4 million for the three months ended December 31, 2011. The average yield on loans decreased from 5.57% for the three months ended December 31, 2011 to 5.13% for the three months ended December 31, 2012.

Interest on securities available-for-sale decreased by $76,000 for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, due to a 60 basis point decrease in the average yield. The decrease was partially offset by an increase in average balances of $1.9 million from the investment of excess liquidity.

Interest income on interest-bearing deposits was unchanged at $5,000 for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, as a result of a $324,000 decrease in average balances offset by a two basis point increase in the average yield.

Interest expense on total deposits decreased $110,000 for the three months ended December 31, 2012, from $496,000 for the three months ended December 31, 2011 to $386,000 for the three months ended December 31, 2012, due to a 33 basis point decrease in the average cost of interest-bearing deposits partially offset by a $484,000 increase in the average balance of interest-bearing deposits. Interest on certificates of deposits decreased $106,000 to $371,000 for the three months ended December 31, 2012, as a result of the 38 basis point decrease in average cost of time deposits and a decrease in average balances of $2.3 million. Interest on savings deposits decreased by $2,000 to $9,000 for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, due to a decrease in the average cost of savings deposits of 5 basis points partially offset by an increase in average balances of $2.3 million. Interest on NOW and money market deposit accounts decreased by $2,000 for the three months ended December 31, 2012, due to a decrease of 14 basis points in the average cost of NOW and money market deposit accounts partially offset by an increase in average balances of $498,000.

26

Average Balances, Interest and Yields. The following table for the three months ended December 31, 2012 and 2011 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 average yields and costs. The yields and costs for the periods indicated are derived by dividing the annualized 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.

	Three Months Ended December 31,
	2012							2011
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets:
Interest-bearing deposits	$	7,590,767	$	5,261		0.28	%	$	7,914,997	$	5,144		0.26	%
Investment securities available-for-sale		56,801,370		180,877		1.27			54,907,125		256,922		1.87
Loans receivable, net		83,147,417		1,071,782		5.13			83,363,910		1,170,312		5.57
Other interest-earning assets		228,400		1,399		2.44			666,388		5,283		3.15
Total interest-earning assets		147,767,954		1,259,319		3.39	%		146,852,420		1,437,661		3.89	%
Noninterest-earning assets		6,114,787							6,282,204
Total assets	$	153,882,741						$	153,134,624
Liabilities and Shareholders’ Equity:
Time deposits	$	99,401,277		370,692		1.48	%	$	101,718,157		476,468		1.86	%
Savings		24,511,546		9,243		0.15			22,208,454		11,167		0.20
NOW and money market accounts		8,347,510		5,643		0.27			7,849,993		8,116		0.41
Total interest-bearing deposits		132,260,333		385,578		1.16			131,776,604		495,751		1.49
Other interest-bearing liabilities		455,719		0		0.00			421,293		0		0.00
Total interest-bearing liabilities		132,716,052		385,578		1.16	%		132,197,897		495,751		1.49	%
Noninterest-bearing deposits		5,941,622							6,271,782
Other noninterest-bearing liabilities		667,938							478,143
Total liabilities		139,325,612							138,947,822
Total shareholders’ equity		14,557,129							14,186,802
Total liabilities and shareholders’ equity	$	153,882,741						$	153,134,624
Net interest income				873,741						$	941,910
Interest rate spread						2.23	%						2.40	%
Net interest margin						2.35	%						2.54	%
Average interest-earning assets to average interest-bearing liabilities						111.34	%						111.09	%

· Average loan balances include nonaccrual loans.

· For presentation in this table, balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

27

Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations, and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

Our provision for loan losses decreased $29,000 to $61,000 for the three months ended December 31, 2012 from $90,000 for the three months ended December 31, 2011. At December 31, 2012, the allowance for loan losses was $902,000, or 1.08% of total loans compared to $837,000 or 0.98% of total loans at March 31, 2012, and $776,000, or 0.91% of total loans at December 31, 2011. We had balances of $426,000 in 1-4 single family residential mortgage nonaccrual loans at December 31, 2012, compared to $288,000 of nonaccrual 1-4 single family loans at March 31, 2012, and $216,000 of 1-4 single family loans and $8,000 of consumer nonaccrual loans at December 31, 2011.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

We had no recoveries and $12,000 in 1-4 single family mortgage charge-offs during the three months ended December 31, 2012, compared to no loan recoveries and $74,000 loan charge-offs during the three months ended December 31, 2011.

