Sugar Creek Financial 10QSB 2008 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to ______________

Commission file number: 0-52532 

SUGAR CREEK FINANCIAL CORP.       

(Exact name of small business issuer as specified in its charter)

United States	74-3210459
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

28 West Broadway, Trenton, Illinois 62293-1304

(Address of principal executive offices)

(618) 224-9228

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o

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

Yes o No x

As of November 8, 2007 there were 906,879 of the registrant’s common stock outstanding, $.01 par value per share.

Transitional Small Business Disclosure Format (Check one): Yes o No x

SUGAR CREEK FINANCIAL CORP.

FORM 10-QSB

Index

		Page No.
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets at September 30, 2007 and March 31, 2007 (Unaudited)	1
	Consolidated Statements of Earnings for the three and six months ended September 30, 2007 and 2006 (Unaudited)	2
	Consolidated Statements of Cash Flows for the six months ended September 30, 2007 and 2006 (Unaudited)	3
	Notes to Unaudited Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis or Plan of Operation	4
Item 3.	Controls and Procedures	11
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults upon Senior Securities	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
Item 5.	Other Information	12
Item 6.	Exhibits	12
Signatures

i

Part I. Financial Information

Item 1. Financial Statements.

Sugar Creek Financial Corp. (the “Company”) was organized April 3, 2007 following the completion of the mutual holding company reorganization of Tempo Bank (the “Bank”). After the reorganization and initial public offering, the Company became a federally chartered mid-tier stock holding company of the Bank and owns all of the Bank’s capital stock. The information presented in this report is on a consolidated basis for the Company at and for the three and six months ended September 30, 2007 and for the unconverted Bank at March 31, 2007 and for the three and six months ended September 30, 2006. See note 2 to the unaudited consolidated financial statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

	September 30,			March 31,
Assets	2007			2007
Cash and due from banks	$	626,823			469,454
Federal funds sold		2,019,979			1,680,880
FHLB daily investment		1,095,327			4,808,373
Cash and cash equivalents		3,742,129			6,958,707
Stock in Federal Home Loan Bank of Chicago		1,660,145			1,660,145
Loans receivable, net of allowance for loan losses
of $130,000 and $130,000		81,153,521			79,920,973
Premises and equipment, net		971,784			866,898
Accrued interest receivable:
Securities		-			10,000
Loans		324,881			307,241
Other assets		90,263			617,405
Total assets	$	87,942,723			90,341,369
Liabilities and Stockholders' Equity
Deposits	$	55,819,781			64,170,227
Accrued interest on deposits		220,550			244,647
Advances from FHLB of Chicago		22,000,000			19,000,000
Advances from borrowers for taxes and insurance		122,558			275,521
Other liabilities		195,568			161,303
Income taxes		442,765			420,865
Total liabilities		78,801,222			84,272,563
Commitments and contingencies
Stockholders' equity:
Common stock, 906,879 shares $.01 par value per share		9,069			-
Additional paid-in capital		3,342,804			-
Common stock acquired by employee stock ownership plan		(339,690	)		-
Retained earnings - substantially restricted		6,129,318			6,068,806
Total stockholders' equity		9,141,501			6,068,806
Total liabilities and stockholders' equity	$	87,942,723			90,341,369

See accompanying notes to consolidated financial statements.

