UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




(Mark
      One)x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31,
      2009ORo
              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 000-52826





BEACON
      FEDERAL BANCORP, INC.(Exact
      name of registrant as specified in its charter)





Maryland
                            
                            26-0706826(State
      or other jurisdiction of
                            
                            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





5000
      Brittonfield Parkway, East Syracuse, New York
                                        
                                        13057(Address
      of principal executive office)
                                        
                                        (Zip
      Code)Registrant’s
      telephone number, including area code (315)
      433-0111




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




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




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer ”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o Smaller reporting
company x




Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.


Class
                
                Outstanding
      May 12, 2009Common
      Stock, par value $0.01 per share
                
                6,915,236







BEACON
FEDERAL BANCORP, INC.




FORM
10-Q




FOR THE
QUARTER ENDED MARCH 31, 2009




INDEX





PAGE
      NO.PART
      I - Financial Information.
                        
                        3Item
      1. Financial Statements.
                        
                        3Consolidated
      Balance Sheets
                        
                        3Consolidated
      Statements of Income
                        
                        4Consolidated
      Statements of Stockholders’ Equity
                        
                        5Consolidated
      Statements of Cash Flows
                        
                        6Notes
      to Consolidated Financial Statements
                        
                        8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                        
                        23Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                        
                        38Item
      4T. Controls and Procedures.
                        
                        38PART
      II - Other Information.
                        
                        39Item
      1.Legal
      Proceedings.
                        
                        39Item
      1A. Risk Factors
                        
                        39Item
      2.Unregistered
      Sales of Equity Securities and Use of Proceeds.
                        
                        39Item
      3.Defaults
      Upon Senior Securities.
                        
                        40Item
      4. Submission of Matters to a Vote of Security Holders.
                        
                        40Item
      5.Other
      Information.
                        
                        40Item
      6.Exhibits.
                        
                        40Signatures
                        
                        41Certifications
                        
                        42




2




BEACON
FEDERAL BANCORP, INC.




PART
1. FINANCIAL INFORMATION - ITEM 1. FINANCIAL STATEMENTS




CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands)


March
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008(Unaudited)ASSETSCash
      and due from financial institutions
                  
                  $
                  43,389
                  
                  
                  $
                  18,297Federal
      funds sold
                  
                  
                  —
                  
                  
                  
                  —Cash
      and cash equivalents
                  
                  
                  43,389
                  
                  
                  
                  18,297Interest-bearing
      deposits in other financial institutions
                  
                  
                  536
                  
                  
                  
                  536Trading
      account assets
                  
                  
                  —
                  
                  
                  
                  23,337Securities
      held to maturity (fair value of $20,662 and $21,955,
      respectively)
                  
                  
                  21,547
                  
                  
                  
                  23,315Securities
      available for sale
                  
                  
                  134,264
                  
                  
                  
                  139,803Loans
      held for sale
                  
                  
                  6,574
                  
                  
                  
                  1,536Loans,
      net of allowance for loan losses of $12,568 and $10,546,
      respectively
                  
                  
                  789,243
                  
                  
                  
                  770,695Federal
      Home Loan Bank stock of New York
                  
                  
                  12,436
                  
                  
                  
                  13,080Premises
      and equipment, net
                  
                  
                  4,294
                  
                  
                  
                  3,437Accrued
      interest receivable
                  
                  
                  3,753
                  
                  
                  
                  3,985Foreclosed
      and repossessed assets
                  
                  
                  247
                  
                  
                  
                  149Bank-owned
      life insurance
                  
                  
                  10,401
                  
                  
                  
                  10,369Other
      assets
                  
                  
                  13,427
                  
                  
                  
                  12,804Total
      assets
                  
                  $
                  1,040,111
                  
                  
                  $
                  1,021,343LIABILITIES
      AND STOCKHOLDERS’ EQUITYDeposits
                  
                  $
                  656,836
                  
                  
                  $
                  626,467Federal
      Home Loan Bank advances
                  
                  
                  208,641
                  
                  
                  
                  218,641Securities
      sold under agreement to repurchase
                  
                  
                  70,000
                  
                  
                  
                  70,000Accrued
      interest payable and other liabilities
                  
                  
                  5,057
                  
                  
                  
                  4,150Total
      liabilities
                  
                  
                  940,534
                  
                  
                  
                  919,258Commitments
      and contingenciesPreferred
      stock, $.01 par value, 50,000,000 shares authorized; none issued or
      outstandingCommon
      stock, $.01 par value, 100,000,000 shares authorized; 7,662,315 and
      7,662,315 shares issued
                  
                  
                  74
                  
                  
                  
                  74Additional
      paid-in capital
                  
                  
                  72,363
                  
                  
                  
                  72,160Retained
      earnings-substantially restricted
                  
                  
                  44,863
                  
                  
                  
                  42,835Unearned
      Employee Stock Ownership Plan (ESOP) shares
                  
                  
                  (4,535
                  )
                  
                  
                  (4,733
                  )Accumulated
      other comprehensive loss, net
                  
                  
                  (10,146
                  )
                  
                  
                  (8,251
                  )Treasury
      stock, 383,116 shares at cost
                  
                  
                  (3,042
                  )
                  
                  
                  —Total
      stockholders’ equity
                  
                  
                  99,577
                  
                  
                  
                  102,085Total
      liabilities and stockholders’ equity
                  
                  $
                  1,040,111
                  
                  
                  $
                  1,021,343




See
accompanying notes to consolidated financial statements.


3




BEACON
FEDERAL BANCORP, INC.




CONSOLIDATED STATEMENTS OF
INCOME


(Dollars
in thousands, except per share data)


Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008(Unaudited)Interest
      and dividend income:Loans,
      including fees
                          
                          $
                          11,342
                          
                          
                          $
                          11,310Securities
                          
                          
                          2,355
                          
                          
                          
                          1,933FHLB
      stock
                          
                          
                          99
                          
                          
                          
                          163Federal
      funds sold and other
                          
                          
                          16
                          
                          
                          
                          230Total
      interest income
                          
                          
                          13,812
                          
                          
                          
                          13,636Interest
      expense:Deposits
                          
                          
                          4,247
                          
                          
                          
                          4,991FHLB
      advances
                          
                          
                          2,294
                          
                          
                          
                          2,783Securities
      sold under agreement to repurchase
                          
                          
                          543
                          
                          
                          
                          287Total
      interest expense
                          
                          
                          7,084
                          
                          
                          
                          8,061Net
      interest income
                          
                          
                          6,728
                          
                          
                          
                          5,575Provision
      for loan losses
                          
                          
                          2,570
                          
                          
                          
                          900Net
      interest income after provision for loan losses
                          
                          
                          4,158
                          
                          
                          
                          4,675Noninterest
      income:Service
      charges
                          
                          
                          730
                          
                          
                          
                          666Commission
      and fee income
                          
                          
                          140
                          
                          
                          
                          146Change
      in cash surrender value of BOLI
                          
                          
                          32
                          
                          
                          
                          118Gain
      on sale of loans
                          
                          
                          163
                          
                          
                          
                          38Gain
      on sale of securities available for sale
                          
                          
                          —
                          
                          
                          
                          129Other
                          
                          
                          159
                          
                          
                          
                          73Total
      noninterest income
                          
                          
                          1,224
                          
                          
                          
                          1,170Noninterest
      expense:Salaries
      and employee benefits
                          
                          
                          2,351
                          
                          
                          
                          2,062Occupancy
      and equipment
                          
                          
                          327
                          
                          
                          
                          325Advertising
      and marketing
                          
                          
                          121
                          
                          
                          
                          125Telephone,
      delivery and postage
                          
                          
                          192
                          
                          
                          
                          198Supplies
                          
                          
                          66
                          
                          
                          
                          59Audit
      and examination
                          
                          
                          122
                          
                          
                          
                          165FDIC
      premium expense
                          
                          
                          163
                          
                          
                          
                          91Provision
      for loss on servicing asset
                          
                          
                          (34
                          )
                          
                          
                          —Other-than-temporary
      impairment (OTTI) credit loss on securities
                          
                          
                          424
                          
                          
                          
                          528Prepayment
      penalty on FHLB advances
                          
                          
                          241
                          
                          
                          
                          —Other
                          
                          
                          742
                          
                          
                          
                          682Total
      noninterest expense
                          
                          
                          4,715
                          
                          
                          
                          4,235Income
      before income taxes
                          
                          
                          667
                          
                          
                          
                          1,610Income
      tax expense
                          
                          
                          231
                          
                          
                          
                          646Net
      income
                          
                          $
                          436
                          
                          
                          $
                          964Basic
      and diluted earnings per share
                          
                          $
                          0.06
                          
                          
                          $
                          0.14OTTI
      credit loss on securities:Total
      OTTI loss on securities
                          
                          $
                          444Portion
      of OTTI loss recognized in other comprehensive loss before income
      taxes
                          
                          
                          (20
                          )OTTI
      credit loss on securities
                          
                          $
                          424




See
accompanying notes to consolidated financial statements.


4




BEACON
FEDERAL BANCORP, INC.




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(Dollars
in thousands, except per share data)


Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008(Unaudited)Common
      Stock
                          
                          $
                          74
                          
                          
                          $
                          74Additional
      paid-in capital:Balance
      at beginning of period
                          
                          
                          72,160
                          
                          
                          
                          72,080Earned
      ESOP shares
                          
                          
                          (37
                          )
                          
                          
                          7Amortization
      of stock-based compensation expense
                          
                          
                          240
                          
                          
                          
                          —Balance
      at end of period
                          
                          
                          72,363
                          
                          
                          
                          72,087Retained
      earnings:Balance
      at beginning of period
                          
                          
                          42,835
                          
                          
                          
                          46,673Adoption
      of FSP SFAS No. 115-2
                          
                          
                          1,866
                          
                          
                          
                          —Balance
      at beginning of period, as adjusted
                          
                          
                          44,701
                          
                          
                          
                          46,673Net
      income
                          
                          
                          436
                          
                          
                          
                          964Cash
      dividends, $.04 per share
                          
                          
                          (274
                          )
                          
                          
                          —Balance
      at end of period
                          
                          
                          44,863
                          
                          
                          
                          47,637Unearned
      ESOP shares:Balance
      at beginning of period
                          
                          
                          (4,733
                          )
                          
                          
                          (5,325
                          )Earned
      ESOP shares
                          
                          
                          198
                          
                          
                          
                          147Balance
      at end of period
                          
                          
                          (4,535
                          )
                          
                          
                          (5,178
                          )Accumulated
      other comprehensive loss, net:Balance
      at beginning of period
                          
                          
                          (8,251
                          )
                          
                          
                          (328
                          )Adoption
      of FSP SFAS No. 115-2, net of taxes of $1,144
                          
                          
                          (1,866
                          )
                          
                          
                          —Balance
      at beginning of period, as adjusted
                          
                          
                          (10,117
                          )
                          
                          
                          (328
                          )Net
      change in unrealized losses on available for sale securities, net of taxes
      of $11 and $1,559
                          
                          
                          (17
                          )
                          
                          
                          (2,339
                          )OTTI
      non-credit related loss on securities for which a portion of the OTTI has
      been recognized in income, net of taxes of $8
                          
                          
                          (12
                          )
                          
                          
                          —Balance
      at end of period
                          
                          
                          (10,146
                          )
                          
                          
                          (2,667
                          )Treasury
      stock-repurchase of common stock
                          
                          
                          (3,042
                          )
                          
                          
                          —Total
      stockholders’ equity
                          
                          $
                          99,577
                          
                          
                          $
                          111,953Comprehensive
      income (loss):Net
      income
                          
                          $
                          436
                          
                          
                          $
                          964Net
      change in unrealized losses on available for sale securities, net of taxes
      of $11 and $1,559
                          
                          
                          (17
                          )
                          
                          
                          (2,339
                          )OTTI
      non-credit related loss on securities for which a portion of the OTTI has
      been recognized in income, net of taxes of $8
                          
                          
                          (12
                          )
                          
                          
                          —Comprehensive
      income (loss)
                          
                          $
                          407
                          
                          
                          $
                          (1,375
                          )




See
accompanying notes to consolidated financial statements.


5




BEACON
FEDERAL BANCORP, INC.




