Sugar Creek Financial 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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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 December 31, 2009

OR

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

For the transition period from ______________ to _____________

Commission file number:  0-52532

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, including area code)

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 x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See 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   ¨   Accelerated Filer ¨   Non-accelerated Filer ¨   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 ¨ No x

As of February 12, 2010 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 December 31, 2009 and March 31, 2009 (Unaudited)	1
		Consolidated Statements of Earnings for the three and nine months ended December 31, 2009 and 2008 (Unaudited)	2
		Consolidated Statements of Cash Flows for the nine months ended December 31, 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	7
	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			17

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Part I.  Financial Information

Item 1. Financial Statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

	December 31,			March 31,
	2009			2009
Assets
Cash and due from banks	$	564,637			775,208
Federal funds sold		1,600,018			5,611,104
FHLB daily investment account		5,210,079			2,543,514
Cash and cash equivalents		7,374,734			8,929,826
Stock in FHLB of Chicago		1,660,145			1,660,145
Loans receivable, net of allowance for loan losses of $120,378 at December 31, 2009 and $165,323 at March 31, 2009		75,281,026			79,129,004
Premises and equipment, net		1,088,756			1,130,874
Foreclosed real estate		505,465			357,847
Accrued interest receivable on loans		326,766			315,727
Other assets		557,900			204,640
Total assets	$	86,794,792			91,728,063
Liabilities and Stockholders' Equity
Deposits	$	65,582,986			67,076,374
Accrued interest payable on deposits		132,702			193,674
Advances from FHLB of Chicago		11,000,000			14,000,000
Advances from borrowers for taxes and insurance		215,614			310,026
Other liabilities		203,505			254,856
Income taxes payable		356,617			619,429
Total liabilities		77,491,424			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		3,229,491			3,213,361
Treasury stock, at cost, 7,870 shares and 6,772, respectively		(64,118	)		(56,157	)
Common stock acquired by employee stock ownership plan		(284,392	)		(302,167	)
Retained earnings - substantially restricted		6,413,318			6,409,598
Total stockholders' equity		9,303,368			9,273,704
Total liabilities and stockholders' equity	$	86,794,792			91,728,063

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Earnings (Unaudited)

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
Interest income:
Loans receivable	$	1,135,009		1,248,261		3,454,141		3,734,861
Securities		-		-		-		-
Other interest-earning assets		710		4,725		5,224		26,182
Total interest income		1,135,719		1,252,986		3,459,365		3,761,043
Interest expense:
Deposits		345,947		461,020		1,204,226		1,395,778
Advances from FHLB of Chicago		140,915		190,294		484,599		627,905
Total interest expense		486,862		651,314		1,688,825		2,023,683
Net interest income		648,857		601,672		1,770,540		1,737,360
Provision for loan losses		20,000		40,046		157,348		51,876
Net interest income after provision for loan losses		628,857		561,626		1,613,192		1,685,484
Noninterest income:
Loan service charges		5,002		4,988		16,639		14,930
Service charges on deposit accounts		37,220		43,548		111,034		123,153
Other		3,904		4,936		14,434		15,058
Total noninterest income		46,126		53,472		142,107		153,141
Noninterest expense:
Compensation and benefits		285,086		279,898		820,348		779,504
Occupancy expense		30,473		25,789		92,678		76,282
Equipment and data processing		87,051		83,039		235,999		268,280
FDIC premium expense		51,548		10,762		133,337		15,011
Advertising		13,344		18,079		25,909		34,483
Supplies expense		11,998		5,114		26,658		22,326
Operations of foreclosed real estate, net		24,910		1,002		92,933		14,414
Other		91,073		80,848		265,587		235,140
Total noninterest expense		595,483		504,531		1,693,449		1,445,440
Earnings before income taxes		79,500		110,567		61,850		393,185
Income tax expense		26,425		44,165		21,189		152,006
Net earnings	$	53,075		66,402		40,661		241,179
Basic and diluted earnings per share	$	0.06		0.08		0.05		0.28
Dividends per share	$	0.10		0.00		0.10		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)