1

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Earnings

	Three Months Ended September 30,				Six Months Ended September 30,
	2007		2006		2007		2006
Interest income:	(Unaudited)				(Unaudited)
Loans receivable	$	1,205,816		1,097,453	$	2,397,652		2,103,540
Securities		4,551		21,122		13,051		33,099
Other interest-earning assets		27,216		47,999		64,077		79,894
Total interest income		1,237,583		1,166,574		2,474,780		2,216,533
Interest expense:
Deposits		496,674		496,229		1,012,799		962,479
Advances from FHLB		248,651		175,366		465,695		294,729
Total interest expense		745,325		671,595		1,478,494		1,257,208
Net interest income		492,258		494,979		996,286		959,325
Provision (credit) for loan losses		-		10,548		-		(4,452	)
Net interest income after provision (credit)
for loan losses		492,258		484,431		996,286		963,777
Noninterest income:
Loan service charges		7,243		3,777		11,376		8,042
Service charges on deposit accounts		33,411		24,154		63,306		41,563
Gain on sale of investment in service bureau		-		-		-		18,492
Other		3,953		2,984		7,309		5,375
Total noninterest income		44,607		30,915		81,991		73,472
Noninterest expense:
Compensation and benefits		274,834		240,018		592,824		529,119
Occupancy expense		25,467		23,641		44,857		43,071
Equipment and data processing		82,096		72,951		158,397		141,887
Federal deposit insurance premiums		1,851		1,862		3,684		3,632
Advertising		9,498		15,202		16,569		27,661
Supplies expense		5,958		9,065		19,789		22,584
Other		70,019		56,848		141,973		111,193
Total noninterest expense		469,723		419,587		978,093		879,147
Earnings before income taxes		67,142		95,759		100,184		158,102
Income taxes		26,479		37,790		39,672		62,843
Net earnings	$	40,663		57,969	$	60,512		95,259
Earnings per share	$	0.05		N/A	$	0.07		N/A
Dividends per share	$	0.00		N/A	$	0.00		N/A

See accompanying notes to consolidated financial statements.

2

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net earnings	$	60,512			95,259
Adjustments to reconcile net earnings to net
cash provided by (used for) operating activities:
Depreciation		38,063			44,122
ESOP expense		16,095			-
Amortization of deferred loan fees, net		(10,849	)		(10,722	)
Provision (credit) for loan losses		-			(4,452	)
Decrease (increase) in accrued interest receivable		(7,640	)		(7,858	)
Decrease in other assets		527,142			94,226
Increase (decrease) in:
Accrued interest on deposits		(24,097	)		41,301
Other liabilities		34,265			(6,100	)
Income taxes		21,900			6,910
Net cash provided by (used for) operating activities		655,391			252,686
Cash flows from investing activities:
Net change in loans receivable		(1,221,699	)		(7,399,564	)
Redemption of FHLB stock		-			815,355
Purchase of premises and equipment		(142,949	)		(2,000	)
Net cash provided by (used for) investing activities		(1,364,648	)		(6,586,209	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(8,350,446	)		814,467
Increase (decrease) in advances from
borrowers for taxes and insurance		(152,963	)		(187,532	)
Proceeds from advances from FHLB		19,000,000			5,000,000
Repayment of advances from FHLB		(16,000,000	)		-
Proceeds from sale of common stock, net		2,996,088			-
Net cash provided by (used for) financing activities		(2,507,321	)		5,626,935
Net increase (decrease) in cash and cash equivalents		(3,216,578	)		(706,588	)
Cash and cash equivalents at beginning of period		6,958,707			5,110,683
Cash and cash equivalents at end of period	$	3,742,129			4,404,095
Supplemental disclosures-cash paid during the period for:
Interest on deposits and advances from FHLB	$	1,478,495			1,320,184
Federal and state income taxes		39,672			19,000
Real estate and repossessions acquired in settlement of loans	$	-			-

See accompanying notes to consolidated financial statements.

3

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

September 30, 2007

(1)Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of the financial statements in conformity with U.S. generally accepted accounting principles. However, all adjustments that are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. Such adjustments were of a normal recurring nature. The results of operations for the three and six month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans.

(2)Mutual Holding Company Reorganization and Minority Stock Issuance

Sugar Creek Financial Corp. was organized as a federal corporation at the direction of the Bank in connection with the mutual holding company reorganization of the Bank. The reorganization was completed on April 3, 2007. In the reorganization, the Company sold 45% of its outstanding shares of common stock (408,095 shares) to the public, and issued 55% of its outstanding shares of common stock (498,784 shares) to Sugar Creek MHC, the mutual holding company of the Bank. The Company loaned $355,490 to a trust for the Employee Stock Ownership Plan (“the ESOP”) enabling the ESOP to purchase 35,549 shares of common stock in the offering for the benefit of the Bank’s employees. In addition, a contribution of $50,000 was made to capitalize Sugar Creek MHC. Costs incurred in connection with the common stock offering were recorded as a reduction of the proceeds from the offering and totaled $679,371.

