United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2014

 

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: 0-55170

 

SUGAR CREEK FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Maryland		38-3920636
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

 

28 West Broadway, Trenton, Illinois		62293
(Address of principal executive offices)		(Zip Code)

 

(618) 224-9228

(Registrant’s telephone number)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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

(Do not check if a smaller reporting company)

 

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

 

Yes ¨ No x

 

As of August 13, 2014, the issuer had 949,228 shares of common stock outstanding.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Form 10-Q

Index

 

PART 1.  FINANCIAL INFORMATION	1
ITEM 1.  FINANCIAL STATEMENTS	1
Consolidated Balance Sheets (Unaudited)	1
Consolidated Statements of Earnings (Unaudited)	2
Consolidated Statements of Stockholders’ Equity (Unaudited)	3
Consolidated Statements of Cash Flows (Unaudited)	4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
Item 3. Quantitative and Qualitative Disclosures about Market Risk	28
Item 4. Controls and Procedures	28
PART II – OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Mine Safety Disclosures	29
Item 5. Other Information	29
Item 6. Exhibits	29
SIGNATURES	31
Exhibit 31.0	32
Exhibit 32.0	33

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

PART 1. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Consolidated Balance Sheets (Unaudited)

 

		June 30,				March 31,
		2014				2014
Assets
Cash and due from banks		$	2,858,283			$	4,013,453
Federal funds sold			10,980,000				8,860,000
FHLB daily investment account			1,165,947				3,774,375
Cash and cash equivalents			15,004,230				16,647,828
Stock in Federal Home Loan Bank of Chicago ("FHLBC")			1,165,513				1,165,513
Loans receivable, net of allowance for losses of $281,103 and $304,103			74,048,806				73,386,855
Premises and equipment, net			1,126,059				1,145,346
Foreclosed real estate			729,609				754,704
Accrued interest receivable on loans			249,123				241,411
Other assets			356,636				770,149
Total assets		$	92,679,976			$	94,111,806
Liabilities and Stockholders' Equity
Deposits		$	73,510,949			$	77,800,822
Accrued interest payable on deposits			38,156				38,371
Advances from FHLBC			5,000,000				5,000,000
Advances from borrowers for taxes and insurance			469,956				370,091
Other liabilities			303,723				301,922
Income taxes payable			253,847				200,108
Total liabilities			79,576,631				83,711,314
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; 949,228 and  906,879 shares issued			9,492				9,069
Additional paid-in capital			6,114,168				3,288,508
Treasury stock, at cost, 11,852 shares at March 31, 2014			-				(85,638	)
Common stock acquired by Employee Stock Ownership Plan ("ESOP")			(469,103	)			(183,670	)
Retained earnings - substantially restricted			7,448,788				7,372,223
Total stockholders' equity			13,103,345				10,400,492
Total liabilities and stockholders' equity		$	92,679,976			$	94,111,806

 

See accompanying notes to consolidated financial statements.

 

 

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Consolidated Statements of Earnings (Unaudited)

 

		Three Months Ended
		June 30,
		2014				2013
Interest income:
Loans receivable		$	831,575				865,393
Stock in FHLBC			1,437				862
Other interest-earning assets			6,394				6,026
Total interest income			839,406				872,281
Interest expense:
Deposits			109,648				117,100
Advances from FHLBC			59,529				59,529
Total interest expense			169,177				176,629
Net Interest Income			670,229				695,652
Provision for (credit to) loan losses			(23,000	)			-
Net interest income after provision for (credit to) loan losses			693,229				695,652
Noninterest income:
Loan service charges			3,206				3,064
Service charges on deposit accounts			25,838				29,642
Other			4,404				3,093
Total noninterest income			33,448				35,799
Noninterest expense:
Compensation and benefits			331,242				305,773
Occupancy expense			31,466				28,282
Equipment and data processing			87,553				86,310
FDIC premium expense			12,870				19,893
Operations of foreclosed real estate, net			30,437				3,536
Professional and regulatory fees			26,261				38,862
Other			79,907				63,471
Total noninterest expense			599,736				546,127
Earnings before income tax expense			126,941				185,324
Income tax expense			50,376				75,058
Net earnings		$	76,565				110,266
Basic and diluted earnings per share		$	0.09				0.13
Dividends per share		$	0.00				0.00

 

See accompanying notes to consolidated financial statements.

 

 

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

														Common
						Additional								Stock								Total
		Common				Paid-in				Treasury				Acquired				Retained				Stockholders'
		Stock				Capital				Stock				by ESOP				Earnings				Equity
Balance at March 31, 2014		$	9,069			$	3,288,508			$	(85,638	)		$	(183,670	)		$	7,372,223			$	10,400,492
Net earnings			-				-				-				-				76,565				76,565
Treasury stock retired pursuant to reorganization			-				(85,638	)			85,638				-				-				-
Amortization of ESOP awards			-				(2,224	)			-				14,237				-				12,013
Cancellation of Old Sugar Creek Financial Corp. shares			(9,069	)			9,069				-				-				-				-
Net proceeds from stock offering			9,492				2,904,453				-				(299,670	)			-				2,614,275
Balance at June 30, 2014		$	9,492			$	6,114,168			$	-			$	(469,103	)		$	7,448,788			$	13,103,345

