Sugar Creek Financial 10-Q 2010 Q1 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 June 30, 2009

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 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 o

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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o   No 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.  (Check one): 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 July 31, 2009 there were 899,009 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 June 30, 2009 and March 31, 2009 (Unaudited)	1
		Consolidated Statements of Earnings for the three months ended June 30, 2009 and 2008 (Unaudited)	2
		Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2008 (Unaudited)	3
		Notes to Unaudited Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	15
	Item 4.	Controls and Procedures	15
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings	16
	Item 1A.	Risk Factors	16
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
	Item 3.	Defaults upon Senior Securities	16
	Item 4.	Submission of Matters to a Vote of Security Holders	16
	Item 5.	Other Information	16
	Item 6.	Exhibits	16
Signatures

i

Part I.  Financial Information

Item 1. Financial Statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

	June 30,			March 31,
Assets	2009			2009
Cash and due from banks	$	620,137			775,208
Federal funds sold		5,551,749			5,611,104
FHLB daily investment account		4,794,053			2,543,514
Cash and cash equivalents		10,965,939			8,929,826
Stock in Federal Home Loan Bank of Chicago		1,660,145			1,660,145
Loans receivable, net of allowance for loan losses
of $205,323 at June 30, 2009 and $165,323 at March 31, 2009		77,253,487			79,129,004
Premises and equipment, net		1,107,573			1,130,874
Foreclosed real estate, net of allowance for losses of $28,000 at June 30, 2009
and March 31, 2009		485,811			357,847
Accrued interest receivable on loans		292,348			315,727
Other assets		154,513			204,640
Total assets	$	91,919,816			91,728,063
Liabilities and Stockholders' Equity
Deposits	$	67,319,026			67,076,374
Accrued interest payable on deposits		186,637			193,674
Advances from FHLB of Chicago		14,000,000			14,000,000
Advances from borrowers for taxes and insurance		428,594			310,026
Other liabilities		285,012			254,856
Income taxes payable		394,283			619,429
Total liabilities		82,613,552			82,454,359
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		3,218,927			3,213,361
Treasury stock, at cost, 6,772 shares		(56,157	)		(56,157	)
Common stock acquired by employee stock ownership plan		(296,242	)		(302,167	)
Retained earnings - substantially restricted		6,430,667			6,409,598
Total stockholders' equity		9,306,264			9,273,704
Total liabilities and stockholders' equity	$	91,919,816			91,728,063

See accompanying notes to consolidated financial statements.

1

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Earnings (Unaudited)

	Three Months Ended
	June 30,
	2009		2008
Interest income:
Loans receivable	$	1,172,696		1,217,877
Securities		-		-
Other interest-earning assets		2,333		9,191
Total interest income		1,175,029		1,227,068
Interest expense:
Deposits		451,759		490,702
Advances from FHLB of Chicago		170,903		206,493
Total interest expense		622,662		697,195
Net interest income		552,367		529,873
Provision for loan losses		40,000		-
Net interest income after provision for loan losses		512,367		529,873
Noninterest income:
Loan service charges		6,343		4,556
Service charges on deposit accounts		36,939		35,116
Other		5,546		4,898
Total noninterest income		48,828		44,570
Noninterest expense:
Compensation and benefits		272,896		263,567
Occupancy expense		27,370		22,203
Equipment and data processing		66,477		95,051
FDIC premium expense		55,272		1,628
Advertising		5,028		8,997
Supplies expense		9,551		13,439
Professional and regulatory fees		40,029		33,378
Other		46,648		43,563
Total noninterest expense		523,271		481,826
Earnings before income taxes		37,924		92,617
Income tax expense		16,855		32,836
Net earnings	$	21,069		59,781
Basic and diluted earnings per share	$	0.02		0.07
Dividends per share	$	0.00		0.00

See accompanying notes to consolidated financial statements.

