Sugar Creek Financial 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from ______________ to _____________

Commission file number: 0-52532

SUGAR CREEK FINANCIAL CORP.

(Exact name of registrant 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

(Registrant’s telephone number)

Not Applicable

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

Indicate by checkmark 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 xNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o  Accelerated Filer o Non-accelerated Filer o  Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 3, 2008 there were 898,379 shares of the registrant’s common stock outstanding, $.01 par value per share.

SUGAR CREEK FINANCIAL CORP.

FORM 10-Q

Index

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets at September 30, 2008 and March 31, 2008 (Unaudited)	1
	Consolidated Statements of Earnings for the three and six months ended September 30, 2008 and 2007 (Unaudited)	2
	Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007 (Unaudited)	3
	Notes to Unaudited Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	13
Item 4.	Controls and Procedures	13
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults upon Senior Securities	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 5.	Other Information	14
Item 6.	Exhibits	15
Signatures		16

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Part I. Financial Information

Item 1. Financial Statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

	September 30,			March 31,
Assets	2008			2008
Cash and due from banks	$	746,217			607,687
Federal funds sold		2,021,065			929,733
FHLB daily investment		1,669,833			1,629,805
Cash and cash equivalents		4,437,115			3,167,225
Stock in Federal Home Loan Bank of Chicago		1,660,145			1,660,145
Loans receivable, net of allowance for loan losses
of $130,287 and $124,287		84,519,442			79,803,742
Premises and equipment, net		1,182,192			1,036,555
Foreclosed real estate		385,847			385,847
Accrued interest receivable:
Securities		—			—
Loans		356,318			329,079
Other assets		153,653			223,594
Total assets	$	92,694,712			86,606,187
Liabilities and Stockholders' Equity
Deposits	$	59,199,772			59,181,449
Accrued interest on deposits		188,016			233,399
Advances from FHLB of Chicago		23,000,000			17,000,000
Advances from borrowers for taxes and insurance		234,000			342,017
Other liabilities		235,477			247,438
Income taxes		552,775			436,865
Total liabilities		83,410,040			77,441,168
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued or outstanding		—			—
Common stock, $.01 par value, 14,000,000 shares
authorized; 906,879 shares issued		9,069			9,069
Additional paid-in capital		3,344,782			3,341,901
Treasury stock, at cost, 8,500 shares		(69,855	)		—
Common stock acquired by employee stock ownership plan		(314,016	)		(325,866	)
Retained earnings - substantially restricted		6,314,692			6,139,915
Total stockholders' equity		9,284,672			9,165,019
Total liabilities and stockholders' equity	$	92,694,712			86,606,187

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Earnings

	Three Months Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007
Interest income:	(Unaudited)				(Unaudited)
Loans receivable	$	1,268,723		1,205,816	$	2,486,600		2,397,652
Securities		—		4,551		—		13,051
Other interest-earning assets		12,266		27,216		21,457		64,077
Total interest income		1,280,989		1,237,583		2,508,057		2,474,780
Interest expense:
Deposits		444,056		496,674		934,758		1,012,799
Advances from FHLB		231,118		248,651		437,611		465,695
Total interest expense		675,174		745,325		1,372,369		1,478,494
Net interest income		605,815		492,258		1,135,688		996,286
Provision for loan losses		11,830		—		11,830		—
Net interest income after provision
for loan losses		593,985		492,258		1,123,858		996,286
Noninterest income:
Loan service charges		5,386		7,243		9,942		11,376
Service charges on deposit accounts		44,488		33,411		79,604		63,306
Other		5,224		3,953		10,122		7,309
Total noninterest income		55,098		44,607		99,668		81,991
Noninterest expense:
Compensation and benefits		236,038		274,834		499,605		592,824
Occupancy expense		28,290		25,467		50,493		44,857
Equipment and data processing		90,190		82,096		185,241		158,397
FDIC premium expense		2,621		1,851		4,249		3,684
Advertising		7,407		9,498		16,404		16,569
Supplies expense		3,773		5,958		17,212		19,789
Other		90,763		70,019		167,704		141,973
Total noninterest expense		459,082		469,723		940,908		978,093
Earnings before income taxes		190,001		67,142		282,618		100,184
Income taxes		75,005		26,479		107,841		39,672
Net earnings	$	114,996		40,663	$	174,777		60,512
Basic and diluted earnings per share	$	0.13		0.05	$	0.20		0.07
Dividends per share	$	0.00		0.00	$	0.00		0.00