 

See accompanying notes to consolidated financial statements.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Consolidated Statements of Cash Flows (Unaudited)

 

		Three Months Ended
		June 30,
		2014				2013
Cash flows from operating activities:
Net earnings		$	76,565			$	110,266
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			20,954				18,756
Provision for (credit to) loan losses			(23,000	)			-
Provision for losses on foreclosed real estste			23,000				-
ESOP expense			12,013				3,314
Equity incentive plan expense			-				6,972
Amortization of deferred loan fees, net			(4,168	)			(7,243	)
(Increase) decrease in accrued interest receivable			(7,712	)			2,900
Decrease in other assets			413,513				138,832
Increase (decrease) in:
Accrued interest payable on deposits			(215	)			86
Other liabilities			1,801				(80,197	)
Income taxes payable			53,739				(114,942	)
Net cash provided by operating activities			566,490				78,744
Cash flows from investing activities:
Net increase in loans receivable			(634,783	)			(435,712	)
Purchase of premises and equipment			(1,667	)			(52,846	)
Other, net			2,095				-
Net cash used for investing activities			(634,355	)			(488,558	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(4,289,873	)			400,243
Increase in advances from borrowers for taxes and insurance			99,865				81,789
Proceeds from sale of common stock			2,614,275				-
Net cash (used for) provided by financing activities			(1,575,733	)			482,032
Net (decrease) increase in cash and cash equivalents			(1,643,598	)			72,218
Cash and cash equivalents at beginning of period			16,647,828				14,451,393
Cash and cash equivalents at end of period		$	15,004,230			$	14,523,611
Supplemental disclosures - cash paid:
Interest on deposits and advances from FHLBC		$	170,045			$	177,197
Federal and state income taxes			-				-
Real estate acquired in settlement of loans		$	-			$	-

 

See accompanying notes to consolidated financial statements.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Summary of Significant Accounting Policies

 

General

 

On April 8, 2014, Sugar Creek Financial Corp., a Maryland corporation (the “Company”), became the holding company for the Bank upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the Conversion”). The Conversion involved the sale by the Company of 535,127 shares of common stock in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan, the exchange of 414,101 shares of common stock after consideration of fractional shares of the Company for shares of common stock of the former Sugar Creek Financial Corp. (“old Sugar Creek”) held by persons other than Sugar Creek MHC (the “MHC”), and the elimination of old Sugar Creek and the MHC. Net proceeds received from the reorganization and stock offering totaled $2,614,275, net of costs of $929,802, common stock acquired by the ESOP of $299,670 and the contribution of cash from the MHC of $98,382.

 

The Bank is a community oriented financial institution that provides traditional financial services within the areas it serves. The Bank is engaged primarily in the business of attracting deposits from the general public and using these funds to originate one- to four-family residential mortgage loans located in the Clinton, St. Clair, and Madison County, Illinois area. Further, operations of the Bank are managed and financial performance is evaluated on an institution-wide basis. As a result, all of the Bank’s operations are considered by management to be aggregated in one reportable operating segment. The Bank has no subsidiaries.

 

Accounting Standards Codification

 

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) is the officially recognized source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

 

Interim Financial Statements

 

The consolidated financial statements of the Company at June 30, 2014 and for the three months ended June 30, 2014 and 2013 have been prepared in conformity with U.S. GAAP for interim financial information and predominant practices followed by the financial services industry and are unaudited. However, in management’s opinion, the interim data at June 30, 2014 and for the three months ended June 30, 2014 and 2013 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Tempo Bank. The Company’s principal business is the business of the Bank. All significant intercompany accounts and transactions have been eliminated.

 

 

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Use of Estimates

 

The consolidated financial statements have been prepared in conformity with U.S. GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses for the periods covered. Actual results could differ significantly from these estimates and assumptions. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

 

Note 2. Earnings per Share

 

Earnings per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding. Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the EPS computation using the two-class method. Prior period EPS data is adjusted retrospectively.

 

		Three Months Ended
		June 30,
		2014				2013
Basic and diluted earnings per share:
Net earnings		$	76,565			$	110,266
Less dividends paid:
Common stock			-				-
Participating securities			-				-
Undistributed earnings		$	76,565			$	110,266
Weighted-average basic and diluted shares and participating securities outstanding			887,980				875,539
Distributed earnings per share		$	-			$	-
Undistributed earnings per share			0.09				0.13
Net earnings per share		$	0.09			$	0.13

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Note 3. Loans Receivable, Net

 

Loans receivable, net, are summarized as follows:

 

		June 30,				March 31,
		2014				2014
Real estate loans:
Single-family, owner occupied		$	58,760,069			$	58,115,912
Single-family, non-owner occupied			8,639,392				8,437,076
Multi-family, 5 or more units			768,213				782,917
Commercial			2,729,176				2,980,571
Land			1,479,917				1,553,915
Consumer loans			2,044,048				1,912,416
			74,420,815				73,782,807
Allowance for losses			(281,103	)			(304,103	)
Deferred loan fees, net			(90,906	)			(91,849	)
Total loans		$	74,048,806			$	73,386,855

 

The weighted-average rate on loans was 4.46% and 4.50% at June 30, 2014 and March 31, 2014, respectively.

