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
      1934
 
 For the
quarterly period ended September 30,
2008
 
 OR
 
 o
              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 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 checkmark 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 November 13,
    2008Common
      Stock, par value $0.01 per share
              7,396,431
  
  BEACON
FEDERAL BANCORP, INC.
 FORM
10-Q
 
 FOR THE
QUARTER ENDED SEPTEMBER 30, 2008
 
 INDEX
 
 PAGE
      NO.PART
      I -
              Financial
      Information.
              3Item
      1.
              Financial
      Statements.
              3Consolidated
      Balance Sheets
              3Consolidated
      Statements of Operations
              4Consolidated
      Statements of Comprehensive Income (Loss)
              5Consolidated
      Statements of Cash Flows
              6Notes
      to Consolidated Financial Statements
              8Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
              13Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk.
              32Item
      4T.
              Controls
      and Procedures.
              33PART
      II -
              Other
      Information.
              34Item
      1.
              Legal
      Proceedings.
              34Item
      1A.
              Risk
      Factors
              34Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds.
              34Item
      3.
              Defaults
      Upon Senior Securities.
              34Item
      4.
              Submission
      of Matters to a Vote of Security Holders.
              34Item
      5.
              Other
      Information.
              34Item
      6.
              Exhibits.
              34Signatures
              36Certifications
              37
  2
  BEACON
FEDERAL BANCORP, INC.
 PART
1.  FINANCIAL INFORMATION - ITEM 1.  FINANCIAL
STATEMENTS
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands)
  September
      30,
                
                
                December
      31,ASSETS
                
                2008
                
                
                2007(Unaudited)Cash
      and due from financial institutions
                
                $
                18,947
                
                
                $
                5,448Federal
      funds sold
                
                
                -
                
                
                
                8,700Cash
      and cash equivalents
                
                
                18,947
                
                
                
                14,148Interest-bearing
      deposits in other financial institutions
                
                
                535
                
                
                
                1,636Securities
      held to maturity (fair value of $22,949 and $29,032,
      respectively)
                
                
                24,009
                
                
                
                29,488Securities
      available for sale
                
                
                161,431
                
                
                
                92,859Loans
      held for sale
                
                
                1,900
                
                
                
                696Loans,
      net of allowance for loan losses of $10,326 and $6,827,
      respectively
                
                
                762,093
                
                
                
                708,993Federal
      Home Loan Bank of New York stock
                
                
                13,621
                
                
                
                11,117Premises
      and equipment, net
                
                
                3,502
                
                
                
                3,502Accrued
      interest receivable
                
                
                3,999
                
                
                
                3,439Foreclosed
      and repossessed assets
                
                
                139
                
                
                
                319Bank-owned
      life insurance
                
                
                10,315
                
                
                
                10,002Other
      assets
                
                
                7,834
                
                
                
                1,791Total
      assets
                
                $
                1,008,325
                
                
                $
                877,990LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits
                
                $
                591,410
                
                
                $
                514,488Federal
      Home Loan Bank advances
                
                
                241,814
                
                
                
                226,815Securities
      sold under agreement to repurchase
                
                
                70,000
                
                
                
                20,000Accrued
      interest payable and other liabilities
                
                
                4,484
                
                
                
                3,513Total
      liabilities
                
                
                907,708
                
                
                
                764,816Commitments
      and contingenciesPreferred
      stock, $.01 par value, 50,000,000 shares authorized;none
      issued or outstandingCommon
      stock, $.01 par value, 100,000,000 sharesauthorized;
      7,396,431 shares issued and outstanding
                
                
                74
                
                
                
                74Additional
      paid-in capital
                
                
                72,091
                
                
                
                72,080Retained
      earnings-substantially restricted
                
                
                39,477
                
                
                
                46,673Unearned
      Employee Stock Ownership Plan (ESOP) shares
                
                
                (4,882
                )
                
                
                (5,325
                )Accumulated
      other comprehensive loss, net of tax benefit of $4,095 and $221,
      respectively
                
                
                (6,143
                )
                
                
                (328
                )Total
      stockholders' equity
                
                
                100,617
                
                
                
                113,174Total
      liabilities and stockholders' equity
                
                $
                1,008,325
                
                
                $
                877,990See
      accompanying notes to consolidated financial statements.
   3
  BEACON
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Dollars
in thousands)
 
  Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Interest
      and dividend income:
                
                (Unaudited)
                
                
                (Unaudited)Loans,
      including fees
                
                $
                11,610
                
                
                $
                10,031
                
                
                $
                34,330
                
                
                $
                27,734Securities
                
                
                2,653
                
                
                
                1,008
                
                
                
                6,797
                
                
                
                2,150FHLB
      stock
                
                
                211
                
                
                
                160
                
                
                
                611
                
                
                
                328Federal
      funds sold and other
                
                
                37
                
                
                
                148
                
                
                
                342
                
                
                
                412Total
      interest income
                
                
                14,511
                
                
                
                11,347
                
                
                
                42,080
                
                
                
                30,624Interest
      expense:Deposits
                
                
                4,525
                
                
                
                5,446
                
                
                
                14,181
                
                
                
                15,646FHLB
      advances
                
                
                2,771
                
                
                
                1,943
                
                
                
                8,336
                
                
                
                3,729Securities
      sold under agreement to repurchase
                
                
                410
                
                
                
                26
                
                
                
                985
                
                
                
                284Total
      interest expense
                
                
                7,706
                
                
                
                7,415
                
                
                
                23,502
                
                
                
                19,659Net
      interest income
                
                
                6,805
                
                
                
                3,932
                
                
                
                18,578
                
                
                
                10,965Provision
      for loan losses
                
                
                3,427
                
                
                
                737
                
                
                
                5,857
                
                
                
                1,394Net
      interest income after provisionfor
      loan losses
                
                
                3,378
                
                
                
                3,195
                
                
                
                12,721
                
                
                
                9,571Noninterest
      income:Service
      charges
                
                
                761
                
                
                
                647
                
                
                
                2,111
                
                
                
                1,837Commission
      and fee income
                
                
                306
                
                
                
                92
                
                
                
                573
                
                
                
                349Change
      in cash surrender value of BOLI
                
                
                81
                
                
                
                -
                
                
                
                313
                
                
                
                -Gain
      on sale of loans
                
                
                -
                
                
                
                -
                
                
                
                98
                
                
                
                -Gain
      on sale of securities available for sale
                
                
                -
                
                
                
                -
                
                
                
                129
                
                
                
                -Other
                
                
                74
                
                
                
                125
                
                
                
                242
                
                
                
                220Total
      noninterest income
                
                
                1,222
                
                
                
                864
                
                
                
                3,466
                
                
                
                2,406Noninterest
      expense:Salaries
      and employee benefits
                
                
                2,139
                
                
                
                1,560
                
                
                
                6,372
                
                
                
                4,958Occupancy
      and equipment
                
                
                336
                
                
                
                310
                
                
                
                983
                
                
                
                908Advertising
      and marketing
                
                
                97
                
                
                
