UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended December 31, 2013

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. Yes X  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). Yes    X  No____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 company    X
(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             No   X       

As of February 7, 2014 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, 2013 (unaudited) and March 31, 2013 (audited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2013 and 2012 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2013 and 2012 (unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended December 31, 2013 and 2012 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2013 and 2012 (unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
Part II. Other Information
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
Signatures		37

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MADISON BANCORP, INC AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2013 and March 31, 2013

	December 31, 2013			March 31, 2013
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	795,570		$	663,720
Federal funds sold and interest-bearing deposits		4,025,719			4,149,416
Cash and cash equivalents		4,821,289			4,813,136
Certificates of deposit		506,073			499,862
Investment securities available-for-sale		51,666,297			56,282,175
Federal Home Loan Bank stock, at cost		294,300			181,800
Loans receivable, net		84,211,395			83,540,352
Premises and equipment, net		3,481,463			3,538,379
Foreclosed real estate		0			55,000
Accrued interest receivable		365,388			421,538
Deferred income taxes		734,030			0
Prepaid expenses and other assets		309,822			569,604
Total Assets	$	146,390,057		$	149,901,846
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing	$	7,037,913		$	5,971,726
Interest bearing		123,857,111			128,684,072
Total Deposits		130,895,024			134,655,798
Borrowings		1,250,000			0
Advances from borrowers for taxes and insurance		365,822			627,482
Deferred income taxes		0			8,350
Other liabilities		643,876			350,128
Total Liabilities		133,154,722			135,641,758
Shareholders’ Equity
Common Stock, $.01 par value, 10,000,000 shares authorized. Issued: 608,116 shares at December 31, 2013 and March 31, 2013		6,081			6,081
Additional paid-in capital		5,405,969			5,361,954
Retained earnings		9,091,182			9,049,637
Unearned ESOP shares		(309,441	)		(338,813	)
Accumulated other comprehensive income (loss)		(958,456	)		181,229
Total Shareholders’ Equity		13,235,335			14,260,088
Total Liabilities and Shareholders’ Equity	$	146,390,057		$	149,901,846

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, 2013 and 2012

	Three Months Ended December 31,					Nine Months Ended December 31,
	2013			2012		2013		2012
Interest Revenue
Loans, including fees	$	971,989		$	1,071,782	$	2,969,697	$	3,310,257
Investment securities available-for-sale		205,251			180,877		573,511		605,574
Interest-bearing deposits		3,932			5,261		12,035		17,374
Other		1,265			1,399		3,672		5,239
Total Interest Revenue		1,182,437			1,259,319		3,558,915		3,938,444
Interest Expense
Interest on deposits:
Time		258,645			370,692		843,675		1,195,430
Savings		6,043			9,243		18,268		27,299
NOW and Money Market		4,433			5,643		13,203		17,235
Borrowings		677			0		677		15
Total Interest Expense		269,798			385,578		875,823		1,239,979
Net Interest Income		912,639			873,741		2,683,092		2,698,465
Provision for Loan Losses		20,000			61,000		53,000		230,000
Net Interest Income after Provision for Loan Losses		892,639			812,741		2,630,092		2,468,465
Noninterest Revenue
Gain (loss) on sale of investment securities		(60	)		126,269		5,490		286,115
Gain on sale of land		0			0		0		71,144
Other		44,607			48,038		122,238		141,468
Total Noninterest Revenue		44,547			174,307		127,728		498,727
Noninterest Expenses
Salaries and employee benefits		499,139			485,028		1,477,740		1,485,864
Occupancy and equipment expense		217,092			210,370		626,674		625,806
Advertising		3,174			3,447		11,512		7,102
Professional services		38,421			50,727		130,452		143,641
FDIC premiums and regulatory assessments		38,200			43,050		125,750		133,050
Data processing		56,492			50,751		161,797		156,772
Stationery and postage		17,532			15,865		53,188		50,125
Other operating expenses		49,420			55,569		129,162		158,367
Total Noninterest Expenses		919,470			914,807		2,716,275		2,760,727
Income Before Income Taxes		17,716			72,241		41,545		206,465
Income Tax Expense		0			0		0		0
Net Income	$	17,716		$	72,241	$	41,545	$	206,465
Income per common share - basic	$	0.03		$	0.13	$	0.07	$	0.36
Income per common share - diluted	$	0.03		$	0.13	$	0.07	$	0.36

   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, 2013 and 2012

	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Net income	$	17,716		$	72,241		$	41,545		$	206,465
Other comprehensive income (loss):
Securities available for sale:
Net unrealized gain / loss during the period		(562,772	)		(327,060	)		(1,876,573	)		183,803
Reclassification adjustment for gains / losses in net income		60			(126,269	)		(5,490	)		(286,115	)
		(562,712	)		(453,329	)		(1,882,063	)		(102,312	)
Deferred tax expense (benefit):
Securities available for sale:
Net unrealized gain / loss during the period		(221,985	)		(129,009	)		(740,212	)		72,501
Reclassification adjustment for gains / losses in net income		24			(49,807	)		(2,166	)		(112,858	)
		(221,961	)		(178,816	)		(742,378	)		(40,357	)
Other comprehensive income (loss), net of tax		(340,751	)		(274,513	)		(1,139,685	)		(61,955	)
Comprehensive income (loss)	$	(323,035	)	$	(202,272	)	$	(1,098,140	)	$	144,510

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, 2013 and 2012

	Common Stock		Additional Paid-in Capital		Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
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 gain on available-for-sale securities, net of tax effect of $138,459											(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
Balance March 31, 2013	$	6,081	$	5,361,954	$	9,049,637	$	(338,813	)	$	181,229		$	14,260,088
Comprehensive Income:
Net income						41,545								41,545
Net unrealized loss on available-for-sale securities, net of tax effect of $(742,378)											(1,139,685	)		(1,139,685	)
Stock based compensation				24,857				992						25,849
ESOP shares allocated for release				19,158				28,380						47,538
Balance December 31, 2013	$	6,081	$	5,405,969	$	9,091,182	$	(309,441	)	$	(958,456	)	$	13,235,335