 

The risk characteristics of each loan portfolio segment are as follows:

Single-family, owner occupied

 

Single-family, owner occupied loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Single-family, non-owner occupied

 

Single-family, non-owner occupied loans carry greater inherent risks than single-family, owner occupied loans, since the repayment ability of the borrower is reliant on the success of the income generated from the property.

 

Multi-family, 5 or more units

 

Multi-family real estate loans are typically secured by apartment complexes. These loans typically have larger loan balances and involve a greater degree of risk than single-family residential mortgage loans. Payments on loans secured by income producing properties often depend on successful operation and management of the properties. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Commercial real estate

 

Commercial real estate loans are secured primarily by office buildings and various income-producing properties. Commercial real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

 

Consumer

 

Consumer loans include automobile, signature and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.

 

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended June 30, 2014 and 2013:

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Three months ended June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	209,010			$	1,953			$	-			$	-			$	210,963
Single-family, non-owner occupied			52,576				(2,086	)			-				-				50,490
Multi-family, 5 or more units			2,356				(44	)			-				-				2,312
Commercial			8,971				(757	)			-				-				8,214
Land			4,677				(223	)			-				-				4,454
Consumer loans			4,420				(55	)			-				-				4,365
Unallocated			22,093				(21,788	)			-				-				305
		$	304,103			$	(23,000	)		$	-			$	-			$	281,103

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Three months ended June 30, 2013:
Real estate loans:
Single-family, owner occupied		$	287,934				4,140				-				-				292,074
Single-family, non-owner occupied			30,865				-				-				-				30,865
Multi-family, 5 or more units			3,036				(61	)			-				-				2,975
Commercial			12,793				(1,305	)			-				-				11,488
Land			4,841				548				-				-				5,389
Consumer			4,627				(221	)			-				-				4,406
Unallocated			39,007				(3,101	)			-				-				35,906
		$	383,103				-				-				-				383,103

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The following presents by portfolio segment, the recorded investment in loans and impairment method at June 30, 2014 and March 31, 2014:

 

		Allowance for Loan Losses												Loans
		Individually				Collectively								Individually				Collectively
		Evaluated				Evaluated								Evaluated				Evaluated
		for Impairment				for Impairment				Total				for Impairment				for Impairment				Total
At June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	37,000			$	173,963			$	210,963			$	961,267			$	57,798,802			$	58,760,069
Single-family, non-owner occupied			28,525				21,965				50,490				443,589				8,195,804				8,639,393
Multi-family, 5 or more units			-				2,312				2,312				-				768,213				768,213
Commercial			-				8,214				8,214				-				2,729,176				2,729,176
Land			-				4,454				4,454				-				1,479,917				1,479,917
Consumer loans			-				4,365				4,365				-				2,044,047				2,044,047
Unallocated			-				305				305				-				-				-
		$	65,525			$	215,578			$	281,103			$	1,404,856			$	73,015,959			$	74,420,815

 

		Allowance for Loan Losses												Loans
		Individually				Collectively								Individually				Collectively
		Evaluated				Evaluated								Evaluated				Evaluated
		for Impairment				for Impairment				Total				for Impairment				for Impairment				Total
At March 31, 2014:
Real estate loans:
Single-family, owner occupied		$	37,000			$	172,010			$	209,010			$	966,027			$	57,149,885			$	58,115,912
Single-family, non-owner occupied			28,525				24,051				52,576				446,293				7,990,783				8,437,076
Multi-family, 5 or more units			-				2,356				2,356				-				782,917				782,917
Commercial			-				8,971				8,971				-				2,980,571				2,980,571
Land			-				4,677				4,677				-				1,553,915				1,553,915
Consumer loans			-				4,420				4,420				-				1,912,416				1,912,416
Unallocated			-				22,093				22,093				-				-				-
		$	65,525			$	238,578			$	304,103			$	1,412,320			$	72,370,487			$	73,782,807

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The following presents impaired loans and allocated valuation allowances based upon class levels and average recorded investment:

 

		Impaired Loans
		With				With no								Unpaid				Allowance
		Allowance				Allowance								Principal				for
		for Losses				for Losses				Total				Balance				Losses
At June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	961,267			$	-			$	961,267			$	961,267			$	37,000
Single-family, non-owner occupied			443,589				-				443,589				443,589				28,525
Multi-family, 5 or more units			-				-				-				-				-
Commercial			-				-				-				-				-
Land			-				-				-				-				-
Consumer loans			-				-				-				-				-
		$	1,404,856			$	-			$	1,404,856			$	1,404,856			$	65,525

 

The average recorded investment on impaired loans for the three months ended June 30, 2014 included: single-family, owner occupied of $963,647 and single-family, non-owner occupied of $444,941.

 

The average recorded investment on impaired loans for the three months ended June 30, 2013 included: single-family, owner occupied of $1,990,910 and consumer loans of $9,494.