                57
                
                
                
                308
                
                
                
                226Telephone,
      delivery and postage
                
                
                229
                
                
                
                108
                
                
                
                609
                
                
                
                355Supplies
                
                
                80
                
                
                
                70
                
                
                
                194
                
                
                
                300Audit
      and examination
                
                
                176
                
                
                
                79
                
                
                
                470
                
                
                
                220FDIC
      premium expense
                
                
                94
                
                
                
                94
                
                
                
                286
                
                
                
                275Provision
      for loss on foreclosed assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                110Impairment
      writedown on securities
                
                
                9,967
                
                
                
                -
                
                
                
                10,768
                
                
                
                -Provision
      for loss on premises
                
                
                -
                
                
                
                218
                
                
                
                -
                
                
                
                218Other
                
                
                743
                
                
                
                559
                
                
                
                2,331
                
                
                
                1,570Total
      noninterest expense
                
                
                13,861
                
                
                
                3,055
                
                
                
                22,321
                
                
                
                9,140Income
      (loss) before income taxes
                
                
                (9,261
                )
                
                
                1,004
                
                
                
                (6,134
                )
                
                
                2,837Income
      tax expense (benefit)
                
                
                (817
                )
                
                
                399
                
                
                
                513
                
                
                
                1,097Net
      income (loss)
                
                $
                (8,444
                )
                
                $
                605
                
                
                $
                (6,647
                )
                
                $
                1,740Basic
      and diluted earnings (loss) per share
                
                $
                (1.22
                )
                
                $
                N/A
                
                
                $
                (0.97
                )
                
                $
                N/AN/A  Not
      applicable.See
      accompanying notes to consolidated financial
  statements.
  4
  BEACON
FEDERAL BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Dollars
in thousands)
 
 Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007(Unaudited)
                
                
                (Unaudited)Net
      income (loss)
                
                $
                (8,444
                )
                
                $
                605
                
                
                $
                (6,647
                )
                
                $
                1,740Other
      comprehensive income (loss):Reclass
      for gain on sale of securities,net
      of tax of $52
                
                
                -
                
                
                
                -
                
                
                
                (77
                )
                
                
                -Reclass
      for impairment writedown onsecurities,
      net of tax benefit of$1,839
      and $1,839, respectively
                
                
                8,128
                
                
                
                -
                
                
                
                8,929
                
                
                
                -Unrealized
      gains (losses) on securitiesarising
      during the period, net of taxbenefit
      of $2,179, $108, $5,661 and$159,
      respectively
                
                
                (8,635
                )
                
                
                (163
                )
                
                
                (14,667
                )
                
                
                (239
                )Comprehensive
      income (loss)
                
                $
                (8,951
                )
                
                $
                442
                
                
                $
                (12,462
                )
                
                $
                1,501See
      accompanying notes to consolidated financial statements.
 
 
 
 5
  BEACON
FEDERAL BANCORP, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in thousands)
 
 Nine
      Months EndedSeptember
      30,2008
                
                
                2007Cash
      flows from operating activities:
                
                (Unaudited)Net
      income (loss)
                
                $
                (6,647
                )
                
                $
                1,740Adjustments
      to reconcile net income (loss) to netcash
      provided by (used for) operating activities:Provision
      for loan losses
                
                
                5,857
                
                
                
                1,394Provision
      for loss on foreclosed assets
                
                
                -
                
                
                
                110Provision
      for loss on premises
                
                
                -
                
                
                
                218Depreciation
      and amortization
                
                
                361
                
                
                
                326ESOP
      expense
                
                
                454
                
                
                
                -Amortization
      of net deferred loan costs
                
                
                1,161
                
                
                
                624Net
      amortization of premiums and discounts on securities
                
                
                15
                
                
                
                17Gain
      on sale of loans
                
                
                (98
                )
                
                
                -Originations
      of loans held for sale
                
                
                (25,965
                )
                
                
                -Proceeds
      from loans held for sale
                
                
                24,859
                
                
                
                -Gain
      on sale of securities available for sale
                
                
                (129
                )
                
                
                -Impairment
      writedown on securities
                
                
                10,768
                
                
                
                -Increase
      in cash surrender value of BOLI
                
                
                (313
                )
                
                
                -Net
      change in:Accrued
      interest receivable
                
                
                (560
                )
                
                
                (757
                )Other
      assets
                
                
                (2,169
                )
                
                
                (6,556
                )Accrued
      interest payable and other liabilities
                
                
                971
                
                
                
                117Net
      cash provided by (used for) operating activities
                
                
                8,565
                
                
                
                (2,767
                )Cash
      flows from investing activities:Purchase
      of FHLB stock
                
                
                (5,723
                )
                
                
                (8,776
                )Redemption
      of FHLB stock
                
                
                3,219
                
                
                
                3,069Maturities
      of interest-bearing deposits in other financialinstitutions
                
                
                1,101
                
                
                
                499Securities
      held to maturity:Maturities,
      prepayments and calls
                
                
                5,428
                
                
                
                5,388Securities
      available for sale:Purchases
                
                
                (122,236
                )
                
                
                (56,704
                )Proceeds
      from maturity or call
                
                
                33,243
                
                
                
                492Proceeds
      from sale
                
                
                129
                
                
                
                -Loan
      originations and payments, net
                
                
                (60,136
                )
                
                
                (131,490
                )Purchase
      of premises and equipment
                
                
                (361
                )
                
                
                (575
                )Proceeds
      from sale of foreclosed and repossessed assets, net
                
                
                198
                
                
                
                -Net
      cash used for investing activities
                
                $
                (145,138
                )
                
                $
                (188,097
                )
 Continued
on following page
 6
  BEACON
FEDERAL BANCORP, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Dollars
in thousands)
  Continued
  Nine
      Months EndedSeptember
      30,2008
                
                
                2007Cash
      flows from financing activities:
                
                (Unaudited)Net
      change in deposits
                
                $
                76,922
                
                
                $
                117,307Proceeds
      from FHLB advances
                
                
                291,749
                
                
                
                981,593Repayment
      of FHLB advances
                
                
                (276,750
                )
                
                
                (857,875
                )Proceeds
      from securities sold under agreement to repurchase
                
                
                50,000
                
                
                
                -Repayment
      of securities sold under agreement to repurchase
                
                
                -
                
                
                
                (15,227
                )Cash
      dividends
                
                
                (549
                )
                
                
                -Net
      cash provided by financing activities
                
                
                141,372
                
                
                
                225,798Net
      change in cash and cash equivalents
                
                
                4,799
                
                
                
                34,934Cash
      and cash equivalents at beginning of period
                
                
                14,148
                
                
                
                8,799Cash
      and cash equivalents at end of period
                
                $
                18,947
                
                
                $
                43,733Supplemental
      cash flow information:Interest
      paid
                
                $
                23,418
                
                
                $
                18,950Income
      taxes paid
                
                
                2,183
                
                
                
                1,312Real
      estate and repossessions acquired in settlement of loans
                
                $
                413
                
                
                $
                465Loans
      originated to finance the sale of foreclosed assets
                
                $
                395
                
                
                $
                997See
      accompanying notes to consolidated financial statements.
  7
  BEACON
FEDERAL BANCORP, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands)
 
 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 and nine months
ended September 30, 2008 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 completed its conversion from a mutual
savings association to a capital stock savings association (the “Bank”). 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 $2.0 million and excluding $5.9 million which was loaned by
the Company to a trust for the Employee Stock Ownership Plan (the “ESOP”),
enabling the ESOP to purchase 591,714 shares of common stock in the offering for
the benefit of the Bank’s employees.  Shares of the Company’s common
stock purchased by the ESOP are held in a suspense account until released for
allocation to participants.  Shares released are allocated to each
eligible participant based on the ratio of each such participant’s compensation,
as defined in the ESOP, to the total compensation of all eligible plan
participants.  As the unearned shares are released from suspense, the
Company recognizes compensation expense equal to the fair value of the ESOP
shares committed to be released during the period.  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 equity as additional paid-in
capital.
 