2

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended
	June 30,
	2009			2008
Cash flows from operating activities:
Net earnings	$	21,069			59,781
Adjustments to reconcile net earnings to net
cash provided by (used for) operating activities:
Depreciation		25,257			26,498
ESOP expense		4,519			5,182
Equity incentive plan expense		6,972			-
Amortization of deferred loan fees, net		(11,554	)		(6,447	)
Provision for loan losses		40,000			-
Decrease (increase) in accrued interest receivable		23,379			(3,070	)
Decrease  in other assets		50,127			89,685
Increase (decrease) in:
Accrued interest on deposits		(7,037	)		(15,135	)
Other liabilities		30,156			(80,326	)
Income taxes payable		(225,146	)		12,190
Net cash provided by (used for) operating activities		(42,258	)		88,358
Cash flows from investing activities:
Net change in loans receivable		1,719,107			(2,651,117	)
Purchase of premises and equipment		(1,956	)		(191,129	)
Net cash provided by (used for) investing activities		1,717,151			(2,842,246	)
Cash flows from financing activities:
Net increase in deposits		242,652			118,015
Increase  in advances from
borrowers for taxes and insurance		118,568			127,803
Proceeds from advances from FHLB		-			2,500,000
Net cash provided by (used for) financing activities		361,220			2,745,818
Net increase (decrease) in cash and cash equivalents		2,036,113			(8,070	)
Cash and cash equivalents at beginning of period		8,929,826			3,167,225
Cash and cash equivalents at end of period	$	10,965,939			3,159,155
Supplemental disclosures - cash paid (received):
Interest on deposits and advances from FHLB	$	631,612			713,410
Federal and state income taxes	$	242,000			-
Real estate and repossessions acquired in settlement of loans	$	127,964			-

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

Three Months Ended June 30, 2009 and 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 month period ended June 30, 2009 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.

Subsequent events have been evaluated through August 10, 2009, which is the date the financial statements were issued.

(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 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 the 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.

4

(3)        Earnings Per Share

Earnings per share are based upon the weighted-average shares outstanding.  ESOP shares, which have been committed to be released within the next twelve months, are considered outstanding.  Stock options, if any, and restricted stock are considered outstanding to the extent dilutive.  Under the treasury stock method, stock options and restricted stock are dilutive when the average market price of the Company’s common stock and effect of any unamortized compensation expense exceeds the exercise price during the period.  In addition, proceeds from the assumed exercise of dilutive stock options and restricted stock and related tax benefit are assumed to be used to repurchase common stock at the average market price during the period.

	Three Months Ended
	June 30,
	2009		2008
Net earnings	$	21,069		59,781
Weighted-average shares - Basic EPS		870,187		874,589
Effect of dilutive stock awards		848		-
Weighted-average shares - Diluted EPS		871,035		874,589
Basic earnings per common share	$	0.02		0.07
Diluted earnings per common share	$	0.02		0.07
Anti-dilutive shares	$	-		-

4)         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 to fund these awards were repurchased in the open market at an average price of $8.10.

            A summary of the Company’s restricted stock award expense under the Plan is as follows:

	Three Months Ended
	June 30,
	2009		2008
Pre-tax	$	6,972		-
After-tax		4,253		-
Basic and diluted earnings per share	$	0.00		-

             At June 30, 2009, the total unrecognized expense related to restricted stock awards was   approximately $116,000 and is expected to be recognized over the weighted-average period of 4.00 years.

5

Non-vested stock awards activity for the three months ended June 30, 2009 is summarized as follows:

			Weighted-
	Number of		Average
	Non-vested		Grant Date
	Shares		Fair Value
Nonvested at March 31, 2009		-
Granted		17,774	$	7.90
Vested		-
Forfeited		-
Nonvested at June 30, 2009		17,774	$	7.90

5)       Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

The Company follows the provisions of Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”), “Fair Value Measurements,” for financial assets and liabilities.  SFAS No. 157 defines fair value as 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.  The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the “inputs”) into three broad levels.

The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Valuation Techniques

Available for sale securities are carried at fair value utilizing Level 1 and Level 2 inputs.  For debt securities, the Bank obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve.  The Company had no debt securities at June 30, 2009.