Although management utilizes its best judgment in providing for losses, there can be no assurance that they will not have to increase the allowance for loan losses in subsequent periods. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as appropriate.

Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

	At or for the Three
	Months Ended December 31,
	2012			2011
Allowance for loan losses at beginning of period	$	852,627		$	760,000
Provision for loan losses		61,000			90,000
Recoveries:
Loans secured by mortgages:
1-4 single family residential		0			0
Land		0			0
Charge-offs:
Loans secured by mortgages:
1-4 single family residential		(11,540	)		(60,500	)
Commercial		0			(13,202	)
Total charge-offs		(11,540	)		(73,702	)
Net charge-offs		(11,540	)		(73,702	)
Allowance for loan losses at end of period	$	902,087		$	776,298
Allowance for loan losses to nonaccrual loans		211.95	%		346.96	%
Allowance for loan losses to total loans outstanding at the end of the period		1.08	%		0.91	%
Net charge-offs to average loans outstanding during the period (not annualized)		0.01	%		0.09	%

28

At December 31, 2012, Madison had two 1-4 single family loans totaling $382,000 classified as troubled debt restructurings “TDRs”, which received rate modifications to current market rates. These loans are in accrual status and in compliance with their modified terms, and therefore, not included in the nonperforming ratio above. At December 31, 2011, one of these loans was classified as a TDR in the amount of $384,000. For the period ended December 31, 2012, the individual impairment recorded against this loan was $60,000 compared to $50,000 at December 31, 2011.

Noninterest Revenue. Noninterest revenue increased by $76,000, or 77.81%, for the three months ended December 31, 2012, to $174,000 as compared to $98,000 for the three months ended December 31, 2011. The increase during the period was primarily due to increases of $72,000 in gains on the sale of investment securities.

Noninterest Expenses. Noninterest expense decreased by $17,000, or 1.84%, to $915,000 for the three months ended December 31, 2012 as compared to $932,000 for the three months ended December 31, 2011, primarily due to decreases in salaries and employee benefits partially offset by increases in professional services.

Income Tax Expense. For the three months ended December 31, 2012 and 2011, we incurred no income tax expense. At March 31, 2012, we had a net operating loss carry-forward totaling approximately $268,000, which expires in 2030 and 2031. We also had a capital loss carry-forward of $566,000, which expires in 2014. We have established a valuation allowance to reflect uncertainty as to our ability to realize our deferred tax asset. See Note 12 of the notes to the consolidated financial statements for March 31, 2012, filed in our Annual Report on Form 10-K for the year ended March 31, 2012.

29

Results of Operations for the Nine Months Ended December 31, 2012, and 2011

Overview.Net income was $206,000 for the nine months ended December 31, 2012, compared to $22,000 for the nine months ended December 31, 2011. The increase in net income for the current period was primarily the result of increases in noninterest revenue resulting from the gain on the sale of investment securities and a gain on the sale of a portion of real estate owned by the Bank, and a decrease in noninterest expense. These increases to income were only partially offset by a decrease in net interest income, and an increase in the provision for loan losses.

Net Interest Income. Net interest income decreased by $161,000 to $2.7 million for the nine months ended December 31, 2012, as compared to $2.9 million for the nine months ended December 31, 2011, due to decreases in the yield and in the average balance of interest-earning assets, partially offset by decreases in the cost of funds and in the average balance of interest-bearing deposits. Our interest rate spread was 2.33% for the nine months ended December 31, 2012, compared to 2.45% for the nine months ended December 31, 2011, and our net interest margin decreased by 12 basis points to 2.46% for the nine months ended December 31, 2012, from 2.58% for the nine months ended December 31, 2011.

Interest on loans decreased by $251,000 for the nine months ended December 31, 2012, as compared to the nine months ended December 31, 2011. The average balance of loans decreased by $1.5 million to $82.5 million for the nine months ended December 31, 2012, from $84.0 million for the nine months ended December 31, 2011. The average yield on loans decreased from 5.62% for the nine months ended December 31, 2011 to 5.34% for the nine months ended December 31, 2012.

Interest on securities available-for-sale decreased by $181,000 for the nine months ended December 31, 2012, as compared to the nine months ended December 31, 2011, due to a 57 basis point decrease in the average yield. The decrease was partially offset by an increase in average balances of $3.9 million from the investment of excess liquidity.