	Nine Months Ended
	December 31,
	2009			2008
Cash flows from operating activities:
Net earnings	$	40,661			241,179
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		78,105			79,493
ESOP expense		12,987			15,636
Equity incentive plan expense		20,918			11,653
Amortization of deferred loan fees, net		(27,654	)		(15,020	)
Provision for loan losses		157,348			51,876
Provision for losses on foreclosed real estate		34,357			-
Decrease (increase) in accrued interest receivable		(11,039	)		329
Decrease (increase) in other assets		(353,260	)		15,533
Increase (decrease) in:
Accrued interest on deposits		(60,972	)		(47,133	)
Other liabilities		(51,351	)		(63,241	)
Accrued income taxes		(262,812	)		163,465
Net cash provided by (used for) operating activities		(422,712	)		453,770
Cash flows from investing activities:
Net change in loans receivable		3,234,813			(2,773,512	)
Purchase of premises and equipment		(35,987	)		(200,337	)
Proceeds from foreclosed real estate		301,496			-
Net cash provided by (used for) investing activities		3,500,322			(2,973,849	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(1,493,388	)		3,183,762
Decreases in advances from borrowers for taxes and insurance		(94,412	)		(137,233	)
Proceeds from advances from FHLB		-			19,500,000
Repayment of advances from FHLB		(3,000,000	)		(16,500,000	)
Dividends paid		(36,941	)		-
Repurchase of common stock		(7,961	)		(200,067	)
Net cash provided by (used for) financing activities		(4,632,702	)		5,846,462
Net increase (decrease) in cash and cash equivalents		(1,555,092	)		3,326,383
Cash and cash equivalents at beginning of period		8,929,826			3,167,225
Cash and cash equivalents at end of period	$	7,374,734			6,493,608
Supplemental disclosures - cash paid:
Interest on deposits and advances from FHLB	$	1,762,180			2,080,884
Federal and state income taxes		26,425			152,006
Real estate and repossessions acquired in settlement of loans	$	483,471			43,176

See accompanying notes to consolidated financial statements.

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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

(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 nine month periods ended December 31, 2009 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.  Subsequent events have been evaluated through February 12, 2010, which is the date the financial statements were issued.

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.

Effective for all interim and annual periods ending after September 15, 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied to nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.

(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 to the public, and issued 55% of its outstanding shares of common stock 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

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.

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	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
Net earnings	$	53,075		66,402	$	40,661		241,179
Weighted-average shares - Basic EPS		870,275		863,524		870,170		870,536
Effect of dilutive stock awards		1,245		2,205		940		792
Weighted-average shares - Diluted EPS		871,520		865,729		871,110		871,328
Basic earnings per common share	$	0.06		0.08	$	0.05		0.28
Diluted earnings per common share	$	0.06		0.08	$	0.05		0.28
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				Nine Months Ended
	December 31,				December 31,
	2009		2008		2009		2008
Pre-tax	$	6,973		6,973		20,918		11,653
After-tax		4,254		4,254		12,760		7,108
Diluted earnings per common share	$	0.00		0.00		0.01		0.01

                At December 31, 2009, the total unrecognized expense related to restricted stock awards was approximately $101,000 and is expected to be recognized over the weighted-average period of 3.5 years.

Non-vested stock awards activity for the nine months ended December 31, 2009 is summarized as follows:

				Weighted-
	Number of			Average
	Non-vested			Grant Date
	Shares			Fair Value
Nonvested at March 31, 2009		17,774		$	7.90
Granted		-
Vested		(3,559	)		7.90
Forfeited		-
Nonvested at December 31, 2009		14,215		$	7.90

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5)            Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

                The Company follows the provisions of FASB ASC 820-10, “Fair Value Measurements,” for financial assets and liabilities.  FASB ASC 820-10 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 December 31, 2009.

                Impaired loans, as defined under FASB ASC 310-10-35, 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.

At December 31, 2009, the Company did not have any available for sale securities or impaired loans under FASB ASC 310-10-35.

Non-financial assets measured on a non-recurring basis include foreclosed real estate of $505,000 at December 31, 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.

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. 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.

	December 31,				March 31,
	2009		2009		2009		2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Non-trading instruments and nonderivatives:
Cash and cash equivalents	$	7,374,734		7,374,734		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		75,281,026		78,066,144		79,129,004		82,770,610
Accrued interest receivable		326,766		326,766		315,727		315,727
Deposits		65,582,986		65,218,671		67,076,374		66,748,824
Accrued interest on deposits		132,702		132,702		193,674		193,674
Advances from FHLB of Chicago	$	11,000,000		11,573,613		14,000,000		14,825,091

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

Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended December 31, 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.

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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.