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Dollars
in thousands)


Three
      Months Ended
                                              March
      31,2009
                                            
                                            
                                            2008(Unaudited)Cash
      flows from operating activities:Net
      income
                                            
                                            $
                                            436
                                            
                                            
                                            $
                                            964Adjustments
      to reconcile net income to net cash provided by (used for) operating
      activities:Provision
      for loan losses
                                            
                                            
                                            2,570
                                            
                                            
                                            
                                            900Provision
      for loss on servicing assets
                                            
                                            
                                            (34
                                            )
                                            
                                            
                                            —Depreciation
      and amortization
                                            
                                            
                                            123
                                            
                                            
                                            
                                            117ESOP
      expense
                                            
                                            
                                            161
                                            
                                            
                                            
                                            154Amortization
      of stock-based compensation expense
                                            
                                            
                                            240
                                            
                                            
                                            
                                            —Amortization
      of net deferred loan costs
                                            
                                            
                                            630
                                            
                                            
                                            
                                            289Net
      amortization of premiums and discounts on securities
                                            
                                            
                                            (5
                                            )
                                            
                                            
                                            3Gain
      on sale of loans
                                            
                                            
                                            (163
                                            )
                                            
                                            
                                            (38
                                            )Gain
      on sale of securities available for sale
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (129
                                            )Other-than-temporary
      impairment loss on securities
                                            
                                            
                                            424
                                            
                                            
                                            
                                            528Originations
      of loans held for sale
                                            
                                            
                                            (29,730
                                            )
                                            
                                            
                                            (4,857
                                            )Proceeds
      from loans held for sale
                                            
                                            
                                            24,855
                                            
                                            
                                            
                                            5,237Proceeds
      from trading account assets
                                            
                                            
                                            23,337
                                            
                                            
                                            
                                            —Increase
      in cash surrender value of BOLI
                                            
                                            
                                            (32
                                            )
                                            
                                            
                                            (118
                                            )Net
      change in:Accrued
      interest receivable
                                            
                                            
                                            232
                                            
                                            
                                            
                                            (246
                                            )Other
      assets
                                            
                                            
                                            (568
                                            )
                                            
                                            
                                            614Accrued
      interest payable and other liabilities
                                            
                                            
                                            907
                                            
                                            
                                            
                                            (274
                                            )Net
      cash provided by operating activities
                                            
                                            
                                            23,383
                                            
                                            
                                            
                                            3,144Cash
      flows from investing activities:Purchase
      of FHLB stock
                                            
                                            
                                            (284
                                            )
                                            
                                            
                                            (1,364
                                            )Redemption
      of FHLB stock
                                            
                                            
                                            928
                                            
                                            
                                            
                                            4Maturities
      of interest-bearing deposits
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,000Securities
      held to maturity:Maturities,
      prepayments and calls
                                            
                                            
                                            1,753
                                            
                                            
                                            
                                            1,521Securities
      available for sale:Purchases
                                            
                                            
                                            (5,974
                                            )
                                            
                                            
                                            (59,181
                                            )Proceeds
      from maturity or call
                                            
                                            
                                            11,059
                                            
                                            
                                            
                                            6,104Proceeds
      from sale
                                            
                                            
                                            —
                                            
                                            
                                            
                                            129Loan
      originations and payments, net
                                            
                                            
                                            (22,058
                                            )
                                            
                                            
                                            (13,972
                                            )Purchase
      of premises and equipment
                                            
                                            
                                            (980
                                            )
                                            
                                            
                                            (244
                                            )Proceeds
      from (additions to) foreclosed and repossessed assets
                                            
                                            
                                            212
                                            
                                            
                                            
                                            37Net
      cash provided by (used for) investing activities
                                            
                                            $
                                            (15,344
                                            )
                                            
                                            $
                                            (65,966
                                            )




Continued
on following page


6




BEACON
FEDERAL BANCORP, INC.




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Dollars
in thousands)




Continued


Three
      Months Ended
                      March
      31,2009
                    
                    
                    2008(Unaudited)Cash
      flows from financing activities:Net
      change in deposits
                    
                    $
                    30,369
                    
                    
                    $
                    25,781Proceeds
      from FHLB advances
                    
                    
                    —
                    
                    
                    
                    27,192Repayment
      of FHLB advances
                    
                    
                    (10,000
                    )
                    
                    
                    (5,000
                    )Proceeds
      from securities sold under agreement to repurchase
                    
                    
                    —
                    
                    
                    
                    20,000Cash
      dividends
                    
                    
                    (274
                    )
                    
                    
                    —Repurchase
      of common stock
                    
                    
                    (3,042
                    )
                    
                    
                    —Net
      cash provided by financing activities
                    
                    
                    17,053
                    
                    
                    
                    67,973Net
      change in cash and cash equivalents
                    
                    
                    25,092
                    
                    
                    
                    5,151Cash
      and cash equivalents at beginning of period
                    
                    
                    18,297
                    
                    
                    
                    14,148Cash
      and cash equivalents at end of period
                    
                    $
                    43,389
                    
                    
                    $
                    19,299Supplemental
      cash flow information:Interest
      paid
                    
                    $
                    7,323
                    
                    
                    $
                    7,934Income
      taxes paid
                    
                    $
                    38
                    
                    
                    $
                    96Real
      estate and repossessions acquired in settlement of loans
                    
                    $
                    310
                    
                    
                    $
                    140Loans
      originated to finance the sale of foreclosed real estate
                    
                    $
                    —
                    
                    
                    $
                    131




See
accompanying notes to consolidated financial statements.


7




BEACON
FEDERAL BANCORP, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share data)




NOTE
1 – BASIS OF PRESENTATION




The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X and, therefore, do not include all disclosures necessary for a
complete presentation of the financial statements in conformity with U.S.
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the results of operations for the interim periods. The results
of operations for the three months ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the entire year or any other
interim period.




NOTE
2 – STOCK CONVERSION




On
October 1, 2007, Beacon Federal (the “Bank”) completed its conversion from a
mutual savings association to a capital stock corporation. A new holding
company, Beacon Federal Bancorp, Inc. (the “Company”), was established as part
of the conversion. The public offering was consummated through the sale and
issuance by Beacon Federal Bancorp, Inc. of 7,396,431 shares of common stock at
$10 per share. Net proceeds of $66.2 million were raised in the stock offering,
after deduction of estimated conversion costs of $1.8 million and excluding $5.9
million which was loaned by the Company to a trust for the Employee Stock
Ownership Plan (the “ESOP”), enabling it to purchase 591,714 shares of common
stock in the offering.




The cost
of shares issued to the ESOP, but not yet committed to be released, is shown as
a reduction of stockholders’ equity. For ESOP shares committed to be released,
the Bank recognizes compensation expense equal to the average fair values of the
shares committed to be released during the period in accordance with the
provisions of Statement of Position 93-6. To the extent that the fair value of
the ESOP shares differs from the cost of such shares, the difference is charged
or credited to stockholders’ equity as additional paid-in capital. Dividends on
allocated ESOP shares are paid to participants of the ESOP and charged to
retained earnings. Dividends on unallocated ESOP shares are used to repay the
ESOP loan and related accrued interest.




Beacon
Federal Bancorp, Inc.’s common stock is traded on the NASDAQ Global Market under
the symbol “BFED.”




Voting
rights are held and exercised exclusively by the stockholders of the Company.
Deposit account holders continue to be insured by the FDIC. A liquidation
account was established in the amount of $44.7 million, which represented the
Bank’s total equity as of March 31, 2007, the latest balance sheet date in the
final prospectus used in the conversion.




The Bank
may not declare, pay a dividend on, or repurchase any of its capital stock, if
the effect thereof would cause retained earnings to be reduced below the
liquidation account amount or regulatory capital requirements. Any repurchase of
the new holding company’s common stock will be conducted in accordance with
applicable laws and regulations.


8




BEACON
FEDERAL BANCORP, INC.




NOTE
3 – EARNINGS PER SHARE




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


Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008(Unaudited)
                            (In
      thousands, except
                            per share
      data)Basic
      earnings per share:Net
      income
                          
                          $
                          436
                          
                          
                          $
                          964Less
      dividends paid:Common
      stock
                          
                          
                          263Participating
      securities
                          
                          
                          11
                          
                          
                          
                          —Undistributed
      earnings
                          
                          $
                          162
                          
                          
                          $
                          964Weighted-average
      basic shares outstanding
                          
                          
                          6,819
                          
                          
                          
                          6,871Add:
      weighted-average participating securities outstanding
                          
                          
                          266
                          
                          
                          
                          —Total
      weighted-average basic shares and participating securities
      outstanding
                          
                          
                          7,085
                          
                          
                          
                          6,871Distributed
      earnings per share
                          
                          $
                          0.04
                          
                          
                          $
                          —Undistributed
      earnings per share
                          
                          
                          0.02
                          
                          
                          
                          0.14Net
      income per share
                          
                          $
                          0.06
                          
                          
                          $
                          0.14Diluted
      earnings per share:Undistributed
      earnings
                          
                          $
                          162
                          
                          
                          $
                          964Total
      weighted-average basic shares and participating securities
      outstanding
                          
                          
                          7,085
                          
                          
                          
                          6,871Add:
      Dilutive stock options 1)
                          
                          
                          —
                          
                          
                          
                          —Total
      weighted-average diluted shares and participating securities
      outstanding
                          
                          
                          7,085
                          
                          
                          
                          6,871Distributed
      earnings per share
                          
                          $
                          0.04
                          
                          
                          $
                          —Undistributed
      earnings per share
                          
                          
                          0.02
                          
                          
                          
                          0.14Net
      income per share
                          
                          $
                          0.06
                          
                          
                          $
                          0.141)
      Option shares were excluded, since the effect would have been
      anti-dilutive.


9




BEACON
FEDERAL BANCORP, INC.




On
January 1, 2009, the Company adopted FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” This FSP requires that 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. The Company’s weighted-average shares
outstanding and net income per common share for the three months ended March 31,
2009 were computed in accordance with this FSP. Prior period per share amounts
were not impacted materially.


10




BEACON
FEDERAL BANCORP, INC.




NOTE
4 – SECURITIES




The
amortized cost, unrealized gross gains and losses and fair values of securities
at March 31, 2009 were as follows:


March
      31, 2009
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair
                  ValueHeld
      to maturity:Debt
      securities:Mortgage
      backed securities
                
                $
                6,074
                
                
                $
                95
                
                
                $
                (45
                )
                
                $
                6,124Collateralized
      mortgage obligations
                
                
                15,473
                
                
                
                148
                
                
                
                (1,083
                )
                
                
                14,538Total
                
                $
                21,547
                
                
                $
                243
                
                
                $
                (1,128
                )
                
                $
                20,662Available
      for sale:Debt
      securities:Treasuries
                
                $
                100
                
                
                $
                2
                
                
                $
                —
                
                
                $
                102Agencies
                
                
                5,974
                
                
                
                11
                
                
                
                (4
                )
                
                
                5,981Pooled
      trust preferred securities
                
                
                13,705
                
                
                
                —
                
                
                
                (10,048
                )
                
                
                3,657Mortgage
      backed securities
                
                
                45,368
                
                
                
                1,558
                
                
                
                —
                
                
                
                46,926Collateralized
      mortgage obligations
                
                
                85,928
                
                
                
                1,367
                
                
                
                (9,697
                )
                
                
                77,598Total
                
                $
                151,075
                
                
                $
                2,938
                
                
                $
                (19,749
                )
                
                $
                134,264




Maturities
of debt securities at March 31, 2009 are summarized as follows:


Held
      to Maturity
                
                
                Available
      for SaleAmortized
                  Cost
                
                
                Fair
                  Value
                
                
                Amortized
                  Cost
                
                
                Fair
                  ValueDue
      within one year
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Due
      after one through five years
                
                
                —
                
                
                
                —
                
                
                
                6,074
                
                
                
                6,083Due
      after five through ten years
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Due
      after ten years
                
                
                —
                
                
                
                —
                
                
                
                13,705
                
                
                
                3,657—
                
                
                
                
                
                
                
                19,779
                
                
                
                9,740Mortgage
      backed securities
                
                
                6,074
                
                
                
                6,124
                
                
                
                45,368
                
                
                
                46,926Collateralized
      mortgage obligations
                
                
                15,473
                
                
                
                14,538
                
                
                
                85,928
                
                
                
                77,598$
                21,547
                
                
                $
                20,662
                
                
                $
                151,075
                
                
                $
                134,264




Mortgage-backed
securities and collateralized mortgage obligations are backed by single-family
mortgage loans. The Company does not have any such securities backed by
commercial real estate loans.


11




BEACON
FEDERAL BANCORP, INC.




