Sugar Creek Financial Corp./MD/ - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - Sugar Creek Financial Corp./MD/	v445834_ex32-0.htm
EX-31.0 - EXHIBIT 31.0 - Sugar Creek Financial Corp./MD/	v445834_ex31-0.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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 incorporation or organization)		(I.R.S. Employer Identification No.)

	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 July 28, 2016, the issuer had 864,524 shares of common stock outstanding.

Form 10-Q

Index

PART I. 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	17

Item 3. Quantitative and Qualitative Disclosures about Market Risk	26

Item 4. Controls and Procedures	26

PART II – OTHER INFORMATION	26

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3. Defaults Upon Senior Securities	27

Item 4. Mine Safety Disclosures	27

Item 5. Other Information	27

Item 6. Exhibits	28

SIGNATURES	29

Exhibit 31.0

Exhibit 32.0

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

	June 30,			March 31,
	2016			2016
Assets

Cash and due from banks	$	2,813,463		$	2,248,602
Federal funds sold		9,449,812			10,359,296
FHLB daily investment account		1,439,876			2,011,704
Cash and cash equivalents		13,703,151			14,619,602
Stock in Federal Home Loan Bank of Chicago ("FHLBC")		1,165,513			1,165,513
Loans receivable, net of allowance for losses of $193,403 at June 30, 2016 and March 31, 2016, respectively		80,365,981			79,083,416
Premises and equipment, net		1,135,813			1,158,680
Foreclosed real estate		580,762			593,762
Accrued interest receivable on loans		254,401			246,161
Other assets		214,868			322,216
Total assets	$	97,420,489		$	97,189,350

Liabilities and Stockholders' Equity

Deposits	$	79,093,330		$	78,858,005
Accrued interest payable on deposits		68,109			69,236
Advances from FHLBC		5,000,000			5,000,000
Advances from borrowers for taxes and insurance		362,854			456,353
Other liabilities		325,542			284,639
Deferred tax liability		208,108			208,108
Total liabilities		85,057,943			84,876,341
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 and 865,495 shares issued and outstanding at June 30, 2016 and March 31, 2016, respectively		8,655			8,655
Additional paid-in capital		5,558,070			5,553,764
Common stock acquired by Employee Stock Ownership Plan ("ESOP")		(377,218	)		(388,137	)
Retained earnings - substantially restricted		7,173,039			7,138,727
Total stockholders' equity		12,362,546			12,313,009
Total liabilities and stockholders' equity	$	97,420,489		$	97,189,350

See accompanying notes to consolidated financial statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Earnings (Unaudited)

	Three Months Ended
	June 30,
	2016		2015

Interest income:
Loans receivable	$	840,114		816,514
Stock in FHLBC		3,052		1,437
Other interest-earning assets		11,385		8,897
Total interest income		854,551		826,848

Interest expense:
Deposits		164,018		144,693
Advances from FHLBC		59,529		59,529
Total interest expense		223,547		204,222
Net interest income		631,004		622,626
Provision for (credit to) loan losses		-		(11,700	)
Net interest income after provision for (credit to) loan losses		631,004		634,326

Noninterest income:
Loan service charges		5,312		4,871
Service charges on deposit accounts		25,463		22,757
Other		3,749		5,777
Total noninterest income		34,524		33,405

Noninterest expense:
Compensation and benefits		326,981		306,490
Occupancy expense		33,240		28,153
Equipment and data processing		103,153		105,253
FDIC premium expense		16,386		15,906
Advertising		6,794		9,215
Operations of foreclosed real estate, net		13,121		14,673
Professional and regulatory fees		37,945		43,127
Other		65,029		70,470
Total noninterest expense		602,649		593,287
Earnings before income tax expense		62,879		74,444

Income tax expense		28,567		29,604

Net earnings	$	34,312		44,840

Basic and diluted earnings per share	$	0.04		0.05
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
For the Three Months Ended	Common		Paid-in		Acquired			Retained		Stockholders’
June 30, 2016	Stock		Capital		by ESOP			Earnings		Equity

Balance at March 31, 2016	$	8,655	$	5,553,764	$	(388,137	)	$	7,138,727	$	12,313,009
Unaudited:
Net earnings		-		-		-			34,312		34,312

Amortization of ESOP awards		-		4,306		10,919			-		15,225

Balance at June 30, 2016		8,655		5,558,070		(377,218	)		7,173,039		12,362,546

					Common
			Additional		Stock					Total
For the Three Months Ended	Common		Paid-in		Acquired			Retained		Stockholders’
June 30, 2015	Stock		Capital		by ESOP			Earnings		Equity