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, 2013 and 2012

	Nine Months Ended December 31,
	2013			2012
Cash flows from Operating Activities
Net income	$	41,545		$	206,465
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of investment securities		118,534			259,342
Increase in net deferred loan costs		(429	)		(43,368	)
Provision for loan losses		53,000			230,000
Gain on sale of investment securities		(5,490	)		(286,115	)
Gain on sale of land		0			(71,144	)
Gain on sale and write-down of foreclosed real estate		(110	)		0
Depreciation and amortization		166,756			156,812
ESOP expense		47,538			31,218
Stock based compensation		25,849			10,375
Changes in operating assets and liabilities:
Accrued interest receivable		56,150			48,102
Prepaid expenses and other assets		259,782			89,947
Other liabilities		293,748			107,806
Net cash provided by operating activities		1,056,873			739,440
Cash flows from Investing Activities
(Increase) decrease in loans receivable, net		(723,614	)		2,181,612
(Increase) decrease in investment certificates of deposit, net		(6,211	)		240,128
Activity in available-for-sale securities:
Sales		2,315,202			17,469,413
Maturities, repayments and calls		8,396,795			15,043,992
Purchases		(8,091,228	)		(36,617,193	)
Purchase of property and equipment		(109,840	)		(20,367	)
Proceeds from sale of property and equipment		0			99,852
Redemption of FHLB stock		(112,500	)		6,100
Proceeds from sale of foreclosed real estate		55,110			0
Proceeds from sale of ground rents		0			290,000
Net cash (used in) provided by investing activities		1,723,714			(1,306,463	)
Cash flow from Financing Activities
(Decrease) increase in deposits, net		(3,760,774	)		(3,578,316	)
Advance from Federal Home Loan Bank		1,250,000			0
(Decrease) increase in advances from borrowers, net		(261,660	)		(220,263	)
Net cash used by financing activities		(2,772,434	)		(3,798,579	)
Net Change in Cash and Cash Equivalents		8,153			(4,365,602	)
Cash and Cash Equivalents, Beginning of Period		4,813,136			10,735,213
Cash and Cash Equivalents, End of Period	$	4,821,289		$	6,369,611
Supplemental disclosure:
Interest paid	$	875,834		$	1,253,420
Loans transferred to foreclosed real estate		0			57,000

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, 2013

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.

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, 2013 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, 2013. 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, 2013 through February 10, 2014, 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 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, 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 did not have a significant impact on our financial statements.

ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives 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 an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 became effective for the Company on April 1, 2013 and did not have a significant impact on our financial statements.

ASU 2012-06, “Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force).” ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Under ASU 2012-06, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 became effective for the Company on April 1, 2013 and did not have a significant impact on our financial statements.

ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on April 1, 2013 and did not have a significant impact on our financial statements.

9

Note 2. Earnings per Share

Basic earnings per share are computed by dividing net income 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. Basic and diluted earnings per share for the three and nine months ended December 31, 2013 and 2012 are summarized below:

	Three Months Ended December 31				Nine Months Ended December 31
	2013		2012		2013		2012
Net income	$	17,716	$	72,241	$	41,545	$	206,465
Average common shares outstanding		574,755		571,917		574,734		571,896
Stock option adjustment		14,635		3,841		11,744		2,318
Average common shares outstanding - diluted		589,390		575,758		586,478		574,214
Earnings per common share - basic	$	0.03	$	0.13	$	0.07	$	0.36
Earnings per common share - diluted	$	0.03	$	0.13	$	0.07	$	0.36

Note 3. Cash and Cash Equivalents

The Company sells federal funds on an unsecured basis to correspondent banks. As of December 31, 2013 and March 31, 2013, the balance of federal funds sold on an unsecured basis was $73,777 and $173,535, respectively. As of December 31, 2013 and March 31, 2013, the Company had $184,004 and $168,629, respectively, 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.

Note 4. Investment Securities

The amortized cost and estimated fair value of investment securities at December 31, 2013 and March 31, 2013, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2013
Investment securities available-for-sale:
U.S. government agencies	$	15,386,705	$	0	$	891,201	$	14,495,504
Brokered certificates of deposit		5,146,000		17,100		5,276		5,157,824
Mortgage-backed securities (Agency)		21,558,982		95,272		627,982		21,026,272
Collateralized mortgage obligations (Agency)		11,157,396		21,071		191,770		10,986,697
	$	53,249,083	$	133,443	$	1,716,229	$	51,666,297

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2013
Investment securities available-for-sale:
U.S. government agencies	$	15,137,211	$	18,332	$	33,765	$	15,121,778
Brokered certificates of deposit		8,444,000		36,394		1,119		8,479,275
Mortgage-backed securities (Agency)		18,802,845		256,680		37,871		19,021,654
Collateralized mortgage obligations (Agency)		13,598,841		76,606		15,979		13,659,468
	$	55,982,897	$	388,012	$	88,734	$	56,282,175

10

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, 2013 and March 31, 2013, there were no borrowings or securities pledged under these lines of credit.

The following is a summary of contractual maturities of securities available-for-sale as of December 31, 2013:

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
Amounts maturing in:
One year or less	$	1,900,000	$	1,904,114
After one year through five years		8,618,607		8,525,724
After five years through ten years		8,364,098		7,697,533
After ten years		1,650,000		1,525,957
		20,532,705		19,653,328
Mortgage-backed securities (Agency)		21,558,982		21,026,272
Collateralized mortgage obligations (Agency)		11,157,396		10,986,697
	$	53,249,083	$	51,666,297

Proceeds from the sale of investment securities were $2,315,202 and $17,469,413 during the nine months ended December 31, 2013 and 2012, respectively, with gains of $14,347 and losses of $8,857 for the nine months ended December 31, 2013 and gains of $302,785 and losses of $16,670 for the nine months ended December 31, 2012.

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, 2013 and March 31, 2013.

	Less than 12 Months				12 Months or More				Total
December 31, 2013	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	$	11,348,595	$	586,302	$	3,146,909	$	304,899	$	14,495,504	$	891,201
Brokered certificates of deposit		664,724		5,276		0		0		664,724		5,276
Mortgage-backed securities (Agency)		13,880,726		627,981		0		0		13,880,726		627,981
Collateralized mortgage obligations (Agency)		3,697,198		168,982		2,395,870		22,789		6,093,068		191,771
	$	29,591,243	$	1,388,541	$	5,542,779	$	327,688	$	35,134,022	$	1,716,229

	Less than 12 Months				12 Months or More				Total
March 31, 2013	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	$	7,592,327	$	33,765	$	0	$	0	$	7,592,327	$	33,765
Brokered certificates of deposit		431,881		1,119		0		0		431,881		1,119
Mortgage-backed securities (Agency)		4,318,861		37,871		0		0		4,318,861		37,871
Collateralized mortgage obligations (Agency)		2,214,670		11,111		1,117,261		4,868		3,331,931		15,979
	$	14,557,739	$	83,866	$	1,117,261	$	4,868	$	15,675,000	$	88,734

11

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.