The
amortized cost, unrealized gross gains and losses and fair values of securities
at December 31, 2008 were as follows:


December
      31, 2008
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair
                  ValueHeld
      to maturity:Debt
      securities:Mortgage
      backed securities
                
                $
                6,291
                
                
                $
                67
                
                
                $
                (61
                )
                
                $
                6,297Collateralized
      mortgage obligations
                
                
                17,024
                
                
                
                77
                
                
                
                (1,443
                )
                
                
                15,658Total
                
                $
                23,315
                
                
                $
                144
                
                
                $
                (1,504
                )
                
                $
                21,955Available
      for sale:Debt
      securities:Treasuries
                
                $
                100
                
                
                $
                3
                
                
                $
                —
                
                
                $
                103Agencies
                
                
                3,000
                
                
                
                3
                
                
                
                —
                
                
                
                3,003Pooled
      trust preferred securities
                
                
                12,318
                
                
                
                —
                
                
                
                (7,535
                )
                
                
                4,783Mortgage
      backed securities
                
                
                47,508
                
                
                
                1,144
                
                
                
                (10
                )
                
                
                48,642Collateralized
      mortgage obligations
                
                
                90,627
                
                
                
                1,222
                
                
                
                (8,577
                )
                
                
                83,272Total
                
                $
                153,553
                
                
                $
                2,372
                
                
                $
                (16,122
                )
                
                $
                139,803




Proceeds
from sale of securities available for sale, gross realized gains and gross
realized losses amounted to $129, $129 and $0, respectively for the three months
ended March 31, 2008. There were no such sales during the three months ended
March 31, 2009.




In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP SFAS No. 115-2 and SFAS
No. 124-2 applies to debt securities classified as available-for-sale and
held-to-maturity and makes other-than-temporary impairment guidance more
operational and improves related presentation and disclosure requirements. This
FSP requires that impairment losses related to credit losses will be included in
earnings. Impairments related to other factors will be included in other
comprehensive income, when management asserts it does not have the intent to
sell the security and it is not more likely than not that it will have to sell
the security before its recovery.




For debt
securities held at the beginning of the interim period of adoption for which an
other-than-temporary impairment was previously recognized, if the entity does
not intend to sell and it is not more likely than not that it will be required
to sell the security before recovery of its amortized cost basis, the entity
will recognize the cumulative-effect adjustment, including related tax effects,
to the beginning balance of retained earnings and corresponding adjustment to
accumulated other comprehensive income. FSP SFAS No. 115-2 and SFAS No. 124-2 is
effective for interim and annual periods ending after June 15, 2009. This FSP
amends SFAS No. 115 and other related guidance. Early adoption is permitted for
periods ending after March 15, 2009. FSP SFAS No. 115-2 and SFAS No. 124-2 was
early adopted, effective March 31, 2009.


12




BEACON
FEDERAL BANCORP, INC.




Securities
with unrealized losses, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
are as follows:


Less
      than 12 Months
                            
                            12
      Months or Longer
                            
                            TotalMarch
      31, 2009
                            
                            Fair
                              Value
                            
                            Unrealized
                              loss
                            
                            Fair
                              Value
                            
                            Unrealized
                              loss
                            
                            Fair
                              Value
                            
                            Unrealized
                              lossAgencies
                            
                            $
                            972
                            
                            
                            $
                            (4
                            )
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            972
                            
                            
                            $
                            (4
                            )Pooled
      trustpreferred
      securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,657
                            
                            
                            
                            (10,048
                            )
                            
                            
                            3,657
                            
                            
                            
                            (10,048
                            )Mortgage-backedsecurities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,144
                            
                            
                            
                            (45
                            )
                            
                            
                            3,144
                            
                            
                            
                            (45
                            )Collateralizedmortgage
      obligations
                            
                            
                            3,950
                            
                            
                            
                            (1,327
                            )
                            
                            
                            23,381
                            
                            
                            
                            (9,453
                            )
                            
                            
                            27,331
                            
                            
                            
                            (10,780
                            )$
                            4,922
                            
                            
                            $
                            (1,331
                            )
                            
                            $
                            30,182
                            
                            
                            $
                            (19,546
                            )
                            
                            $
                            35,104
                            
                            
                            $
                            (20,877
                            )Less
      than 12 Months
                            
                            12
      Months or Longer
                            
                            TotalDecember
      31, 2008
                            
                            Fair
                              Value
                            
                            Unrealized
                              loss
                            
                            Fair
                              Value
                            
                            Unrealized
                              loss
                            
                            Fair
                              Value
                            
                            Unrealized
                              lossPooled
      trustpreferred
      securities
                            
                            $
                            4,783
                            
                            
                            $
                            (7,535
                            )
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            4,783
                            
                            
                            $
                            (7,535
                            )Mortgage-backedsecurities
                            
                            
                            6,276
                            
                            
                            
                            (32
                            )
                            
                            
                            1,616
                            
                            
                            
                            (39
                            )
                            
                            
                            7,892
                            
                            
                            
                            (71
                            )Collateralizedmortgage
      obligations
                            
                            
                            21,029
                            
                            
                            
                            (5,612
                            )
                            
                            
                            9,087
                            
                            
                            
                            (4,408
                            )
                            
                            
                            30,116
                            
                            
                            
                            (10,020
                            )$
                            32,088
                            
                            
                            $
                            (13,179
                            )
                            
                            $
                            10,703
                            
                            
                            $
                            (4,447
                            )
                            
                            $
                            42,791
                            
                            
                            $
                            (17,626
                            )




Pooled Trust Preferred Securities
(PTPS) (6 issues).The unrealized losses on the Company’s pooled trust
preferred securities, which are backed by banking issuers, were caused by
general market conditions for financial institutions, which is an industry
sector that is relatively out of favor, and the resulting lack of liquidity in
the market for securities issued by or backed by financial institutions.
Management of the Company does not intend to sell the securities and it is not
more likely than not that the Company will be required to sell the securities
before recovery of their amortized cost basis, which may be upon maturity.
Accordingly, the Company did not consider the unrealized losses on those
securities to be other-than-temporarily impaired credit related losses at March
31, 2009.




Our PTPS
were rated “BBB+”, or lower, and the lowest was rated “Ca”, as discussed
below.




Mortgage-backed Securities (4 issues)
and Privately-Issued Collateralized Mortgage Obligations (15 issues).The
unrealized losses on the Company’s mortgage-backed securities and
privately-issued collateralized mortgage obligations were caused primarily by
decreased liquidity and larger risk premiums for these securities. Management of
the Company does not intend to sell the securities and it is not more likely
than not that the Company will be required to sell the securities before
recovery of their amortized cost basis, which may be upon maturity. Accordingly,
the Company did not consider the unrealized losses on those securities to be
other-than-temporarily impaired credit related losses at March 31,
2009.


13




BEACON
FEDERAL BANCORP, INC.




Nine
privately issued CMOs were rated “AAA” and six issues were rated less than
investment grade as further discussed below.




Other-Than-Temporary
Impairments. In estimating other-than-temporary impairment (“OTTI”)
losses, management considers: (1) the length of time and extent that fair value
has been less than cost, (2) the financial condition and near term prospects of
the issuer, (3) the Company’s ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value and (4)
evaluation of cash flows to determine if they have been adversely affected (See
“Recent Accounting Pronouncements” for discussion of authoritative accounting
literature as it relates to other-than-temporary impairments).




The
Company recognized an OTTI credit loss of $217 on one trust preferred security
(rated “Ca” by Moody’s) during the quarter ended March 31, 2009. The Company
used a discounted cash flow (“DCF”) analysis to provide an estimate of the OTTI
credit loss, which resulted from the fair value amount being less than the
carrying amount. Inputs to the discount model included default rates, deferrals
of interest, over-collateralization tests, interest coverage tests and other
factors. The discount rate was based upon spreads currently observed in the
market for similar securities. The increase in the defaults and deferrals, by
$50.0 million, contributed to the OTTI credit loss for the quarter.




The
Company recognized an OTTI credit loss of $207 on one collateralized mortgage
obligation (rated “Caa2” by Moody’s) during the three months ended March 31,
2009. The Company used a DCF analysis to provide an estimate of the OTTI credit
loss, which resulted from the fair value amount being less than the carrying
amount. The expected cash flows were discounted using the effective interest
rate implicit in the securities at the purchase date. Inputs to the DCF analysis
include prepayment rate, default rate, delinquencies, loss severities and
percentage of non-performing assets. The increase in the percentage of loans
greater than 90 days delinquent, from 14% to 19%, contributed to the OTTI credit
loss for the quarter.




An OTTI
loss of $528 related to FNMA perpetual preferred stock was recorded during the
three months ended March 31, 2008. The Company’s FNMA and FHLMC preferred stock
was sold in December 2008.


14




BEACON
FEDERAL BANCORP, INC.




The
following table summarizes the change in OTTI credit related losses on
securities, exclusive of tax effects, for the three months ended March 31,
2009:


Credit
      related impairments with a portionrecognized
      in other comprehensive loss:Balance
      at January 1, 2009
                
                $
                —Cumulative
      effect adjustment:Total
      OTTI credit related lossesat
      January 1, 2009
                
                
                4,596Less:
      adoption of FSP SFAS No. 115-2in
      other comprehensive loss
                
                
                3,010Balance
      at January 1, 2009, as adjusted
                
                
                1,586Credit
      related impairments on portionsof
      OTTI previously recognized in othercomprehensive
      loss
                
                
                424Balance
      at March 31, 2009
                
                $
                2,010




NOTE
5 – LOANS, FORECLOSED ASSETS AND REPOSESSED ASSETS




Activity
in the allowance for loan losses was as follows:


Three
      Months Ended
                  March
      31,2009
                
                
                2008(Dollars
      in Thousands)Beginning
      balance
                
                $
                10,546
                
                
                $
                6,827Provision
      for loan losses
                
                
                2,570
                
                
                
                900Loans
      charged off
                
                
                (617
                )
                
                
                (270
                )Recoveries
                
                
                69
                
                
                
                80Ending
      balance
                
                $
                12,568
                
                
                $
                7,537Ratios:Net
      charge-offs to average loans outstanding
                
                
                0.28
                %
                
                
                0.10
                %Allowance
      for loan losses to nonperforming loans at end of period
                
                
                130.00
                %
                
                
                567.12Allowance
      for loan losses to total loans at end of period
                
                
                1.58
                %
                
                
                1.04
                %


15


BEACON
FEDERAL BANCORP, INC.
  Following
is a summary of nonperforming assets, impaired loans and other related
data:
 March
      31,
                                    2009
                                  
                                  
                                  December
      31,
                                    2008(Dollars
      in Thousands)Nonaccrual
      loans
                                  
                                  $
                                  7,576
                                  
                                  
                                  $
                                  3,711Loans
      past due over 90 days still accruing
                                  
                                  
                                  2,092
                                  
                                  
                                  
                                  975Total
      nonaccrual loans and loans past due
                                    over
      90 days and still accruing
                                  
                                  
                                  9,668
                                  
                                  
                                  
                                  4,686Foreclosed
      and repossessed assets
                                  
                                  
                                  247
                                  
                                  
                                  
                                  149Total
      nonperforming assets
                                  
                                  $
                                  9,915
                                  
                                  
                                  $
                                  4,835Ratios:Nonperforming
      loans to total loans
                                  
                                  
                                  1.21
                                  %
                                  
                                  
                                  0.60
                                  %Nonperforming
      assets to total assets
                                  
                                  
                                  0.95
                                  %
                                  
                                  
                                  0.47
                                  %Impaired
      loans (in nonaccrual loans)
                                  
                                  $
                                  7,482
                                  
                                  
                                  $
                                  2,439Allowance
      for losses on impaired loans
                                  
                                  $
                                  2,191
                                  
                                  
                                  $
                                  610Impaired
      loans with no allowance
                                  
                                  $
                                  674
                                  
                                  
                                  $
                                  —Average
      balance of impaired loans
                                  
                                  $
                                  5,100
                                  
                                  
                                  $
                                  1,338Interest
      income recognized
                                  
                                  $
                                  13
                                  
                                  
                                  $
                                  22
  At March
31, 2009, there were no troubled debt restructurings (loans for which a portion
of interest or principal had been forgiven and loans modified at interest rates
materially less than current market rates). In addition, there were no loans
that were not currently classified as nonaccrual, 90 days past due or impaired
but where known information about possible credit problems of the borrower
caused management to have serious concerns as to the ability of the borrower to
comply with present loan repayment terms and that may result in disclosure as
nonaccrual, 90 days past due or impaired.
  NOTE
6 – MORTGAGE SERVICING RIGHTS
  Mortgage
loans, including securitized loans, serviced for others at March 31, 2009 and
December 31, 2008 were $84,168 and $64,705, respectively. On January 1, 2009,
the Company adopted the subsequent measurement provisions under SFAS No. 156,
“Accounting for Servicing of Financial Assets,” and transferred its mortgage
servicing rights from a class using the amortization method to the fair value
method. There was no cumulative effect adjustment recognized at the adoption
date, since the carrying value approximated the fair value of the mortgage
servicing rights.
 16
  BEACON
FEDERAL BANCORP, INC.
  Mortgage
servicing rights, included in other assets, are summarized as
follows:
 Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008Beginning
      balance
                          