Balance at March 31, 2015	$	9,492	$	6,124,848	$	(432,527	)	$	7,582,502	$	13,284,315
Unaudited:
Net earnings		-		-		-			44,840		44,840

Amortization of ESOP awards		-		3,196		11,632			-		14,828

Balance at June 30, 2015	$	9,492	$	6,128,044	$	(420,895	)	$	7,627,342	$	13,343,983

See accompanying notes to consolidated financial statements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended
	June 30,
	2016			2015

Cash flows from operating activities:
Net earnings	$	34,312		$	44,840
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		22,867			22,773
Provision for (credit to) loan losses		-			(11,700	)
Provision for losses on foreclosed real estste		13,000			11,715
ESOP expense		15,225			14,828
Amortization of deferred loan fees, net		(3,846	)		(8,076	)
(Increase) decrease in accrued interest receivable		(8,240	)		20,641
Decrease in other assets		107,348			50,758
Increase (decrease) in:
Accrued interest payable on deposits		(1,127	)		13,041
Other liabilities		40,903			(8,130	)
Deferred tax liability		-			-
Net cash provided by operating activities		220,442			150,690
Cash flows from investing activities:
Net (decrease) increase in loans receivable		(1,278,719	)		743,396
Purchase of premises and equipment		-			-
Proceeds from sale of (additions to) foreclosed real estate		-			(13,606	)
Net cash (used for) provided by investing activities		(1,278,719	)		729,790
Cash flows from financing activities:
Net increase in deposits		235,325			2,610,760
Decrease in advances from borrowers for taxes and insurance		(93,499	)		(110,176	)
Net cash provided by financing activities		141,826			2,500,584
Net (decrease) increase in cash and cash equivalents		(916,451	)		3,381,064
Cash and cash equivalents at beginning of period		14,619,602			16,720,008
Cash and cash equivalents at end of period	$	13,703,151			20,101,072

Supplemental disclosures - cash paid:
Interest on deposits and advances from FHLBC	$	225,328		$	191,835
Federal and state income taxes		-			-
Noncash transactions:
Real estate acquired in settlement of loans		-			-
Financing of foreclosed real estate		-			154,000

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 Tempo Bank (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 414,118 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 U.S. 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, 2016 and for the three months ended June 30, 2016 and 2015 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, 2016 and for the three months ended June 30, 2016 and 2015 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.

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 consolidated 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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Note 2. Earnings per Share

Earnings per share (“EPS”) 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,
	2016		2015

Net earnings	$	34,312	$	44,840

Weighted-average basic and diluted shares		814,860		893,233

Basic and diluted earnings per share	$	0.04	$	0.05

Note 3. Loans Receivable, Net

Loans receivable, net, are summarized as follows:

	June 30,			March 31,
	2016			2016

Real estate loans:
Single-family, owner occupied	$	64,990,179		$	63,558,503
Single-family, non-owner occupied		9,058,910			9,038,252
Multi-family, 5 or more units		888,711			909,057
Commercial		2,599,017			2,664,961
Land		1,130,054			1,164,847
Consumer loans		1,974,966			2,023,413
		80,641,837			79,359,033
Allowance for losses		(193,403	)		(193,403	)
Deferred loan fees, net		(82,453	)		(82,214	)
Total loans	$	80,365,981		$	79,083,416

The weighted-average rate on loans was 4.16% and 4.19% at June 30, 2016 and March 31, 2016, respectively.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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 adequacy 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.

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.

Land

Land loans are secured by unimproved land with terms of fifteen years or less and loan amounts that do not exceed 85% of the lesser of the appraised value or the purchase price. Loans secured by unimproved land generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate and the marketability of the underlying property may also be adversely affected in a high interest rate environment or adverse conditions in the real estate market or 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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended June 30, 2016 and 2015:

	Allowance for Loan Losses
	Beginning		Provision for							Ending
	Balance		Losses			Charge-offs		Recoveries		Balance
Three months ended June 30, 2016:
Real estate loans:
Single-family, owner occupied	$	116,012	$	(3,669	)	$	-	$	-	$	112,343
Single-family, non-owner occupied		25,930		808			-		-		26,738
Multi-family, 5 or more units		1,600		(121	)		-		-		1,479
Commercial		4,690		(365	)		-		-		4,325
Land		2,050		(169	)		-		-		1,881
Consumer loans		2,694		(238	)		-		-		2,456
Unallocated		40,427		3,754			-		-		44,181
	$	193,403	$	-		$	-	$	-	$	193,403