 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 new holding
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 (LOSS) PER SHARE
 
 Earnings
(loss) per share are based upon the weighted-average shares
outstanding.  ESOP shares, which have been committed to be released,
are considered outstanding.
 
 Loss per
share for the three months ended September 30, 2008 was based upon a net loss of
$8.4 million and weighted-average shares outstanding of 7,396,000 less ESOP
shares not yet committed to be released of 495,000, or 6,901,000.
 
 Loss per
share for the nine months ended September 30, 2008 was based upon a net loss of
$6.6 million and weighted-average shares outstanding of 7,396,000 less ESOP
shares not yet committed to be released of 510,000, or
6,886,000.  Earnings per share are not applicable for periods prior to
the conversion date of October 1, 2007.
 
 NOTE
4 – UNREALIZED LOSSES ON SECURITIES
 
 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
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                UnrealizedSeptember
      30, 2008
                
                Value
                
                
                loss
                
                
                Value
                
                
                loss
                
                
                Value
                
                
                lossPooled
      trust preferredsecurities
                
                $
                5,209
                
                
                $
                (6,881
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                5,209
                
                
                $
                (6,881
                )Mortgage-backed
      securities
                
                
                42,646
                
                
                
                (424
                )
                
                
                2,618
                
                
                
                (40
                )
                
                
                45,264
                
                
                
                (464
                )Collateralized
      mortgageobligations
                
                
                52,708
                
                
                
                (2,468
                )
                
                
                10,455
                
                
                
                (2,155
                )
                
                
                63,163
                
                
                
                (4,623
                )$
                100,563
                
                
                $
                (9,773
                )
                
                $
                13,073
                
                
                $
                (2,195
                )
                
                $
                113,636
                
                
                $
                (11,968
                )
  For all
of the above securities, the unrealized losses are primarily due to changes in
market interest rates and not credit quality of the issuers and, as such, are
considered to be temporary by the Company.   In addition,
management of the Company has the intent and ability to hold these securities
until market recovery or maturity and believes that the fair value of these
securities will recover in the future.
 
 NOTE
5 – IMPAIRMENT WRITEDOWN ON SECURITIES
 
 During
each quarter of 2008, the Company determined that an impairment writedown was
required on certain securities in accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” and SEC Staff Accounting
Bulletin No. 59, “Accounting for Non-current Marketable
Securities.”  The Company’s assessment considered the duration and
severity of the unrealized losses, the financial condition and near term
prospects of the issuer, and the ability to recover its initial cost basis
within a reasonable period of time.  Based on these factors, the
Company recorded an impairment charge of $528 on its FNMA perpetual preferred
stock during the quarter ended March 31, 2008.  During the three
months ended June 30, 2008 and three months ended September 30, 2008, impairment
charges of $273 and $5.4 million, respectively, were recorded on the FNMA and
FHLMC perpetual preferred stock.  At September 30, 2008, the cost
basis of the FNMA and FHLMC perpetual preferred stock was $493.
  9
  BEACON
FEDERAL BANCORP, INC.
 The
impairment charge on the Freddie Mac and Fannie Mae perpetual preferred stock
for the quarter ended September 30, 2008 resulted from the significant decline
in the value of the securities following the announcement by the Federal Housing
Finance Agency (“the FHFA”) that both government sponsored enterprises have been
placed under conservatorship.  Additionally, the FHFA eliminated the
payment of dividends on common stock and preferred stock and assumed the powers
of the Board and management of Freddie Mac and Fannie Mae.  Management
of the Company has determined the impairment to be other-than-temporary based
upon the duration and extent to which the market value has been less than cost,
the inability to forecast a recovery in market value and other factors
concerning the issuers of the securities.
 
 In
addition, the Company recorded an aggregate impairment charge of $4.6 million on
a collateralized mortgage obligation and two trust preferred
securities.  The collateralized mortgage obligation was rated “A” by
Moody’s at September 30, 2008.  The two trust preferred securities
were downgraded to “Baa1” and “Ba1”, respectively, at September 30,
2008.
 
 The
impairment charge on the private label, collateralized mortgage obligation and
two trust preferred securities resulted from the deterioration and adverse
changes in the cash flows of the underlying securities, reflective of the
continued turmoil in the financial markets resulting from the “sub-prime
crisis.”
 
 Collateralized
mortgage obligations and trust preferred securities with ratings under “AA” were
evaluated for other-than-temporary impairment under Emerging Issues Task Force
No. 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets.”
 
 The
Company concluded that no additional other-than-temporary impairments were
required at September 30, 2008.
 
 NOTE 6 – FAIR VALUE
MEASUREMENTS
 
 General.  Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” for financial assets and liabilities.  In accordance
with Financial Accounting Standards Board Staff Position No. 157-2, “Effective
Date of FASB Statement No. 157,” the Company will delay application of SFAS No.
157 for non-financial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements, until January 1,
2009.
 
 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 exists,
requiring entities to develop their own assumptions and data.
 
 Level 2
inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly.  These inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or
liabilities in market areas that are not active, inputs other than quoted prices
that are observable for the asset or liability (such as interest rates,
volatilities, prepayment speeds, credit risks and default rates) or inputs that
are derived principally from or corroborated by observable market data by
correlation or other means.
  10
  BEACON
FEDERAL BANCORP, INC.
 Valuation
Techniques.Available for sale securities are carried at fair
value utilizing Level 1 and Level 2 inputs.  For equity securities,
the Company obtains fair values for its FNMA and FHLMC preferred stock using
quoted prices in the New York Stock Exchange market.
 
 For U.S.
Treasuries, the Company obtains fair values using quoted prices in the U.S.
Treasury market.  For other debt securities, the Company obtains fair
value measurements from an independent pricing service.  Other debt
securities include agencies, pooled trust preferred securities, mortgage-backed
securities and collateralized mortgage obligations.  The fair value
measurements consider observable data that may include dealer quotes, live
trading levels, trade execution data, cash flows, market consensus prepayment
speeds, market spreads, credit information and the U.S. Treasury yield
curve.
  The
Company estimates fair values on mortgage servicing rights using Level 2 inputs,
which include discounted cash flows based on a current market interest
rate.  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.  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 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 business 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.
 