 

		Impaired Loans
		With				With no								Unpaid				Allowance
		Allowance				Allowance								Principal				for
		for Losses				for Losses				Total				Balance				Losses
At March 31, 2014:
Real estate loans:
Single-family, owner occupied		$	966,027			$	-			$	966,027			$	966,027			$	37,000
Single-family, non-owner occupied			446,293				-				446,293				446,293				28,525
Multi-family, 5 or more units			-				-				-				-				-
Commercial			-				-				-				-				-
Land			-				-				-				-				-
Consumer loans			-				-				-				-				-
		$	1,412,320			$	-			$	1,412,320			$	1,412,320			$	65,525

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The following presents nonperforming loans based upon class level:

 

	Nonperforming Loans
						Past Due 90				Accruing
						Days or More				Troubled Debt
		Nonaccrual				and Still Accruing				Restructurings				Total
At June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	-			$	-			$	961,267			$	961,267
Single-family, non-owner occupied			-				-				210,869				210,869
Multi-family, 5 or more units			-				-				-				-
Commercial			-				-				-				-
Land			-				-				-				-
Consumer loans			-				-				-				-
		$	-			$	-			$	1,172,136			$	1,172,136

 

	Nonperforming Loans
						Past Due 90				Accruing
						Days or More				Troubled Debt
		Nonaccrual				and Still Accruing				Restructurings				Total
At March 31, 2014:
Real estate loans:
Single-family, owner occupied		$	-			$	-			$	966,027			$	966,027
Single-family, non-owner occupied			-				-				212,104				212,104
Multi-family, 5 or more units			-				-				-				-
Commercial			-				-				-				-
Land			-				-				-				-
Consumer loans			-				-				-				-
		$	-			$	-			$	1,178,131			$	1,178,131

 

For the three months ended June 30, 2013, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms was $35,680. Interest income recognized on such loans for the three months ended June 30, 2013 was $3,328, respectively.

 

There were no new additions for loans modified as troubled debt restructurings during the three months ended June 30, 2014.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The following presents a summary of new troubled debt restructurings during the three months ended June 30, 2013:

 

						Pre-modification				Post-modification
						Outstanding				Outstanding
		Number of				Recorded				Recorded
		Contracts				Investment				Investment
Three months ended June 30, 2013:
Single-family, owner occupied			1			$	499,223			$	510,623
Single-family, non-owner occupied			-				-				-
			1			$	499,223			$	510,623

 

The following presents a summary of accruing troubled debt restructurings at June 30, 2014 and March 31, 2014:

 

		June 30,								March 31,
		2014								2014
		Number of				Recorded				Number of				Recorded
		Contracts				Investment				Contracts				Investment
Real estate loans:
Single-family, owner occupied			2			$	961,267				2			$	966,027
Single-family, non-owner occupied			2				210,869				2				212,104
			4			$	1,172,136				4			$	1,178,131

 

The following presents the Bank's loan portfolio aging analysis:

 

		Days Past Due
		30-59				60-89				90 or more				Current				Total
At June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	645,648			$	194,811			$	-			$	57,919,610			$	58,760,069
Single-family, non-owner occupied			294,578				200,163				-				8,144,652				8,639,393
Multi-family, 5 or more units			-				-				-				768,213				768,213
Commercial			-				-				-				2,729,176				2,729,176
Land			40,835				-				-				1,439,082				1,479,917
Consumer loans			-				8,100				-				2,035,947				2,044,047
		$	981,061			$	403,074			$	-			$	73,036,680			$	74,420,815

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

		Days Past Due
		30-59				60-89				90 or more				Current				Total
At March 31, 2014:
Real estate loans:
Single-family, owner occupied		$	808,034			$	277,663			$	-			$	57,030,215			$	58,115,912
Single-family, non-owner occupied			-				212,104				-				8,224,972				8,437,076
Multi-family, 5 or more units			-				-				-				782,917				782,917
Commercial			-				-				-				2,980,571				2,980,571
Land			-				-				-				1,553,915				1,553,915
Consumer loans			-				20,223				-				1,892,193				1,912,416
		$	808,034			$	509,990			$	-			$	72,464,783			$	73,782,807

 

The Bank categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on a homogeneous basis.

 

The Bank uses the following definitions for risk ratings:

 

The Pass asset quality rating encompasses assets that have performed as expected. With the exception of some smaller consumer and residential loans, these assets do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk. 

 

The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. 

 

The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain.  Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss.  Collateral coverage may be marginal.

 

Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as substandard.  In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.

 

 

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The following presents the credit risk profile for the Bank's loan portfolio based upon rating category:

 

		Credit Quality Indicator-Credit Risk Profile by Grade or Classification
		Special
		Mention				Substandard				Doubtful				Loss				Pass				Total
At June 30, 2014:
Real estate loans:
Single-family, owner occupied		$	-			$	961,267			$	-			$	-			$	57,798,802			$	58,760,069
Single-family, non-owner occupied			210,869				-				-				-				8,428,524				8,639,393
Multi-family, 5 or more units			-				-				-				-				768,213				768,213
Commercial			-				-				-				-				2,729,176				2,729,176
Land			-				-				-				-				1,479,917				1,479,917
Consumer loans			-				-				-				-				2,044,047				2,044,047
		$	210,869			$	961,267			$	-			$	-			$	73,248,679			$	74,420,815

 

		Credit Quality Indicator-Credit Risk Profile by Grade or Classification
		Special
		Mention				Substandard				Doubtful				Loss				Pass				Total
At March 31, 2014:
Real estate loans:
Single-family, owner occupied		$	-			$	966,027			$	-			$	-			$	57,149,885			$	58,115,912
Single-family, non-owner occupied			446,293				-				-				-				7,990,783				8,437,076
Multi-family, 5 or more units			-				-				-				-				782,917				782,917
Commercial			-				-				-				-				2,980,571				2,980,571
Land			-				-				-				-				1,553,915				1,553,915
Consumer loans			-				-				-				-				1,912,416				1,912,416
		$	446,293			$	966,027			$	-			$	-			$	72,370,487			$	73,782,807

 

Note 4.