	Allowance for Loan Losses
	Beginning		Provision for							Ending
	Balance		Losses			Charge-offs		Recoveries		Balance
Three months ended June 30, 2015:
Real estate loans:
Single-family, owner occupied	$	162,403	$	(29,938	)	$	-	$	-	$	132,465
Single-family, non-owner occupied		33,206		(4,949	)		-		-		28,257
Multi-family, 5 or more units		1,500		37,185			-		-		38,685
Commercial		5,986		(1,628	)		-		-		4,358
Land		2,521		(830	)		-		-		1,691
Consumer loans		2,954		(763	)		-		-		2,191
Unallocated		33,533		(10,777	)		-		-		22,756
	$	242,103	$	(11,700	)	$	-	$	-	$	230,403

The following presents by portfolio segment, the recorded investment in loans and impairment method at June 30, 2016 and March 31, 2016:

	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, 2016:
Real estate loans:
Single-family, owner occupied	$	5,000	$	107,343	$	112,343	$	546,067	$	64,444,112	$	64,990,179
Single-family, non-owner occupied		12,000		14,738		26,738		202,170		8,856,740		9,058,910
Multi-family, 5 or more units		-		1,479		1,479		-		888,711		888,711
Commercial		-		4,325		4,325		-		2,599,017		2,599,017
Land		-		1,881		1,881		-		1,130,054		1,130,054
Consumer loans		-		2,456		2,456		-		1,974,966		1,974,966
Unallocated		-		44,181		44,181		-		-		-
	$	17,000	$	176,403	$	193,403	$	748,237	$	79,893,600	$	80,641,837

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

	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, 2016:
Real estate loans:
Single-family, owner occupied	$	5,000	$	111,012	$	116,012	$	483,589	$	63,074,914	$	63,558,503
Single-family, non-owner occupied		10,380		15,550		25,930		203,330		8,834,922		9,038,252
Multi-family, 5 or more units		-		1,600		1,600		-		909,057		909,057
Commercial		-		4,690		4,690		-		2,664,961		2,664,961
Land		-		2,050		2,050		-		1,164,847		1,164,847
Consumer loans		-		2,694		2,694		-		2,023,413		2,023,413
Unallocated		-		40,427		40,427		-		-		-
	$	15,380	$	178,023	$	193,403	$	686,919	$	78,672,114	$	79,359,033

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.

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, 2016
Real estate loans:
Single-family, owner occupied	$	480,923	$	65,144	$	546,067	$	546,067	$	5,000
Single-family, non-owner occupied		202,170		-		202,170		202,170		12,000
Multi-family, 5 or more units		-		-		-		-		-
Commercial		-		-		-		-		-
Land		-		-		-		-		-
Consumer loans		-		-		-		-		-
	$	683,093	$	65,144	$	748,237	$	748,237	$	17,000

The average recorded investment on impaired loans for the three months ended June 30, 2016 consisted of single-family, owner occupied dwellings of $547,400 and single-family, non-owner occupied dwellings of $202,750.

The average recorded investment on impaired loans for the three months ended June 30, 2015 consisted of single-family, owner occupied dwellings of $1,216,711, single-family, non-owner occupied dwellings of $223,002, multi-family, five or more units of $85,082 and consumer loans of $8,532.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

	Impaired Loans
	With		With no				Unpaid		Allowance
	Allowance		Allowance				Principal		for
	for Losses		for Losses		Total		Balance		Losses
At March 31, 2016
Real estate loans:
Single-family, owner occupied	$	483,589	$	-	$	483,589	$	483,589	$	5,000
Single-family, non-owner occupied		203,330		-		203,330		203,330		10,380
Multi-family, 5 or more units		-		-		-		-		-
Commercial		-		-		-		-		-
Land		-		-		-		-		-
Consumer loans		-		-		-		-		-
	$	686,919	$	-	$	686,919	$	686,919	$	15,380

The following presents nonperforming loans based upon class level at June 30, 2016 and March 31, 2016:

	Nonperforming Loans
				Past Due 90		Accruing
				Days or More		Troubled Debt
		Nonaccrual		and Still Accruing		Restructurings		Total
At June 30, 2016:
Real estate loans:
Single-family, owner occupied		$	65,144	$	-	$	480,923	$	546,067
Single-family, non-owner occupied			-		-		202,170		202,170
Multi-family, 5 or more units			-		-		-		-
Commercial			-		-		-		-
Land			-		-		-		-
Consumer loans			-		-		-		-
		$	65,144	$	-	$	683,093	$	748,237

	Nonperforming Loans
				Past Due 90		Accruing
				Days or More		Troubled Debt
		Nonaccrual		and Still Accruing		Restructurings		Total
At March 31, 2016:
Real estate loans:
Single-family, owner occupied		$	-	$	-	$	483,589	$	483,589
Single-family, non-owner occupied			-		-		203,330		203,330
Multi-family, 5 or more units			-		-		-		-
Commercial			-		-		-		-
Land			-		-		-		-
Consumer loans			-		-		-		-
		$	-	$	-	$	686,919	$	686,919

For the three months ended June 30, 2016, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms was $353. There was no interest income recognized on such loans for the three months ended June 30, 2016.