(3) Earnings Per Share

When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Because the Company did not exist as of September 30, 2006 or for the period April 1, 2007 through April 2, 2007, per share earnings data is not meaningful for such periods and is therefore not presented.

Earnings per share for the three months ended September 30, 2007 is based on total shares outstanding of 906,879 less unallocated ESOP shares of 34,364, or 872,515 shares. Earnings per share for the period April 3, 2007 through September 30, 2007 is based on total shares outstanding of 906,879 less unallocated ESOP shares of 34,759, or 872,120 shares.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended September 30, 2007 and 2006 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

4

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe our future plans, strategies and expectations. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, changes in real estate market values in our area, and changes in relevant accounting principles and guidelines.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

Sugar Creek Financial Corp. is the holding company for Tempo Bank. Tempo Bank operates from two offices in Trenton and Breese, Illinois. Tempo Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate a variety of consumer and business loans.

Critical Accounting Policy

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover probable 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 at least 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 collectibility 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 conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency 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.

5

Balance Sheet Analysis

Overview. Total assets at September 30, 2007 were $87.9 million compared to $90.3 million at March 31, 2007, a decrease of $2.4 million or 2.7%. The decrease in cash and cash equivalents of $3.2 million was used to fund a portion of deposit account withdrawals.

Loans. Loans, net of allowance for loan losses, increased by $1.2 million to $81.2 million at September 30, 2007 from $79.9 million at March 31, 2007. Nonaccrual loans at September 30, 2007 amounted to $1.054 million compared to $728,000 at March 31, 2007. Nonaccrual loans at September 30, 2007 were made up of $1.024 million single family loans and $30,000 of consumer loans. The composition at March 31, 2007 was $698,000 of single family loans and $30,000 of consumer loans. There were no loans 90 days or more past due and still accruing or other nonperforming assets at either date.

Nonperforming Assets
	September 30,			March 31,
(Dollars in thousands)	2007			2007
Nonaccrual loans:
Residential real estate	$	1,024		$	698
Commercial real estate		—			—
Commercial		—			—
Consumer		30			30
Total		1,054			728
Total nonperforming assets		1,054			728
Total nonperforming loans to total loans		1.30	%		0.91	%
Total nonperforming loans to total assets		1.20	%		0.83	%
Total nonperforming assets and troubled debt restructurings to total assets		1.20	%		0.83	%

Investments. The Bank is a member of the Federal Home Loan Bank of Chicago (FHLBC), from which we borrow to fund our operations. As a member, we are required to own stock in the FHLBC. In addition, we maintain excess or voluntary stock, which is stock held in excess of the amount required as a condition of membership or for borrowings. On October 10, 2007, the FHLBC entered into a consensual cease and desist order with the Federal Housing Finance Board Office of Supervision which limits the ability of the FHLBC to redeem excess or voluntary stock or to pay dividends. On October 30, 2007, the board of directors of the FHLBC determined that it would not declare a dividend for the third quarter of 2007. As of September 30, 2007, we owned $1.66 million of FHLBC stock, of which $560,100 was considered excess or voluntary stock. Based on the liquidity needs of Tempo Bank and subject to the stock redemption guidelines of the FHLBC, Tempo Bank expects to request redemption of the majority of its excess or voluntary stock. For the six months ended September 30, 2007 and 2006, the Bank recognized $13,051 and $33,099, respectively, in dividend income from the FHLBC.