Income Taxes

 

The effective tax rate was 39.7% for the three months ended June 30, 2014, compared to 40.5% for the three months ended June 30, 2013.

 

Note 5.

Regulatory Capital Requirements

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk-weightings and other factors. At June 30, 2014 and March 31, 2014, the Bank met all capital adequacy requirements.

 

The Bank is also subject to the regulatory framework for prompt corrective action. At June 30, 2014 and March 31, 2014, the most recent notification from the regulatory agencies categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the aforementioned notifications that management believes have changed the Bank’s category.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The Bank’s actual and required capital amounts and ratios are summarized as follows:

 

										Minimum Required
										for Capital								to be "Well
		Actual								Adequacy								Capitalized"
At June 30, 2014:		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
Equity of the Bank		$	11,224
General valuation allowance			281
Total capital to risk-weighted assets		$	11,505				25.1	%		$	3,666				8.0	%		$	4,583				10.0	%
Tier 1 capital to risk-weighted assets		$	11,224				24.5	%		$	1,833				4.0	%		$	2,750				6.0	%
Tier 1 capital to total assets		$	11,224				12.1	%		$	3,706				4.0	%		$	4,633				5.0	%

 

										Minimum Required
										for Capital								to be "Well
		Actual								Adequacy								Capitalized"
At March 31, 2014:		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
Equity of the Bank		$	9,972
General valuation allowance			304
Total capital to risk-weighted assets		$	10,276				22.3	%		$	3,687				8.0	%		$	4,608				10.0	%
Tier 1 capital to risk-weighted assets		$	9,972				21.6	%		$	1,843				4.0	%		$	2,765				6.0	%
Tier 1 capital to total assets		$	9,972				10.6	%		$	3,764				4.0	%		$	4,705				5.0	%

 

Note 6.

Financial Instruments with Off-Balance Sheet Risk

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments typically include commitments to originate mortgage loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

 

The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments.

 

The Company minimizes this risk by evaluating each borrower’s creditworthiness on a case-by-case basis. Generally, collateral held by the Company consists of a first or second mortgage on the borrower’s property. At June 30, 2014, there was one commitment of $199,000 to finance a single-family, owner occupied residence.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Note 7.

Concentration of Credit Risk

 

The Bank originates loans to the general public, which includes military personnel and civilian employees of Scott Air Force Base, located in Belleville, Illinois. This concentration of credit risk could unfavorably impact the level of credit risk of the Bank should events occur, such as employment curtailments, temporary layoffs or other events. Management believes that the secured nature of the majority of these loans mitigates this risk based upon current economic conditions.

 

Note 8.

Fair Value Measurements and Fair Value of Financial Instruments

 

Fair Value Measurements

 

Fair value is 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. At June 30, 2014 and March 31, 2014, the Company did not have any available for sale securities.

 

Impaired loans are carried at fair value utilizing Level 3 inputs, consisting of appraisals of underlying collateral (collateral method) adjusted for selling costs (unobservable input) and discounted cash flow analysis. See note 3.

 

 

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY  

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis at June 30, 2014 and March 31, 2014 include impaired loans of $1,404,856 and $1,412,320, respectively, utilizing Level 3 inputs. The impaired loans are collateral dependent.

 

Following is a summary of the activity in the allowance for losses on impaired loans, including troubled debt restructurings:

 

		Three Months Ended
		June 30,
		2014				2013
Balance, beginning of period		$	65,525			$	108,363
Loan charge-offs			-				-
Recoveries			-				-
Provision for loan losses			-				1,637
Balance, end of period		$	65,525			$	110,000

 

Nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed real estate which amounted to $729,609 at June 30, 2014 and $754,704 at March 31, 2014. Foreclosed real estate is initially recorded at fair value utilizing Level 2 units based on observable market data less costs to sell, establishing a new cost basis.

 

Fair Value of Financial Instruments

 

The carrying amount, fair value and the financial hierarchy of the Company’s financial instruments are summarized in the following table. Fair values of financial instruments have been estimated by the Company based upon available market information with the assistance of an independent consultant.