                          $
                          313
                          
                          
                          $
                          —Additions
                          
                          
                          223
                          
                          
                          
                          —Disposals
                          
                          
                          —
                          
                          
                          
                          —Change
      in fair value in non-interest expense
                          
                          
                          34
                          
                          
                          
                          —Ending
      balance
                          
                          $
                          570
                          
                          
                          $
                          —
  Fair
value is based on a valuation model that calculates the present value of
estimated future net servicing income. The valuation model includes assumptions
that market participants would use in estimating future net servicing income,
including the discount rate, prepayment rate, ancillary income, float earnings
rate, inflation rate, cost to service, acquisition costs and delinquency
rates.
  NOTE
7 – EQUITY INCENTIVE PLAN
  Equity Incentive Plan: As authorized
by the Beacon Federal Bancorp, Inc. 2008 Equity Incentive Plan (the “2008
Plan”), the Board of Directors granted 444,134 shares of non-incentive stock
options and 265,884 shares of common stock as restricted stock awards to
directors, officers and employees on November 26, 2008. The 2008 Plan authorizes
the award of up to 739,643 shares pursuant to grants of stock options and up to
295,857 shares of common stock may be issued as restricted stock awards, subject
to restrictions, to directors, officers and employees of the Company and the
Bank. The Plan provides for the grant of stock options, stock appreciation
rights and restricted stock. Options expire ten years from the date of the
grant. All stock options and stock awards granted are vested over a three-year
period.
  The
Company follows SFAS No. 123R, “Share-Based Payment,” using the modified
prospective method. Under this method compensation expense is recognized based
on the fair value of awards granted, which includes restricted stock and stock
options, at the grant date and is recognized on a straight-line basis over the
requisite service period, generally defined as the vesting period.
  The
Company has estimated the fair value of awards granted under its stock option
plan to be $1.60 utilizing the Black-Scholes pricing model. There were no awards
granted during the three months ended March 31, 2009 or 2008.
 17
  BEACON
FEDERAL BANCORP, INC.
  Stock
option compensation expense is as follows:
 Three
      Months Ended
                            March
      31,2009
                          
                          
                          2008Pre-tax
                          
                          $
                          58
                          
                          
                          
                          —After-tax
                          
                          
                          35
                          
                          
                          
                          —Basic
      and diluted earnings per share
                          
                          $
                          0.01
                          
                          
                          
                          —
  At March
31, 2009, the total unrecognized expense related to non-vested stock options was
approximately $630 and is expected to be recognized over the weighted-average
period of 2.65 years.
  A summary
of the Company’s stock option activity under the Plan for the three months ended
March 31, 2009 is as follows:
 Number
                    of
      Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted-
                    Average
                    Remaining
                    Contractual
                    Term
      in
                    Years
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at January 1, 2009
                  
                  
                  444,134
                  
                  
                  $
                  8.23
                  
                  
                  
                  9.90
                  
                  
                  $
                  —Granted
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Expired
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  (2,000
                  )
                  
                  
                  8.23
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at March 31, 2009
                  
                  
                  442,134
                  
                  
                  $
                  8.23
                  
                  
                  
                  9.65
                  
                  
                  $
                  —Exercisable
      at March 31, 2009
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —Vested
      at March 31, 2009
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —At
      March 31, 2009 share options
                    expected
      to vest in the future
                  
                  
                  434,174
                  
                  
                  $
                  8.23
                  
                  
                  
                  9.65
                  
                  
                  $
                  —
  A summary
of the Company’s restricted stock award expense is as follows:
 Three
      Months Ended
                                March
      31,2009
                              
                              
                              2008Pre-tax
                              
                              $
                              182
                              
                              
                              $
                              —After-tax
                              
                              
                              109
                              
                              
                              
                              —Basic
      and diluted earnings per share
                              
                              $
                              0.02
                              
                              
                              $
                              —
  At March
31, 2009, the total unrecognized expense related to restricted stock awards was
approximately $1.9 million and is expected to be recognized over the
weighted-average period of 2.65 years.
 18
  BEACON
FEDERAL BANCORP, INC.
  A summary
of the Company’s non-vested stock award activity for the period ended March 31,
2009 is as follows:
 Number
                            of
                            Nonvested
                            Shares
                          
                          
                          Weighted-
                            Average
                            Grant
      Date
                            Fair
      ValueNonvested
      at January 1, 2009
                          
                          
                          265,884
                          
                          
                          $
                          8.23Granted
                          
                          
                          —
                          
                          
                          
                          —Vested
                          
                          
                          —
                          
                          
                          
                          —Forfeited
                          
                          
                          (1,000
                          )
                          
                          
                          8.23Nonvested
      at March 31, 2009
                          
                          
                          264,884
                          
                          
                          $
                          8.23
  NOTE
8 – INCOME TAXES
  We
adopted the provisions of FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB No. 109,” effective
January 1, 2007. There was no cumulative effect on adoption of FIN 48. At March
31, 2009, the Company had $190 of unrecognized tax benefits, which would affect
the effective tax rate if recognized. The Company does not anticipate that the
total unrecognized tax benefits will change significantly in the next twelve
months. We are subject to U.S. Federal income taxes, as well as State of New
York, Massachusetts, Texas and Tennessee income taxes. Income tax returns filed
for the tax years ended December 31, 2005 through December 31, 2007 remain open
to examination by these jurisdictions. We recognize interest and penalties
related to tax positions in income tax expense.
  NOTE
9 – FAIR VALUE MEASUREMENTS
  General. The Company follows the provisions of
SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities.
Effective January 1, 2009, the Company adopted the provisions of Financial
Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of
FASB Statement No. 157,” for non-financial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements. In addition,
the Company adopted FSP SFAS No. 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (See Note 4 to Consolidated
Financial Statements for discussion of the early adoption of FSP SFAS No. 115-2
and SFAS No. 124-2).
  SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value hierarchy prioritizes the
assumptions that market participants would use in pricing the assets or
liabilities (the “inputs”) into three broad levels.
  The fair
value hierarchy gives the highest priority (Level 1) to quoted prices in active
markets for identical assets and liabilities and the lowest priority (Level 3)
to unobservable inputs in which little, if any, market activity exits, requiring
entities to develop their own assumptions and data.
 19
  BEACON
FEDERAL BANCORP, INC.
  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 on a recurring
basis utilizing Level 1, Level 2 and Level 3 inputs. For U.S. Treasuries, the
Company obtains fair values using quoted prices in the U.S. Treasury market. For
agencies, mortgage-backed securities, and collateralized mortgage obligations,
the Company 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. For trust preferred securities, the Company obtains fair values
using a discounted cash flow analysis. Assumptions used in the analysis include
the default rate, deferral of interest, over-collateralization test, interest
coverage test and other factors. The discount rate was based upon spreads
currently observed in the market for similar securities.
  The
Company estimates fair values on mortgage servicing rights using Level 2 inputs,
which include discounted cash flows based on current market pricing. For
purposes of measuring impairment, the rights are stratified based on the
predominant risk characteristics of the underlying loans. The predominant
characteristic currently used for stratification is type of loan, including
coupon and loan age. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceeds their fair
value.
  Impaired
loans are carried at fair value on a non-recurring basis utilizing Level 3
inputs, consisting of appraisals of underlying collateral and discounted cash
flow analysis. A loan is impaired when full payment under the loan terms is not
expected. Commercial and commercial real estate loans are individually evaluated
for impairment. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported net, at the present value of estimated future cash
flows using the loan’s existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
  Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or market, utilizing Level 2 inputs as determined
based on expected proceeds from outstanding commitments from
investors.
  Derivative
instruments used in the ordinary course of business consist of mandatory forward
sales contracts and interest rate lock commitments. The Company manages interest
rate risk and hedges the interest rate lock commitments through mandatory
forward sales contracts, which fair value changes are opposite to market
movements. Generally, in an interest rate lock commitment, the borrower locks-in
the current market rate for a fixed-rate loan. The mandatory forward sales
contract is a loans sales agreement in which the Company commitments to deliver
a certain principal amount of mortgage loans to an investor at a specific price
on or before a specific date.
 20
  BEACON
FEDERAL BANCORP, INC.
  The
Company had outstanding forward sales contracts of $19.9 million in notional
value, matched against $20.6 million of interest rate lock commitments at March
31, 2009. The interest rate lock commitments included in other assets and
forward sales contracts recognized in other liabilities amounted to $178 and
$215, respectively, at March 31, 2009 and were accounted for at fair value as an
undesignated derivative under SFAS No. 133, with a $178 fair value gain on the
interest rate lock commitments and a $215 fair value loss on the mandatory
forward sales contracts recognized in non-interest income for the three months
ended March 31, 2009. The fair value of the Company’s derivative financial
instruments is primarily measured by obtaining pricing from broker-dealers
recognized to be market participants. The pricing is derived from market
observable inputs that can generally be verified and do not typically involve
significant judgment by the Company. Forward contracts and loan commitments are
recorded at fair value utilizing Level 2 inputs.
  The
Company believes that they have enough sources of liquidity to satisfy future
cash requirements as they relate to these derivative instruments.
  Non-financial
assets measured at fair value on a non-recurring basis include foreclosed and
repossessed assets. Assets acquired through or instead of loan foreclosure and
by repossession are initially recorded at fair value utilizing level 2 units
based on observable market data less costs to sell when acquired, establishing a
new cost basis. Foreclosed assets also include properties for which the Bank has
taken physical possession, even though formal foreclosure proceedings have not
taken place.
  Financial Assets and Liabilities
Measured at Fair Value on a Recurring Basis.The following table
summarizes financial assets and liabilities measured at fair value on a
recurring basis at March 31, 2009, segregated by the level of the inputs within
the hierarchy used to measure fair value:
 Assets
                            
                            Quoted
      Prices in
                              Active
      Markets
                              for
      Identical
                              Assets
                              (Level
      1)
                            
                            
                            Significant
                              Other
                              Observable
                              Inputs
                              (Level
      2)
                            
                            
                            Significant
                              Unobservable
                              Inputs
                              (Level
      3)
                            
                            
                            Total
                              Fair
                              ValueAvailable
      for sale securities:Debt
      securities:U.S.
      Treasury and agencies
                            
                            $
                            102
                            
                            
                            
                            5,981
                            
                            
                            
                            —
                            
                            
                            
                            6,083Pooled
      trust preferred securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,657
                            
                            
                            
                            3,657Mortgage-backed
      securities
                            
                            
                            —
                            
                            
                            
                            46,926
                            
                            
                            
                            —
                            
                            
                            
                            46,926Collateralized
      mortgage obligations
                            
                            
                            —
                            
                            
                            
                            77,598
                            
                            
                            
                            —
                            
                            
                            
                            77,598$
                            102
                            
                            
                            $
                            130,505
                            
                            
                            $
                            3,657
                            
                            
                            $
                            134,264Mortgage
      servicing rights
                            
                            $
                            —
                            
                            
                            $
                            570
                            
                            
                            $
                            —
                            
                            
                            $
                            570Loan
      commitment derivatives
                            
                            $
                            —
                            
                            
                            $
                            178
                            
                            
                            $
                            —
                            
                            
                            $
                            178LiabilitiesSales
      contract derivatives
                            
                            $
                            —
                            
                            
                            $
                            215
                            
                            
                            $
                            —
                            
                            
                            $
                            215
  21
  BEACON
FEDERAL BANCORP, INC.
  The
following table summarizes financial assets measured at fair value on a
recurring basis at December 31, 2008, segregated by the level of the inputs
within the hierarchy used to measure fair value:
 Assets
                      
                      Quoted
      Prices in
                        Active
      Markets
                        for
      Identical
                        Assets
                        (Level
      1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level
      2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level
      3)
                      
                      
                      Total
                        Fair
                        ValueTrading
      account assets
                      
                      $
                      —
                      
                      
                      $
                      23,337
                      
                      
                      $
                      —
                      
                      
                      $
                      23,337Available
      for sale securities:Debt
      securities:U.S.
      Treasury and agencies
                      
                      $
                      —
                      
                      
                      $
                      3,106
                      
                      
                      $
                      —
                      
                      
                      $
                      3,106Pooled
      trust preferred securities
                      
                      
                      —
                      
                      
                      
                      4,783
                      
                      
                      
                      —
                      
                      
                      
                      4,783Mortgage-backed
      securities
                      
                      
                      —
                      
                      
                      
                      48,642
                      
                      
                      