 11
  BEACON
FEDERAL BANCORP, INC.
 Assets Measured at Fair Value on a
Recurring Basis.The following table summarizes financial
assets measured at fair value on a recurring basis at September 30, 2008,
segregated by the level of the inputs within the hierarchy used to measure fair
value:
 
 Quoted
      Prices in
                
                
                SignificantActive
      Markets
                
                
                Other
                
                
                Significantfor
      Identical
                
                
                Observable
                
                
                Unobservable
                
                
                TotalAssets
                
                
                Inputs
                
                
                Inputs
                
                
                FairAssets
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)
                
                
                ValueAvailable
      for sale securities:Debt
      securities:U.S.
      Treasury and agencies
                
                $
                -
                
                
                $
                16,190
                
                
                $
                -
                
                
                $
                16,190Pooled
      trust preferred securities
                
                
                -
                
                
                
                6,059
                
                
                
                -
                
                
                
                6,059Mortgage-backed
      securities
                
                
                -
                
                
                
                49,001
                
                
                
                -
                
                
                
                49,001Collateralized
      mortgage obligations
                
                
                -
                
                
                
                89,688
                
                
                
                -
                
                
                
                89,688Equity
      securities:FNMA
      and FHLMC preferred stock
                
                
                493
                
                
                
                -
                
                
                
                -
                
                
                
                493$
                493
                
                
                $
                160,938
                
                
                $
                -
                
                
                $
                161,431Mortgage
      servicing rights
                
                $
                -
                
                
                $
                244
                
                
                $
                -
                
                
                $
                244
  Assets Measured at Fair Value on a
Non-Recurring Basis.Assets measured at fair value on a
non-recurring basis at September 30, 2008 include impaired loans of $2,982,
utilizing level 3 inputs and loans held for sale of $1,900, utilizing level 2
inputs.  The impaired loans are collateral dependent and the allowance
for losses on the impaired loans was $2,651 at September 30,
2008.  There was a provision for losses on these loans of $1,419 and
$2,267 during the three and nine months ended September 30, 2008,
respectively.
 
 12
  BEACON
FEDERAL BANCORP, INC.
 
 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
September 30, 2008 and for the three and nine months ended September 30, 2008
and 2007 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, 2007, 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.
  U.S. Treasury’s
Capital Purchase Program.The Company intends to apply to
participate in the U.S. Treasury’s Capital Purchase Program
(“Program”).  The Company would be eligible to receive investment
funds ranging between $6.8 million and $20.5 million from the U.S. Treasury.
While the Company and the Bank are both well-capitalized, participation in the
Program might enhance the Company’s flexibility in meeting future capital needs
that may arise.  The Company has not made a final decision as to
participation in the Program.
  13
  BEACON
FEDERAL BANCORP, INC.
 FDIC Temporary
Liquidity Guarantee Program.On October 23, 2008, the Federal
Deposit Insurance Corporation (“FDIC”) issued an interim rule, establishing the
Temporary Liquidity Guarantee Program (“TLGP”), effective October 14,
2008.  The TLGP consists of two components: the Debt Guarantee Program
(“DGP”), a temporary guarantee (through June 30, 2012) of newly-issued senior
unsecured debt up to prescribed limits issued from October 14, 2008 through June
30, 2009 and the Transaction Account Guarantee Program (“TAGP”), a temporary
guarantee of noninterest-bearing transaction accounts held at FDIC-insured
depository institutions in excess of the existing deposit insurance limit of
$250,000 per account.  Entities must inform the FDIC whether they will
opt out of either or both of the programs under the TLGP on or before December
5, 2008.  The Company will opt out of the DGP, but is participating in
the TAGP.  Retroactive to November 13, 2008, the Company will be
assessed on a quarterly basis an annualized amount equal to 10 basis points on
the non-interest bearing deposit balances exceeding the existing deposit
insurance limit of $250,000.  Management does not expect that the
assessment under the TAGP will have any material impact on the results of
operations of the Company.
  Operating
Results.  The Company reported a net loss of $8.4 million for
the three months ended September 30, 2008, compared to net income of $605,000
for the three months ended September 30, 2007.  The Company incurred a
net loss of $6.6 million for the nine months ended September 30, 2008, compared
to net income of $1.7 million for the nine months ended September 30,
2007.
 
 The net
losses reflect a substantial impairment writedown on securities, an increased
provision for loan losses, higher non-interest expenses, partially offset by an
increase in net interest income and non-interest income and lower income
taxes.
 
 Financial
Condition.Total assets increased $130.3 million to $1.0
billion at September 30, 2008 from $878.0 million at December 31, 2007, as a
result of a $53.1 million increase in net loans, a $63.1 million increase in
securities, a $2.5 million increase in FHLB of New York stock, a $4.8 million
increase in cash and cash equivalents and a $6.0 million increase in other
assets, funded by a $76.9 million increase in deposits and a $65.0 million
increase in borrowings.  Stockholders’ equity decreased $12.6 million
due to a $5.8 million increase in the accumulated other comprehensive loss, net
of taxes, cash dividends of $549,000, and a net loss of $6.6 million for the
nine months ended September 30, 2008, partially offset by the release of ESOP
shares of $454,000.
 
 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.
  14
 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 September 30, 2008 and December 31, 2007
 
 Loans,
Net.  Net loans increased $53.1 million, or 7.5%, to $762.1
million at September 30, 2008 from $709.0 million at December 31, 2007,
reflecting strong business relationships maintained by our loan staff in their
local markets.  During the nine months ended September 30, 2008, loan
growth was experienced primarily in one-to four-family loans, indirect
automobile loans and commercial real estate loans.
  15
 BEACON
FEDERAL BANCORP, INC.
 Securities.  Securities
available for sale increased to $161.4 million at September 30, 2008 from $92.9
million at December 31, 2007.  The increase in securities available
for sale reflected the deployment of excess liquidity resulting from the
conversion and public offering in October 2007 and proceeds from
deposits.  Securities held to maturity decreased $5.5 million to $24.0
million at September 30, 2008.  During the quarter ended March 31,
2008, the Company recorded an impairment charge of $528,000 on its FNMA
perpetual preferred stock.  During the quarter ended June 30, 2008 and
quarter ended September 30, 2008, impairment charges of $273,000 and $5.4
million, respectively, were recorded on the FNMA and FHLMC perpetual preferred
stock.  At September 30, 2008, the cost basis of the FNMA and FHLMC
perpetual preferred stock was $493,000.  In addition, the Company
recorded an aggregate impairment charge of $4.6 million on a collateralized
mortgage obligation and two trust preferred securities during the quarter ended
September 30, 2008.
 