There were no new additions for loans modified as troubled debt restructurings (“TDRs”) during the three months ended June 30, 2016 and 2015.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

The following presents a summary of accruing TDRs at June 30, 2016 and March 31, 2016:

	June 30,			March 31,
	2016			2016
	Number of	Recorded		Number of	Recorded
	Contracts	Investment		Contracts	Investment
Real estate loans:
Single-family, owner occupied	1	$	480,923	1	$	483,589
Single-family, non-owner occupied	2		202,170	2		203,330
	3	$	683,093	3	$	686,919

At June 30, 2016, the recorded investment in single-family, real estate loans that are in the process of foreclosure according to the local jurisdiction requirement was $65,144.

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, 2016:
Real estate loans:
Single-family, owner occupied	$	404,154		143,927		65,144	$	64,376,954	$	64,990,179
Single-family, non-owner occupied		-		202,170		-		8,856,740		9,058,910
Multi-family, 5 or more units		-				-		888,711		888,711
Commercial		-				-		2,599,017		2,599,017
Land		66,760				-		1,063,294		1,130,054
Consumer loans		11,752				-		1,963,214		1,974,966
	$	482,666	$	346,097	$	65,144	$	79,747,930	$	80,641,837

	Days Past Due
	30-59		60-89		90 or more		Current		Total
At March 31, 2016:
Real estate loans:
Single-family, owner occupied	$	597,118		310,932		-	$	62,650,453	$	63,558,503
Single-family, non-owner occupied		121,440		203,330		-		8,713,482		9,038,252
Multi-family, 5 or more units		-		-		-		909,057		909,057
Commercial		-		-		-		2,664,961		2,664,961
Land		-		-		-		1,164,847		1,164,847
Consumer loans		18,046		2,660		-		2,002,707		2,023,413
	$	736,604	$	516,922	$	-	$	78,105,507	$	79,359,033

The Bank classifies 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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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.

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, 2016:
Real estate loans:
Single-family, owner occupied	$	-	$	546,067	$	-	$	-	$	64,444,112	$	64,990,179
Single-family, non-owner occupied		-		202,170		-		-		8,856,740		9,058,910
Multi-family, 5 or more units		-		-		-		-		888,711		888,711
Commercial		-		-		-		-		2,599,017		2,599,017
Land		-		-		-		-		1,130,054		1,130,054
Consumer loans		-		-		-		-		1,974,966		1,974,966
	$	-	$	748,237	$	-	$	-	$	79,893,600	$	80,641,837

	Credit Quality Indicator-Credit Risk Profile by Grade or Classification
	Special
	Mention		Substandard		Doubtful		Loss		Pass		Total
At March 31, 2016:
Real estate loans:
Single-family, owner occupied	$	-	$	483,589	$	-	$	-	$	63,074,914	$	63,558,503
Single-family, non-owner occupied		-		203,330		-		-		8,834,922		9,038,252
Multi-family, 5 or more units		-		-		-		-		909,057		909,057
Commercial		-		-		-		-		2,664,961		2,664,961
Land		-		-		-		-		1,164,847		1,164,847
Consumer loans		-		-		-		-		2,023,413		2,023,413
	$	-	$	686,919	$	-	$	-	$	78,672,114	$	79,359,033

Note 4. Income Taxes

The effective tax rate was 45.4% for the three months ended June 30, 2016, compared to 39.8% for the three months ended June 30, 2015.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Note 5. Stockholders’ Equity and Regulatory Capital Requirements

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 law or regulation. The Company may pay a dividend, if and when declared by its Board of Directors, in accordance with applicable laws and regulations. Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

On November 12, 2015, the Board of Directors of the Company authorized the repurchase of up to $1.1 million of the outstanding shares of the Company’s common stock. During the year ended March 31, 2016, the Company repurchased 83,750 shares of common stock at an average price of $11.86 per share. There were no such repurchases during the three months ended June 30, 2016.

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, 2016 and March 31, 2016, the Bank met all capital adequacy requirements.