                      —
                      
                      
                      
                      48,642Collateralized
      mortgage obligations
                      
                      
                      —
                      
                      
                      
                      83,272
                      
                      
                      
                      —
                      
                      
                      
                      83,272$
                      —
                      
                      
                      $
                      139,803
                      
                      
                      $
                      —
                      
                      
                      $
                      139,803
  Assets
Measured at Fair Value on a Recurring Basis Using Significant Unobservable
Inputs (Level 3).
 A
reconciliation of the beginning and ending balances for trust preferred
securities using Level 3 inputs was as follows:
 Balance
      at January 1, 2009
                      
                      $
                      —Transfer
      from Level 2 to Level 3 input
                        category
      at March 31, 2009
                      
                      
                      3,874OTTI
      credit related losses recognized in
                        non-interest
      expense
                      
                      
                      (217
                      )Balance
      at March 31, 2009
                      
                      $
                      3,657
  Financial Assets Measured at Fair
Value on a Non-Recurring Basis.Assets measured at fair value on a
non-recurring basis at March 31, 2009 include impaired loans of $7,482,
utilizing level 3 inputs. The impaired loans are collateral dependent and the
allowance for losses on the impaired loans was $2,191 at March 31,
2009.
 The
activity in the allowance for losses on impaired loans during the three months
ended March 31, 2009 was as follows:
 Balance
      at January 1, 2009
                      
                      $
                      610Provision
      for loan losses
                      
                      
                      1,581Loans
      charged off
                      
                      
                      —Recoveries
                      
                      
                      —Balance
      at March 31, 2009
                      
                      $
                      2,191
  Assets
measured at fair value on a non-recurring basis at December 31, 2008 include
mortgage servicing rights of $313, utilizing level 2 inputs. There were impaired
loans of $2,439 at December 31, 2008.
 22
  BEACON
FEDERAL BANCORP, INC.
  Non-financial Assets Measured at Fair Value on a
Non-Recurring Basis. Non-financial assets measured on a non-recurring
basis at March 31, 2009 include foreclosed and repossessed assets of $247,000 at
March 31, 2009. There was no provision for losses on these assets during the
three months ended March 31, 2009.
  ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
  Management’s
discussion and analysis of financial condition and results of operations at
March 31, 2009 and for the three months ended March 31, 2009 and 2008 is
intended to assist in understanding the financial condition and results of
operations of the Company. The information contained in this section should be
read in conjunction with the Unaudited Consolidated Financial Statements and the
notes thereto, appearing in Part 1, Item 1 of this report.
  Forward-Looking
Statements
  When used
in this Form 10-Q, the words or phrases “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “estimate,” “project” or similar expressions
are intended to identify “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in our
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in our market area, and competition that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. Additionally, other risks and uncertainties
are described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, as filed with the Securities and Exchange Commission (the
“SEC”), which is available through the SEC’s website at www.sec.gov. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which only speak as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company’s financial
performance and could cause the Company’s actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
  The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
  Overview
  General.
Our results of operations depend mainly on our net interest income, which is the
difference between the interest income earned on our loan and investment
portfolios and interest expense we pay on our deposits and borrowings. Results
of operations are also affected by fee income from banking operations,
provisions for loan losses, gains on sales of loans and other miscellaneous
income. Our noninterest expense consists primarily of compensation and employee
benefits, occupancy and equipment, marketing, general administrative expenses
and income tax expense.
  Our
results of operations are also significantly affected by general economic and
competitive conditions, particularly with respect to changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially affect our
financial condition and results of operations.
 23
  BEACON
FEDERAL BANCORP, INC.
  Economic
Conditions.The national economy,
as well as the local economy, continue to weaken. The economy has been marked by
higher unemployment rates, rising numbers of foreclosures, declining home prices
and contractions in business and consumer credit. The national unemployment rate
rose to 8.5% in March 2009 from 4.9% at the end of 2007. The unemployment rate
in the Company’s market area in New York is slightly below the national average.
The Federal Open Market Committee has responded by reducing the federal funds
rate from 4.25 % at December 11, 2007 to the current rate between 0.00% and
0.25%. The reduction in the federal funds rate has increased the Company’s net
interest margin and net interest income. However, price competition for loans
and deposits has increased.
  Financial
institutions have been affected by the lack of liquidity and credit
deterioration, resulting in depressed valuations and failures of certain banks.
In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted, providing for $700 billion in funding to the U.S. Treasury to restore
liquidity and stability to the U.S. financial system and includes extensive tax,
energy and disaster relief provisions.
  In
February 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was
enacted, providing for tax cuts, expansion of unemployment benefits, social
welfare provisions, and spending programs for education, health care and
infrastructure.
  Operating
Results.Net
income decreased to $436,000 for the three months ended March 31, 2009 from
$964,000 for the three months ended March 31, 2008. The decrease in net income
reflected an increased provision for loan losses and an increase in non-interest
expense, partially offset by an increase in net interest income and non-interest
income and lower income taxes.
  Financial
Condition.Total assets increased $18.8 million to $1.04 billion at March
31, 2009 from $1.02 billion at December 31, 2008. The increase was the result of
a $25.1 million increase in cash and cash equivalents, an $18.5 million increase
in net loans, and a $5.0 million increase in loans held for sale, net of a $23.3
million decrease in trading account assets and a $7.3 million decrease in
securities. The increase in assets was funded by a $30.4 million increase in
deposits, net of a $10.0 million decrease in borrowings. Equity decreased $2.5
million, or 2.5%, to $99.6 million at March 31, 2009 from $102.1 million at
December 31, 2008.
  Critical
Accounting Policies
  We
consider accounting policies that require management to exercise significant
judgment or discretion or make significant assumptions that have, or could have,
a material impact on the carrying value of certain assets or on income, to be
critical accounting policies. We consider the following to be our critical
accounting policies:
  Allowance for
Loan Losses.The allowance for loan losses is the estimated amount
considered necessary to cover probable incurred credit losses inherent in the
loan portfolio at the balance sheet date. The allowance is established through
the provision for loan losses, which is charged against income. In determining
the allowance for loan losses, management makes significant estimates. The
methodology for determining the allowance for loan losses is considered a
critical accounting policy by management due to the high degree of judgment
involved, the subjectivity of the assumptions utilized and the potential for
changes in the economic environment that could result in changes to the amount
of the recorded allowance for loan losses.
 24
  BEACON
FEDERAL BANCORP, INC.
  A
substantial amount of our loan portfolio is collateralized by real estate.
Appraisals of the underlying value of property securing loans and discounted
cash flow valuations of properties are critical in determining the amount of the
allowance required for specific loans. Assumptions for appraisals and discounted
cash flow valuations are instrumental in determining the value of properties.
Overly optimistic assumptions or negative changes to assumptions could
significantly affect the valuation of a property securing a loan and the related
allowance. The assumptions supporting such appraisals and discounted cash flow
valuations are carefully reviewed by management to determine that the resulting
values reasonably reflect amounts realizable on the related loans.
  Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. Consideration is given to a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal and external loan reviews and other relevant factors. This evaluation
is inherently subjective, as it requires material estimates that may be
susceptible to significant revision based on changes in economic and real estate
market conditions.
  The
analysis of the allowance for loan losses has two components: specific and
general allocations. Specific allocations are made for loans that are determined
to be impaired. Impairment is measured by determining the present value of
expected future cash flows or, for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. The general
allocation is determined by segregating the remaining loans by type of loan,
risk weighting (if applicable) and payment history. We also analyze historical
loss experience, delinquency trends, general economic conditions and geographic
and industry concentrations. This analysis establishes factors that are applied
to the loan groups to determine the amount of the general allocations. Actual
loan losses may be significantly more than the allowance for loan losses we have
established, which could have a material negative effect on our financial
results.
  Securities
Impairment.We periodically perform analyses to determine whether there
has been an other- than-temporary decline in the value of one or more of our
securities. Our available-for-sale securities portfolio is carried at estimated
fair value, with any unrealized gains or losses, net of taxes, reported as
accumulated other comprehensive income or loss in stockholders’ equity. Our
held-to-maturity securities portfolio, consisting of debt securities for which
we have a positive intent and ability to hold to maturity, is carried at
amortized cost. We conduct a quarterly review and evaluation of the securities
portfolio to determine if the value of any security has declined below its cost
or amortized cost, and whether such decline is other-than-temporary. If such
decline is deemed other-than-temporary, we adjust the cost basis of the security
by writing down the security to estimated fair market value through a charge to
current period operations. The market values of our securities are affected by
changes in interest rates.
  Comparison
of Financial Condition at March 31, 2009 and December 31, 2008
  Cash and Cash
equivalents.Cash and cash equivalents increased $25.1 million as a
result of the proceeds received from sale of the trading account assets, which
consisted of 30-year mortgage loans. The Company is retaining higher levels of
cash and cash equivalents due to the limited borrowing capacity with the Federal
Home Loan Bank of New York (discussed below) and for funding short-term growth.
The Company can utilize alternative sources of financing, including brokered
deposits.
 25
  BEACON
FEDERAL BANCORP, INC.
  Loans,
Net. Net loans increased $18.5 million, or 2.4%, to $789.2 million at
March 31, 2009 from $770.7 million at December 31, 2008, reflecting strong
business relationships maintained by our loan staff in their local
markets.
  Securities.Securities available for
sale decreased to $134.3 million at March 31, 2009 from $139.8 million at
December 31, 2008. The decrease in securities available for sale reflected the
maturities of $11.1 million in excess of the purchases of $6.0 million.
Securities held to maturity decreased $1.8 million to $21.5 million at March 31,
2009.
  Other
Assets.Federal
Home Loan Bank of New York stock decreased $644,000 to $12.4 million at March
31, 2009 as a result of a lower level of FHLB advances outstanding. Accrued
interest receivable decreased due primarily to a lower yield on loans, lower
balance of securities outstanding and timing of interest receipts, partially
offset by a higher loan balance and a higher yield on securities.
  Deposits.Deposits increased $30.4
million, or 4.8%, to $656.8 million at March 31, 2009 from $626.4 million at
December 31, 2008, due to the success of promotional efforts throughout the
period to attract additional deposits. Certificate of deposit accounts increased
by $26.7 million and represented the largest dollar increase in our deposit
accounts. Savings accounts and checking accounts increased by $2.7 million and
$2.5 million, respectively. In contrast, money market accounts decreased by $6.1
million. Overall, total “core” deposits (savings, money market, non-interest
bearing demand and NOW accounts) increased by $3.7 million, or
1.3%.
  Borrowings.FHLB advances are utilized
to the extent that liquidity needs are not met by cash received from customer
deposits. FHLB advances decreased $10.0 million, or 4.6%, to $208.6 million at
March 31, 2009 from $218.6 million at December 31, 2008. Retail certificates of
deposit were generally utilized to a greater degree during the quarter because
the Company has temporarily lost its ability to borrow additional amounts from
the FHLB due to loan repayments, payoffs and downgrades of certain securities
collateral. The Company is attempting to pledge additional assets, other than
single-family loans and securities, in order to increase its borrowing capacity
with the FHLB.
  Stockholders’
Equity.
Stockholders’ equity decreased $2.5 million, or 2.5%, to $99.6 million at March
31, 2009 from $102.1 million at December 31, 2008. The decrease reflected the
repurchase of $3.0 million of common stock and cash dividends of $274,000,
partially offset by net income of $436,000, release of ESOP shares of $161,000
and stock options and awards expense of $240,000.
  As a
result of the early adoption of FSP SFAS No. 115-2 and SFAS No. 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments,” a cumulative
effect adjustment of $1.9 million was recognized to increase retained earnings
and other comprehensive loss. This adjustment had no impact on total
stockholders’ equity, but increased regulatory capital by $1.9
million.
  Comparison
of Operating Results for the Three Months Ended March 31, 2009 and
2008
  Interest
Income.Interest income
increased $176,000, or 1.3%, to $13.8 million for the three months ended March
31, 2009 from $13.6 million for the three months ended March 31, 2008. The
increase resulted primarily from higher average balances of securities and
higher yields on such securities in the 2009 period compared to the 2008
period.
 26
  BEACON
FEDERAL BANCORP, INC.
  Interest
income on loans was $11.3 million for both the three months ended March 31, 2009
and 2008. The effect of a higher average balance was offset by a lower average
yield. The average balance on loans increased to $796.6 million for the three
months ended March 31, 2009 from $722.3 million for the three months ended March
31, 2008, reflecting our continued emphasis on loan growth. The average yield on
loans declined 52 basis points to 5.77% for the three months ended March 31,
2009, which reflected a decline in the yield on loans indexed to prime,
partially offset by the greater proportion of higher-yielding commercial real
estate, commercial business and secured consumer loans in our loan portfolio
during the 2009 period compared to the 2008 period.
  Interest
income on securities, including FHLB stock, increased $358,000, or 17.1%, to
$2.5 million for the three months ended March 31, 2009 from $2.1 million for the
three months ended March 31, 2008, reflecting a higher average balance of such
securities (to $176.3 million from $158.9 million) as well as higher average
yields on such securities to 5.65% from 5.28%.
  Interest
earned on interest-earning deposits at other financial institutions decreased to
$16,000 for the three months ended March 31, 2009 from $230,000 for the same
period a year ago, reflecting lower yields on such interest-earning assets, and
to a lesser extent, lower average balances.
  Interest
Expense.Interest expense
decreased $977,000, or 12.1%, to $7.1 million for the three months ended March
31, 2009 from $8.1 million for the three months ended March 31, 2008. The
decrease in interest expense reflected primarily lower average rates on
deposits, partially offset by higher balances of deposits.
  Interest
expense on deposits decreased $744,000, or 14.9%, to $4.2 million for the three
months ended March 31, 2009 from $5.0 million for the three months ended March
31, 2008, reflecting a lower average rate, partially offset by a higher average
balance. The average rate paid on such deposits decreased to 2.86% for the
current quarter from 4.03% for the comparable period in 2008. The average
balance of deposits increased to $601.7 million for the three months ended March
31, 2009 from $497.2 million for the three months ended March 31,
2008.
  Interest
expense on money market accounts decreased to $906,000 from $1.3 million,
reflecting substantially lower average rates on such accounts (2.56% in the 2009
period compared to 4.11% in the 2008 period), partially offset by higher average
balances on such accounts ($143.8 million compared to $125.7 million). Interest
expense on certificates of deposit also decreased to $3.1 million for the three
months ended March 31, 2009 from $3.3 million for the three months ended March
31, 2008, due primarily to a lower average rate (3.55% compared to 4.83%),
partially offset by higher average balances of such deposits ($349.5 million
compared to $272.0 million). At March 31, 2009 and December 31, 2008, we had
$89.8 million and $77.5 million, respectively, in brokered deposits. Brokered
deposits are highly susceptible to withdrawal if the rates we pay on such
deposits are not competitive.
  Interest
expense on borrowings decreased to $2.8 million for the three months ended March
31, 2009 from $3.1 million for the three months ended March 31, 2008. The
decrease was due primarily to a lower average rate. The interest rates paid on
such borrowings decreased to 4.03% from 4.32%. The average rates decreased as a
result of a lower rate environment and a greater weight of borrowings in reverse
repurchase agreements, which rates were generally more attractive than FHLB
advances with similar terms.
 27
  BEACON
FEDERAL BANCORP, INC.
  Net Interest
Income.Net
interest income increased $1.2 million, or 20.7%, to $6.7 million for the three
months ended March 31, 2009 from $5.5 million for the three months ended March
31, 2008. The increase in net interest income was due to a higher interest rate
spread and overall asset growth. Our net interest rate spread increased to 2.40%
for the March 2009 quarter from 1.91% for the March 2008 quarter and the net
interest margin increased to 2.75% from 2.47%. The higher interest rate spread
was attributable to a lower cost of funds. The cost of funds decreased 90 basis
points, while the yield on interest-earning assets declined by 41 basis
points.
  Net
interest-earning assets decreased to $106.7 million for the three months ended
March 31, 2009 from $123.7 million for the three months ended March 31, 2008.
The decline in net interest-earning assets is principally related to the
realized and unrealized losses recognized on the Company’s securities portfolio
in the past twelve months.
  Provision for
Loan Losses.We establish provisions
for loan losses, which are charged to operations, in order to maintain the
allowance for loan losses at a level we consider necessary to absorb credit
losses incurred in the loan portfolio that are both probable and reasonably
estimable at the balance sheet date. In determining the level of the allowance
for loan losses, we consider past and current loss experience, evaluations of
real estate collateral, current economic conditions, volume and type of lending,
adverse situations that may affect a borrower’s ability to repay a loan and the
levels of nonperforming and other classified loans. The amount of the allowance
is based on estimates and the ultimate losses may vary from such estimates as
more information becomes available or economic conditions change. We assess the
allowance for loan losses on a quarterly basis and make provisions for loan
losses as required in order to maintain the allowance.
  We
recorded a provision for loan losses of $2.6 million for the three months ended
March 31, 2009 compared to a provision for loan losses of $900,000 for the three
months ended March 31, 2008. The provision for loan losses resulted from an
increase in nonperforming commercial real estate and commercial business loans,
a higher level of commercial and consumer loan charge-offs, an increase in
classified loans and an overall growth of the loan portfolio.
  Components
of the provision for loan losses included a general allowance for each type of
loan based on historical loan loss experience, and related adjustments to
historical experience, and the risks associated with increased commercial
lending. The provision reflected net charge-offs of $548,000 for the three
months ended March 31, 2009, compared to net charge-offs of $190,000 for the
three months ended March 31, 2008. Net charge-offs increased due primarily to
write-downs on consumer loans, principally secured by automobiles.
  The
allowance for loan losses was $12.6 million, or 1.58% of total loans at March
31, 2009 compared to $10.5 million, or 1.36%, of total loans at December 31,
2008. Total nonperforming loans were $9.7 million at March 31, 2009 compared to
$4.7 million at December 31, 2008. We used the same methodology in assessing the
allowances for both periods. To the best of our knowledge, we have recorded all
losses that are both probable and reasonable to estimate for the three months
ended March 31, 2009 and 2008.
  Non-Interest
Income.Non-interest income
increased to $1.22 million for the three months ended March 31, 2009 from $1.17
million for the three months ended March 31, 2008. Service charges increased by
$64,000 to $730,000 for the three months ended March 31, 2009, reflecting higher
deposit-related fees. Other non-interest income increased by $86,000 to $159,000
for the three months ended March 31, 2009, as a result of a higher level of loan
servicing fees and other miscellaneous fee income. The changes in the cash
surrender value of the Company’s BOLI investment decreased by $86,000, when
compared to the comparable period last year, due to a lower asset yield. Gain on
sale of loans increased by $125,000 to $163,000 for the three months ended March
31, 2009 as a result of a higher volume of loans sold in the secondary market.
The Company received $24.9 million from proceeds of loans sold for the three
months ended March 31, 2009, compared to $5.2 million in the same prior period.
During the three months ended March 31, 2008, the Bank recognized a gain of
$129,000 as a result of a sale of its equity investment in Visa, Inc., acquired
as part of the restructuring that resulted in Visa, Inc. issuing common stock to
members of Visa U.S.A.
 28
  BEACON
FEDERAL BANCORP, INC.
  Non-Interest
Expense.Non-interest expense
increased $480,000, or 11.3%, to $4.7 million for the three months ended March
31, 2009 from $4.2 million for the three months ended March 31, 2008. The
increase reflected higher salaries and benefits, an increase in FDIC premium
expense, a prepayment penalty on FHLB advances and higher other non-interest
expense, partially offset by a decrease in audit and examination expenses, a
credit to provision for losses on servicing assets, and a lower OTTI loss on
securities, as compared to the same period in 2008.
  Salaries
and employee benefits increased by $289,000 due primarily to the recognition of
stock option and stock award expenses of $58,000 and $182,000, respectively, for
the three months ended March 31, 2009. There were no such expenses during the
same quarter for 2008.
  FDIC
premium expense increased by $72,000 to $163,000 for the three months ended
March 31, 2009 due to the growth of the Bank, and a higher risk-based assessment
which considers the supervisory rating and certain financial ratios of each
financial institution. On February 27, 2009, the FDIC adopted an interim rule
imposing a special assessment of 20 basis points on the Bank’s assessment base
for the June 2009 quarter, payable September 30, 2009. The interim rule also
permits the FDIC to impose an additional special assessment of up to 10 basis
points if warranted.
  The FDIC
adopted a final rule that increases the current initial base assessment rates to
a range of 12 to 45 basis points, effective April 1, 2009. In addition, changes
were made to the FDIC’s risk-based assessment system. Regular assessments will
be higher for institutions that rely on certain brokered deposits to fund rapid
asset growth. Additional adjustments will be made for the Company’s unsecured
debt and secured liabilities. As a result of the 20 basis point special
assessment and increase in the current deposit insurance rate, management of the
Company estimates that the FDIC premium expense will increase by approximately
$1.7 million for 2009, although there can be no assurances regarding such
amount. This estimated amount could be higher if an additional special
assessment is imposed and the current deposit insurance assessment increases
further due to changes in the risk-based assessment system. Management of the
Company is unable to estimate the amount of any additional assessments at this
time.
  The
Company recognized an OTTI loss of $424,000 on one collateralized mortgage
obligation and one trust preferred security during the March 2009 quarter,
compared to an OTTI loss of $528,000 on one FNMA preferred stock issue during
the March 2008 quarter. See Note 4 of Notes to Consolidated Financial Statements
for further information regarding the impairment losses on
securities.
  During
the three months ended March 31, 2009, the Company recognized in non-interest
expense a $241,000 prepayment penalty on $10.0 million of fixed-rate FHLB
advances. The prepayment penalty on FHLB advances was incurred to improve the
Company’s net interest margin and allow short-term funding of anticipated growth
in the near term.
  Other
non-interest expense increased by $60,000 to $742,000 for the three months ended
March 31, 2009 as a result of higher travel costs, subscription costs, board
fees, and expenses related to operating as a public company.
 29
  BEACON
FEDERAL BANCORP, INC.
  Income Tax
Expense.The
provision for income taxes was $231,000 for the three months ended March 31,
2009, compared to $646,000 for the three months ended March 31, 2008. The
decrease was due to a lower level of pre-tax income and effective tax rate. Our
effective tax rate was 34.6% for the three months ended March 31, 2009 compared
to 40.1% for the three months ended March 31, 2008.
  30
 BEACON
FEDERAL BANCORP, INC.
  Average Balances and Yields.
The following tables set forth average balance sheets, average yields and rates,
and certain other information for the periods indicated. No tax-equivalent yield
adjustments were made, as the effect thereof was not material. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of net
deferred costs, discounts and premiums that are amortized or accreted to
interest income.
  For
      the Three Months Ended March 31,2009
                                                                    