Overview – Financial Highlights

Financial Condition. Total assets at December 31, 2009 were $86.8 million compared to $91.7 million at March 31, 2009. Asset shrinkage was lead by a $3.8 million decrease in loans receivable caused by loan prepayments and a decrease in cash and cash equivalents used to fund a $1.5 million decline in deposits. Liability shrinkage was lead by a $3.0 million decrease in advances from FHLBC.

             Operating Results. During the nine month period ended December 31, 2009,  net earnings of $41,000 was recorded compared to net earnings of $241,000 for the comparable 2008 period.  The decrease in net earnings for the period was primarily due to an increased loan loss provision, an increase in FDIC premium expense and higher costs related to foreclosed real estate.

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

Loans Receivable, Net.   Loans receivable, net of allowance for loan losses, decreased to $75.3 million at December 31, 2009 from $79.1 million at March 31, 2009.  The decrease consisted primarily of one-to four-family residential real estate loans and was primarily due to loan prepayments.

Nonaccrual loans at December 31, 2009 decreased to $280,000 compared to $1.8 million at March 31, 2009. Nonaccrual loans at December 31, 2009 consisted of two single-family loans aggregating $250,000, one commercial land loan of $17,000 and four consumer loans totaling $13,000. At March 31, 2009, there were eight single-family loans aggregating $1.5 million; two loans secured by commercial real estate aggregating $176,000; and nine consumer loans of $93,000 classified as nonaccrual. Nonaccrual loans continue to be impacted by a slow local and regional economy, job layoffs, and divorce and health issues affecting our borrowers.  There were three single-family troubled debt restructurings totaling $652,000 at December 31, 2009.  There were no loans 90 days or more past due and still accruing at either date. Foreclosed real estate consisted of two single-family residential properties. Other repossessed assets consisted of one automobile loan.

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	December 31,			March 31,
(Dollars in thousands)	2009			2009
Nonaccrual loans:
Residential real estate	$	250		$	1,515
Multi-family		-			-
Commercial		17			176
Consumer		13			93
Troubled debt restructurings		652			-
Total nonperforming loans		932			1,784
Foreclosed real estate - residential		505			358
Other repossessed assets - autos		10			6
Total		515			364
Total nonperforming assets	$	1,447		$	2,148
Total nonperforming loans to total loans		1.23	%		2.25	%
Total nonperforming loans to total assets		1.07			1.94
Total nonperforming assets to total assets		1.67	%		2.34	%

At December 31, 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.

For the nine months ended December 31, 2009, the amount of interest income collected (and recognized) on nonperforming loans and the contractual amount due during the period was $17,000 and $18,000, respectively.

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 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 December 31, 2009, we owned $1.7 million of FHLBC stock, of which $914,000 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 redeem the majority of its excess or voluntary stock as soon as an official redemption policy has been announced by the FHLBC.

               Premises and Equipment, Net.  Premises and equipment, net decreased $42,000 to $1.1 million at December 31, 2009 as a result of depreciation expense, net of purchases.

               Other Assets.  At December 31, 2009,other assets increased by $353,000 to $558,000 at December 31, 2009 due primarily to the FDIC’s levy of a 3 year prepaid deposit insurance premium.

Deposits. Deposit balances decreased to $65.6 million at December 31, 2009 from $67.1 million at March 31, 2009. Deposits decreased, in part, due to rate sensitive deposits being withdrawn during the period.

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Borrowings. We use short-term, cash equivalent FHLBC advances as an additional source of liquidity. FHLBC advances declined at December 31, 2009 to $11.0 million from $14.0 million as compared with March 31, 2009.

Other Liabilities.  Advances from borrowers for taxes and insurance decreased $94,000 to $216,000 at December 31, 2009 due to payments made for real estate taxes.  Other liabilities decreased $51,000 to $204,000 at December 31, 2009 as a result of timing and payment of certain accrual items.

Results of Operations for the Three Months Ended December 31, 2009 and 2008.

Total Interest Income. Total interest income decreased $117,000 to $1.1 million for the three months ended December 31, 2009.  The decrease was largely due to a reduction in loans receivable.  The Bank does not expect to receive cash or stock dividends on its FHLBC stock for the foreseeable future.

Total Interest Expense. Total interest expense decreased $164,000 to $487,000 for the three months ended December 31, 2009 from $651,000 for the three months ended December 31, 2008. The decrease resulted primarily from lower deposit and FHLBC advance balances and lower average rates paid for deposits.

Net Interest Income.  Net interest income increased $47,000 to $649,000 for the three months ended December 31, 2009 from $602,000 for the three months ended December 31, 2008.  The increase is due primarily to the lower deposit rates.