Note 5. Loans Receivable and Allowance for Loan Losses

Loans receivable consist of the following at December 31, 2013 and March 31, 2013:

	December 31, 2013			March 31, 2013
Loans secured by mortgages:
Residential:
1-4 Single family	$	55,029,606		$	54,604,184
Multifamily		1,446,856			1,513,209
Lines of credit		3,147,962			2,658,271
Commercial		14,212,965			14,553,616
Land		2,834,744			4,191,616
Farm loans guaranteed by the USDA		1,251,660			888,544
Residential construction		1,228,618			1,367,134
		79,152,411			79,776,574
Consumer		437,342			403,330
Commercial		5,304,143			4,090,168
Total loans receivable		84,893,896			84,270,072
Net deferred costs		180,196			179,768
Allowance for loan losses		(862,697	)		(909,488	)
Loans receivable, net	$	84,211,395		$	83,540,352

Credit Quality Indicators

When assessing credit quality management considers all aspects of the loan, including: 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 allowance for loan losses. If adverse circumstances warrant additional allocations, an analysis will be performed on a case-by-case basis.

Other loans designated as special mention generally require higher reserves than are allocated to pass loans.

12

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 allowance for loan losses.

13

The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans as of December 31, 2013 and March 31, 2013.

Commercial Credit Exposure	Commercial, Not Real Estate Secured				Commercial Real Estate (1)
	December 31, 2013		March 31, 2013		December 31, 2013		March 31, 2013
Grade:
Pass	$	5,304,143	$	3,702,067	$	12,691,760	$	11,634,602
Special Mention		0		372,524		0		3,430,979
Substandard		0		15,577		2,772,865		376,579
Doubtful		0		0		0		0
Loss		0		0		0		0
	$	5,304,143	$	4,090,168	$	15,464,625	$	15,442,160

Other Credit Exposure	Residential Real Estate Construction and Land				Residential Real Estate Other (2)				Consumer
	December 31, 2013		March 31, 2013		December 31, 2013		March 31, 2013		December 31, 2013		March 31, 2013
Grade:
Pass	$	3,940,049	$	2,021,668	$	57,844,136	$	57,944,859	$	437,342	$	401,803
Special Mention		0		3,396,480		566,369		509,874		0		0
Substandard		123,313		140,602		1,213,919		320,931		0		1,527
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
	$	4,063,362	$	5,558,750	$	59,624,424	$	58,775,664	$	437,342	$	403,330

(1) Commercial real estate includes farm loans guaranteed by the USDA.

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

Age Analysis of Past Due Loans as of December 31, 2013 and March 31, 2013

	30-59 Days		60-89 Days		90 Days or More Past Due				Total				Total Nonaccrual		Nonaccrual Interest Not
December 31, 2013	Past Due		Past Due		Accrual		Nonaccrual		Past Due		Current		Loans		Accrued
Loans secured by mortgages:
Residential:
1-4 Single family	$	928,885	$	887,169	$	0	$	569,474	$	2,385,528	$	52,644,078	$	605,452	$	35,953
Multifamily		0		0		0		0		0		1,446,856		0		0
Lines of credit		0		0		0		0		0		3,147,962		0		0
Commercial		0		0		0		365,916		365,916		13,847,049		365,916		7,499
Land		0		0		0		0		0		2,834,744		0		0
Farm		0		0		0		0		0		1,251,660		0		0
Residential Construction		0		0		0		0		0		1,228,618		0		0
		928,885		887,169		0		935,390		2,751,444		76,400,967		971,368		43,452
Consumer		2,580		0		0		0		2,580		434,762		0		0
Commercial		449,434		0		0		0		449,434		4,854,709		0		0
	$	1,380,899	$	887,169	$	0	$	935,390	$	3,203,458	$	81,690,438	$	971,368	$	43,452

	30-59 Days		60-89 Days		90 Days or More Past Due				Total				Total Nonaccrual		Nonaccrual Interest Not
March 31, 2013	Past Due		Past Due		Accrual		Nonaccrual		Past Due		Current		Loans		Accrued
Loans secured by mortgages:
Residential:
1-4 Single family	$	576,788	$	74,160	$	0	$	313,580	$	964,528	$	53,639,656	$	313,580	$	26,954
Multifamily		0		0		0		0		0		1,513,209		0		0
Lines of credit		0		0		0		0		0		2,658,271		0		0
Commercial		0		0		376,579		0		376,579		14,177,037		0		0
Land		0		0		0		0		0		4,191,616		0		0
Farm		0		0		0		0		0		888,544		0		0
Residential Construction		424,938		0		0		0		424,938		942,196		0		0
		1,001,726		74,160		376,579		313,580		1,766,045		78,010,529		313,580		26,954
Consumer		3,494		0		0		1,527		5,021		398,309		1,527		0
Commercial		0		0		0		15,577		15,577		4,074,591		15,577		109
	$	1,005,220	$	74,160	$	376,579	$	330,684	$	1,786,643	$	82,483,429	$	330,684	$	27,063

14

Impaired Loans as of and for the Nine Months Ended December 31, 2013

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans secured by mortgages:
Residential:
1-4 Single family	$	1,405,281	$	798,885	$	408,896	$	1,207,781	$	59,900	$	1,225,104	$	24,484
Multifamily		0		0		0		0		0		0		0
Lines of credit		371,785		371,785		0		371,785		0		380,595		5,382
Commercial		2,772,866		2,772,866		0		2,772,866		0		2,785,043		46,475
Land		227,813		123,313		0		123,313		0		124,535		7,851
Farm		0		0		0		0		0		0		0
Residential construction		0		0		0		0		0		0		0
		4,777,745		4,066,849		408,896		4,475,745		59,900		4,515,277		84,192
Consumer		0		0		0		0		0		0		0
Commercial		0		0		0		0		0		0		0
Total impaired loans	$	4,777,745	$	4,066,849	$	408,896	$	4,475,745	$	59,900	$	4,515,277	$	84,192

Impaired Loans as of and for the Year Ended March 31, 2013

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans secured by mortgages:
Residential:
1-4 Single family	$	812,251	$	313,580	$	379,930	$	693,510	$	60,200	$	777,370	$	10,346
Multifamily		0		0		0		0		0		0		0
Lines of credit		0		0		0		0		0		0		0
Commercial		376,579		376,579		0		376,579		0		381,180		33,686
Land		230,102		140,602		0		140,602		0		223,763		9,945
Farm		0		0		0		0		0		0		0
Residential construction		0		0		0		0		0		0		0
		1,418,932		830,761		379,930		1,210,691		60,200		1,382,313		53,977
Consumer		1,527		1,527		0		1,527		0		1,588		34
Commercial		15,837		15,577		0		15,577		0		16,832		343
Total impaired loans	$	1,436,296	$	847,865	$	379,930	$	1,227,795	$	60,200	$	1,400,733	$	54,354

We occasionally modify loans to extend the term to help borrowers stay current on their loan and to avoid foreclosure. At December 31, 2013, we had nine 1-4 single family mortgage loans totaling approximately $2,132,000 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. Three of these nine modified loans with balances totaling $845,000 were current, one of these nine with a balance of $152,000 was 30-59 days delinquent, three of these nine with balances totaling $807,000 were 60-89 days delinquent and two of these nine with balances totaling $328,000 were greater than 90 days delinquent at December 31, 2013.