                                                                    
                                                                    2008Average
                                                                      Outstanding
                                                                      Balance
                                                                    
                                                                    
                                                                    Interest
                                                                      Earned/Paid
                                                                    
                                                                    
                                                                    Yield
      /
                                                                      Rate
                                                                    
                                                                    
                                                                    Average
                                                                      Outstanding
                                                                      Balance
                                                                    
                                                                    
                                                                    Interest
                                                                      Earned/Paid
                                                                    
                                                                    
                                                                    Yield
      /
                                                                      Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
                                                                    
                                                                    $
                                                                    796,621
                                                                    
                                                                    
                                                                    $
                                                                    11,342
                                                                    
                                                                    
                                                                    
                                                                    5.77
                                                                    %
                                                                    
                                                                    $
                                                                    722,278
                                                                    
                                                                    
                                                                    $
                                                                    11,310
                                                                    
                                                                    
                                                                    
                                                                    6.29
                                                                    %Securities
                                                                    
                                                                    
                                                                    163,198
                                                                    
                                                                    
                                                                    
                                                                    2,355
                                                                    
                                                                    
                                                                    
                                                                    5.85
                                                                    
                                                                    
                                                                    
                                                                    146,643
                                                                    
                                                                    
                                                                    
                                                                    1,933
                                                                    
                                                                    
                                                                    
                                                                    5.29FHLB
      stock
                                                                    
                                                                    
                                                                    13,052
                                                                    
                                                                    
                                                                    
                                                                    99
                                                                    
                                                                    
                                                                    
                                                                    3.08
                                                                    
                                                                    
                                                                    
                                                                    12,211
                                                                    
                                                                    
                                                                    
                                                                    163
                                                                    
                                                                    
                                                                    
                                                                    5.36Interest-earning
      deposits
                                                                    
                                                                    
                                                                    20,873
                                                                    
                                                                    
                                                                    
                                                                    16
                                                                    
                                                                    
                                                                    
                                                                    0.31
                                                                    
                                                                    
                                                                    
                                                                    23,991
                                                                    
                                                                    
                                                                    
                                                                    230
                                                                    
                                                                    
                                                                    
                                                                    3.85Total
      interest-earning assets
                                                                    
                                                                    
                                                                    993,744
                                                                    
                                                                    
                                                                    
                                                                    13,812
                                                                    
                                                                    
                                                                    