Impaired loans, as defined under Statement of Financial Accounting Standard No. 114 (“SFAS No. 114”), are carried at fair value utilizing Level 3 inputs, consisting of appraisals of underlying collateral and discounted cash flow analysis.  The Bank considers a loan to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis.  The types of loans for which impairment is measured include nonaccrual income property loans, large nonaccrual single- family loans and troubled debt restructurings.  Valuation allowances are established for impaired loans for the difference between the loan amount and the fair value of collateral and estimated selling costs.

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At June 30, 2009, the Company did not have any available for sale securities or impaired loans under SFAS No. 114.

Non-financial assets measured on a non-recurring basis include foreclosed real estate of $486,000 at June 30, 2009.  There was no provision for losses on these assets during the three months ended June 30, 2009.

Fair Value of Financial Instruments

The following methods and assumptions were used in estimating the fair values shown below:

· Cash and cash equivalents are valued at their carrying amounts due to the relatively short period to maturity of the instruments.

· Stock in FHLB of Chicago (“FHLBC”) is valued at cost, which represents historical redemption value and approximates fair value.  The FHLBC has suspended redemption of FHLBC stock.  See “Balance Sheet Analysis – Investments”.

· Fair values are computed for each loan category using market spreads to treasury securities for similar existing loans in the portfolio and management's estimates of prepayments.

· The carrying amounts of accrued interest receivable and payable approximate fair value.

· Deposits with no defined maturities, such as NOW accounts, savings accounts and money market deposit accounts, are valued at the amount payable on demand at the reporting date.

· The fair values of certificates of deposit and advances from FHLB are computed at fixed spreads to treasury securities with similar maturities.

	June 30,				March 31,
	2009				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Non-trading instruments
and nonderivatives:
Cash and cash equivalents	$	10,965,939		10,965,939		8,929,826		8,929,826
Stock in FHLB of Chicago		1,660,145		1,660,145		1,660,145		1,660,145
Loans receivable, net		77,253,487		80,723,580		79,129,004		82,770,610
Accrued interest receivable		292,348		292,348		315,727		315,727
Deposits		67,319,026		67,259,582		67,076,374		66,748,824
Accrued interest on deposits		186,637		186,637		193,674		193,674
Advances from FHLB of Chicago	$	14,000,000		14,715,734		14,000,000		14,825,091

Off-balance sheet assets include the commitments to extend credit for which fair values were estimated based on interest rates and fees currently charged to enter into similar transactions.  As a result of the short-term nature of the outstanding commitments, the fair values of fees on those commitments approximate the amount collected and the Company has not assigned a value to such instruments for purpose of this disclosure.

7

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 months ended June 30, 2009 and 2008 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 single-family residential real estate loans, commercial and multi-family real estate loans, undeveloped land loans, and, to a lesser extent, consumer loans.

Overview – Financial Highlights

Financial Condition. Total assets at June 30, 2009 were $91.9 million compared to $91.7 million at March 31, 2009. Cash and cash equivalents increased by $2.0 million during the three month period.  This increase was partially offset by a $1.9 million decrease in loans receivable.  Deposits increased by $243,000.  Cash and cash equivalents increased to $11.0 million at June 30, 2009 primarily due to loan repayments.

Operating Results. Net earnings for the three months ended June 30, 2009 were $21,000 compared to net earnings of $60,000 for the same period in 2008. The decrease in net earnings for the quarter was primarily due to increases in the provision for loan losses and FDIC premium expense, partially offset by higher net interest income.

8

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

Cash and Cash Equivalents. Cash and cash equivalents increased by $2.0 million to $11.0 million at June 30, 2009, as loan repayments were temporarily invested in the Federal Home Loan Bank of Chicago (“FHLBC”) daily investment account, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other U.S. Government agency, and in secured federal funds sold.

Investments. The Bank is a member of the 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 declared or paid a dividend since the second quarter of 2007 citing regulatory requirements, continuing pressure on net interest income, projected earnings levels, and market conditions.