 Other
Assets.  Federal Home Loan Bank of New York stock increased
$2.5 million to $13.6 million at September 30, 2008 as required by the FHLB due
to a higher level of FHLB advances outstanding.  Accrued interest
receivable increased due to a higher balance of loans and securities outstanding
and timing of interest receipts.  Other assets increased $6.0 million
to $7.8 million at September 30, 2008 as a result of a higher deferred tax asset
on net unrealized losses on securities available for sale.
 
 Deposits.  Deposits
increased $76.9 million, or 15.0%, to $591.4 million at September 30, 2008 from
$514.5 million at December 31, 2007, due to the success of promotional efforts
throughout the period to attract additional deposits.  Certificate of
deposit accounts increased by $34.8 million and represented our largest dollar
increase in our deposit accounts.  Checking accounts and money market
accounts increased by $14.5 million and $29.1 million,
respectively.  Overall, total “core” deposits (savings, money market,
non-interest bearing demand and NOW accounts) increased by $42.1 million, or
8.2%.
 
 Borrowings.  FHLB
advances are utilized to the extent that liquidity needs are not met by an
increase in customer deposits. FHLB advances increased $15.0 million, or 6.6%,
to $241.8 million at September 30, 2008 from $226.8 million at December 31,
2007.  FHLB advances were generally utilized to a greater degree
because the costs for such advances were lower than retail certificates of
deposit in the period.  Securities sold under agreement to repurchase
increased by $50.0 million to $70.0 million at September 30,
2008.  These borrowings were utilized since the rates were more
attractive than FHLB advances with similar terms.
 
 Stockholders’
Equity.  Stockholders’ equity decreased $12.6 million, or
11.1%, to $100.6 million at September 30, 2008 from $113.2 million at December
31, 2007.  The decrease reflected an increase of $5.8 million in net
unrealized losses on securities available for sale, less tax effect, cash
dividends paid of $549,000 and a net loss of $6.6 million for the nine months
ended September 30, 2008, partially offset by the release of ESOP shares of
$454,000.
 
 Net
unrealized losses on securities available for sale before tax effect increased
to $10.2 million at September 30, 2008 from $549,000 at December 31,
2007.  The majority of these unrealized losses related to
collateralized mortgage obligations (CMOs) and pooled trust preferred
securities.  The pooled trust preferred securities and CMOs with
unrealized losses were rated “Aaa” by Moody’s at September 30, 2008. The decline
in the value of our securities portfolio was a result of increased risk premiums
(spreads) demanded from investors due to the continued turmoil in the financial
markets resulting from the “sub prime crisis.”  The increase in
spreads more than offset the decline in interest rates and was reflected in
lower pricing of the portfolio as compared to December 31, 2007.
 
 With the
exception of the writedown of the FNMA and FHLMC perpetual preferred stock, one
collateralized mortgage obligation and two trust preferred securities,
management does not believe that an adverse change in the cash flows of the
underlying securities had occurred as of September 30,
2008.  Accordingly, the declines in value were not considered to be
other than temporary.
  16
 BEACON
FEDERAL BANCORP, INC.
 Comparison
of Operating Results for the Three Months Ended September 30, 2008 and
2007
 
 Interest
Income.  Interest income increased $3.2 million, or 27.9%, to
$14.5 million for the three months ended September 30, 2008 from $11.3 million
for the three months ended September 30, 2007.  The increase resulted
primarily from higher average balances of loans and securities in the 2008
period compared to the 2007 period.  The average balances of loans and
securities increased primarily as a result of the deployment of net proceeds
raised in the initial public offering completed in October 2007 and proceeds
from deposits and borrowings.
 
 Interest
income on loans increased to $11.6 million for the three months ended September
30, 2008 from $10.0 million for the three months ended September 30, 2007 due to
a higher average balance of loans, partially offset by a lower average
yield.  The average balance of loans increased to $768.9 million for
the three months ended September 30, 2008 from $647.4 million for the three
months ended September 30, 2007, reflecting our continued emphasis on loan
growth.  The average yield earned on loans decreased to 6.01% for the
three months ended September 30, 2008 from 6.15% for the three months ended
September 30, 2007, as a result of a decline in the yield on loans indexed to
prime, partially offset by the greater proportion of higher-yielding commercial
business and multi-family loans in our loan portfolio during the 2008 period
compared to the 2007 period.  Interest income on securities, including
FHLB stock, increased $1.7 million, or 145.2%, to $2.9 million for the three
months ended September 30, 2008 from $1.2 million for the three months ended
September 30, 2007, reflecting a higher average balance of such securities (to
$198.9 million from $82.6 million) and higher average yields on such securities
to 5.76% from 5.61%.
 
 Interest
Expense.  Interest expense increased $291,000, or 3.9%, to $7.7
million for the three months ended September 30, 2008 from $7.4 million for the
three months ended September 30, 2007.  The increase in interest
expense reflected substantially higher average balances of borrowings used to
fund loan growth, partially offset by lower rates.
 
 Interest
expense on deposits decreased $921,000, or 16.9%, to $4.5 million for the three
months ended September 30, 2008 from $5.4 million for the three months ended
September 30, 2007, reflecting a decrease in the average rate paid on deposits
to 3.30% from 4.18%.  The average balance of such deposits increased
to $545.5 million for the three months ended September 30, 2008 from $517.8
million for the three months ended September 30, 2007.  The average
balance of non-interest-bearing deposits increased to $28.6 million for the
three months ended September 30, 2008, compared to $23.5 million for the same
period last year.
 
 Interest
expense on money market accounts also decreased to $1.2 million from $1.4
million, reflecting substantially lower average rates on such accounts (3.16% in
the 2008 period compared to 4.53% in the 2007 period) and partially offset by
higher average balances ($154.0 million compared to $122.5
million).  Interest expense on certificates of deposit decreased to
$2.9 million for the three months ended September 30, 2008 from $3.6 million for
the three months ended September 30, 2007, due to a lower average rate on such
deposits (4.07% compared to 5.04%), partially offset by a higher average balance
($282.2 million compared to $281.0 million).  At September 30, 2008,
we had $57.2 million in brokered deposits.  Brokered deposits were
utilized since the rates were more attractive than local, retail
deposits.  Brokered deposits are highly susceptible to withdrawal at
maturity if the rates we pay on such deposits are not competitive.
  17
  BEACON
FEDERAL BANCORP, INC.
 Interest
expense on borrowings increased to $3.2 million for the three months ended
September 30, 2008 from $2.0 million for the three months ended September 30,
2007.  The increase was due to a higher average balance of such
borrowings, to $304.2 million for the three months ended September 30, 2008 from
$162.4 million for the three months ended September 30, 2007, as borrowings were
used to supplement deposits to fund loan growth.  The interest rates
paid on such borrowings decreased to 4.04% from 4.81%.
 
 Net Interest
Income.  Net interest income increased $2.9 million, or 73.1%,
to $6.8 million for the three months ended September 30, 2008 from $3.9 million
for the three months ended September 30, 2007.  The increase in net
interest income was due to an increase in net interest-earning assets to $121.6
million for the three months ended September 30, 2008 from $61.9 million for the
three months ended September 30, 2007 and increases in our net interest rate
spread (to 2.33% from 1.74%) and net interest margin (to 2.79% from
2.10%).  The net interest margin increased 69 basis points due to
growth in net interest-earning assets of the Company, primarily as a result of
the stock conversion completed in early October 2007.
 