                                                                    5.64
                                                                    
                                                                    
                                                                    
                                                                    905,123
                                                                    
                                                                    
                                                                    
                                                                    13,636
                                                                    
                                                                    
                                                                    
                                                                    6.05Non-interest-earning
      assets
                                                                    
                                                                    
                                                                    29,182
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    20,086Total
      assets
                                                                    
                                                                    $
                                                                    1,022,926
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    925,209Interest-bearing
      liabilities:Savings
                                                                    
                                                                    $
                                                                    56,755
                                                                    
                                                                    
                                                                    
                                                                    58
                                                                    
                                                                    
                                                                    
                                                                    0.41
                                                                    
                                                                    
                                                                    $
                                                                    58,789
                                                                    
                                                                    
                                                                    
                                                                    90
                                                                    
                                                                    
                                                                    
                                                                    0.61Money
      market accounts
                                                                    
                                                                    
                                                                    143,773
                                                                    
                                                                    
                                                                    
                                                                    906
                                                                    
                                                                    
                                                                    
                                                                    2.56
                                                                    
                                                                    
                                                                    
                                                                    125,673
                                                                    
                                                                    
                                                                    
                                                                    1,288
                                                                    
                                                                    
                                                                    
                                                                    4.11NOW
      accounts
                                                                    
                                                                    
                                                                    51,633
                                                                    
                                                                    
                                                                    
                                                                    222
                                                                    
                                                                    
                                                                    
                                                                    1.74
                                                                    
                                                                    
                                                                    
                                                                    40,747
                                                                    
                                                                    
                                                                    
                                                                    341
                                                                    
                                                                    
                                                                    
                                                                    3.36Time
      accounts
                                                                    
                                                                    
                                                                    349,541
                                                                    
                                                                    
                                                                    
                                                                    3,061
                                                                    
                                                                    
                                                                    
                                                                    3.55
                                                                    
                                                                    
                                                                    
                                                                    271,969
                                                                    
                                                                    
                                                                    
                                                                    3,272
                                                                    
                                                                    
                                                                    
                                                                    4.83Total
      deposits
                                                                    
                                                                    
                                                                    601,702
                                                                    
                                                                    
                                                                    
                                                                    4,247
                                                                    
                                                                    
                                                                    
                                                                    2.86
                                                                    
                                                                    
                                                                    
                                                                    497,178
                                                                    
                                                                    
                                                                    
                                                                    4,991
                                                                    
                                                                    
                                                                    
                                                                    4.03FHLB
      advances
                                                                    
                                                                    
                                                                    215,375
                                                                    
                                                                    
                                                                    
                                                                    2,294
                                                                    
                                                                    
                                                                    
                                                                    4.32
                                                                    
                                                                    
                                                                    
                                                                    249,064
                                                                    
                                                                    
                                                                    
                                                                    2,783
                                                                    
                                                                    
                                                                    
                                                                    4.48Reverse
      repurchase agreements
                                                                    
                                                                    
                                                                    70,000
                                                                    
                                                                    
                                                                    
                                                                    543
                                                                    
                                                                    
                                                                    
                                                                    3.15
                                                                    
                                                                    
                                                                    
                                                                    35,165
                                                                    
                                                                    
                                                                    
                                                                    287
                                                                    
                                                                    
                                                                    
                                                                    3.28Total
      interest-bearing liabilities
                                                                    
                                                                    
                                                                    887,077
                                                                    
                                                                    
                                                                    
                                                                    7,084
                                                                    
                                                                    
                                                                    
                                                                    3.24
                                                                    
                                                                    
                                                                    
                                                                    781,407
                                                                    
                                                                    
                                                                    
                                                                    8,061
                                                                    
                                                                    
                                                                    
                                                                    4.14Non-interest-bearing
      deposits
                                                                    
                                                                    
                                                                    30,617
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    25,860Other
      non-interest-bearing liabilities
                                                                    
                                                                    
                                                                    6,073
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    4,440Total
      liabilities
                                                                    
                                                                    
                                                                    923,767
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    811,707Stockholders’
      Equity
                                                                    
                                                                    
                                                                    99,159
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    113,502Total
      liabilities and equity
                                                                    
                                                                    $
                                                                    1,022,926
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    925,209Net
      interest income
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    6,728
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    5,575Net
      interest rate spread
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    2.40
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    1.91
                                                                    %Net
      interest-earning assets
                                                                    
                                                                    $
                                                                    106,667
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    $
                                                                    123,716Net
      interest margin
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    2.75
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    2.47
                                                                    %Average
      of interest-earning assets to interest-bearing liabilities
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    112.02
                                                                    %
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    115.83
                                                                    %
  31
  BEACON
FEDERAL BANCORP, INC.
  Liquidity
and Capital Resources
  Our
primary sources of funds consist of deposit inflows, loan repayments, advances
from the Federal Home Loan Bank of New York, and maturities and sales of
securities. In addition, we have the ability to collateralize borrowings in the
wholesale markets. 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 seek to maintain a liquidity ratio of 8.0% or
greater. For the three months ended March 31, 2009, our liquidity ratio averaged
13.1%. We believe that we have enough sources of liquidity to satisfy our short-
and long-term liquidity needs as of March 31, 2009. Excess liquid assets have
been invested generally in interest-earning deposits and short- and
intermediate-term securities.
  Our most
liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending and investing activities during
any given period. At March 31, 2009, cash and cash equivalents totaled $43.4
million. Securities classified as available-for-sale, which provide additional
sources of liquidity, totaled $134.3 million at March 31, 2009. On that date, we
had $208.6 million in advances outstanding and $1.7 million in limited recourse
obligations related to loans sold, with the ability to borrow an additional $2.5
million.
  The
Company is retaining higher levels of cash and cash equivalents due to the
limited borrowing capacity with the Federal Home Loan Bank of New York and for
funding short-term growth. The Company can utilize alternative sources of
financing, including brokered deposits. Our cash flows are derived from
operating activities, investing activities and financing activities as reported
in our Consolidated Statements of Cash Flows included in our Consolidated
Financial Statements.
  At March
31, 2009, we had $53.1 million in loan commitments outstanding. In addition to
commitments to originate loans, we had $59.9 million in unused lines of credit
to borrowers. Certificates of deposit due within one year of March 31, 2009
totaled $255.9 million, or 39.0% of total deposits. If these deposits do not
remain with us, we will be required to seek other sources of funds, including
loan and security sales, brokered deposits and Federal Home Loan Bank advances.
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 March 31, 2009. We believe, however, based on past
experience that a significant portion of such deposits will remain with us. We
have the ability to attract and retain deposits by adjusting the interest rates
offered.
  Our
primary investing activity is originating loans. During the three months ended
March 31, 2009, we originated $103.7 million of loans, and during the three
months ended March 31, 2008, we originated $68.5 million of loans. We purchased
$6.0 million of securities during the three months ended March 31, 2009,
compared to $59.2 million for the three months ended March 31,
2008.
  Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances. We experienced a net increase in total deposits of $30.4
million for the three months ended March 31, 2009 and a net increase in total
deposits and securities sold under agreement to repurchase of $25.8 million and
$20.0 million, respectively, for the three months ended March 31, 2008. Deposit
flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors, and by other
factors.
 32
  BEACON
FEDERAL BANCORP, INC.
  If we
require funds beyond our ability to generate them internally, borrowing
agreements exist with the Federal Home Loan Bank of New York, which provide an
additional source of funds. Federal Home Loan Bank advances decreased by $10.0
million for the three months ended March 31, 2009, compared to an increase of
$22.2 million for the three months ended March 31, 2008. Federal Home Loan Bank
advances have primarily been used to fund loan demand. At March 31, 2009, we had
the ability to borrow up to $212.8 million from the Federal Home Loan Bank of
New York.
  Banks are
subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators. Failure to meet capital requirements can initiate regulatory action.
At March 31, 2009 the Bank met all capital adequacy requirements.
  Prompt
corrective action regulations provide five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition. If an institution is only adequately capitalized,
regulatory approval is required to accept brokered deposits. If an institution
is undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At March 31, 2009 and
December 31, 2008, the most recent regulatory notification categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution’s category.
  Actual
and required capital amounts and ratios for the Bank are presented
below:
 Actual
                          
                          For
      Capital
                            Adequacy
      Purposes
                          
                          To
      Be Well
                            Capitalized
      Under
                            Prompt
      Corrective
                            Action
      ProvisionsMarch
      31, 2009 (Dollars in Thousands)
                          
                          Amount
                          
                          Ratio
                          
                          Amount
                          
                          Ratio
                          
                          Amount
                          
                          RatioEquity
                          
                          $
                          77,504Unrealized
      loss on securities as a result of cumulative effect
    adjustment
                          
                          
                          1,866Unrealized
      loss on AFS securities
                          
                          
                          8,280Tier
      1 (Core) Capital and Tangible Capital
                          
                          
                          87,650
                          
                          8.29
                          %
                          $
                          15,853
                          1.50
                          %General
      valuation allowance 1)
                          
                          
                          9,542Deduction
      for low-level recourse
                          
                          
                          (1,664
                          )Total
      Capital to risk-weighted assets
                          
                          $
                          95,528
                          
                          12.32
                          %
                          $
                          62,053
                          8.00
                          %
                          $
                          77,566
                          10.00
                          %Tier
      1 (Core) Capital to risk-weighted assets
                          
                          $
                          85,986
                          
                          11.09
                          %
                          $
                          31,027
                          4.00
                          %
                          $
                          46,540
                          6.00
                          %Tier
      1 (Core) Capital to adjusted total assets
                          
                          $
                          87,650
                          
                          8.29
                          %
                          $
                          42,275
                          4.00
                          %
                          $
                          52,844
                          5.00
                          %
  1)
Limited to 1.25% of risk-weighted assets.
 33
  BEACON
FEDERAL BANCORP, INC.
 Actual
                                
                                For
      Capital
                                  Adequacy
      Purposes
                                
                                To
      Be Well
                                  Capitalized
      Under
                                  Prompt
      Corrective
                                  Action
      ProvisionsDecember
      31, 2008 (Dollars in Thousands)
                                
                                Amount
                                
                                Ratio
                                
                                Amount
                                
                                Ratio
                                
                                Amount
                                
                                RatioEquity
                                
                                $
                                76,634Unrealized
      loss on AFS securities
                                
                                
                                8,251Tier
      1 (Core) Capital and Tangible Capital
                                
                                
                                84,885
                                
                                8.20
                                %
                                $
                                15,528
                                1.50
                                %General
      valuation allowance 1)
                                
                                
                                9,018Deduction
      for low-level recourse
                                
                                
                                (1,507
                                )Total
      Capital to risk-weighted assets
                                
                                $
                                92,396
                                
                                12.81
                                %
                                $
                                57,712
                                8.00
                                %
                                $
                                72,140
                                10.00
                                %Tier
      1 (Core) Capital to risk-weighted assets
                                
                                $
                                83,378
                                
                                11.56
                                %
                                $
                                28,856
                                4.00
                                %
                                $
                                43,284
                                6.00
                                %Tier
      1 (Core) Capital to adjusted total assets
                                
                                $
                                84,885
                                
                                8.20
                                %
                                $
                                41,407
                                4.00
                                %
                                $
                                51,579
                                5.00
                                %
  1)
Limited to 1.25% of risk-weighted assets.
 34
  BEACON
FEDERAL BANCORP, INC.
  Asset
Quality
  Classification of
Assets.We
regularly review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of our
review of our assets at March 31, 2009, classified assets consisted of
substandard assets of $10.8 million and doubtful assets of $3.4 million.
Substandard assets and doubtful assets were $6.4 million and $700,000,
respectively, at December 31, 2008.
  As of
March 31, 2009, we had $17.3 million of assets designated as special mention,
compared to $19.8 million at December 31, 2008. As of March 31, 2009, our
largest borrower under the substandard asset category had loans secured by
multi-family properties located in Gardner, Lowell and Chelmsford,
Massachusetts, with a principal balance of $2.3 million. As of March 31, 2009,
our largest doubtful loan was secured by a first lien on commercial property
located in Upstate New York, with a principal balance of $1.9
million.
  Off-Balance
Sheet Arrangements
  Commitments.As a financial services
provider, we routinely are a party to various financial instruments with
off-balance-sheet risks, such as commitments to extend credit and unused lines
of credit. While these contractual obligations represent our future cash
requirements, a significant portion of commitments to extend credit may expire
without being drawn upon. Such commitments are subject to the same credit
policies and approval process accorded to loans we make.
  The
contractual amount of financial instruments with off-balance-sheet risk was as
follows:
 March
      31, 2009
                                  