At June 30, 2009, we owned $1.7 million of FHLBC stock, of which $914,000 was considered excess or voluntary stock. Tempo Bank expects to redeem a majority of its excess or voluntary stock, when such redemptions are allowed by the FHLBC.  At the present time, such redemption date is uncertain.

FHLBC stock is evaluated for impairment in accordance with Statement of Position 01-06, “Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others.”  Determination of whether the FHLBC stock is impaired is based on the assessment of the ultimate recoverability of cost rather than by recognizing declines in value.  The determination of whether a decline affects the ultimate recoverability of costs is influenced by the significance of the decline in net assets compared to the capital of the FHLBC and the length of time this situation has persisted; the ability of the FHLBC to make payments required by law or regulation and operating performance; the impact of legislative and regulatory changes on member institutions and customer base and the liquidity position of the FHLBC.

9

Management believes that no impairment charge on the FHLBC stock is necessary at June 30, 2009.

Loans Receivable, Net.   Loans receivable, net of allowance for loan losses, decreased to $77.3 million at June 30, 2009 from $79.1 million at March 31, 2009.  The decrease consisted primarily of loan repayments on one-to four-family residential real estate loans.

Nonaccrual loans decreased by $52,000 to $1.73 million at June 30, 2009 compared to $1.78 million at March 31, 2009.  The largest nonaccrual loan category at June 30, 2009 consisted of seven single-family loans aggregating $1.7 million.  Nonaccrual loans resulted from a slowing local and regional economy, job layoffs, divorce and health issues afflicting our borrowers.  There were no troubled debt restructurings, loans 90 days or more past due and still accruing or impaired loans under SFAS No. 114 at either date.

Nonperforming Assets

	June 30,			March 31,
(Dollars in thousands)	2009			2009
Nonaccrual loans:
Residential real estate	$	1,666		$	1,515
Commercial real estate		—			158
Land		—			18
Consumer		66			93
Total		1,732			1,784
Foreclosed real estate – residential (1)		486			358
Other repossessed assets – autos (2)		6			6
Total nonperforming assets	$	2,224		$	2,148
Total nonperforming loans to total loans		2.23	%		2.25	%
Total nonperforming loans to total assets		1.88	%		1.94	%
Total nonperforming assets to total assets		2.42	%		2.34	%

_______________________

(1) Foreclosed real estate at June 30, 2009 consisted of two single-family residences located in O’Fallon and New Baden, Illinois.

(2) Other repossessed assets at June 30, 2009 consist of one automobile.

At June 30, 2009, 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.

Premises and Equipment, Net.  Premises and equipment, net decreased $23,000 to $1.1 million at June 30, 2009 primarily as a result of depreciation expense.

            Accrued Interest Receivable on Loans.  Accrued interest receivable on loans decreased by $23,000 to $292,000 at June 30, 2009 due to the timing of interest receipts and a lower portfolio balance.

            Other Assets.  At June 30, 2009, other assets decreased to $155,000 at June 30, 2009 from $205,000 at March 31, 2009 due primarily to the timing and payment of certain prepaid items.

Deposits. Deposit balances increased slightly to $67.3 million at June 30, 2009 from $67.1 million at March 31, 2009.  Deposits increased, in part, due to interest credited to accounts less withdrawal activity during the period.

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Borrowings. We use short-term, cash equivalent FHLB advances as an additional source of liquidity. FHLB advances remained steady at $14.0 million at June 30, 2009 as compared with March 31, 2009.

Other Liabilities.  Advances from borrowers for taxes and insurance increased by $119,000 to $429,000 at June 30, 2009 due to deposits made by borrowers for real estate taxes and insurance.  Other liabilities increased by $30,000 to $285,000 at June 30, 2009 as a result of timing and payment of certain accrual items.  Income taxes payable decreased by $225,000 to $394,000 at June 30, 2009 due to the timing of income tax payments.

Results of Operations for the Three Months Ended June 30, 2009 and 2008.