Classified loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Generally, TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are also classified as nonperforming if they are on nonaccrual or become greater than 30 days past due.

15

A summary of TDRs at December 31, 2013 and March 31, 2013 follows:

December 31, 2013	Number of Loans		Performing		Nonperforming		Total
Loans secured by residential:
1-4 Single family		3	$	372,919	$	35,977	$	408,896
Total		3	$	372,919	$	35,977	$	408,896

March 31, 2013	Number of Loans		Performing		Nonperforming		Total
Loans secured by residential:
1-4 Single family		2	$	382,186	$	0	$	382,186
Total		2	$	382,186	$	0	$	382,186

16

The following tables set forth for the nine months ended December 31, 2013 and 2012 and for the year ended March 31, 2013, 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, 2013:

	Allowance 3/31/2013		Charge-offs		Recoveries		Provision			Allowance 12/31/2013
Loans secured by mortgages:
Residential:
1-4 Single family	$	343,110	$	85,700	$	909	$	86,736		$	345,055
Multifamily		19,218		0		0		(1,132	)		18,086
Lines of credit		15,950		0		0		25,759			41,709
Commercial		258,443		0		0		63,923			322,366
Land		95,200		15,000		0		(36,356	)		43,844
Farm		0		0		0		0			0
Residential construction		36,459		0		0		(21,101	)		15,358
		768,380		100,700		909		117,829			786,418
Consumer		2,802		0		0		107			2,909
Commercial		60,147		0		0		11,989			72,136
Unallocated		78,159		0		0		(76,925	)		1,234
Total	$	909,488	$	100,700	$	909	$	53,000		$	862,697

	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	$	59,900	$	285,155	$	1,207,781	$	53,821,825	$	55,029,606
Multifamily		0		18,086		0		1,446,856		1,446,856
Lines of credit		0		41,709		371,785		2,776,177		3,147,962
Commercial		0		322,366		2,772,866		11,440,099		14,212,965
Land		0		43,844		123,313		2,711,431		2,834,744
Farm		0		0		0		1,251,660		1,251,660
Residential construction		0		15,358		0		1,228,618		1,228,618
		59,900		726,518		4,475,745		74,676,666		79,152,411
Consumer		0		2,909		0		437,342		437,342
Commercial		0		72,136		0		5,304,143		5,304,1433
Unallocated		0		1,234		0		0		0
Total	$	59,900	$	802,797	$	4,475,745	$	80,418,151	$	84,893,896

17

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
Farm		0		0		0		0			0
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
Farm		0		0		0		0		0
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

18

For the Year Ended March 31, 2013:

	Allowance 3/31/2012		Charge-offs		Recoveries		Provision			Allowance 3/31/2013
Loans secured by mortgages:
Residential:
1-4 Single family	$	372,404	$	75,712	$	7,401	$	39,017		$	343,110
Multifamily		18,705		0		0		513			19,218
Lines of credit		13,817		0		0		2,133			15,950
Commercial		188,199		0		0		70,244			258,443
Land		152,621		89,500		0		32,079			95,200
Farm		0		0		0		0			0
Residential construction		16,417		0		0		20,042			36,459
		762,163		165,212		7,401		164,028			768,380
Consumer		3,103		0		0		(301	)		2,802
Commercial		71,149		0		236		(11,238	)		60,147
Unallocated		648		0		0		77,511			78,159
Total	$	837,063	$	165,212	$	7,637	$	230,000		$	909,488

	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	$	60,200	$	282,910	$	693,510	$	53,910,674	$	54,604,184
Multifamily		0		19,218		0		1,513,209		1,513,209
Lines of credit		0		15,950		0		2,658,271		2,658,271
Commercial		0		258,443		376,579		14,177,037		14,553,616
Land		0		95,200		140,602		4,051,014		4,191,616
Farm		0		0		0		888,544		888,544
Residential construction		0		36,459		0		1,367,134		1,367,134
		60,200		708,180		1,210,691		78,565,883		79,776,574
Consumer		0		2,802		1,527		401,803		403,330
Commercial		0		60,147		15,577		4,074,591		4,090,168
Unallocated		0		78,159		0		0		0
Total	$	60,200	$	849,288	$	1,227,795	$	83,042,277	$	84,270,072

Note 6. Borrowings

At December 31, 2013, the Bank had the ability to borrow a total of approximately $29.4 million from the Federal Home Loan Bank of Atlanta, and the Bank has lines of credit totaling approximately $5.3 million with two large financial institutions. The FHLB borrowing requires us to pledge mortgage loans as collateral, and one of the lines of credit requires us to pledge brokered certificates of deposit or US Government Agency securities. At December 31, 2013, the Bank had Federal Home Loan Bank advances totaling $1,250,000 outstanding and no borrowings on the lines of credit. The interest rate on the advance outstanding was 0.18%. The advance matured on January 23, 2014. The rates on the borrowing lines are determined at the time of the advance. There were no borrowings as of March 31, 2013.

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.

19

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, 2013		March 31, 2013
Mortgage loan commitments – fixed rate	$	218,750	$	1,573,750
Mortgage loan commitments – variable rate		14,109		238,629
Unused equity lines of credit (variable rate)		2,572,096		2,815,945
Commercial and consumer lines of credit		259,707		230,651
Standby letters of credit		312,293		377,530
Total	$	3,376,955	$	5,236,505

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, 2013 and March 31, 2013, the fair values were measured using the following methodologies:

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Government agencies	$	0	$	14,495,504	$	0	$	14,495,504
Brokered certificates of deposit		0		5,157,824		0		5,157,824
Mortgage-backed securities (Agency)		255,397		20,769,423		1,452		21,026,272
Collateralized mortgage obligations (Agency)		0		10,986,697		0		10,986,697
	$	255,397	$	51,409,450	$	1,452	$	51,666,297

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Government agencies	$	1,024,845	$	14,096,933	$	0	$	15,121,778
Brokered certificates of deposit		8,479,275		0		0		8,479,275
Mortgage-backed securities (Agency)		1,022,582		17,503,140		495,932		19,021,654
Collateralized mortgage obligations (Agency)		285,887		12,797,159		576,422		13,659,468
	$	10,812,589	$	44,397,232	$	1,072,354	$	56,282,175

The following table summarizes activity in securities valued using Level 3 inputs during the nine months ended December 31, 2013:

	December 31, 2013
Balance at beginning of the period	$	1,072,354
Purchases		0
Sales		0
Paydowns		(81,702	)
Transfers in and/or out of Level 3		(917,573	)
Changes in market value		(71,627	)
Balance at the end of the period	$	1,452

The Company measures its impaired loans on a nonrecurring basis, generally based on the fair value of the loans’ collateral. Fair value is generally determined based upon independent appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of December 31, 2013 and March 31, 2013, our recorded investment in impaired loans was $4,475,745 and $1,227,795, respectively. Our allowance for loan losses included an allocation for these individually evaluated loans of $59,900 and $60,200 as of December 31, 2013 and March 31, 2013, respectively.