 

		June 30,
		2014
		Carrying				Fair				Fair Value Measurements Using
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Non-trading instruments and nonderivatives:
Cash and cash equivalents		$	15,004,230			$	15,004,230			$	15,004,230			$	-			$	-
Stock in FHLB of Chicago			1,165,513				1,165,513				-				1,165,513				-
Loans receivable, net			74,048,806				77,537,258				-				76,132,402				1,404,856
Accrued interest receivable on loans			249,123				249,123				-				249,123				-
Deposits			73,510,949				68,045,189				-				68,045,189				-
Accrued interest on deposits			38,156				38,156				-				38,156				-
Advances from FHLB of Chicago		$	5,000,000			$	5,456,078			$	-			$	5,456,078			$	-

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

		March 31,
		2014
		Carrying				Fair				Fair Value Measurements Using
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Non-trading instruments and nonderivatives:
Cash and cash equivalents		$	16,647,828			$	16,647,828			$	16,647,828			$	-			$	-
Stock in FHLB of Chicago			1,165,513				1,165,513				-				1,165,513				-
Loans receivable, net			73,386,855				76,404,679				-				74,992,359				1,412,320
Accrued interest receivable on loans			241,411				241,411				-				241,411				-
Deposits			77,800,822				71,176,039				-				71,176,039				-
Accrued interest on deposits			38,371				38,371				-				38,371				-
Advances from FHLB of Chicago		$	5,000,000			$	5,498,149			$	-			$	5,498,149			$	-

 

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

 

·

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

·

Stock in FHLB of Chicago is valued at cost, which represents historical redemption value and approximates fair value.

·

Fair values for the loan portfolio, certificates of deposit and advances from the FHLBC are computed using an analysis which considers the amount and timing of all future cash flows of the underlying instruments discounted at current market rates.

·

Fair values of non-maturing deposits, such as checking, NOW, savings and money market deposit accounts are computed using an analysis which uses decay rates to estimate the amount and timing of all future cash flows of the underlying instruments, which are discounted at current market rates.

·

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

 

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.

 

There were no transfers between Level 1 and Level 2 categorizations and into or out of Level 3 categorization during the periods presented.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

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 June 30, 2014 and for the three months ended June 30, 2014 and 2013 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 Consolidated Financial Statements (Unaudited) and the notes thereto, appearing in Part I, Item 1 of this report.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·

statements of our goals, intentions and expectations;

 

·

statements regarding our business plans, prospects, growth and operating strategies;

 

·

statements regarding the asset quality of our loan and investment portfolios; and

 

·

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·

competition among depository and other financial institutions;

 

·

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

·

adverse changes in the securities markets;

 

·

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·

our ability to enter new markets successfully and capitalize on growth opportunities;

 

·

changes in consumer spending, borrowing and savings habits;

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

·

changes in accounting policies and practices, as may be adopted by the Federal Deposit Insurance Corporation, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board;

 

·

changes in our organization, compensation and benefit plans;

 

·

changes in our financial condition or results of operations that reduce capital; and

 

·

changes in the financial condition or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Overview-General

 

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses. At June 30, 2014, we had total assets of $92.7 million, net loans of $74.0 million, total deposits of $73.5 million and stockholders’ equity of $13.1 million.

 

Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.

 

A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from loan service charges and service charges on deposit accounts.

 

Expenses. The noninterest expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expenses, FDIC premiums, costs from operation of foreclosed real estate, professional and regulatory fees and other miscellaneous expenses, legal and accounting fees and expenses of stockholder communications and meetings.

 

Our largest noninterest expense is compensation and benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits, including employee stock ownership plan allocations.

 

Critical Accounting Policy

 

In the preparation of our financial statements, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in note 1 of the notes to the consolidated financial statements.

 

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Allowance for Loan Losses. We consider the allowance for loan losses to be our 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 operations. 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 qualitative loss factors to be applied to the various segments of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least monthly. The allowance consists of allocated and general components. The allocated component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows, or loans otherwise adversely classified. The general component covers non-impaired loans and is based on the historical loan loss experience for generally the last three years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Company’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions. 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 OCC, 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.

 

Comparison of Financial Condition at June 30, 2014 and March 31, 2014

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $1.6 million to $15.0 million at June 30, 2014 from $16.6 million at March 31, 2014 primarily as a result of deposit withdrawals.

 

Loans. The largest segment of our loan portfolio is single-family owner occupied residential real estate loans. At June 30, 2014, single-family owner occupied residential real estate loans totaled $58.8 million, or 79.0% of total loans, compared to $58.1 million, or 78.8% of total loans at March 31, 2014. Increases in single-family owner occupied residential real estate loans are the result of our continued emphasis on this type of lending and improving economic conditions in the local and regional area.

 

Single-family non-owner occupied residential real estate loans, the second largest segment of our loan portfolio, totaled $8.6 million, or 11.6% of total loans, at June 30, 2014 compared to $8.4 million, or 11.4% of total loans, at March 31, 2014. The increases in this segment was a result of a new loan origination.

 

Multi-family and commercial real estate loans totaled $3.5 million, or 4.7% of total loans, at June 30, 2014 compared to $3.7 million, or 5.1% of total loans, at March 31, 2014. Reductions in these loan segments were a result of repayments by borrowers largely as a result of the competitive environment for financing these types of mortgage loans.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Consumer loan balances totaled $2.0 million, or 2.7% of total loans, at June 30, 2014 compared to $1.9 million, or 2.6% of total loans, at March 31, 2014.

 

At June 30, 2014, fixed-rate loans, balloon loans and adjustable-rate loans totaled $41.0 million, $33.3 million and $42,000, respectively.

 

Loan originations for the three months ended June 30, 2014 decreased to $3.1 million, or 38.6% from $5.2 million for the three months ended June 30, 2013. We believe an unusually cold winter followed by a cold and wet spring depressed loan demand.