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net earnings	$	174,777			60,512
Adjustments to reconcile net earnings to net
cash provided by (used for) operating activities:
Depreciation		26,498			38,063
ESOP expense		10,051			16,095
Incentive plan expense		4,680			—
Amortization of deferred loan fees, net		(9,146	)		(10,849	)
Provision for loan losses		11,830			—
Increase in accrued interest receivable		(27,239	)		(7,640	)
Decrease in other assets		69,941			527,142
Increase (decrease) in:
Accrued interest on deposits		(45,383	)		(24,097	)
Other liabilities		(11,961	)		34,265
Income taxes		115,910			21,900
Net cash provided by (used for) operating activities		319,958			655,391
Cash flows from investing activities:
Net change in loans receivable		(4,718,384	)		(1,221,699	)
Purchase of premises and equipment		(172,135	)		(142,949	)
Net cash provided by (used for) investing activities		(4,890,519	)		(1,364,648	)
Cash flows from financing activities:
Net increase (decrease) in deposits		18,323			(8,350,446	)
Increase (decrease) in advances from
borrowers for taxes and insurance		(108,017	)		(152,963	)
Proceeds from advances from FHLB		13,500,000			19,000,000
Repayment of advances from FHLB		(7,500,000	)		(16,000,000	)
Proceeds from sale of common stock, net		—			2,996,088
Repurchase of common stock		(69,855	)		—
Net cash provided by (used for) financing activities		5,840,451			(2,507,321	)
Net increase (decrease) in cash and cash equivalents		1,269,890			(3,216,578	)
Cash and cash equivalents at beginning of period		3,167,225			6,958,707
Cash and cash equivalents at end of period	$	4,437,115			3,742,129
Supplemental disclosures-cash paid during the period for:
Interest on deposits and advances from FHLB	$	1,410,688			1,478,495
Federal and state income taxes		107,841			39,672
Real estate and repossessions acquired in settlement of loans	$	—			—

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

September 30, 2008

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q 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, 2008 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. (the “Company”) was organized as a federal corporation at the direction of Tempo Bank (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 $679,000. The Company owns all of the Bank’s capital stock.

(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, including ESOP shares which have been committed to be released. 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.

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Following is a summary of basic and diluted earnings per share:

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Net earnings	$	114,996		40,663	$	174,777		60,512
Weighted-average shares - Basic EPS		873,546		872,515		874,064		872,120
Effect of dilutive stock awards		—		—		—		—
Weighted-average shares - Diluted EPS		873,546		872,515		874,064		872,120
Basic earnings per common share	$	0.13		0.05	$	0.20		0.07
Diluted earnings per common share	$	0.13		0.05	$	0.20		0.07
Anti-dilutive shares		6,093		—		2,518		—

Item 2. Management’s Discussion and Analysis of Financial Condition and Results 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, 2008 and 2007 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 Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

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 single-family residential mortgages, consumer and business loans.

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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.

Balance Sheet Analysis

Overview. Total assets at September 30, 2008 were $92.7 million compared to $86.6 million at March 31, 2008. A $4.7 million increase in loans was funded primarily by FHLB of Chicago borrowings.

Loans Receivable, Net. Loans receivable, net of allowance for loan losses, increased to $84.5 million at September 30, 2008 from $79.8 million at March 31, 2008. The increase consisted primarily of one-to four-family residential real estate loans.

Nonaccrual loans at September 30, 2008 increased to $394,000 compared to $64,000 at March 31, 2008. Nonaccrual loans at September 30, 2008 consisted of three single-family loans aggregating $285,000 and eight consumer loans aggregating $109,000. At March 31, 2008, there were three consumer loans aggregating $64,000 classified as nonaccrual. Nonaccrual loans increased for the six month period ended September 30, 2008 as result of a slowing local and regional economy, job layoffs and health issues for one of our borrowers. There were no troubled debt restructurings or loans 90 days or more past due and still accruing at either date.