On July 9, 2013, the OCC approved rules that amended the regulatory capital rules applicable to the Company and Bank. The rules include new minimum risk-based capital and leverage ratios, which became effective January 1, 2015. The new minimum capital level requirements applicable to the Company and Bank are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of 6% (increased from 4%); (iii) a total capital to risk-weighted assets ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and resulting in the following ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital to risk-weighted assets ratio of 8.5%; and, (iii) a total capital to risk-weighted assets ratio of 10.5%. The Tier 1 leverage ratio was unchanged at 4.0%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to further limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. The Company is exempt from the “Basel III” rules.

The Bank is also subject to the regulatory framework for prompt corrective action. At June 30, 2016 and March 31, 2016, the most recent notifications from the regulatory agencies categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum capital standards for total risk-based, Tier 1 risk-based, common equity 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 under “Basel III” are summarized as follows:

						Minimum Required
						for Capital					to be "Well
	Actual					Adequacy					Capitalized"
At June 30, 2016:	Amount		Ratio			Amount		Ratio ⁽¹⁾			Amount		Ratio
	(Dollars in Thousands)

Total capital to risk-weighted assets	$	11,238		23.6	%	$	4,103		8.625	%	$	4,757		10.0	%

Tier 1 capital to risk-weighted assets	$	11,045		23.2	%	$	3,151		6.625	%	$	3,806		8.0	%

Common equity tier 1 capital to risk- weighted assets	$	11,045		23.2	%	$	2,438		5.125	%	$	3,092		6.5	%

Tier 1 capital to total assets	$	11,045		11.4	%	$	3,863		4.000	%	$	4,829		5.0	%

(1) Includes transition of capital conservation buffer.

						Minimum Required
						for Capital					to be "Well
	Actual					Adequacy					Capitalized"
At March 31, 2016:	Amount		Ratio			Amount		Ratio ⁽¹⁾			Amount		Ratio
	(Dollars in Thousands)

Total capital to risk-weighted assets	$	11,186		23.7	%	$	4,077		8.625	%	$	4,727		10.0	%

Tier 1 capital to risk-weighted assets	$	10,993		23.3	%	$	3,132		6.625	%	$	3,782		8.0	%

Common equity tier 1 capital to risk-weighted assets	$	10,993		23.3	%	$	2,423		5.125	%	$	3,073		6.5	%

Tier 1 capital to total assets	$	10,993		11.4	%	$	3,854		4.000	%	$	4,817		5.0	%

(1) Includes transition of capital conservation buffer.

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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

The Company mitigates 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, 2016, there were four loan commitments outstanding of $1,018,000.

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, 2016 and March 31, 2016, 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.

Assets Measured at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis at June 30, 2016 and March 31, 2016 include impaired loans of $748,237 and $686,919, respectively, utilizing Level 3 inputs. The impaired loans are collateral dependent.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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

	Three Months Ended
	June 30,
	2016		2015

Balance, beginning of period	$	15,380	$	53,665
Loan charge-offs		-		-
Loan recoveries		-		-
Provision for (credit to) loan losses		1,620		36,455
Balance, end of period	$	17,000	$	90,120

Nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed real estate which amounted to $580,762 at June 30, 2016 and $593,762 at March 31, 2016. 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,
	2016
	Carrying		Fair		Fair Value Measurements Using
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

Non-trading instruments and nonderivatives:
Cash and cash equivalents	$	13,703,151	$	13,703,151	$	13,703,151	$	-	$	-
Stock in FHLBC		1,165,513		1,165,513		-		1,165,513		-
Loans receivable, net		80,365,981		83,434,921		-		82,686,684		748,237
Accrued interest receivable on loans		254,401		254,401		-		254,401		-
Deposits		79,093,330		76,467,908		-		76,467,908		-
Accrued interest on deposits		68,109		68,109		-		68,109		-
Advances from FHLBC		5,000,000		5,121,540		-		5,121,540		-

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

	March 31,
	2016
	Carrying		Fair		Fair Value Measurements Using
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

Non-trading instruments and nonderivatives:
Cash and cash equivalents	$	14,619,602	$	14,619,602	$	14,619,602	$	-	$	-
Stock in FHLBC		1,165,513		1,165,513		-		1,165,513		-
Loans receivable, net		79,083,416		81,221,342		-		80,534,423		686,919
Accrued interest receivable on loans		246,161		246,161		-		246,161		-
Deposits		78,858,005		75,150,936		-		75,150,936		-
Accrued interest on deposits		69,236		69,236		-		69,236		-
Advances from FHLBC		5,000,000		5,166,470		-		5,166,470		-

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.