Net Interest Income.  Net interest income increased by $22,000 to $552,000 for the three months ended June 30, 2009 from $530,000 for the three months ended June 30, 2008.  The increase is due primarily to an improved interest rate spread.  The interest rate spread increased 6 basis points from the comparable period in 2008 to 2.13%, primarily as a result of a 69 basis point decline in the rate paid on deposits.

Interest Income. Interest income decreased $52,000 to $1.2 million for the three months ended June 30, 2009.  The decrease was due largely to a reduction in the average balance of loans of $3.3 million for the June 2009 quarter, when compared to the same period a year ago.

            The $1.7 million investment in FHLBC stock continues to earn no dividends.  The Bank does not expect to receive cash or stock dividends on the FHLBC stock for the foreseeable future.

            Lower rates of return on other interest-earning funds, partially offset by higher balances, further contributed to the decrease in interest income.  The average yield on over-night funds decreased 188 basis points to .09% for the quarter ended June 30, 2009.  The average balance of over-night funds increased to $9.1 million for the current quarter, compared to $1.8 million for the June 2008 quarter.

Interest Expense. Interest expense decreased by $74,000 to $623,000 for the three months ended June 30, 2009 from $697,000 for the comparable period in 2008. The decrease resulted primarily from a lower average rate paid on deposits and a lower balance of advances from FHLBC.

The average rate on deposits was 2.79% for the current quarter, compared to 3.48% for the June 2008 quarter due to declining market interest rates.   The average balance of deposits increased to $64.7 million for the three months ended June 30, 2009 from $56.5 million for the same period in 2008.  Increases in money market accounts and certificates of deposit resulted from stock market volatility and movement by customers toward the safety of FDIC insured deposits.

The average balance of advances from FHLBC decreased to $14.0 million for the June 2009 quarter, compared to $18.2 million for the comparable period last year.  The average rate on advances from FHLBC increased to 4.89% for the three months ended June 30, 2009 from 4.54% for the same quarter a year ago.

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              The following table summarizes average balances and annualized average yields and costs for the three months ended June 30, 2009 and 2008.

	Three Months Ended June 30,
	2009								2008
(Dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	77,892		$	1,173		6.02	%	$	81,156		$	1,218		6.00	%
Stock in FHLB of Chicago		1,660			-		-			1,660			0		-
Other interest-earning assets		9,122			2		0.09	%		1,828			9		1.97	%
Total interest-earning assets		88,674			1,175		5.30	%		84,644			1,227		5.80	%
Noninterest-earning assets		3,112								3,164
Total assets		91,786								87,808
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	4,198		$	5		0.48	%	$	4,177		$	5		0.48	%
Savings accounts		8,074			14		0.69	%		7,328			12		0.66	%
Money market accounts		6,390			34		2.13	%		3,825			25		2.61	%
Certificates of deposit		46,027			399		3.47	%		41,168			449		4.36	%
Total interest-bearing deposits		64,689			452		2.79	%		56,498			491		3.48	%
FHLB advances		14,000			171		4.89	%		18,167			206		4.54	%
Total interest-bearing liabilities	$	78,689		$	623		3.17	%	$	74,665		$	697		3.73	%
Noninterest-bearing NOW accounts		2,377								2,632
Other noninterest-bearing liabilities		1,412								1,305
Total liabilities		82,478								78,602
Stockholders’ equity		9,308								9,206
Total liabilities and stockholders’ equity	$	91,786							$	87,808
Net interest income				$	552							$	530
Interest rate spread							2.13	%							2.07	%
Net interest margin							2.49	%							2.50	%
Average interest-earning assets to average interest-bearing liabilities		112.69	%							113.37	%

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.

The $40,000 provision for loan losses for the current quarter was necessary due to a local economy that continues to weaken, rising unemployment rates, the increasing number of foreclosures in the Bank’s market area and declining home prices.  No such provision for loan losses was recognized during the June 2008 quarter.