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Nonperforming Assets
	September 30,			March 31,
(Dollars in thousands)	2008			2008
Nonaccrual loans:
Residential real estate	$	285		$	—
Commercial real estate		—			—
Commercial		—			—
Consumer		109			64
Total		394			64
Foreclosed real estate and other repossessed assets (1)		392			386
Total nonperforming assets	$	786		$	450
Total nonperforming loans to total loans		0.47	%		0.08	%
Total nonperforming loans to total assets		0.43	%		0.07	%
Total nonperforming assets to total assets		0.85	%		0.52	%

(1) Foreclosed real estate and other repossessed assets consist of one single-family residence located in O’Fallon, Illinois and one automobile.

At September 30, 2008, we had no loans which were not currently classified as nonaccrual, 90 days past due or impaired but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure in nonaccrual, 90 days past due or impaired.

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. The FHLBC has not paid a dividend during the last five quarters citing continuing pressure on net interest income, projected earnings levels, market conditions and regulatory requirements. At September 30, 2008, we owned $1.66 million of FHLBC stock, of which $510,000 was considered excess or voluntary stock. Our investment portfolio consists solely of our investment in the FHLBC.

Premises and Equipment, Net. Premises and equipment, net, increased $146,000 to $1.2 million at September 30, 2008 primarily as a result of the purchase of a tract of land for a possible future branch location.

Other Assets. Other assets decreased $70,000 to $154,000 at September 30, 2008 due primarily to the timing of payment of certain prepaid items.

Deposits. Deposit balances were virtually unchanged at $59.2 million at both September 30, 2008 and March 31, 2008.

Borrowings. We use short-term, cash equivalent FHLB advances as an additional source of liquidity. FHLB advances increased $6.0 million from $17.0 million at March 31, 2008 to $23.0 million at September 30, 2008.

Other Liabilities. Advances from borrowers for real estate taxes and insurance decreased $108,000 to $234,000 at September 30, 2008 due to payments made for real estate taxes and insurance.

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Other liabilities decreased $12,000 to $235,000 at September 30, 2008 as a result of timing of payment of certain accrual items.

Results of Operations for the Three Months Ended September 30, 2008 and 2007.

General. Net earnings for the three months ended September 30, 2008 were $115,000, compared to $41,000 for the same period last year. Higher net interest income and noninterest income and lower noninterest expenses were partially offset by a higher provision for loan losses and income tax expense.

Total Interest Income.Total interest income increased $43,000 to $1.3 million for the three months ended September 30, 2008. Interest income on loans increased as result of a higher average balance on loans with higher average yields. The FHLB of Chicago continues its suspended dividend policy and, therefore, the Bank does not expect to receive cash or stock dividends on the FHLB stock in the near future.

Total Interest Expense.Total interest expense decreased by $70,000 to $675,000 for the three months ended September 30, 2008 from $745,000 for the three months ended September 30, 2007. The decrease resulted primarily from lower average rates on deposits and borrowings.

Net Interest Income. Net interest income increased $114,000 to $606,000 for the three months ended September 30, 2008 from $492,000 for the three months ended September 30, 2007 as a result of lower average rates on deposits and FHLB advances.

Provision for Loan Losses. 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, including level of nonaccrual loans. During the quarter ended September 30, 2008, the Bank recorded $11,830 as a provision for loan losses. For the comparable period ended September 30, 2007, the Bank did not record a provision for loan losses.

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, 2008 to $55,000 from $45,000 for the three months ended September 30, 2007 due to increased ATM fees and the Bank’s recently enacted overdraft privilege program for transaction account customers.

Noninterest Expense. Noninterest expense includes salaries and employee benefits, equipment and data processing, occupancy and other expenses. Total noninterest expense decreased by $11,000 to $459,000 for the three months ended September 30, 2008 from $470,000 for the three months ended September 30, 2007. Reductions in compensation, health care and retirement benefit costs were the largest contributors to the decrease, while occupancy, equipment and data processing, and real estate owned expenses increased. Health care costs declined as a result of our decision to change providers. Retirement benefit expenses decreased due to lower plan contributions required as a result of higher investment returns. Equipment and data processing increased due to higher depreciation expense on computer equipment and data processing costs as a result of a new internet banking system, implementation of the Check 21 program and upgrades to data lines. Real estate owned expense increased as a result of real estates taxes subsequent to foreclosure and property maintenance expenses. Other noninterest expense increased primarily as a result of higher professional fees and costs associated with the Company’s status as a public entity.