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, 2016 and for the three months ended June 30, 2016 and 2015 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 and the Consolidated Financial Statements (Audited) and the notes thereto, appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

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:

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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, except as may be required under applicable law.

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;

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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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, 2016, we had total assets of $97.4 million, net loans of $80.4 million, total deposits of $79.1 million and stockholders’ equity of $12.4 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 quarterly. 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 Office of the Comptroller of the Currency (“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, 2016 and March 31, 2016

Cash and Cash Equivalents. Cash and cash equivalents decreased $916,000 to $13.7 million at June 30, 2016 from $14.6 million at March 31, 2016 primarily as a result of increased loan originations during the first quarter.

Loans. The largest segment of our loan portfolio is single-family owner occupied residential real estate loans. At June 30, 2016, single-family, owner occupied residential real estate loans totaled $65.0 million, or 80.6% of total loans, compared to $63.6 million, or 80.1% of total loans at March 31, 2016. The increase in single-family owner occupied residential real estate loans is the result of market forces and competition for this type of mortgage lending.

Single-family non-owner occupied residential real estate loans, the second largest segment of our loan portfolio, totaled $9.1 million, or 11.2% of total loans, at June 30, 2016 compared to $9.0 million, or 11.4% of total loans, at March 31, 2016. Single-family non-owner occupied residential real estate loan balances increased due to new originations.

Multi-family and commercial real estate loans totaled $3.5 million, or 4.3% of total loans, at June 30, 2016 compared to $3.6 million, or 4.5% of total loans, at March 31, 2016. 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.

Consumer loan balances totaled $2.0 million, or 2.4% of total loans, at June 30, 2016 compared to $2.0 million, or 2.5% of total loans, at March 31, 2016.

Land loan balances totaled $1.1 million, or 1.4% of total loans, at June 30, 2016 compared to $1.2 million, or 1.5% of total loans, at March 31, 2016. This segment of the portfolio is virtually unchanged from March 31, 2016 as a result of payments and prepayments net of new originations.

At June 30, 2016, fixed-rate loans, balloon loans and adjustable-rate loans totaled $42.4 million, $38.2 million and $11,000, respectively. A balloon mortgage is a mortgage that does not fully amortize over the term of the loan, and therefore, a large portion of the principal balance is repaid with a single payment at the end of its term.

Loan originations for the three months ended June 30, 2016 decreased $700,000 to $4.4 million, from $5.1 million for the three months ended June 30, 2015. The decrease was a result of a slower sales market.

Investments. At June 30, 2016, 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 March 31, 2016. At June 30, 2016, excess or voluntary FHLB stock increased to $879,214 from $569,614 at March 31, 2016. The increase of $309,600 in excess or voluntary FHLB stock was due to reductions in membership and borrowing activity requirements.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Other Assets. Other assets totaled $215,000 at June 30, 2016, a decrease of $107,000 from March 31, 2016. The decrease over the period was due primarily to a lower prepaid multi-employer plan benefit expense and the timing of other prepaid items.

Deposits. Deposits totaled $79.1 million at June 30, 2016, an increase of $200,000 from March 31, 2016. This increase in balances occurred in core deposits net of withdrawals from repricing certificates of deposit withdrawals and attributed to local competitive rates being offered for certificates of deposit. 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. At June 30, 2016 and March 31, 2016, the Bank had no brokered deposits.

Borrowings. We utilize FHLBC advances to supplement our supply of funds for loans. During the three months ended June 30, 2016 there were no new advances or repayments made.

Results of Operations for the Three Months Ended June 30, 2016 and 2015.

General. Net earnings of $34,000 were recorded for the three months ended June 30, 2016 compared with net earnings of $45,000 for the three months ended June 30, 2015. The decrease in net earnings was primarily due to the absence of a credit to provision for loan losses of $12,000 recognized during the three months ended June 30, 2015 and higher noninterest expense, partially offset by higher net interest income.

Total Interest Income. Total interest income increased $28,000 to $855,000 for the three months ended June 30, 2016. The increase was due primarily to higher interest income on loans receivable as a result of higher average loan balances.

Total Interest Expense. Total interest expense increased $20,000 to $224,000 for the three months ended June 30, 2016 from $204,000 for the three months ended June 30, 2015. The increase resulted primarily from higher deposit balances as a result of new deposits and higher deposit rates on certificates of deposit.

At June 30, 2016, the Bank had a $5 million fixed rate FHLB advance that carries an effective interest rate of 4.78% and matures February 13, 2017. The advance was obtained in a substantially higher interest rate environment. The Bank has not prepaid the advance because it would involve a substantial penalty.