The Company measures its foreclosed real estate on a nonrecurring basis at fair value less estimated cost to sell. There was no foreclosed real estate as of December 31, 2013. As of March 31, 2013, the fair value of foreclosed real estate was estimated to be $55,000. Fair value was determined based on offers and/or appraisals. Cost to sell the assets was based on standard market factors. The Company categorizes its foreclosed real estate as Level 3. During the nine months ended December 31, 2113, the foreclosed real estate owned as of March 31, 2013 was sold for $55,110.

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The following table summarizes the fair values of assets measured on a nonrecurring basis as of December 31, 2013 and March 31, 2013:

	December 31, 2013
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Impaired loans	$	0	$	0	$	4,415,845	$	4,415,845
Foreclosed real estate		0		0		0		0
Total impaired loans and foreclosed real estate	$	0	$	0	$	4,415,845	$	4,415,845

	March 31, 2013
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Impaired loans	$	0	$	0	$	1,167,595	$	1,167,595
Foreclosed real estate		0		0		55,000		55,000
Total impaired loans and foreclosed real estate	$	0	$	0	$	1,222,595	$	1,222,595

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 Statements of Financial Condition, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, are as follows:

	December 31, 2013				March 31, 2013
(dollars in thousands)	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Financial assets
Level 1 inputs:
Cash and cash equivalents	$	4,821	$	4,821	$	4,813	$	4,813
Level 2 inputs:
Certificates of deposit		506		506		500		500
Accrued interest receivable		365		365		422		422
Level 3 inputs:
Federal Home Loan Bank stock		294		294		182		182
Loans, net		84,211		87,937		83,540		96,396
Financial liabilities
Level 2 inputs:
Noninterest-bearing deposits	$	7,038	$	7,038	$	5,972	$	5,972
Advances from borrowers for taxes and insurance		366		366		627		627
Level 3 inputs:
Interest-bearing deposits		123,857		124,616		128,684		129,625
Borowings		1,250		1,250		0		0

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

As of December 31, 2013, 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:

	Actual					Minimum Requirements					To Be Well Capitalized
(dollars in thousands)	Amount		%			Amount		%			Amount		%
As of December 31, 2013:
Total risk-based capital (to risk-weighted assets)	$	13,458		19.5	%	$	5,524		8.0	%	$	6,905		10.0	%
Tier I capital (to risk-weighted assets)		12,595		18.2		N/A		N/A				4,143		6.0
Tier I capital (to adjusted total assets)		12,595		8.6			5,846		4.0			7,307		5.0
As of March 31, 2013:
Total risk-based capital (to risk-weighted assets)	$	13,298		19.1	%	$	5,571		8.0	%	$	6,963		10.0	%
Tier I capital (to risk-weighted assets)		12,427		17.8		N/A		N/A				4,178		6.0
Tier I capital (to adjusted total assets)		12,427		8.3			5,986		4.0			7,483		5.0

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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 nine months ended December 31, 2013 the Company granted stock options for 19,460 shares, with an exercise price of $14.60 per share. The options are exercisable up to 10 years from the grant date. The options vest over a three-year period with one third of the options vesting on each of the first, second and third anniversary dates.

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 having vested immediately, one third of the options having vested on the first anniversary date and the final third of the options vesting on the second anniversary date.

Option expense recognized during the nine months ended December 31, 2013 and December 31, 2012 was $24,857 and $7,130, respectively. At December 31, 2013, there was $40,952 of total unrecognized compensation expense related to non-vested stock options to be recognized through February 28, 2016. The weighted average grant date fair value of the options granted during the year ended March 31, 2012 was $1.77 and the weighted average grant date fair value of the options granted during the nine months ended December 31, 2013 was $2.76.

A summary of information regarding stock options outstanding as of December 31, 2013, is as follows:

Weighted Average Exercise Price	Outstanding Shares		Average Remaining Life (Years)		Exercisable Shares
$10.94		43,630		8.68		16,113
Intrinsic value	$	253,327			$	140,989

There are 17,181 options available for future grant.

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

Safe Harbor Statement for Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the 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 25, 2013. 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.

25

Comparison of Financial Condition at December 31, 2013 and March 31, 2013

Assets. Total assets decreased $3,512,000, or 2.3%, from $149,902,000 at March 31, 2013, to $146,390,000 at December 31, 2013 due to a $4,616,000, or 8.2%, decrease in investment securities available-for-sale, partially offset by an increase in net loans receivable of $671,000.

Cash and Cash Equivalents. Cash and cash equivalents increased by $8,000, or 0.2%, from $4,813,000 at March 31, 2013 to $4,821,000 at December 31, 2013.

	December 31,		March 31,
	2013		2013
Cash and due from banks	$	795,570	$	663,720
Federal funds sold		73,778		173,535
Interest-bearing deposits		184,004		175,862
FHLB overnight deposits		128,910		379,282
Federal Reserve Bank balances		3,639,027		3,420,737
Total	$	4,821,289	$	4,813,136

Loans. Net loans receivable increased by $671,000, or 0.8%, from $83,540,000 at March 31, 2013 to $84,211,000 at December 31, 2013, primarily as a result of the net effect of a $1,214,000 increase in commercial loans, a $490,000 increase in home equity lines of credit and a $425,000 increase in 1-4 single family mortgages, partially offset by a $1,357,000 decrease in mortgages secured by land. The increase in residential mortgage loans was primarily the result of our increased emphasis on lending in this specific area. The decrease in mortgages secured by land was primarily the result of significant principal reductions on two loans and normal principal reductions on the remaining portfolio.

Securities. Available-for-sale investment securities decreased by $4,616,000, or 8.2%, from $56,282,000 at March 31, 2013 to $51,666,000 at December 31, 2013. The net decrease in available-for-sale securities is the result of the sale of mortgage backed securities, collateralized mortgage obligations and agency securities with proceeds of 2,315,000 with $14,000 in gains $9,000 in losses on the sale, and $8,397,000 of securities being called, having matured, or repayments. These sales, calls, maturities and repayments were partially offset by the purchase of $7,981,000 of U.S. Government Agency bonds, mortgage backed securities, collateralized mortgage obligations, and $110,000 of Brokered Investment CDs. At December 31, 2013, we also held a $294,000 investment in the common stock of the Federal Home Loan Bank of Atlanta.

