Management's discussion and analysis of the financial condition and results of operations at and for the three months ended June 30, 2009 and 2008 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this report.

Forward-Looking Statements

This quarterly report contains forward-looking statements that are based on assumptions and may describe our future plans, strategies and expectations. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, changes in real estate market values in our area, and changes in relevant accounting principles and guidelines.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

Sugar Creek Financial Corp. is the holding company for Tempo Bank. Tempo Bank operates from two offices in Trenton and Breese, Illinois. Tempo Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate single-family residential real estate loans, commercial and multi-family real estate loans, undeveloped land loans, and, to a lesser extent, consumer loans.

Overview - Financial Highlights

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

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

Critical Accounting Policy

Allowance for Loan Losses. We consider the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are:
loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Balance Sheet Analysis

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

Investments. The Bank is a member of the FHLBC, from which we borrow to fund our operations. As a member, we are required to own stock in the FHLBC. In addition, we maintain excess or voluntary stock, which is stock held in excess of the amount required as a condition of membership or for borrowings. On October 10, 2007, the FHLBC entered into a consensual cease and desist order with the Federal Housing Finance Board Office of Supervision which limits the ability of the FHLBC to redeem excess or voluntary stock or to pay dividends. The FHLBC has not declared or paid a dividend since the second quarter of 2007 citing regulatory requirements, continuing pressure on net interest income, projected earnings levels, and market conditions.

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

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

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

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

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

Nonperforming Assets

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

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

At June 30, 2009, we had no loans which were not currently classified as nonaccrual, 90 days past due or impaired but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure in nonaccrual, 90 days past due or impaired.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                                                  Three Months Ended June 30,
                                                2009                                                   2008
                             Average       Interest and                                              Interest and
(Dollars in thousands)       Balance         Dividends        Yield/ Cost       Average Balance        Dividends        Yield/ Cost
Assets:
Interest-earning assets:
  Loans                    $    77,892     $       1,173              6.02 %   $          81,156     $       1,218              6.00 %
  Stock in FHLB of
Chicago                          1,660                 -                 -                 1,660                 0                 -
  Other interest-earning
assets                           9,122                 2              0.09 %               1,828                 9              1.97 %
     Total
interest-earning assets         88,674             1,175              5.30 %              84,644             1,227              5.80 %

Noninterest-earning
assets                           3,112                                                     3,164
     Total assets               91,786                                                    87,808

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
  NOW accounts             $     4,198     $           5              0.48 %   $           4,177     $           5              0.48 %
  Savings accounts               8,074                14              0.69 %               7,328                12              0.66 %
  Money market accounts          6,390                34              2.13 %               3,825                25              2.61 %
  Certificates of
deposit                         46,027               399              3.47 %              41,168               449              4.36 %
   Total
interest-bearing
deposits                        64,689               452              2.79 %              56,498               491              3.48 %

  FHLB advances                 14,000               171              4.89 %              18,167               206              4.54 %
   Total
interest-bearing
liabilities                $    78,689     $         623              3.17 %   $          74,665     $         697              3.73 %

  Noninterest-bearing
NOW accounts                     2,377                                                     2,632
  Other
noninterest-bearing
liabilities                      1,412                                                     1,305
   Total liabilities            82,478                                                    78,602

  Stockholders' equity           9,308                                                     9,206
   Total liabilities and
stockholders' equity       $    91,786                                         $          87,808

  Net interest income                      $         552                                             $         530
  Interest rate spread                                                2.13 %                                                    2.07 %

  Net interest margin                                                 2.49 %                                                    2.50 %

  Average
interest-earning assets
to average
interest-bearing
liabilities                     112.69 %                                                  113.37 %

Provision for Loan Losses. We establish provisions for loan losses which are charged to operations at a level we believe to be appropriate to our risk profile. These provisions represent management's best estimate of probable loan losses in the portfolio. In evaluating the allowance for loan losses, management considers historical loss experience, the composition of the loan portfolio, adverse situations that might impact a borrower's ability to repay the loan, the value of the underlying collateral, and other information, including level of nonaccrual loans.

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

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

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

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

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

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

Liquidity and Capital Management

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the FHLBC. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2009, cash and cash equivalents totaled $11.0 million. In addition, at June 30, 2009, we had the ability to borrow up to a total of $33.2 million from the FHLBC. At June 30, 2009, the Bank had $14.0 million in FHLBC advances outstanding.

A significant use of our liquidity is the funding of loan originations. At June 30, 2009, we had $26,000 in one single-family loan commitment outstanding. Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do not necessarily represent future cash requirements. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of June 30, 2009 totaled $32.7 million, or 72.2% of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. With the recent action taken by the Federal Reserve's Federal Open Market Committee to leave the Fed funds and Discount Window rates and their current benchmarks as is, we have been able to attract new money deposits with targeted pricing. The local deposit market remains extremely competitive with both regional and national banking institutions "buying the market" for liquidity. This has resulted in a very rate sensitive time deposit base. We have the ability to attract and retain these deposits by adjusting the interest rates offered.

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

Our primary investing activity is the origination of loans. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the rates paid and products offered by us and our local competitors and several other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

Capital Management

We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2009, we exceeded all of our regulatory capital requirements. We are considered "well capitalized" under regulatory guidelines.

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

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

The Bank's actual and required capital amounts and ratios at June 30, 2009 are as follows:

                                                                      Minimum Required
                                                          for Capital                  to be "Well
                                Actual                      Adequacy                  Capitalized"
                         Amount         Ratio        Amount         Ratio         Amount         Ratio
                                                     (Dollars in Thousands)
Stockholders' equity
of the Bank             $   8,955           9.7 %   $   1,379            1.5 %
General valuation
allowance                     205
Total capital to
risk-weighted assets    $   9,160          19.1 %   $   3,837            8.0 %   $   4,797          10.0 %

Tier 1 capital to
risk-weighted assets    $   8,955          18.7 %   $   1,919            4.0 %   $   2,878           6.0 %

Tier 1 capital to
total assets            $   8,955           9.7 %   $   3,677            4.0 %   $   4,596           5.0 %

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit.

For the three months ended June 30, 2009, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.