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 December 31, 2009, the Bank recorded a provision for loan losses of $20,000. In the comparable period for 2008, the Bank recorded a provision for loan losses of $40,000. The effects of the economic downturn and unemployment are negatively impacting our market area, causing an increase in delinquencies and a decrease in collateral values.

Noninterest Income.  Noninterest income includes service charges on deposit accounts, loan service charges, and other income.  Total noninterest income decreased for the three month period ended December 31, 2009 to $46,000 from $53,000 for the three months ended December 31, 2008 due primarily to lower service charges on deposit accounts.

Noninterest Expense.  Noninterest expense primarily consists of salaries and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses.  Total noninterest expense increased by $91,000 to $595,000 for the three months ended December 31, 2009 from $505,000 for the three months ended December 31, 2008 primarily due to higher FDIC premium expense and operations of foreclosed real estate.

Income Taxes.  Income tax expense for the three months ended December 31, 2009 was $26,000 compared $44,000 for the three months ended December 31, 2008. The decrease in tax expense is primarily attributable to lower pre-tax earnings.

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Results of Operations for the Nine Months Ended December 31, 2009 and 2008.

General.  The Company recorded net earnings of $41,000 for the nine months ended December 31, 2009 compared with net earnings $241,000 for the same period last year.  The $200,000 decrease in net earnings was primarily due to a higher loan loss provision, an increase in FDIC premium expense and higher costs related to foreclosed real estate.

The following table summarizes average balances and annualized average yields and costs for the nine months ended December 31, 2009 and 2008.

	Nine Months Ended December 31,
	2009									2008
				Interest									Interest
	Average			and			Yield/			Average			and			Yield/
(Dollars in thousands)	Balance			Dividends			Cost			Balance			Dividends			Cost
Assets:
Interest-earning assets:
Loans	$	76,574		$	3,454			6.01	%	$	82,627		$	3,735			6.03	%
Stock in FHLB of Chicago		1,660			-			-			1,660			-			-
Other interest-earning assets		8,000			5			0.08	%		3,339			26			1.04	%
Total interest-earning assets		86,234			3,459			5.35	%		87,626			3,761			5.72	%
Noninterest-earning assets		3,466									3,127
Total assets		89,700									90,753
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	4,362		$	16			0.49	%	$	4,361		$	16			0.49	%
Savings accounts		8,180			43			0.70	%		7,443			38			0.68	%
Money market accounts		7,821			105			1.79	%		4,438			87			2.61	%
Certificates of deposit		43,493			1,040			3.19	%		41,240			1,255			4.06	%
Total interest-bearing deposits		63,856			1,204			2.51	%		57,482			1,396			3.24	%
FHLB advances		13,000			485			4.97	%		20,389			628			4.11	%
Other borrowings		–			–			–			–			–			–
Total interest-bearing liabilities	$	76,856		$	1,689			2.93	%	$	77,871		$	2,024			3.47	%
Noninterest-bearing NOW accounts		2,704									2,695
Other noninterest-bearing liabilities		859									927
Total liabilities		80,419									81,493
Stockholders’ equity		9,281									9,260
Total liabilities and stockholders’ equity	$	89,700								$	90,753
Net interest income				$	1,770								$	1,737
Interest rate spread								2.42	%								2.25	%
Net interest margin					2.74	%								2.64	%
Average interest-earning assets to average interest-bearing liabilities		112.20	%								112.53	%

Total Interest Income. Total interest income decreased $302,000 to $3.5 million for the nine months ended December 31, 2009 from $3.8 million for the same period ended December 31, 2008. The decrease was largely due to a reduction in loan receivable balances and interest rates earned for overnight funds.

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Total Interest Expense. Total interest expense decreased by $335,000 to $1.7 million for the nine months ended December 31, 2009 from $2.0 million for the comparable prior year period. The decline was due primarily to lower deposit rates and a lower FHLB advance balance.

Net Interest Income. Net interest income increased by $33,000 to $1.8 million for the nine months ended December 31, 2009 from $1.7 million for the nine months ended December 31, 2008 as a result of lower average rates paid for deposits and a lower FHLB advance balance.

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 nine month period ended December 31, 2009, we recorded a provision for loan losses of $157,000, compared to $52,000 in the comparable prior period.