Deposits. Total deposits decreased by $3,761,000, or 2.8%, to $130,895,000 at December 31, 2013 from $134,656,000 at March 31, 2013. Balances of noninterest-bearing deposits increased by $1,066,000, or 17.9%, to $7,038,000 at December 31, 2013, from $5,972,000 at March 31, 2013. NOW and money market deposit accounts increased by $620,000, or 7.1%, to $9,366,000 at December 31, 2013 from $8,747,000 at March 31, 2013. Savings deposits decreased by $72,000, or 0.3%, to $24,605,000 at December 31, 2013 from $24,677,000 at March 31, 2013 and certificates of deposit decreased by $5,374,000, or 5.6%, to $89,886,000 at December 31, 2013 from $95,260,000 at March 31, 2013.

Borrowings. We had Federal Home Loan Bank borrowings of $1,250,000 at December 31, 2013 as compared to no borrowings at March 31, 2013.

Shareholders’ Equity.   Shareholders’ equity decreased by $1,025,000, or 7.2%, to $13,235,000 at December 31, 2013 from $14,260,000 at March 31, 2013 primarily due to a decrease in the after-tax valuation for available-for-sale securities of $1,139,000 from $181,000 at March 31, 2013 to $(958,000) at December 31, 2013. The decrease in the valuation reserve was a result of a decline in prices on many securities in the investment portfolio due to the increase in interest rates over the nine month period ended December 31, 2013.

26

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

Overview. Net income was $18,000 for the three months ended December 31, 2013, compared to $72,000 for the three months ended December 31, 2012. The decrease in net income for the current quarter was primarily the result of a decrease in noninterest revenue resulting from reductions in gains on the sale of investment securities. This decrease in net income was partially offset by an increase in net interest income.

Net Interest Income. Net interest income increased by $39,000, or 4.5%, to $913,000 for the three months ended December 31, 2013, as compared to $874,000 for the three months ended December 31, 2012, primarily due to a decrease in the cost of funds for deposits and a decrease in the average balance for total interest-bearing deposits, partially offset by a smaller decrease in the yield on interest-earning assets and a decrease in the average balance of interest-earning assets. Our interest rate spread was 2.44% for the three months ended December 31, 2013, compared to 2.23% for the three months ended December 31, 2012, and our net interest margin increased by 18 basis points to 2.53% for the three months ended December 31, 2013, from 2.35% for the three months ended December 31, 2012.

Interest on loans decreased by $100,000, or 9.3%, to $972,000 for the three months ended December 31, 2013, as compared to $1,072,000 for the three months ended December 31, 2012. The average balance of loans increased by $1,417,000 to $84,564,000 for the three months ended December 31, 2013, from $83,147,000 for the three months ended December 31, 2012. The average yield on loans decreased by 57 basis points from 5.13% for the three months ended December 31, 2012 to 4.56% for the three months ended December 31, 2013.

Interest on securities available-for-sale increased by $24,000, or 13.5%, to $205,000 for the three months ended December 31, 2013, as compared to $181,000 for the three months ended December 31, 2012, due to an increase of 26 basis points in the average yield, partially offset by a decrease of $3,735,000 in average balances of the portfolio.

Interest income on interest-bearing deposits decreased by $1,000, or 25.3%, to $4,000 for the three months ended December 31, 2013, as compared to $5,000 for the three months ended December 31, 2012, as a result of a $2,553,000 decrease in average balances partially offset by a 3 basis point increase in the average yield.

Interest expense on total deposits decreased by $116,000, or 30.2%, to $269,000 for the three months ended December 31, 2013, from $386,000 for the three months ended December 31, 2012, due to a decrease of $7,441,000 in average balances and a 30 basis point decrease in the average cost of interest-bearing deposits. Interest on certificates of deposit decreased $112,000 to $259,000 for the three months ended December 31, 2013, from $371,000 for the three months ended December 31, 2012, as a result of a 36 basis point decrease in average cost of time deposits and a decrease in average balances of $7,976,000. Interest on savings deposits decreased by $3,000 to $6,000 for the three months ended December 31, 2013, as compared to $9,000 for the three months ended December 31, 2012, due to a decrease in the average cost of savings deposits of 5 basis points and a decrease in average balances of $438,000. Interest on NOW and money market deposit accounts decreased $1,000 to $4,000 for the three months ended December 31, 2013, from $6,000 for the three months ended December 31, 2012 due to a decrease of 8 basis points in the average cost of NOW and money market deposit accounts partially offset by an increase in average balances of $973,000.

27

Average Balances, Interest and Yields. The following table for the three months ended December 31, 2013 and 2012 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,
	2013							2012
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets:
Interest-bearing deposits	$	5,037,739	$	3,932		0.31	%	$	7,590,767	$	5,261		0.28	%
Investment securities available-for-sale		53,066,792		205,251		1.53			56,801,370		180,877		1.27
Loans receivable, net		84,564,387		971,989		4.56			83,147,417		1,071,782		5.13
Other interest-earning assets		269,865		1,265		1.86			228,400		1,399		2.44
Total interest-earning assets		142,938,783		1,182,437		3.28	%		147,767,954		1,259,319		3.39	%
Noninterest-earning assets		4,739,134							6,114,787
Total assets	$	147,677,917						$	153,882,741
Liabilities and Shareholders’ Equity:
Time deposits	$	91,425,277		258,645		1.12	%	$	99,401,277		370,692		1.48	%
Savings		24,073,481		6,043		0.10			24,511,546		9,243		0.15
NOW and money market accounts		9,320,752		4,433		0.19			8,347,510		5,643		0.27
Total interest-bearing deposits		124,819,510		269,121		0.86			132,260,333		385,578		1.16
Other interest-bearing liabilities		1,917,675		677		0.14			455,719		0		0.01
Total interest-bearing liabilities		126,737,185		269,798		0.84	%		132,716,052		385,578		1.16	%
Noninterest-bearing deposits		6,948,184							5,941,622
Other noninterest-bearing liabilities		470,592							667,938
Total liabilities		134,155,961							139,325,612
Total shareholders’ equity		13,521,956							14,557,129
Total liabilities and shareholders’ equity	$	147,677,917						$	153,882,741
Net interest income			$	912,639						$	873,741
Interest rate spread						2.44	%						2.23	%
Net interest margin						2.53	%						2.35	%
Average interest-earning assets to average interest-bearing liabilities						112.78	%						111.34	%

● 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.

28

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.