Deposits. Deposit balances decreased $8.4 million or 13.0% to $55.8 million at September 30, 2007 from $64.2 million at March 31, 2007. Deposits decreased, in part, due to completion of the reorganization and transfer of proceeds held as deposits at March 31, 2007 to stockholders’ equity effective April 3, 2007. The remainder of the decrease in deposits reflects the competitive market from banks and other financial services firms. During the period, depositors reinvested rate sensitive money from core deposits as well as from maturing certificates into higher-yielding, shorter term certificates.

Borrowings. We use short-term, cash equivalent FHLB advances as an additional source of liquidity. FHLB advances increased $3.0 million, or 15.8%, to $22.0 million at September 30, 2007 from $19.0 million at March 31, 2007.

6

Results of Operations for the Three Months Ended September 30, 2007 and 2006.

General.Net earnings for the three months ended September 30, 2007 were $40,700, a decrease of $17,300 from the three months ended September 30, 2006. The decrease in net earnings was primarily caused by higher noninterest expense, partially offset by higher noninterest income and lower provision for loan losses.

Total Interest Income.Total interest income increased $71,000 to $1.2 million for the three months ended September 30, 2007 from $1.1 million for the same period ended September 30, 2006. Interest income on loans increased $108,400 as a result of a higher average balance of loans and a higher average yield on loans, partially offset by lower dividends on FHLB stock and lower earnings on other interest-earning assets.

Total Interest Expense.Total interest expense increased by $73,700 to $745,300 for the three months ended September 30, 2007 from $671,600 for the three months ended September 30, 2006. The increase resulted primarily from an increase in interest on FHLB advances due to a higher average balance.

Net Interest Income. Net interest income decreased $2,700 to $492,300 for the three months ended September 30, 2007 from $495,000 for the three months ended September 30, 2006.

Provision for Loan Losses. We did not record a provision for loan losses in the three months ended September 30, 2007. We establish provisions for loan losses which are charged to operations at a level we believe to be appropriate to our risk profile. These provisions represent management’s best estimate of probable loan losses in the portfolio. In evaluating the allowance for loan losses, management considers historical loss experience, the composition of the loan portfolio, adverse situations that might impact a borrower’s ability to repay the loan, the value of the underlying collateral, and other information.

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income increased for the three month period ended September 30, 2007 to $44,600 from $30,900 for the three months ended September 30, 2006. The Bank instituted a new overdraft privilege program for its transaction account customers. As the program is just starting to gain acceptance and use, the income generated from this program is expected to gradually improve in the future.

Noninterest Expense. Noninterest expense includes salaries and employee benefits, equipment and data processing, occupancy and other expenses. Total noninterest expense increased by $50,100 to $469,700 for the three months ended September 30, 2007 from $419,600 for the three months ended September 30, 2006. Compensation and benefits increased due to higher salary levels, ESOP expenses and health care cost. Equipment and data processing expense increased to $82,100 for the three months ended September 30, 2007 from $73,000 for the three months ended September 30, 2006 due to higher outside service bureau costs. Other noninterest expense increased primarily as a result of higher professional fees and costs associated with the Company’s status as a public entity.

Income Taxes. Income taxes declined $11,300 to $26,500 for the three months ended September 30, 2007 from $37,800 for the three months ended September 30, 2006. The decrease in tax expense is directly attributable lower earnings before income taxes.

7

Results of Operations for the Six Months Ended September 30, 2007 and 2006.

General. Net earnings for the six months ended September 30, 2007 were $60,500, a decrease of $34,700 from the six months ended September 30, 2006. The decrease in net earnings was primarily the result of an increase in noninterest expense that was offset by an increase in net interest income, an increase in noninterest income and a decrease in income tax expense.

The following table summarizes average balances and average yields and costs for the six months ended September 30, 2007 and 2006.