Analysis of Loan Loss Experience	Nine Months Ended
	December 31,
(Dollars in thousands)	2009			2008
Allowance at beginning of period	$	165		$	124
Provision for loan losses		157			52
Charge-offs:
One- to four- family		(201	)		-
Consumer loans		(1	)		(11	)
Total charge-offs		(202	)		(11	)
Recoveries:
One- to four- family		-			-
Consumer loans		-			-
Total recoveries		-			-
Net recoveries (charge-offs)		(202	)		(11	)
Allowance at end of period	$	120		$	165
Allowance to nonperforming loans		12.88	%		11.26	%
Allowance to total loans		0.16	%		0.20	%
Annualized net charge-offs (recoveries) to average loans outstanding		0.35	%		0.02	%

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other noninterest income. Total noninterest income decreased for the nine months ended December 31, 2009 to $142,000 from $153,000 for the same period ended December 31, 2008. The decrease was primarily a result of lower service charges on deposit accounts offset by an increase in loan service charges.

Noninterest Expense. Noninterest expense primarily consists of compensation and benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses.  Noninterest expense increased by $248,000 due primarily to a higher FDIC premium expense and higher expenses related to foreclosed real estate.

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                FDIC premium expense increased by $118,000 to $133,000 for the nine months ended December 31, 2009, compared to $15,000 for the same period last year as a result of higher quarterly assessments and one special assessment.  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 was paid to the FDIC on September 30, 2009.  The cost of this special assessment to Tempo Bank was $41,000.  In addition, the quarterly premium increased due to a higher risk-based assessment, which considers the supervisory rating and certain financial ratios of each financial institution.

               Operations of foreclosed real estate increased by $79,000 as a result of higher holding costs, primarily consisting of real estate taxes, repairs and other maintenance expenses.  In addition, the Bank incurred losses on foreclosed real estate of $34,000 during the 2009 period.

               Other noninterest expense increased by $31,000 due to higher legal costs associated with operating as a public company, travel expenses and education costs.

Equipment and data processing expenses decreased by $32,000 to $236,000 for the nine months ended December 31, 2009 as a result of costs associated with implementation of new products in the comparable 2008 period.

Income Taxes. Income tax expense decreased to $21,000 for the nine months ended December 31, 2009 from $152,000 for the same period ended December 31, 2008. The decrease in income tax expense is primarily attributable to lower pre-tax earnings.

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 December 31, 2009, cash and cash equivalents totaled $7.4 million. At December 31, 2009, the Bank had $11.0 million in FHLBC advances outstanding.

A significant use of our liquidity is the funding of loan originations.  At December 31, 2009, we had $400,000 in one outstanding single-family loan commitment.  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 December 31, 2009 totaled $30.9 million, or 74.5% 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 economic and 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 leave the Fed funds and Discount Window rates and their current benchmarks, 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, several of which are TARP recipients. 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, if deemed appropriate.

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    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, if any.  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 December 31, 2009, the Company had liquid assets of $49,000.

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 December 31, 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 OTS.  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 was paid to stockholders of record as of August 18, 2009, excluding the MHC, on September 1, 2009.

The Bank’s actual and required capital amounts and ratios at December 31, 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	$	8,917		10.3	%	$	1,302		1.5	%
General valuation allowance		120
Total capital to risk-weighted assets	$	9,037		19.6	%	$	3,686		8.0	%	$	4,607		10.0	%
Tier 1 capital to risk-weighted assets	$	8,917		19.4	%	$	1,843		4.0	%	$	2,764		6.0	%
Tier 1 capital to total assets	$	8,917		10.3	%	$	3,472		4.0	%	$	4,340		5.0	%

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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 nine months ended December 31, 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.

Legal Proceedings

In January 2010, Tempo Bank was named as a defendant, along with other financial institutions and a brokerage firm, in a proposed class action lawsuit alleging violations of Illinois Consumer Fraud and Deceptive Business Practices Act and negligence.  The plaintiff seeks class action status for an alleged 40 – 100 similarly situated persons.  Tempo Bank has filed a motion to dismiss the complaint.

Management believes, after consultation with counsel, that the likelihood of a favorable outcome on defending the lawsuit is good.  Management believes that a negative outcome would not be material to the financial condition of the Bank or Company.

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 December 31, 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

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  During the quarter ended December 31, 2009, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flow.

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

Not Applicable.

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: February 12, 2010	By:	/s/ Robert J. Stroh, Jr.
		Robert J. Stroh, Jr.
		Chairman, Chief Executive Officer and
		Chief Financial Officer

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