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Noninterest Income.  Noninterest income includes service charges on deposit accounts, loan service charges, and other income.  Noninterest income increased for the three month period ended June 30, 2009 to $49,000 from $45,000 for the comparable period last year due primarily to the Bank’s overdraft privilege program, which increased service charges on deposit accounts, and higher loan service charges.

Noninterest Expense.  Noninterest expense includes compensation and benefits, equipment and data processing, occupancy, FDIC premiums, professional and regulatory fees and other expenses.  Noninterest expense increased by $41,000 due primarily to a higher FDIC premium expense.

FDIC premium expense increased by $53,000 to $55,000 for the quarter ended June 30, 2009, compared to $2,000 for the June 2008 quarter.  On May 22, 2009, the FDIC issued a final rule that imposed a special five basis points assessment on each institution’s assets minus Tier 1 capital as of June 30, 2009, which will be payable to the FDIC on September 30, 2009.  The cost of this special assessment to Tempo Bank was $41,000.  If after June 30, 2009, the reserve ratio of the Deposit Insurance Fund falls to a level that the FDIC believes would adversely affect public confidence or to a level close to or below zero, the FDIC may impose an additional special assessment of up to five basis points on each institution’s assets minus Tier 1 capital for the third and fourth quarters of 2009 if deemed necessary.

Equipment and data processing decreased by $29,000 to $66,000 for the three months ended June 30, 2009 as a result of costs associated with implementation of new products in the comparable quarter.

Income Tax Expense.  Income tax expense was $17,000 for the three months ended June 30, 2009 compared to an expense of $33,000 for the three months ended June 30, 2008.  The decrease in tax expense is primarily attributable to lower pre-tax income.

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 June 30, 2009, cash and cash equivalents totaled $11.0 million.  In addition, at June 30, 2009, we had the ability to borrow up to a total of $33.2 million from the FHLBC.  At June 30, 2009, the Bank had $14.0 million in FHLBC advances outstanding.

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A significant use of our liquidity is the funding of loan originations.  At June 30, 2009, we had $26,000 in one single-family loan commitment 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 June 30, 2009 totaled $32.7 million, or 72.2% of certificates of deposit.  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 leave the Fed funds and Discount Window rates and their current benchmarks as is, we have been able to attract new money deposits with targeted pricing.  The local deposit market remains extremely competitive with both regional and national banking institutions “buying the market” for liquidity. This has resulted in a very rate sensitive time deposit base. We have the ability to attract and retain these deposits by adjusting the interest rates offered.

The Company is a separate legal entity from the Bank and must provide for its own liquidity.  In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, and interest and principal on outstanding debt.  The Company also has repurchased shares of its common stock.  The Company’s primary source of income is dividends received from the Bank.  The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Office of Thrift Supervision but with prior notice to Office of Thrift Supervision, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years.  At June 30, 2009, the Company had liquid assets of $19,000.

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.

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 June 30, 2009, 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 Office of Thrift Supervision.  Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

On August 3, 2009, the Board of Directors of the Company declared a one-time cash dividend of $.10 per share.  The dividend will be paid on or about September 1, 2009 to stockholders of record, excluding the MHC, as of August 18, 2009.

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The Bank’s actual and required capital amounts and ratios at June 30, 2009 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	$	8,955		9.7	%	$	1,379		1.5	%
General valuation allowance		205
Total capital to risk-weighted assets	$	9,160		19.1	%	$	3,837		8.0	%	$	4,797		10.0	%
Tier 1 capital to risk-weighted assets	$	8,955		18.7	%	$	1,919		4.0	%	$	2,878		6.0	%
Tier 1 capital to total assets	$	8,955		9.7	%	$	3,677		4.0	%	$	4,596		5.0	%

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.

For the three months ended June 30, 2009, 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 June 30, 2009, 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

None.

Item 5. Other Information

None.

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: August 10, 2009	By:	/s/ Robert J. Stroh, Jr.
		Robert J. Stroh, Jr. Chairman, Chief Executive Officer and Chief Financial Officer

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