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Income Taxes. Income tax expense was $75,000 for the three months ended September 30, 2008 compared to an expense of $26,000 for the three months ended September 30, 2007. The increase in tax expense is primarily attributable to the higher pre-tax income for the current period.

Results of Operations for the Six Months Ended September 30, 2008 and 2007.

General. Net earnings for the six months ended September 30, 2008 were $175,000, an increase of $114,000 from the six months ended September 30, 2007. The increase in earnings was due to increases in net interest income and noninterest income and reductions in noninterest expenses.

The following table summarizes average balances and annualized average yields and costs for the six months ended September 30, 2008 and 2007.

	Six Months Ended September 30,
	2008							2007
(Dollars in thousands)	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	82,310	$	2,487		6.04	%	$	80,830	$	2,398		5.93	%
Stock in FHLB of Chicago		1,660		—		0.00			1,660		13		1.57
Other interest-earning assets		3,110		21		1.35			2,536		64		5.05
Total interest-earning assets		87,080		2,508		5.76			85,026		2,475		5.82
Noninterest-earning assets		2,525							2,259
Total assets		89,605							87,285
Liabilities and Stockholders’ Equity
Total interest-bearing deposits		56,467		935		3.31			54,657		1,013		3.71
FHLB advances		20,250		437		4.32			20,167		466		4.62
Total interest-bearing liabilities		76,717		1,372		3.58			74,824		1,479		3.95
Noninterest-bearing deposit accounts		2,753							2,326
Other noninterest-bearing liabilities		893							1,039
Total liabilities		80,363							78,189
Stockholders’ equity		9,242							9,096
Total liabilities and stockholders’ equity	$	89,605						$	87,285
Net interest income			$	1,136						$	996
Interest rate spread						2.18	%						1.87	%
Net interest margin						2.61	%						2.34	%

Total Interest Income. Total interest income increased $33,000 to $2.5 million for the six months ended September 30, 2008 from $2.47 million for the same period ended September 30, 2007. While interest income on loans increased because of higher average balances and a higher average yield on loans, interest income on other interest earning assets and dividends on FHLB stock declined.

Total Interest Expense. Total interest expense decreased by $106,000 to $1.4 million for the six months ended September 30, 2008 from $1.5 million for the comparable prior year period. The decline was created by reductions in deposit interest expense and FHLB advance expense.

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Net Interest Income. Net interest income increased by $139,000 to $1.1 million for the six months ended September 30, 2008 from $996,000 for the six months ended September 30, 2007 as a result of lower average rates on deposits and FHLB advances.

Provision for Loan Losses. 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, including level of nonaccrual loans. During the six month period ended September 30, 2008, we added an $11,830 provision for loan losses.

Analysis of Loan Loss Experience.

	Six Months Ended September 30,
(Dollars in thousands)	2008			2007
Allowance at beginning of period	$	124		$	130
Provision for (recovery of) loan losses		12			—
Charge-offs:
One- to four- family		—			—
Consumer loans		(6	)		—
Total charge-offs		(6	)		—
Recoveries:
One- to four- family		—			—
Consumer loans		—			—
Total recoveries		—			—
Net recoveries (charge-offs)		(6	)		—
Allowance at end of period	$	130		$	130
Allowance to nonperforming loans		33.00	%		12.33	%
Allowance to total loans outstanding at end of six month period		0.15	%		0.16	%
Annualized net charge-offs (recoveries) to average loans outstanding		0.01	%		—

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income increased for the six months ended September 30, 2008 to $100,000 from $82,000 for the same period ended September 30, 2007. The increase continues to be driven by increased ATM fees and the Bank’s recently enacted overdraft privilege program for transaction account customers.

Noninterest Expense. Noninterest expense includes salaries and employee benefits, equipment and data processing, occupancy and other expenses. Total noninterest expense decreased to $941,000 for the six months ended September 30, 2008 from $978,000 for the same period ended September 30, 2007. The decrease was primarily due to lower compensation and benefits expense as a result of a change in employee healthcare providers and reduced defined benefit pension plan expenses.