Interest income on interest-bearing deposits was $17,000 for the nine months ended December 31, 2012, as compared to $20,000 for the nine months ended December 31, 2011, as a result of a $3.0 million decrease in average balances partially offset by an eight basis point increase in the average yield.

Interest expense on total deposits decreased $289,000 for the nine months ended December 31, 2012, from $1.5 million for the nine months ended December 31, 2011 to $1.2 million for the nine months ended December 31, 2012, due to a 27 basis point decrease in the average cost of interest-bearing deposits and a $2.0 million decrease in the average balance of interest-bearing deposits. Interest on certificates of deposits decreased $272,000 to $1.2 million for the nine months ended December 31, 2012, as a result of the 28 basis point decrease in average cost of time deposits and a decrease in average balances of $4.4 million. Interest on savings deposits decreased by $9,000 to $27,000 for the nine months ended December 31, 2012, as compared to the nine months ended December 31, 2011, due to a decrease in the average cost of savings accounts of 7 basis points partially offset by an increase in average balances of $1.9 million. Interest on NOW and money market deposit accounts decreased by $8,000 for the nine months ended December 31, 2012, due to a decrease in the cost of NOW and money market deposit accounts of 15 basis points partially offset by an increase of $436,000 in average balances of NOW and money market deposit accounts.

30

Average Balances, Interest and Yields. The following table for the nine months ended December 31, 2012 and 2011 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 average yields and costs. The yields and costs for the periods indicated are derived by dividing the annualized 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.

	Nine Months Ended December 31,
	2012							2011
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets:
Interest-bearing deposits	$	6,167,943	$	17,374		0.37	%	$	9,191,403	$	19,760		0.29	%
Investment securities available-for-sale		56,979,799		605,574		1.41			53,078,872		786,727		1.98
Loans receivable, net		82,536,153		3,310,257		5.34			84,039,935		3,561,320		5.62
Other interest-earning assets		228,400		5,239		3.05			679,782		21,050		4.11
Total interest-earning assets		145,912,295		3,938,444		3.59	%		146,989,992		4,388,857		3.97	%
Noninterest-earning assets		5,746,994							6,638,261
Total assets	$	151,659,289						$	153,628,253
Liabilities and Shareholders’ Equity:
Time deposits	$	98,000,998		1,195,430		1.62	%	$	102,398,245		1,467,424		1.90	%
Savings		24,329,598		27,299		0.15			22,412,257		36,526		0.22
NOW and money market accounts		8,515,876		17,235		0.27			8,079,981		25,303		0.42
Total interest-bearing deposits		130,846,472		1,239,964		1.26			132,890,483		1,529,253		1.53
Other interest-bearing liabilities		285,609		15		0.01			478,815		0		0.00
Total interest-bearing liabilities		131,132,081		1,239,979		1.26	%		133,369,298		1,529,253		1.52	%
Noninterest-bearing deposits		5,726,956							5,951,875
Other noninterest-bearing liabilities		441,284							450,027
Total liabilities		137,300,321							139,771,200
Total shareholders’ equity		14,358,968							13,857,053
Total liabilities and shareholders’ equity	$	151,659,289						$	153,628,253
Net interest income			$	2,698,465						$	2,859,604
Interest rate spread						2.33	%						2.45	%
Net interest margin						2.46	%						2.58	%
Average interest-earning assets to average interest-bearing liabilities						111.27	%						110.21	%

· Average loan balances include nonaccrual loans.

· For presentation in this table, balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

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Provision and Allowance for Loan Losses. Our provision for loan losses increased $19,000 to $230,000 for the nine months ended December 31, 2012 from $211,000 for the nine months ended December 31, 2011. At December 31, 2012, the allowance for loan losses was $902,000, or 1.08% of total loans, compared to $837,063 or 0.98% of total loans at March 31, 2012, and $776,000, or 0.91% of total loans at December 31, 2011. We had balances of $426,000 in 1-4 single family residential mortgage nonaccrual loans at December 31, 2012, compared to $288,000 of nonaccrual 1-4 single family residential mortgage loans and an additional $607,000 1-4 single family residential mortgages which were 90 days delinquent and still accruing at March 31, 2012; and $216,000 in 1-4 single family residential mortgage nonaccrual loans and $8,000 of consumer nonaccrual loans at December 31, 2011. One loan was transferred to foreclosed real estate in the nine months ended December 31, 2012, in the amount of $57,000. During the nine months ended December 31, 2011, one foreclosed real estate property, which had been previously written down by $174,000, was written down by an additional $10,000 and then sold at a loss of $10,000. Net proceeds from the foreclosed real estate sale were $414,000.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

We had $236 in commercial loan recoveries and charge-offs of $75,712 in 1-4 single family mortgage and $89,500 in mortgage land loans during the nine months ended December 31, 2012, compared to $3,000 in recoveries and $74,000 in charge-offs during the nine months ended December 31, 2011.