Our provision for loan losses decreased $41,000 to $20,000 for the three months ended December 31, 2013 from $61,000 for the three months ended December 31, 2012. At December 31, 2013, the allowance for loan losses was $863,000, or 1.02%, of total loans compared to $909,000, or 1.08%, of total loans at March 31, 2013, and $902,000, or 1.08% of total loans at December 31, 2012. We had balances of $605,000 in 1-4 single family nonaccrual residential mortgage and $366,000 commercial nonaccrual loans at December 31, 2013, compared to $314,000 in 1-4 single family nonaccrual loans, $16,000 in commercial nonaccrual loans and $1,500 in consumer nonaccrual loans at March 31, 2013, and $426,000 of 1-4 single family nonaccrual loans at December 31, 2012.

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 recoveries of $98 and $4,000 in 1-4 single family mortgage charge-offs during the three months ended December 31, 2013, compared to no recoveries and $12,000 in 1-4 single family mortgage charge-offs during the three months ended December 31, 2012.

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,
	2013			2012
Allowance for loan losses at beginning of period	$	846,799		$	852,627
Provision for loan losses		20,000			61,000
Recoveries:
Loans secured by mortgages:
1-4 single family residential		98			0
Land		0			0
Commercial		0			0
Total recoveries		98			0
Charge-offs:
Loans secured by mortgages:
1-4 single family residential		4,200			11,540
Land		0			0
Commercial		0			0
Total charge-offs		4,200			11,540
Net charge-offs		4,102			11,540
Allowance for loan losses at end of period	$	862,697		$	902,087
Allowance for loan losses to nonaccrual loans		88.81	%		211.95	%
Allowance for loan losses to total loans outstanding at the end of the period		1.02	%		1.08	%
Net charge-offs to average loans outstanding during the period (not annualized)		0.00	%		0.01	%

29

At December 31, 2013, Madison had three 1-4 single family loans totaling approximately $409,000 classified as troubled debt restructurings “TDRs”, which received rate modifications to current market rates. One of these three loans in the amount of $7,000 with an individual impairment of $900 recorded against the loan is current at December 31, 2013 and is classified as substandard. Another of these three loans in the amount of $36,000 with an individual impairment of $1,500 recorded against the loan is 30-59 days delinquent and is classified as substandard. The third loan in the amount of $366,000 with an individual impairment of $57,500 recorded against the loan has remained current through the three months ended December 31, 2013 and is not adversely classified. These loans are in accrual status and in compliance with their modified terms, and therefore, not included in the nonaccrual ratio above.

Noninterest Revenue. Noninterest revenue decreased by $130,000, or 74.4%, for the three months ended December 31, 2013, to $45,000 as compared to $174,000 for the three months ended December 31, 2012. The decrease during the period was primarily due to decreases of $126,000 in gain on the sale of investment securities.

Noninterest Expenses. Noninterest expense increased by $5,000, or 0.5%, to $920,000 for the three months ended December 31, 2013 as compared to $915,000 for the three months ended December 31, 2012, primarily due to increases in salaries and employee benefits, occupancy & equipment expense and data processing expense, partially offset by decreases in professional services, other operating expenses and regulatory assessments.

Income Tax Expense. For the three months ended December 31, 2013 and 2012, we incurred no income tax expense. At March 31, 2013, the Bank had a net operating loss carry-forward totaling approximately $643,000, which will begin to expire during the year ending March 31, 2029. The Bank also had a capital loss carry-forward of approximately $495,000, which expires during the year ending March 31, 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, 2013, filed in our Annual Report on Form 10-K for the year ended March 31, 2013.

30

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

Overview. Net income was $42,000 for the nine months ended December 31, 2013, compared to $206,000 for the nine months ended December 31, 2012. The decrease in net income for the current period was primarily the result of a decrease in noninterest revenue resulting from reductions in gains on the sale of investment securities and gains on the sale of land and a decrease in net interest income. These decreases to income were only partially offset by a decrease in the provision for loan losses and decreases to noninterest expenses.

Net Interest Income. Net interest income decreased by $15,000, or 0.6%, to $2,683,000 for the nine months ended December 31, 2013, as compared to $2,698,000 for the nine months ended December 31, 2012, due to a decrease in average balances and yield of interest-earning assets, partially offset by a decrease in the average balances and cost of interest-bearing liabilities. Our interest rate spread was 2.38% for the nine months ended December 31, 2013, compared to 2.33% for the nine months ended December 31, 2012, and our net interest margin increased by 2 basis points to 2.48% for the nine months ended December 31, 2013, from 2.46% for the nine months ended December 31, 2012.

Interest on loans decreased by $341,000, or 10.3%, to $2,970,000 for the nine months ended December 31, 2013, as compared to $3,310,000 for the nine months ended December 31, 2012. The average balance of loans increased by $1,159,000 to $83,695,000 for the nine months ended December 31, 2013, from $82,536,000 for the nine months ended December 31, 2012. The average yield on loans decreased by 63 basis points to 4.71% for the nine months ended December 31, 2013 from 5.34% for the nine months ended December 31, 2012.

Interest on securities available-for-sale decreased by $32,000, or 5.3%, to $574,000 for the nine months ended December 31, 2013, as compared to $606,000 for the nine months ended December 31, 2012, due to a decrease of $2,597,000 in average balances in the portfolio and to a 1 basis point decrease in the average yield on the portfolio.

Interest income on interest-bearing deposits decreased by $5,000, or 30.7%, to $12,000 for the nine months ended December 31, 2013, as compared to $17,000 for the nine months ended December 31, 2012, as a result of a decrease in the average yield of 8 basis points and a $711,000 decrease in average balances.

Interest expense on total deposits decreased by $364,000, or 29.4%, to $875,000 for the nine months ended December 31, 2013, from $1,240,000 for the nine months ended December 31, 2012, due to a 34 basis point decrease in the average cost of interest-bearing deposits and a $4,304,000 decrease in the average balance of interest-bearing deposits. Interest on certificates of deposit decreased by $352,000 to $844,000 for the nine months ended December 31, 2013 from $1,195,000 for the nine months ended December 31, 2012, as a result of the 42 basis point decrease in the average cost of time deposits and by a decrease in average balances of $4,986,000. Interest on savings deposits decreased by $9,000 to $18,000 for the nine months ended December 31, 2013, from $27,000 for the nine months ended December 31, 2012, due to a decrease in the average cost of savings accounts of 5 basis points partially offset by an increase in average balances of $12,000. Interest on NOW and money market deposit accounts decreased by $4,000 to $13,000 for the nine months ended December 31, 2013, from $17,000 for the nine months ended December 31, 2012, due to a decrease in the cost of NOW and money market deposit accounts of 8 basis points, partially offset by an increase of $669,000 in average balances.