 

Investments. At June 30, 2014, our investment portfolio totaled $1.2 million and consisted solely of our investment in the FHLBC stock. Our investment in FHLBC stock was unchanged from June 30, 2014. At June 30, 2014, $487,000 of our investment in FHLBC stock consisted of excess or voluntary stock.

 

Other Assets. Other assets totaled $357,000 at June 30, 2014, a decrease of $413,000 from March 31, 2014. The decrease over the period was due to the offset of deferred stock conversion costs against proceeds from sale of common stock and the timing of prepaid items.

 

Deposits. Our deposit base is comprised of noninterest-bearing NOW accounts, NOW accounts, savings accounts, money market accounts and certificates of deposit. We consider our deposit accounts other than certificates of deposit to be core deposits. Deposits decreased $4.3 million, or 5.5%, for the three months ended June 30, 2014, as a result of the utilization of funds for the purchases of common stock, and to a lesser extent, competitive regional deposit pricing and improvement in the stock market. At June 30, 2014 and March 31, 2014, we had no brokered deposits.

 

Borrowings. We utilize FHLBC advances to supplement our supply of funds for loans. During the three months ended June 30, 2014 there were no new advances or repayments made.

 

Results of Operations for the Three Months Ended June 30, 2014 and 2013.

 

Total Interest Income. Total interest income decreased $33,000 to $839,000 for the three months ended June 30, 2014. The decrease was due primarily to a reduction in interest income on loans receivable caused by lower average loan portfolio yields as a result of the continuing protracted low interest environment.

 

Total Interest Expense. Total interest expense decreased $7,000 to $169,000 for the three months ended June 30, 2014 from $176,000 for the three months ended June 30, 2013. The decrease resulted primarily from lower average rates paid for deposits.

 

Net Interest Income. Net interest income decreased $26,000 to $670,000 for the three months ended June 30, 2014 from $696,000 for the three months ended June 30, 2013. The decrease is due primarily to lower interest rate spread.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

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 June 30, 2014, the Bank recorded a credit to the provision for loan losses of $23,000. There was no provision for loan losses for the comparable period in 2013. The effects of the economic downturn and unemployment have begun to moderate in our market area, and while delinquencies are still an issue to be monitored, employment in the local area is improving and home sales are improving collateral values.

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using month-end balances, and nonaccrual loans are included in average balances only. Management does not believe that use of month-end balances instead of daily balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. None of the income reflected in the following table is tax-exempt income.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Average Balance Table		Three Months Ended
		June 30,
		2014												2013
						Interest												Interest
		Average				and				Yield/				Average				and				Yield/
(Dollars in thousands)		Balance				Dividends				Cost				Balance				Dividends				Cost
Assets:
Interest-earning assets:
Loans		$	73,589			$	832				4.52	%		$	73,421			$	865				4.71	%
FHLBC  Stock			1,165				1				0.34				1,165				1				0.34
Other interest-earning assets			12,812				6				0.19				11,452				6				0.21
Total interest-earning assets			87,566				839				3.83				86,038				872				4.05
Noninterest-earning assets			6,015												4,232
Total assets			93,581												90,270
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts		$	6,282			$	2				0.13	%		$	5,604			$	2				0.14	%
Savings accounts			13,849				9				0.26				13,695				10				0.29
Money market accounts			18,394				20				0.43				17,330				20				0.46
Certificates of deposit			32,114				79				0.98				34,106				85				1.00
Total interest-bearing deposits			70,639				110				0.62				70,735				117				0.66
FHLBC advances			5,000				59				4.72				5,000				60				4.80
Other borrowings			-				-				-				-				-				-
Total interest-bearing liabilities		$	75,639			$	169				0.89			$	75,735			$	177				0.93
Noninterest-bearing NOW accounts			5,564												3,301
Other noninterest-bearing liabilities			1,045												1,096
Total liabilities			82,248												80,132
Stockholders’ equity			11,333												10,138
Total liabilities and stockholders’ equity		$	93,581											$	90,270
Net interest income						$	670											$	695
Interest rate spread											2.94	%											3.12	%
Net interest margin							3.06	%											3.23	%
Average interest-earning assets to average interest-bearing liabilities			115.77	%											113.60	%

 

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income decreased $2,000 to $33,000 for the three month period ended June 30, 2014 from $35,000 for the three months ended June 30, 2013 primarily due to a decline in 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 $54,000 to $600,000 for the three months ended June 30, 2014 from $546,000 for the three months ended June 30, 2013.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Compensation and benefit expense increased $25,000 to $331,000 for the three months ended June 30, 2014 from $306,000 for the comparable period in 2013. The increase was due in large part to expenses associated with the ESOP approved as part of the stock offering and an increase in health insurance costs due to a higher number of covered employees. Operations of foreclosed real estate increased $27,000 to $30,000 for the three months ended June 30, 2014 from $3,000 at June 30, 2013. This increase was due to an additional write-down of $23,000 on a single-family residence held in foreclosed real estate that was sold subsequent to June 30, 2014. Other noninterest expense increased $16,000 to $80,000 for the three months ended June 30, 2014 from $64,000 for the three months ended June 30, 2013 due primarily to public company reporting expenses.