	Six Months Ended September 30,
	2007							2006
(Dollars in thousands)	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	80,830	$	2,398		5.93	%	$	72,223	$	2,103		5.83	%
Stock in FHLB of Chicago		1,660		13		1.57			2,366		33		2.80
Other interest-earning assets		2,536		64		5.05			2,766		80		5.78
Total interest-earning assets		85,026		2,475		5.82			77,355		2,216		5.73
Noninterest-earning assets		2,259							2,118
Total assets		87,285							79,473
Liabilities and Stockholders’ Equity
Total interest-bearing deposits		54,657		1,013		3.71			57,982		962		3.32
FHLB advances		20,167		466		4.62			12,571		295		4.69
Other borrowings		—		—		—			—		—		—
Total interest-bearing liabilities		74,824		1,479		3.95			70,553		1,257		3.56
Noninterest-bearing deposit accounts		2,326							2,138
Other noninterest-bearing liabilities		1,039							785
Total liabilities		78,189							73,476
Stockholders’ equity		9,096							5,997
Total liabilities and stockholders’equity	$	87,285						$	79,473
Net interest income			$	996						$	959

Total Interest Income. Total interest income increased $258,200 to $2.5 million for the six months ended September 30, 2007 from $2.2 million for the same period ended September 30, 2006. Interest income on loans increased $294,100 due to a higher average balance of loans and a higher average yield on loans, partially offset by lower dividends on securities and interest on other interest-earning assets.

Total Interest Expense. Total interest expense increased by $221,300 to $1.5 million for the six months ended September 30, 2007 from $1.3 million for the six months ended September 30, 2006. The increase resulted primarily from an increase in interest expense on deposits of $50,300 and an increase in interest on FHLB advances of $171,000 for the six months ended September 30, 2007 due to higher average rates on deposits and advances.

Net Interest Income. Net interest income increased $37,000 to $996,300 for the six months ended September 30, 2007 from $959,300 for the six months ended September 30, 2006.

8

Provision for Loan Losses. We did not record a provision for loan losses in the six months ended September 30, 2007. We establish provisions for loan losses which are charged to operations at a level we believe to be appropriate to our risk profile. These provisions represent management’s best estimate of probable loan losses in the portfolio. In evaluating the allowance for loan losses, management considers historical loss experience, the composition of the loan portfolio, adverse situations that might impact a borrower’s ability to repay the loan, the value of the underlying collateral, and peer group information and industry loss statistics.

Analysis of Loan Loss Experience
	Six Months Ended September 30,
(Dollars in thousands)	2007			2006
Allowance at beginning of period	$	130		$	130
Provision (recovery of) for loan losses		—			(4	)
Charge-offs		—			(11	)
Recoveries		—			15
Net recovery (charge-offs)		—			4
Allowance at end of period	$	130		$	130
Allowance to nonperforming loans		12.33	%		11.13	%
Allowance to total loans outstanding at the end of the period		0.16			0.18
Net charge-offs (recoveries) to average loans outstanding during the period		—			—

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan servicing charges, and other income. Total noninterest income increased $8,500 for the six month period ended September 30, 2007 to $82,000 from $73,500 for the six months ended September 30, 2006. The six months ended September 30, 2006 included a non-recurring gain on sale of stock in a service bureau of $18,500. During the six month period ended September 30, 2007 the Bank instituted a new overdraft privilege program for its transaction accounts. As a result, service charges on deposit accounts increased to $63,300 for the six months ended September 30, 2007 from $41,600 for the six months ended September 30, 2006. As the program is still in the beginning stages, we anticipate wider acceptance and use as the product matures. Income generated from this program is expected to gradually improve in the future.

Noninterest Expense. Noninterest expense includes salaries and employee benefits, equipment and data processing, occupancy and other expenses. Total noninterest expense increased to $985,000 for the six months ended September 30, 2007 from $879,000 for the six months ended September 30, 2006. This increase was due to increases in compensation, ESOP expenses, employee health care, corporate insurance, higher equipment and data processing costs, and higher professional fees.