                                  
                                  December
      31, 2008Fixed
                                    Rate
                                  
                                  
                                  Variable
                                    Rate
                                  
                                  
                                  Fixed
                                    Rate
                                  
                                  
                                  Variable
                                    Rate(Dollars
      in Thousands)Commitments
      to make loans
                                  
                                  $
                                  42,128
                                  
                                  
                                  $
                                  11,016
                                  
                                  
                                  $
                                  20,090
                                  
                                  
                                  $
                                  7,829Unused
      lines of credit
                                  
                                  $
                                  5,937
                                  
                                  
                                  $
                                  53,935
                                  
                                  
                                  $
                                  6,296
                                  
                                  
                                  $
                                  55,773Range
      of fixed-rate commitments
                                  
                                  
                                  3.25%-15.00
                                  %
                                  
                                  
                                  —
                                  
                                  
                                  
                                  4.49%-15.00
                                  %
                                  
                                  
                                  —
  The
following instruments are considered financial guarantees under FASB
Interpretation 45. These instruments are carried at fair value. The contract
amount and fair value of these instruments were as follows:
 March
      31, 2009
                          
                          
                          December
      31, 2008Contract
                            Amount
                          
                          
                          Fair
                            Value
                          
                          
                          Contract
                            Amount
                          
                          
                          Fair
                            Value(Dollars
      in Thousands)Standby
      letters of credit
                          
                          $
                          1,032
                          
                          
                          $
                          —
                          
                          
                          $
                          882
                          
                          
                          $
                          —Limited
      recourse obligations related to loans sold
                          
                          $
                          1,664
                          
                          
                          $
                          —
                          
                          
                          $
                          1,507
                          
                          
                          $
                          —
  Loans
sold to the Federal Home Loan Bank (FHLB) of New York under the Mortgage
Partnership Finance program are sold with recourse. The Bank has agreements to
sell residential loans up to $60.0 million to the FHLB of New York.
Approximately $48.6 million has been sold through March 31, 2009. Under the
agreement, the Bank has a maximum credit enhancement of $1.7 million at March
31, 2009. Based upon a favorable payment history, the Bank does not anticipate
recognizing any losses on these residential loans, and accordingly, has not
recorded a liability for the credit enhancement.
 35
  BEACON
FEDERAL BANCORP, INC.
  Recent
Accounting Pronouncements
  The
following paragraphs summarize recent accounting pronouncements:
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements- an amendment of ARB No. 51.” SFAS No. 160
improves the relevance, comparability, and transparency of the financial
information that an entity provides in its consolidated financial statements by
establishing accounting and reporting standards for a noncontrolling interest or
minority interest, the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (R), “Business
Combinations.” SFAS No. 141 (R) improves the relevance, representational
faithfulness, and comparability of the financial information that an entity
provides in its financial reports regarding business combinations and its
effects.
  SFAS No.
160 and SFAS No. 141 (R) are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2008. SFAS No. 160 and
SFAS No. 141 (R) were adopted January 1, 2009 and did not have a material impact
on the Company’s financial position or results of operation. At March 31, 2009,
the Company did not have a noncontrolling interest.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161
requires enhanced disclosures about an entity’s derivative and hedging
activities and improves the transparency of financial reporting. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with earlier application encouraged. SFAS No.
161 was adopted January 1, 2009 and did not have a material impact on the
Company’s financial position or results of operation.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in
preparation of financial statements that are presented in conformity with U.S.
generally accepted accounting principles. SFAS No. 162 is effective 60 days
following the SEC’s approval of the PCAOB amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.”
  In
February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,
“Effective Date of FASB Statement No. 157.” The Bank adopted this FSP for
non-financial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements, effective January 1, 2009. The FSP did
not have a material impact on the Company’s financial condition or results of
operation.
  In April
2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” FSP SFAS No. 157-4
provides factors to determine whether there has been a significant decrease in
the volume and level of activity for the asset or liability and circumstances
that may indicate that a transaction is not orderly. In those instances,
adjustments to the transactions or quoted prices may be necessary to estimate
fair value with SFAS No. 157. This FSP does not apply to Level 1 inputs. FSP
SFAS No. 157 also requires additional disclosures, including inputs and
valuation techniques used, and changes thereof, to measure the fair value. FSP
SFAS No. 157-4 is effective for interim and annual reporting periods ending
after June 15, 2009. Early adoption is permitted for periods ending after March
15, 2009. This FSP amends SFAS No. 157 and supersedes FSP SFAS No. 157-3. FSP
SFAS No. 157-4 was early adopted, effective March 31, 2009, and did not have a
material impact on the Company’s financial position or results of
operation.
 36
  BEACON
FEDERAL BANCORP, INC.
  In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments.” FSP SFAS No. 115-2 and SFAS
No. 124-2 applies to debt securities classified as available-for-sale and
held-to-maturity and makes other-than-temporary impairment guidance more
operational and improves related presentation and disclosure requirements. This
FSP requires that impairment losses related to credit losses will be included in
earnings. Impairments related to other factors will be included in other
comprehensive income, when management asserts it does not have the intent to
sell the security and it is not more likely than not that it will have to sell
the security before its recovery.
  For debt
securities held at the beginning of the interim period of adoption for which an
other-than-temporary impairment was previously recognized, if the entity does
not intend to sell and it is not more likely than not that it will be required
to sell the security before recovery of its amortized cost basis, the entity
will recognize the cumulative-effect adjustment, including related tax effects,
to the beginning balance of retained earnings and corresponding adjustment to
accumulated other comprehensive income. FSP SFAS No. 115-2 and SFAS No. 124-2 is
effective for interim and annual periods ending after June 15, 2009. This FSP
amends SFAS No. 115 and other related guidance. Early adoption is permitted for
periods ending after March 15, 2009. FSP SFAS No. 115-2 and SFAS No. 124-2 was
early adopted, effective March 31, 2009.
  A
cumulative effect adjustment of $1.9 million was recognized to retained earnings
with the offset to other comprehensive loss. The initial adoption of this FSP
had no impact on stockholders’ equity, but increased regulatory capital by $1.9
million. During the three months ended March 31, 2009, the Company recognized a
$424,000 other-than-temporary impairment charge in income related to credit
losses on one collateralized mortgage obligation and one trust preferred
security.
  In April
2009, the FASB issued FSP SFAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments.” This FSP requires public entities to
disclose the fair values of financial instruments for interim reporting periods.
FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim reporting periods
after June 15, 2009. This FSP may be early adopted if FSP SFAS No. 157-4 and FSP
SFAS No. 115-2 and SFAS No. 124-2 are early adopted. The Company will adopt this
FSP as of June 30, 2009.
  In April
2009, the FASB issued FSP SFAS No. 141 (R)-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This FSP amends and clarifies application issues regarding the
initial recognition, measurement, accounting and disclosure of assets and
liabilities arising from contingencies in a business combination. FSP SFAS No.
141 (R)-1 is effective for business combinations that occur during the first
annual reporting period beginning after December 15, 2008. FSP SFAS No. 141
(R)-1 was adopted January 1, 2009 and did not have a material impact on the
Company’s financial position or results of operation.
 37
  BEACON
FEDERAL BANCORP, INC.
  ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Not
required for smaller reporting companies. See the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 for discussion of interest rate
risk at December 31, 2008.
  ITEM
4T. CONTROLS AND PROCEDURES.
  As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of the Company’s disclosures and procedures. Based on this
evaluation, the Company’s principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
  In
addition, there have been no changes in the Company’s internal control over
financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
 38
  BEACON
FEDERAL BANCORP, INC.
  PART
II - OTHER INFORMATION
  Item
1 - Legal Proceedings.
  There are
no material legal proceedings to which the Company is a party or of which any of
its property is subject. From time to time, the Company is a party to various
legal proceedings incident to its business.
  Item
1A – Risk Factors
  Not
required for smaller reporting companies. See the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 for discussion of risk factors at
December 31, 2008.
  Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds.
  The
following table provides information regarding the Company’s purchases of its
equity securities during the three months ended March 31, 2009:
 ISSUER
      PURCHASES OF EQUITY SECURITIESPeriod
                  
                  (a)
                    Total
      Number
                    of
      Shares
                    (or
      Units)
                    Purchased
                  
                  (b)
                    Average
      Price
                    Paid
      per
                    Share
                    (or
      Unit)
                  
                  (c)
                    Total
      Number of
                    Shares
      (or Units)
                    Purchased
      as
                    Part
      of Publicly
                    Announced
      Plans
                    or
      Programs
                  
                  (d)
                    Maximum
      Number
                    (or
      Approximate
                    Dollar
      Value) of
                    Shares
      (or Units)
                    That
      May Yet Be
                    Purchased
      Under the
                    Plans
      or Programs)January
      1, 2009 throughJanuary
      31, 2009
                  
                  
                  —
                  
                  $
                  —
                  
                  
                  —
                  
                  
                  383,116February
      1, 2009 throughFebruary
      28, 2009
                  
                  
                  132,113
                  
                  $
                  7.98
                  
                  
                  132,113
                  
                  
                  251,003March
      1, 2009 throughMarch
      31, 2009
                  
                  
                  251,003
                  
                  $
                  8.01
                  
                  
                  251,003
                  
                  
                  363,963Total
                  
                  
                  383,116
                  
                  $
                  8.00
                  
                  
                  383,116
  On March
30, 2009, the Board of Directors authorized the Company’s second stock
repurchase program of 363,963 shares. The second repurchase program was
completed on April 13, 2009, which brings the total shares repurchased to
747,079.
 39
  BEACON
FEDERAL BANCORP, INC.
  PART
II - OTHER INFORMATION (continued)
  Item
3 - Defaults upon Senior Securities.
  Not
applicable.
  Item
4 - Submission of Matters to a Vote of Security Holders.
  Not
applicable.
  Item
5 - Other Information.
  None
  Item
6 – Exhibits.
  (a)
Exhibits.
 3.1
                                                                                    
                                                                                    Articles
      of Incorporation of Beacon Federal Bancorp, Inc. (1)3.2
                                                                                    
                                                                                    Bylaws
      of Beacon Federal Bancorp, Inc. (1)4.0
                                                                                    
                                                                                    Form
      of Common Stock Certificate of Beacon Federal Bancorp, Inc. (1)10.1
                                                                                    
                                                                                    Form
      of Employee Stock Ownership Plan (1)10.2
                                                                                    
                                                                                    Employment
      Agreement with Ross J. Prossner (2)10.3
                                                                                    
                                                                                    Employment
      Agreement with J. David Hammond (2)10.4
                                                                                    
                                                                                    Employment
      Agreement with Darren T. Crossett (2)10.5
                                                                                    
                                                                                    Employment
      Agreement with Randy Wiley (4)10.6
                                                                                    
                                                                                    Form
      of Change in Control Agreement (2)10.7
                                                                                    
                                                                                    Beacon
      Federal Excess Benefit Plan (3)10.8
                                                                                    
                                                                                    Beacon
      Federal Annual Cash Incentive Plan (1)10.9
                                                                                    
                                                                                    Beacon
      Federal Supplemental Executive Retirement Plan (5)10.10
                                                                                    
                                                                                    Beacon
      Federal 2008 Equity Incentive Plan (6)21.0
                                                                                    
                                                                                    Subsidiaries
      of Registrant (1)31.1
                                                                                    
                                                                                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                                                                                    
                                                                                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.0
                                                                                    
                                                                                    Statement
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002
 
 (1)
                              Incorporated
      by reference to the Registration Statement on Form S-1 of Beacon Federal
      Bancorp, Inc. (File No. 333-143522), originally filed with the Securities
      and Exchange Commission on June 5, 2007.(2)
                              Field
      with the Securities and Exchange Commission on October 4, 2007 on Form
      8K.(3)
                              Filed
      with the Securities and Exchange Commission on October 31, 2008 on Form
      8K.(4)
                              Filed
      with the Securities and Exchange Commission on July 3, 2008 on Form
      8K.(5)
                              Filed
      with the Securities and Exchange Commission on December 28,
      2007.(6)
                              Incorporated
      by reference to Appendix A of the Company’s Definitive Proxy Statement for
      the Special Meeting of Stockholders (File No. 001-33713), as filed with
      the Securities and Exchange Commission on October 9,
  2008.
  40
  BEACON
FEDERAL BANCORP, INC.
  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.
 BEACON
      FEDERAL BANCORP, INC.(Registrant)DATE:
      May 12,
    2009
                        
                        BY:
                        Ross
      J. ProssnerRoss
      J. Prossner, President and Chief Executive OfficerBY:
                        Lisa
      M. JonesLisa
      M. Jones, Vice-President and Principal Financial andAccounting
      Officer
  41