 Provision for
Loan Losses.  We recorded a provision for loan losses of $3.4
million for the three months ended September 30, 2008 compared to a provision
for loan losses of $737,000 for the three months ended September 30,
2007.  The provision for loan losses reflected an increase in
nonperforming commercial real estate loans and commercial business loans, a
higher level of charge-offs in the commercial and consumer loan areas and
overall growth of the loan portfolio, particularly in commercial
loans.
 
 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 recorded reflected net charge offs of $1.3
million for the three months ended September 30, 2008 compared to net charge
offs of $456,000 for the three months ended September 30, 2007.  Net
charge-offs increased due primarily to write-downs on commercial business loans
and consumer loans, principally secured by automobiles.
 
 The
allowance for loan losses was $10.3 million, or 1.35%, of total loans at
September 30, 2008 compared to $8.2 million, or 1.08%, of total loans at June
30, 2008.  Total nonperforming loans were $5.9 million at September
30, 2008 compared to $3.9 million at June 30, 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 that a loss
has occurred and the amount is reasonable to estimate for the three months ended
September 30, 2008 and 2007.
 
 Non-Interest
Income.  Non-interest income increased to $1.2 million for the
three months ended September 30, 2008 from $864,000 for the three months ended
September 30, 2007.  Commission and fee income for the three months
ended September 30, 2008 includes income from credit life and disability
insurance of $199,000 as a result of a lower experience rate of claims filed by
the Company’s customers.  Additionally, the Company recognized $81,000
as a result of the change in cash surrender value of bank-owned life
insurance.  Service charges increased $114,000, to $761,000 for the
three months ended September 30, 2008, reflecting higher deposit-related
fees.
 
 Non-Interest
Expense.  Non-interest expense increased $10.8 million, or
353.7%, to $13.9 million for the three months ended September 30, 2008 from $3.1
million for the three months ended September 30, 2007.  During the
quarter ended September 30, 2008, there was an aggregate impairment loss of
$10.0 million recorded on our Fannie Mae and Freddie Mac perpetual preferred
stock, a collateralized mortgage obligation and two trust preferred
securities.  To a lesser extent, the increase in non-interest expense
reflected higher salaries and benefits, higher telephone and postage expenses,
higher audit and examination expenses and higher other non-interest expenses,
partially offset by the absence of provision for loss on premises, which was
recognized during the 2007 period.
  18
  BEACON
FEDERAL BANCORP, INC.
 Salaries
and employee benefits increased by $579,000 due primarily to higher employee
bonuses accrued, normal salary increases, $144,000 of ESOP expense and $44,000
of Supplemental Executive Retirement Plan (SERP) expense on behalf of the Chief
Executive Officer of the Company and Bank, approved in December
2007.  There were no ESOP or SERP expenses during the 2007
period.  SERP expense will be recognized over the remaining service
period of the Chief Executive Officer based upon the present value of benefits
expected to be provided under the SERP.
 
 Telephone,
delivery and postage expenses increased due to switching to a new telephone and
server system and temporarily operating dual phone systems.  As a
result of this process, the telephone costs are expected to decrease in the near
term.  Audit and examination expenses increased due primarily to
higher professional expenses associated with our status as a public
company.
 
 Other
non-interest expense increased due to an impairment writedown of $10.0 million
on securities and, to a lesser extent, higher education costs, board fees, check
fraud loss of $58,000, fees paid to outside information technology consultants,
and expenses related to operating as a public company, including attorney’s
fees, securities filings-related costs, and Sarbanes-Oxley compliance-related
costs.
 
 Income Tax
Expense(Benefit).  The Company recognized a tax benefit of $817,000
for the three months ended September 30, 2008, compared to an expense of
$399,000 for the three months ended September 30, 2007.  The tax
benefit was due to a pre-tax loss incurred for the three months ended September
30, 2008, offset by a lower effective tax rate.  Our effective tax
rate was 8.8% on the pre-tax loss for the three months ended September 30, 2008,
compared to 39.7% on the pre-tax income for the three months ended September 30,
2007.  The effective tax rate was lower due primarily to the
nondeductible impairment writedown on Freddie Mac and Fannie Mae perpetual
preferred stock.  There was no tax deduction on the impairment
writedown through September 30, 2008, since there were no prior year’s capital
gains to offset the capital losses.  A tax benefit of $2.5 million on
the Freddie Mac and Fannie Mae impairment charge will be recognized in the
fourth quarter of 2008 as a result of the Emergency Economic Stabilization Act
of 2008, which was enacted in October 2008 and treats the impairment charges as
ordinary losses.
 
 Comparison
of Operating Results for the Nine Months Ended September 30, 2008 and
2007
 
 Interest
Income.  Interest income increased $11.5 million, or 37.4%, to
$42.1 million for the nine months ended September 30, 2008 from $30.6 million
for the nine months ended September 30, 2007.  The increase resulted
primarily from higher average balances of loans and securities in the 2008
period compared to the 2007 period.  The average balances of loans
increased primarily as a result of the deployment of net proceeds raised in the
initial public offering completed in October 2007 and proceeds from deposits and
borrowings.
 
 Interest
income on loans increased to $34.3 million for the nine months ended September
30, 2008 from $27.7 million for the nine months ended September 30,
2007.  The increase was due to a higher average balance of loans,
partially offset by a lower average yield.  The average balance of
loans increased to $746.8 million for the nine months ended September 30, 2008
from $595.9 million for the nine months ended September 30, 2007, reflecting our
continued emphasis on loan growth.  The average yield earned on loans
decreased to 6.14% for the nine months ended September 30, 2008 from 6.23% for
the nine months ended September 30, 2007, as a result of a decline in the yield
on loans indexed to prime, partially offset by the greater proportion of
higher-yielding commercial business and multi-family loans in our loan portfolio
during the 2008 period compared to the 2007 period.  Interest income
on securities, including FHLB stock, increased $4.9 million, or 199.0%, to $7.4
million for the nine months ended September 30, 2008 from $2.5 million for the
nine months ended September 30, 2007, reflecting a higher average balance of
such securities (to $178.9 million from $61.4 million) as well as higher average
yields on such securities to 5.52% from 5.40%.
  19
 BEACON
FEDERAL BANCORP, INC.
 Interest
Expense.  Interest expense increased $3.8 million, or 19.5%, to
$23.5 million for the nine months ended September 30, 2008 from $19.7 million
for the nine months ended September 30, 2007.  The increase in
interest expense reflected substantially higher average balances of borrowings
used to fund loan growth, partially offset by lower rates.
 