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Average Balance and Yields. The following table for the nine months ended December 31, 2013 and 2012 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,
	2013							2012
	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost
Assets:
Interest-bearing deposits	$	5,456,979	$	12,035		0.29	%	$	6,167,943	$	17,374		0.37	%
Investment securities available-for-sale		54,383,187		573,511		1.40			56,979,799		605,574		1.41
Loans receivable, net		83,694,728		2,969,697		4.71			82,536,153		3,310,257		5.34
Other interest-earning assets		211,289		3,672		2.31			228,400		5,239		3.05
Total interest-earning assets		143,746,183		3,558,915		3.29	%		145,912,295		3,938,444		3.59	%
Noninterest-earning assets		4,634,692							5,746,994
Total assets	$	148,380,875						$	151,659,289
Liabilities and Shareholders’ Equity:
Time deposits	$	93,015,228		843,675		1.20	%	$	98,000,998		1,195,430		1.62	%
Savings		24,341,956		18,268		0.10			24,329,598		27,299		0.15
NOW and money market accounts		9,184,793		13,203		0.19			8,515,876		17,235		0.27
Total interest-bearing deposits		126,541,977		875,146		0.92			130,846,472		1,239,964		1.26
Other interest-bearing liabilities		1,060,344		677		0.08			285,609		15		0.01
Total interest-bearing liabilities		127,602,321		875,823		0.91	%		131,132,081		1,239,979		1.26	%
Noninterest-bearing deposits		6,499,623							5,726,956
Other noninterest-bearing liabilities		560,061							441,284
Total liabilities		134,662,005							137,300,321
Total shareholders’ equity		13,718,870							14,358,968
Total liabilities and shareholders’ equity	$	148,380,875						$	151,659,289
Net interest income			$	2,683,092						$	2,698,465
Interest rate spread						2.38	%						2.33	%
Net interest margin						2.48	%						2.46	%
Average interest-earning assets to average interest-bearing liabilities						112.65	%						111.27	%

● 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 decreased $177,000 to $53,000 for the nine months ended December 31, 2013 from $230,000 for the nine months ended December 31, 2012. At December 31, 2013, the allowance for loan losses was $863,000, or 1.02% of total loans, compared to $909,000 or 1.08% of total loans at March 31, 2013, and $902,000, or 1.08% of total loans at December 31, 2012. We had balances of $605,000 in 1-4 single family residential mortgage nonaccrual loans and $366,000 in commercial real estate nonaccrual loans at December 31, 2013, compared to $314,000 in 1-4 single family nonaccrual loans, $16,000 in commercial nonaccrual loans and $1,500 in consumer nonaccrual loans at March 31, 2013, and $426,000 of 1-4 single family nonaccrual loans at December 31, 2012. Early in the first quarter of fiscal year 2014, a loan which had been previously transferred to foreclosed real estate was sold with a gain of less than $1,000. We held no other foreclosed real estate during the nine months ended December 31, 2013. During the nine months ended December 31, 2012, one 1-4 single family loan in the amount of $57,000 was transferred to foreclosed real estate.

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 recoveries of $909 and charge-offs of $85,700 in 1-4 single family mortgage loans and charge-offs of $15,000 in land mortgage loans during the nine months ended December 31, 2013, compared to $236 in commercial loan recoveries and charge-offs of $75,712 in 1-4 single family mortgage and $89,500 in land mortgage loans during the nine months ended December 31, 2012.

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,
	2013			2012
Allowance for loan losses at beginning of period	$	909,488		$	837,063
Provision for loan losses		53,000			230,000
Recoveries:
Loans secured by mortgages:
1-4 single family residential		909			0
Land		0			0
Commercial		0			236
Total recoveries		909			236
Charge-offs:
Loans secured by mortgages:
1-4 single family residential		85,700			75,712
Land		15,000			89,500
Commercial		0			0
Total charge-offs		100,700			165,212
Net charge-offs (recoveries)		99,791			164,976
Allowance for loan losses at end of period	$	862,697		$	902,087
Allowance for loan losses to nonaccrual loans		88.81	%		211.95	%
Allowance for loan losses to total loans outstanding at the end of the period		1.02	%		1.08	%
Net charge-offs to average loans outstanding during the period (not annualized)		0.12	%		0.20	%

At December 31, 2013, Madison had three 1-4 single family loans totaling approximately $409,000 classified as troubled debt restructurings “TDRs”, which received rate modifications to current market rates. One of these three loans in the amount of $7,000 with an individual impairment of $900 recorded against the loan is current at December 31, 2013 and is classified as substandard. Another of these three loans in the amount of $36,000 with an individual impairment of $1,500 recorded against the loan is 30-59 days delinquent and is classified as substandard. The third loan in the amount of $366,000 with an individual impairment of $57,500 recorded against the loan has remained current through the nine months ended December 31, 2013 and is not adversely classified. These loans are in accrual status and in compliance with their modified terms, and therefore, not included in the ratio above.

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Noninterest Revenue. Noninterest revenue decreased by $371,000, or 74.4%, for the nine months ended December 31, 2013, to $128,000 as compared to $499,000 for the nine months ended December 31, 2012. The decrease during the period was primarily due to a decrease of $281,000 in gains on the sale of investment securities and $71,000 in gains on the sale of land.

Noninterest Expenses. Noninterest expense decreased by $44,000 or 1.6%, to $2,716,000 for the nine months ended December 31, 2013 as compared to noninterest expense of $2,761,000 for the nine months ended December 31, 2012, primarily due to decreases in other operating expenses, professional services and salaries and employee benefits, partially offset by an increase in data processing.

Income Tax Expense. For the nine months ended December 31, 2013 and 2012, we incurred no income tax expense. At March 31, 2013, the Bank had a net operating loss carry-forward totaling approximately $643,000, which will begin to expire during the year ending March 31, 2029. The Bank also had a capital loss carry-forward of approximately $495,000, which expires during the year ending March 31, 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, 2013, filed in our Annual Report on Form 10-K for the year ended March 31, 2013.

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, 2013, cash and cash equivalents totaled $4,821,000. Securities classified as available-for-sale amounted to $51,666,000. Our liquidity has decreased slightly as we have continued to decrease interest rates on deposits. In addition, at December 31, 2013, the Bank had the ability to borrow a total of approximately $29.4 million from the Federal Home Loan Bank of Atlanta, and the Bank has lines of credit totaling approximately $5.3 million with two large financial institutions. At December 31, 2013, the Bank had Federal Home Loan Bank advances totaling $1,250,000 outstanding and no borrowings on the lines of credit.

At December 31, 2013, we had $3,377,000 in commitments to extend credit outstanding. Certificates of deposit due within one year of December 31, 2013, totaled $55,584,000, or 61.8% of total 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 September, 2014. 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, 2013, 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, 2013.

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 11, 2014 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, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements

(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 10, 2014	By:	/s/ Michael P. Gavin
		Michael P. Gavin
		President, Chief Executive Officer and Chief Financial Officer
		(principal executive officer & principal financial officer)

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