Net Interest Income. Net interest income increased $8,000 to $631,000 for the three months ended June 30, 2016 from $623,000 for the three months ended June 30, 2015. The increase is due primarily to higher interest income on loans receivable.

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, 2016, the Company did not record a loss provision. During the quarter ended June 30, 2015, the Company recorded a credit to provision for loan losses of $12,000. The effects of the economic downturn and unemployment appear to 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.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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, and are annualized. 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 are now being calculated using daily balances for the three months ended June 30, 2016 and 2015, and nonaccrual loans are included in average balances only. 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.

	Three Months Ended
	June 30,
	2016									2015
				Interest									Interest
	Average			and			Yield/			Average			and			Yield/
(Dollars in thousands)	Balance			Dividends			Cost			Balance			Dividends			Cost
Assets:
Interest-earning assets:
Loans	$	79,962		$	840			4.20	%	$	75,036		$	817			4.36	%
FHLBC Stock		1,165			3			1.03			1,165			1			0.34
Other interest-earning assets		11,409			12			0.42			14,486			9			0.25
Total interest-earning assets		92,536			855			3.70			90,687			827			3.65

Noninterest-earning assets		4,986									5,958
Total assets		97,522									96,645

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	7,043		$	3			0.17	%	$	6,688		$	3			0.18	%
Savings accounts		14,702			8			0.22			14,414			9			0.25
Money market accounts		13,320			12			0.36			16,251			18			0.44
Certificates of deposit		40,108			141			1.41			36,205			114			1.26
Total interest-bearing deposits		75,173			164			0.87			73,558			144			0.78

FHLBC advances		5,000			60			4.80			5,000			60			4.80
Other borrowings		-			-			-			-			-			-
Total interest-bearing liabilities	$	80,173		$	224			1.12		$	78,558		$	204			1.04

Noninterest-bearing NOW accounts		3,931									3,689
Other noninterest-bearing liabilities		1,083									1,091
Total liabilities		85,187									83,338

Stockholders’ equity		12,335									13,307
Total liabilities and stockholders’ equity	$	97,522								$	96,645

Net interest income				$	631								$	623
Interest rate spread								2.58	%								2.61	%

Net interest margin					2.73	%								2.75	%

Average interest-earning assets to average interest-bearing liabilities		115.42	%								115.44	%

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income was $35,000 for the three month period ended June 30, 2016 from $33,000 for the three months ended June 30, 2015.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Noninterest Expense. Noninterest expense primarily consists of salaries and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other noninterest expenses. Total noninterest expense was $603,000 for the three months ended June 30, 2016 from $593,000 for the three months ended June 30, 2015. Higher compensation and benefits expenses were partially offset by lower equipment and data processing, advertising, professional and regulatory fees and other noninterest expense.

Compensation and benefit expense was $327,000 for the three months ended June 30, 2016 from $306,000 for the comparable period in 2015 due primarily to higher salary levels.

Income Taxes. Income taxes for the three months ended June 30, 2016 was $29,000 compared to $30,000 for the three months ended June 30, 2015. The decrease in tax expense is primarily attributable to lower pre-tax earnings.

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, 2016 and 2015.

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 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

Nonaccrual loans at June 30, 2016 consisted of one single-family, owner-occupied dwelling in the amount of $65,000. While the level of nonaccrual loans has improved, a slow local and regional economy, job layoffs, divorce and health issues continue to impact borrowers.

Accruing troubled debt restructurings were $683,000 at June 30, 2016 and $687,000 at March 31, 2016.

At June 30, 2016, 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.

See Note 3 to our unaudited consolidated financial statements for a description by loan category of our classified assets as of June 30, 2016 and March 31, 2016.

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, and borrowings from the FHLBC. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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 (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, 2016, cash and cash equivalents totaled $13.7 million. At June 30, 2016, the Bank had $5.0 million in FHLBC advances outstanding.

In addition, an unsecured open line credit of $2.0 million exists with Quad City Bank and Trust, Davenport, Iowa. The establishment of this credit line is in conjunction with the Bank’s liquidity and contingency funding plans.

A significant use of our liquidity is the funding of loan originations. At June 30, 2016, the Bank had one loan commitment outstanding to refinance an existing mortgage on 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, 2016 totaled $12.4 million, or 31.3% 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, 2017. 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.

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 $770,000 held in overnight Fed Funds and Fed excess balances accounts. Payment of cash dividends on capital stock by a savings and loan holding company is limited by Federal Reserve Board regulations. At June 30, 2016, the Company (on an unconsolidated basis) had liquid assets of $780,000.