 Interest
expense on deposits decreased $1.4 million, or 9.4%, to $14.2 million for the
nine months ended September 30, 2008 from $15.6 million for the nine months
ended September 30, 2007, reflecting a decrease in the average rate paid on
deposits to 3.62% from 4.12%.  The average balance of such deposits
increased to $523.1 million for the nine months ended September 30, 2008 from
$507.7 million for the nine months ended September 30, 2007.  The
average balance of non-interest-bearing deposits increased to $27.5 million for
the nine months ended September 30, 2008, compared to $11.3 million for the same
period last year.
 
 Interest
expense on money market accounts decreased to $3.6 million for the nine months
ended September 30, 2008 from $3.8 million for the nine months ended September
30, 2007, as lower average rates on such accounts (3.52% in the 2008 period
compared to 4.61% in the 2007 period) were partially offset by higher average
balances on such accounts ($135.6 million compared to $110.2
million).  Interest expense on certificates of deposit decreased to
$9.4 million for the nine months ended September 30, 2008 from $10.4 million for
the nine months ended September 30, 2007, due to a lower average rate (4.44%
compared to 4.98%), partially offset by a higher average balance ($281.8 million
compared to $280.1 million).  At September 30, 2008, we had $57.2
million in brokered deposits.  Brokered deposits were utilized since
the rates were more attractive than local, retail deposits.  Brokered
deposits are highly susceptible to withdrawal at maturity if the rates we pay on
such deposits are not competitive.
 
 Interest
expense on borrowings increased to $9.3 million for the nine months ended
September 30, 2008 from $4.0 million for the nine months ended September 30,
2007.  The increase was due to a higher average balance of such
borrowings, to $292.5 million for the nine months ended September 30, 2008 from
$111.6 million for the nine months ended September 30, 2007, as borrowings were
used to supplement deposits to fund loan growth.  The average rate
paid on such borrowings decreased to 4.25% from 4.81%.
 
 Net Interest
Income.  Net interest income increased $7.6 million, or 69.4%,
to $18.6 million for the nine months ended September 30, 2008 from $11.0 million
for the nine months ended September 30, 2007.  The increase in net
interest income was due to an increase in net interest-earning assets to $124.2
million for the nine months ended September 30, 2008 from $49.3 million for the
nine months ended September 30, 2007 and increases in our net interest rate
spread (to 2.13% from 1.88%) and net interest margin (to 2.64% from
2.19%).  The net interest margin increased 45 basis points due to
growth in net interest-earning assets of the Company, primarily as a result of
the stock conversion completed in early October 2007.
  20
  BEACON
FEDERAL BANCORP, INC.
 Provision for
Loan Losses.  We recorded a provision for loan losses of $5.9
million for the nine months ended September 30, 2008 compared to a provision for
loan losses of $1.4 million for the nine months ended September 30,
2007.  The provision for loan losses resulted from an increase in
nonperforming commercial real estate loans and commercial business loans, a
higher level of charge-offs in the commercial and consumer loan areas, and
overall growth of the loan portfolio, particularly in commercial
loans.
 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 $2.4 million for
the nine months ended September 30, 2008 compared to net charge offs of $550,000
for the nine months ended September 30, 2007.  Net charge-offs
increased due primarily to write-downs on commercial business loans and consumer
loans, principally secured by automobiles.
 
 The
allowance for loan losses was $10.3 million, or 1.35% of total loans at
September 30, 2008 compared to $6.8 million, or 0.96%, of total loans at
December 31, 2007.  Total nonperforming loans were $5.9 million at
September 30, 2008 compared to $1.1 million at December 31,
2007.  Nonperforming loans at September 30, 2008 were primarily
secured by commercial real estate and commercial business assets.  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 that a loss has occurred and the amount is reasonable to
estimate for the nine months ended September 30, 2008 and 2007.
 
 Non-Interest
Income.  Non-interest income increased to $3.5 million for the
nine months ended September 30, 2008 from $2.4 million for the nine months ended
September 30, 2007.  Commission and fee income for the nine months
ended September 30, 2008 included income from credit life and disability
insurance of $199,000 as a result of a lower experience rate of claims filed by
the Company’s customers.  During the nine months ended September 30,
2008, the Company 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.  In addition, the Company recognized $313,000 during the nine
months ended September 30, 2008 as a result of the change in cash surrender
value of bank-owned life insurance.  Service charges increased
$274,000, to $2.1 million for the nine months ended September 30, 2008,
reflecting higher deposit-related fees.
 
 Non-Interest
Expense.  Non-interest expense increased $13.2 million, or
144.2%, to $22.3 million for the nine months ended September 30, 2008 from $9.1
million for the nine months ended September 30, 2007.  During the nine
months ended September 30, 2008, there was an impairment loss of $10.8 million
recorded on our Fannie Mae and Freddie Mac perpetual preferred stock, a
collateralized mortgage obligation and two trust preferred
securities.  To a lesser extent, the increase reflected higher
salaries and benefits, higher occupancy and equipment expenses, higher telephone
expenses, higher audit and examination expenses, higher advertising and
marketing, and higher other non-interest expenses, partially offset by lower
supplies expenses and absence of the provision for loss on foreclosed assets and
provision for loss on premises, which were recognized during the 2007
period.
 
 Salaries
and employee benefits increased by $1.4 million due to higher employee bonuses
accrued, normal salary increases, compensation costs related to the retirement
of the Company’s Chief Financial Officer on June 27, 2008, $454,000 of ESOP
expense and $130,000 of Supplemental Executive Retirement Plan (SERP) expense on
behalf of the Chief Executive Officer of the Company and Bank, approved in
December 2007.  There were no ESOP or SERP expenses during the 2007
period.  SERP expense will be recognized over the remaining service
period of the Chief Executive Officer based upon the present value of benefits
expected to be provided under the SERP.
  21
  BEACON
FEDERAL BANCORP, INC.
 Occupancy
and equipment increased as a result of primarily higher office rent expenses,
depreciation expense and equipment maintenance costs.  Telephone,
delivery and postage expenses increased due to switching to a new telephone and
server system and temporarily operating dual phone systems. As a result of this
process, the telephone costs are expected to decrease in the near
term.  Audit and examination expenses increased due primarily to
higher professional expenses associated with our status as a public
company.  Advertising and marketing increased as a result of a higher
volume of promotions.
 
 Other
non-interest expense increased due to an impairment writedown of $10.8 million
on securities and, to a lesser extent, higher insurance costs, subscription
costs, board fees, check fraud loss of $58,000, personnel recruitment costs,
fees paid to outside information technology consultants, provision for losses of
$69,000 on secondary market loan commitments and expenses related to operating
as a public company, including attorney’s fees, securities filings-related
costs, annual meeting expenses, printing costs for annual reports and proxy
materials, and Sarbanes-Oxley compliance-related costs.  These higher
expenses were partially offset by lower correspondent bank service charges due
primarily to the implementation of the Check 21 program.
 