 

Income Taxes. Income tax expense for the three months ended June 30, 2014 was $50,000 compared $75,000 for the three months ended June 30, 2013. The decrease in 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 June 30, 2014, cash and cash equivalents totaled $15.0 million. At June 30, 2014, the Bank had $5.0 million in FHLBC advances outstanding.

 

A significant use of our liquidity is the funding of loan originations. At June 30, 2014, we had one loan commitment outstanding in the amount of $199,000 to finance the purchase of a single-family owner occupied residence. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of June 30, 2014 totaled $15.6 million, or 48.5% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low 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. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

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 advertising for deposits. 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.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

The Company is a separate legal entity from the Bank and must provide for its own liquidity. The Company’s ability to pay cash dividends may depend, in part, upon its receipt of dividends from Tempo Bank because Sugar Creek Financial has no source of income other than earnings from the investment of the net proceeds from the offering of $1.2 million that it retained. Payment of cash dividends on capital stock by a savings and loan holding company is limited by Federal Reserve Board regulations.

 

We did not repurchase any of our common stock during the quarter ended June 30, 2014 and had no publicly announced repurchase plans or programs as of June 30, 2014.

 

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 OCC, 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, 2014, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. See note 5 of notes to the consolidated financial statements.

 

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 repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

 

Off-Balance Sheet Arrangements

 

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. GAAP, 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, 2014 and 2013, 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.

 

Impact of Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditor (Subtopic 310-40).” The provisions of ASU 2014-04 require reclassification of a residential real estate loan to foreclosed real estate upon obtaining legal title to the property, which could occur either through foreclosure or deed in lieu of foreclosure. The existence of the borrower’s right of redemption will not prevent the lender from reclassifying a loan to foreclosed real estate once the lender obtains legal title to the property.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

Entities are required to disclose the amount of foreclosed residential real estate and such loans in the process of foreclosure on an interim and annual basis. The provisions of ASU 2014-04 may be applied using either a modified retrospective transition method or a prospective transition method, beginning after December 15, 2014.

 

Effect of Inflation and Changing Prices

 

The financial statements and related financial data presented in this annual report have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

Analysis of Nonperforming and Classified Assets.

 

We consider foreclosed real estate, repossessed assets, nonaccrual loans and accruing troubled debt restructurings to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. There were no changes in our nonaccrual loan policy during the three months ended June 30, 2014 and 2013.

 

Troubled debt restructurings are loans where concessions have been granted to borrowers experiencing financial difficulties.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure less estimated selling costs. Holding costs and declines in fair value after acquisition of the property result in charges against income.

 

Nonperforming Assets

 

There were no nonaccrual loans at June 30, 2014. The largest lending relationship in the nonperforming loan category amounted to $501,000, which was secured by one single-family dwelling. While improving, the level of nonaccrual loans continues to reflect a slow local and regional economy, job layoffs, divorce and health issues that impact borrowers.

 

Accruing troubled debt restructurings were $1.2 million at June 30, 2014 and at March 31, 2014.

 

We did not have any accruing loans past due 90 days or more at the dates presented above. Income related to nonaccrual loans for the three months ended June 30, 2014 and 2013 was considered immaterial.

 

At June 30, 2014, there were no other loans known to management which 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 as nonaccrual, 90 days past due or impaired.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

See Note 3 to our unaudited consolidated financial statements for a description by loan category of our classified assets as of June 30, 2014 and March 31, 2014.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures 

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2014. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2014, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

Item 1A. Risk Factors

 

Not applicable.

 

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

 

 

(a)

The Company consummated its “second-step” conversion and stock offering on April 8, 2014. The conversion involved the sale by the Company of 535,127 shares of common stock, par value $.01 per share, at a price of $7.00 per share in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan; the exchange of 414,101 shares of common stock and the elimination of old Sugar Creek and the MHC. The subscription and community offerings were managed by Keefe Bruyette & Woods, Inc.

 

Net proceeds from the reorganization and offering of $2,614,215, net of costs of $929,802, the ESOP contribution of $299,670 and the contribution of cash from the MHC of $98,382, have been temporarily deposited in an overnight interest-bearing account. On a longer-term basis, the Company and Bank may deploy a portion of the net offering proceeds to fund new loans and invest in securities. There can be no assurance that we will be able to effectively deploy the net offering proceeds.

 

(b)

Not applicable.

 

(c)

There were no issuer repurchases of securities during the period covered by this report.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1

Articles of Amendment and Restatement to Articles of Incorporation of Sugar Creek Financial Corp. (1)

 

3.2

Bylaws of Sugar Creek Financial Corp. (2)

 

4.0

Form of Common Stock Certificate of Sugar Creek Financial Corp. (2)

 

  

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

 

31.0

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.0

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.0

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

(1)

Incorporated by reference into this document from the exhibits filed with the Quarterly Report on Form 10-Q for the period ended December 31, 2013.

 

(2)

Incorporated by reference into this document from the exhibits filed with the Registration Statement on Form S-1 (SEC File No. 333-192700) and amendments thereto.

 

 

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.
Date:  August 13, 2014	/s/ Robert J. Stroh, Jr.
	Robert J. Stroh, Jr.
	Chief Executive Officer and Chief Financial Officer