Although management utilizes its best judgment in providing for losses, there can be no assurance that they will not have to increase the allowance for loan losses in subsequent periods. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as appropriate.

Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

	At or for the Nine
	Months Ended December 31,
	2012			2011
Allowance for loan losses at beginning of period	$	837,063		$	635,535
Provision for loan losses		230,000			211,099
Recoveries:
Loans secured by mortgages:
1-4 single family residential		0			3,366
Land		0			0
Commercial		236			0
Charge-offs:
Loans secured by mortgages:
1-4 single family residential		(75,712	)		(60,500	)
Land		(89,500	)		0
Commercial		0			(13,202	)
Total charge-offs		(165,212	)		(73,702	)
Net charge-offs (recoveries)		(164,976	)		(70,336	)
Allowance for loan losses at end of period	$	902,087		$	776,298
Allowance for loan losses to nonaccrual loans		211.95	%		346.96	%
Allowance for loan losses to total loans outstanding at the end of the period		1.08	%		0.91	%
Net charge-offs to average loans outstanding during the period (not annualized)		0.20	%		0.08	%

Noninterest Revenue. Noninterest revenue increased by $273,000, or 121.35%, for the nine months ended December 31, 2012, to $499,000 as compared to $225,000 for the nine months ended December 31, 2011. The increase during the period was primarily due to an increase of $194,000 in gains on the sale of investment securities and $71,000 in other noninterest revenue related to the sale of real estate.

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Noninterest Expenses. Noninterest expense decreased by $92,000 or 3.21%, to $2.8 million for the nine months ended December 31, 2012 as compared to noninterest expense of $2.9 million for the nine months ended December 31, 2011, primarily due to decreases in salaries and employee benefits, occupancy and equipment expense and regulatory assessments. The decrease in salaries and employee benefits during the period was primarily due to the retirement of one director and reduction in staff of one part-time employee.

Income Tax Expense. For the nine months ended December 31, 2012 and 2011, we incurred no income tax expense. At March 31, 2012, we had a net operating loss carry-forward totaling approximately $268,000, which expires in 2030 and 2031. We also had a capital loss carry-forward of approximately $566,000, which expires in 2014. We have established a valuation allowance to reflect uncertainty as to our ability to realize our deferred tax asset. See Note 12 of the notes to the consolidated financial statements for March 31, 2012, filed in our Annual Report on Form 10-K.

Liquidity and Capital Resources

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, 2012, cash and cash equivalents totaled $6.4 million. Securities classified as available-for-sale amounted to $57.4 million. Our liquidity has decreased slightly as we have continued to decrease interest rates on deposits. In addition, at December 31, 2012, the Bank had the ability to borrow a total of approximately $30.9 million from the Federal Home Loan Bank of Atlanta, and the Bank has lines of credit totaling $7.4 million with two large financial institutions. At December 31, 2012, we had no Federal Home Loan Bank advances outstanding or borrowings on the lines of credit.

At December 31, 2012, we had $4.3 million in commitments to extend credit outstanding. Certificates of deposit due within one year of December 31, 2012, totaled $48.5 million, or 49.5% 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 longer periods due to the current 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, 2013. 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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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, has 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.

(b) Changes to Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2012, that have materially affected, or are 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 other than routine legal proceedings in the ordinary course of business. We are not a party to any pending legal proceeding that we believe would have a material adverse effect on our financial condition, results of operations, or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

The Annual Meeting of the Stockholders of Madison Bancorp, Inc. will be held on August 12, 2013 at 10:00 a.m.

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 Common 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 Certifications
101.0*	The following materials from the Company’s Quarterly Report on form 10-Q for the quarter ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Changes in shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements

*Furnished, not filed.

(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 4.0 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 8, 2013	By:	/s/ Michael P. Gavin
		Michael P. Gavin
		President, Chief Executive Officer and Chief
		Financial Officer
		(duly authorized officer & principal financial
		officer)

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