Income Taxes. Income tax expense increased to $108,000 for the six months ended September 30, 2008 from $40,000 for the same period ended September 30, 2007. The $68,000 increase in tax expense is primarily attributable to the higher pre-tax income for the six month period ended September 30, 2008.

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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, 2008, cash and cash equivalents totaled $4.4 million and the Bank was eligible for additional advances of up to $10.2 million from the FHLBC. At September 30, 2008, we had $23.0 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2008, we had no outstanding loan commitments.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2008 totaled $33.2 million, or 81.1% of certificates of deposit. Although the percentage of certificates of deposit that mature within one year is slightly larger than last quarter, it continues to reflect consumers’ hesitancy to invest their funds for longer periods given 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. Due to the severe economic conditions, we have become quite sensitized about deposit pricing and the monitoring of liquidity levels. While we believe we can attract new money deposits with targeted pricing, the local deposit market is extremely competitive with both regional and national banking institutions “buying the market” for liquidity. This has contributed significantly to a very rate sensitive time deposit base.

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 rates paid and products offered by us and our local competitors and several 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.

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Equity Incentive Plan. On November 19, 2007 stockholders approved the Sugar Creek Financial Corp. 2007 Equity Incentive Plan (the “Plan”). Under the Plan, the Company may grant to employees, officers and directors up to 62,211 shares of common stock, including 44,437 shares for stock options and 17,774 shares of restricted stock.

On July 21, 2008, the Board of Directors granted 17,774 shares of restricted stock to officers and directors of the Company. Shares of common stock are being purchased in the open market to fund the restricted stock awards. At September 30, 2008, 8,500 shares totaling $70,000 had been repurchased at an average price of $8.22 per share. Incentive plan expense was $5,000 for the three and six months ended September 30, 2008.

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, 2008, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

The Bank may not declare or pay a cash dividend, if the effect of such dividends would be to cause the capital of the Bank to be reduced below the aggregate amount required by federal or state law. The Company may pay a dividend, if and when declared by its Board of Directors. Any dividends waived by the MHC, are subject to approval by the OTS. Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

The Bank’s actual and required capital amounts and ratios at September 30, 2008 are as follows:

						Minimum Required
						for Capital					to be "Well
	Actual					Adequacy					Capitalized"
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
Stockholders' equity of the Bank	$	8,778		9.47	%	$	1,390		1.50	%
General valuation allowance		130
Total capital to risk-weighted assets	$	8,908		17.80	%	$	4,002		8.00	%	$	5,003		10.00	%
Tier 1 capital to risk-weighted assets	$	8,778		17.55	%	$	2,001		4.00	%	$	3,002		6.00	%
Tier 1 capital to total assets	$	8,778		9.47	%	$	3,707		4.00	%	$	4,634		5.00	%

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. 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.

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For the six months ended September 30, 2008, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

During the quarterly period ended September 30, 2008, 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 1A. Risk Factors

Not applicable.

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

(a) On August 18, 2008 the Company held its Annual Meeting of Shareholders.

(b) At the meeting, Timothy P. Fleming and Daniel S. Reilly were elected, each to serve a three-year term.

(c) Stockholders voted on the following matters:

(i) The election of directors of the Company:

DIRECTOR	FOR	ABSTAIN
Timothy P. Fleming	762,456	11,600
Daniel S. Reilly	762,456	11,600

(ii) The ratification of the appointment of Michael Trokey & Company, P.C. as independent registered public accounting firm for the Company for the fiscal year ended March 31, 2009:

FOR	AGAINST	ABSTAIN
772,356	1,600	100

Item 5.Other Information

None.

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Item 6.Exhibits

3.1 Charter of Sugar Creek Financial (1)

3.2 Bylaws of Sugar Creek Financial (1)

4.0 Stock certificate of Sugar Creek Financial (2)

31.0 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial 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 Annual Report on Form 10-KSB (File No. 000-52532), filed on June 27, 2007.

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

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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.

SUGAR CREEK FINANCIAL CORP.

Dated:  November 13, 2008

By:  /s/ Robert J. Stroh, Jr.

Robert J. Stroh, Jr.

Chairman, Chief Executive Officer and Chief Financial Officer

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