On November 12, 2015, the Board of Directors of the Company authorized the repurchase of up to $1.1 million of the outstanding shares of the Company's common stock. The Company intends to conduct any repurchases through open market purchases by means of a trading plan adopted under SEC Rule 10b5-1, subject to market conditions and other factors. There is no guarantee as to the exact dollar amount or number of shares that the Company may repurchase. At June 30, 2016, the Company had repurchased 83,750 shares in the amount of $993,100 and an average price $11.86 per share.

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.

Capital Management. The Bank is 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, 2016, 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, in accordance with applicable law and regulations. Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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, 2016 and 2015, 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 February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The provisions of ASU 2016-02 was issued to increase transparency and comparability among entities by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and disclosing key information about leasing arrangements. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718)-Improvements to Employee Share-Based Payment Accounting.” The provisions of ASU 2016-09 simplify several aspects for share-based payment transactions, including income tax consequences, forfeitures, statutory tax withholding requirements and classifications of the income tax effects of certain share-based payment transactions in the statement of cash flows. ASU 2016-09 eliminates equity treatment for tax benefits or deficiencies that result from differences between compensation costs recognized for GAAP purposes and the related tax deduction and require such differences be recognized as income tax expense. Since excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method will exclude the amount of excess tax benefits when calculating earnings per share. Under ASU 2016-09, forfeitures can be estimated and considered in the accrual of compensation expense, as in current practice, or accounted for as they occur. In addition, for awards to qualify as equity instruments the employer must have a statutory obligation to withhold taxes on the employee’s behalf and the withholdings cannot exceed the maximum statutory tax rates in the applicable jurisdictions. Excess tax benefits are now classified as operating activities and cash paid by an employer when directly withholding shares for tax-withholding purposes is classified as a financing activity. Since the Company qualifies as an emerging growth company, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The provisions of ASU 2016-13 was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable initial recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

Since the Company qualifies as an emerging growth company, ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this quarterly 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.

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, 2016. 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, 2016, 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.

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, we are not a party to any pending legal proceeding, except as disclosed in Note 12 of Notes to Consolidated Financial Statements contained in the 2016 Annual Report on Form 10-K, that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

Not applicable.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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

(a)

Not applicable.

(b)

Not applicable.

(c)

The following table presents information regarding stock repurchases by the Company during the quarter ended June 30, 2016:

Total number of

purchased as

Maximum number

Total

part of publicly

of shares that may

Number of

Average

announced

yet be purchased

price paid

plans or

under the plans or

Period

purchased

per share

programs

programs⁽¹⁾

April 1, 2016 through April 30, 2016

9,000

May 1, 2016 through May 31, 2016

9,000

June 1, 2016 through June 30, 2016

9,000

(1)

Since there were no shares repurchased during the period, the maximum number of shares that may yet be repurchased under the plans or programs is the equivalent of the remaining cash set aside for repurchase divided by the average share price for all purchases made to date and rounded to the nearest 100 shares.

On November 12, 2015, the Board of Directors of the Company authorized the repurchase of up to $1.1 million worth of the outstanding shares of the Company's common stock. The Company intends to conduct any repurchases through open market purchases by means of a trading plan adopted under SEC Rule 10b5-1, subject to market conditions and other factors. There is no guarantee as to the exact dollar amount or number of shares that the Company may repurchase.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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 Certificates of Sugar Creek Financial Corp.⁽²⁾

10.1

Employment Agreement between Sugar Creek Financial Corp. and Robert J. Stroh, Jr.⁽³⁾

10.2

Employment Agreement between Tempo Bank and Robert J. Stroh, Jr.⁽³⁾

10.3

Employment Agreement between Sugar Creek Financial Corp. and Francis J. Eversman⁽³⁾

10.4

Employment Agreement between Tempo Bank and Francis J. Eversman⁽³⁾

10.5

Sugar Creek Financial Corp. 2015 Restricted Stock Plan⁽⁴⁾

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, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to 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.

(3)

Incorporated by reference into this document from the exhibits filed with the Current Report on Form 8-K, filed on June 30, 2014

(4)

Incorporated by reference into this document from Appendix A to the Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders.

SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY

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 12, 2016	/s/ Robert J. Stroh, Jr.
	Robert J. Stroh, Jr.
	Chief Executive Officer and Chief Financial Officer

Sugar Creek Financial Corp./MD/ - FORM 10-Q - August 12, 2016

Attached files

Sugar Creek Financial Corp./MD/ Reports