Income Taxes. Income taxes decreased $23,200 to $39,700 for the six months ended September 30, 2007 from $62,800 for the six months ended September 30, 2006. The reduction in tax expense is directly attributable to lower earnings before income taxes for the six months ended September 30, 2007 of $100,200 versus $158,100 for the six months ended September 30, 2006.

9

Liquidity and Capital Management

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the FHLBC. 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 based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2007, cash and cash equivalents totaled $3.7 million. In addition, at September 30, 2007, we had arrangements to borrow up to $30.5 million from the FHLBC. On September 30, 2007, we had $22.0 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. At September 30, 2007, we had no loan commitments outstanding. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2007 totaled $29.8 million, or 76.8% of certificates of deposit. Although this is a smaller percentage of certificates of deposit that mature within one year than last quarter, it continues to reflect customers’ hesitancy to invest their funds for longer periods given current uncertainties about the interest rate environment. 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. With the recent action taken by the Federal Reserve’s Federal Open Market Committee to lower the Fed funds and Discount Window rates, we believe we can attract new money deposits with targeted pricing and begin to reverse a significant portion of our certificates of deposit outflows of recent periods. The local deposit market is extremely competitive with both regional and national banking institutions resulting in a very rate sensitive time deposit base. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

Capital Management. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2007, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

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We may use capital management tools such as cash dividends and common share repurchases. However, under Office of Thrift Supervision regulations, we are not allowed to repurchase any shares during the first year following the offering, except: (1) in extraordinary circumstances, we may make open market repurchases of up to 5% of our outstanding stock if we receive the prior non-objection of the OTS of such repurchases; (2) repurchases of qualifying shares of a director or if we conduct an OTS-approved offer to repurchase made to all shareholders; (3) if we repurchase to fund a restricted stock award plan that has been approved by shareholders; or (4) if we repurchase stock to fund a tax-qualified employee stock benefit plan. All repurchases are prohibited, however, if the repurchase would reduce Tempo Bank’s regulatory capital below regulatory required levels. The Bank’s actual and required capital amounts and ratios at September 30, 2007 are as follows:

						Minimum					Required
						for Capital					to be "Well
	Actual					Adequacy					Capitalized"
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
Stockholder's equity of the Bank	$	8,720		9.9	%	$	1,319		1.5	%
General valuation allowance		130
Total capital to risk-weighted assets	$	8,850		18.7	%	$	3,796		8.0	%	$	4,744		10.0	%
Tier 1 capital to risk-weighted assets	$	8,720		18.4	%	$	1,898		4.0	%	$	2,847		6.0	%
Tier 1 capital to total assets	$	8,720		9.9	%	$	3,517		4.0	%	$	4,396		5.0	%

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the three and six months ended September 30, 2007, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. During the quarterly period ended September 30, 2007, there were no changes in the Company’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Sugar Creek Financial Corp. is not involved in any pending legal proceedings. Tempo Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.

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

None.

Item 3.Defaults upon Senior Securities

Not Applicable.

Item 4.Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5.Other Information

None.

Item 6.Exhibits

3.1 Charter of Sugar Creek Financial Corp. (2)

3.2 Bylaws of Sugar Creek Financial Corp. (2)

4.0 Stock certificate of Sugar Creek Financial Corp. (1)

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer

31.2 Rule 13a-14(a)/15d-14(a) Certification of President and Chief Operating Officer

32.0 Section 1350 Certification

(1) Incorporated by reference into this document from the Exhibits filed with the Securities and Exchange Commission on the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-139332.

(2) Incorporated by reference into this document from the exhibits filed with the Securities and Exchange Commission on the Form 10-KSB, File No. 000-52532.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SUGAR CREEK FINANCIAL CORP.
Dated: November 9, 2007	By:	/s/ Robert J. Stroh, Jr.
		Robert J. Stroh, Jr.
		Chairman, Chief Executive Officer and
		Chief Financial Officer
		(principal executive, financial and accounting officer)

Dated: November 9, 2007	By:	/s/ Francis J. Eversman
		Francis J. Eversman
		President and Chief Operating Officer (principal executive officer)