 Income Tax
Expense.  The provision for income taxes was $513,000 for the
nine months ended September 30, 2008 compared to $1.1 million for the nine
months ended September 30, 2007.  The decrease was due to a pre-tax
loss incurred for the nine months ended September 30, 2008, partially offset by
a lower effective tax rate.  Our effective tax rate was 8.4% for the
nine months ended September 30, 2008 compared to 38.7% for the nine months ended
September 30, 2007.  The effective tax rate was lower due primarily to
the nondeductible portion of the impairment writedown on the Freddie Mac and
Fannie Mae perpetual preferred stock.  There was no tax deduction on
the impairment writedown through September 30, 2008, since there were no prior
year’s capital gains to offset the capital losses.  A tax benefit of
$2.5 million on the Freddie Mac and Fannie Mae impairment charge will be
recognized in the fourth quarter of 2008 as a result of the Emergency Economic
Stabilization Act of 2008, which was enacted in October 2008 and treats the
impairment charges as ordinary losses.
 
 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.
  22
  BEACON
FEDERAL BANCORP, INC.
 For
      the Three Months Ended September 30,2008
                
                
                2007Average
      Outstanding Balance
                
                
                Interest
      Earned/Paid
                
                
                Yield
      /
                  Rate
                
                
                Average
      Outstanding Balance
                
                
                Interest
      Earned/Paid
                
                
                Yield
      /
                  Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
                
                $
                768,897
                
                
                $
                11,610
                
                
                
                6.01
                %
                
                $
                647,353
                
                
                $
                10,031
                
                
                
                6.15
                %Securities
                
                
                184,829
                
                
                
                2,653
                
                
                
                5.71
                
                
                
                74,561
                
                
                
                1,008
                
                
                
                5.37FHLB
      stock
                
                
                14,090
                
                
                
                211
                
                
                
                5.96
                
                
                
                8,073
                
                
                
                160
                
                
                
                7.87Interest-earning
      deposits
                
                
                3,395
                
                
                
                37
                
                
                
                4.34
                
                
                
                12,171
                
                
                
                148
                
                
                
                4.83Total
      interest-earning assets
                
                
                971,211
                
                
                
                14,511
                
                
                
                5.94
                
                
                
                742,158
                
                
                
                11,347
                
                
                
                6.07Non-interest-earning
      assets
                
                
                21,497
                
                
                
                
                
                
                
                
                
                
                
                9,764Total
      assets
                
                $
                992,708
                
                
                
                
                
                
                
                
                
                
                $
                751,922Interest-bearing
      liabilities:Savings
                
                $
                62,338
                
                
                
                84
                
                
                
                0.54
                
                
                $
                66,855
                
                
                
                128
                
                
                
                0.76Money
      market accounts
                
                
                153,985
                
                
                
                1,223
                
                
                
                3.16
                
                
                
                122,500
                
                
                
                1,398
                
                
                
                4.53NOW
      accounts
                
                
                46,972
                
                
                
                333
                
                
                
                2.82
                
                
                
                47,473
                
                
                
                350
                
                
                
                2.93Time
      accounts
                
                
                282,182
                
                
                
                2,885
                
                
                
                4.07
                
                
                
                280,981
                
                
                
                3,570
                
                
                
                5.04Total
      deposits
                
                
                545,477
                
                
                
                4,525
                
                
                
                3.30
                
                
                
                517,809
                
                
                
                5,446
                
                
                
                4.18FHLB
      advances
                
                
                250,252
                
                
                
                2,771
                
                
                
                4.41
                
                
                
                160,756
                
                
                
                1,943
                
                
                
                4.80Reverse
      repurchase agreements
                
                
                53,913
                
                
                
                410
                
                
                
                3.03
                
                
                
                1,666
                
                
                
                26
                
                
                
                6.20Total
      interest-bearing liabilities
                
                
                849,642
                
                
                
                7,706
                
                
                
                3.61
                
                
                
                680,231
                
                
                
                7,415
                
                
                
                4.33Non-interest-bearing
      deposits
                
                
                28,641
                
                
                
                
                
                
                
                
                
                
                
                23,459Other
      non-interest-bearing liabilities
                
                
                4,417
                
                
                
                
                
                
                
                
                
                
                
                2,663Total
      liabilities
                
                
                882,700
                
                
                
                
                
                
                
                
                
                
                
                706,353Equity
                
                
                110,008
                
                
                
                
                
                
                
                
                
                
                
                45,569Total
      liabilities and equity
                
                $
                992,708
                
                
                
                
                
                
                
                
                
                
                $
                751,922Net
      interest income
                
                
                
                
                
                $
                6,805
                
                
                
                
                
                
                
                
                
                
                $
                3,932Net
      interest rate spread
                
                
                
                
                
                
                
                
                
                
                2.33
                %
                
                
                
                
                
                
                
                
                
                
                1.74
                %Net
      interest-earning assets
                
                $
                121,569
                
                
                
                
                
                
                
                
                
                
                $
                61,927Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.79
                %
                
                
                
                
                
                
                
                
                
                
                2.10
                %Average
      of interest-earning assets tointerest-bearing
      liabilities
                
                
                
                
                
                
                
                
                
                
                114.31
                %
                
                
                
                
                
                
                
                
                
                
                109.10
                %
  23
  BEACON
FEDERAL BANCORP, INC.
 For
      the Nine Months Ended September 30,2008
                
                
                2007Average
      Outstanding Balance
                
                
                Interest
      Earned/Paid
                
                
                Yield
      /
                  Rate
                
                
                Average
      Outstanding Balance
                
                
                Interest
      Earned/Paid
                
                
                Yield
      /
                  Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
                
                $
                746,782
                
                
                $
                34,330
                
                
                
                6.14
                %
                
                $
                595,917
                
                
                $
                27,734
                
                
                
                6.23
                %Securities
                
                
                165,789
                
                
                
                6,797
                
                
                
                5.48
                
                
                
                55,874
                
                
                
                2,150
                
                
                
                5.15FHLB
      stock
                
                
                13,061
                
                
                
                611
                
                
                
                6.25
                
                
                
                5,534
                
                
                
                328
                
                
                
                7.93Interest-earning
      deposits
                
                
                14,150
                
                
                
                342
                
                
                
                3.23
                
                
                
                11,244
                
                
                
                412
                
                
                
                4.90Total
      interest-earning assets
                
                
                939,782
                
                
                
                42,080
                
                
                
                5.98
                
                
                
                668,569
                
                
                
                30,624
                
                
                
                6.13Non-interest-earning
      assets
                
                
                19,450
                
                
                
                
                
                
                
                
                
                
                
                8,539Total
      assets
                
                $
                959,232
                
                
                
                
                
                
                
                
                
                
                $
                677,108Interest-bearing
      liabilities:Savings
                
                $
                61,225
                
                
                
                262
                
                
                
                0.57
                
                
                $
                67,097
                
                
                
                421
                
                
                
                0.84Money
      market accounts
                
                
                135,629
                
                
                
                3,575
                
                
                
                3.52
                
                
                
                110,219
                
                
                
                3,796
                
                
                
                4.61NOW
      accounts
                
                
                44,454
                
                
                
                986
                
                
                
                2.96
                
                
                
                50,253
                
                
                
                1,012
                
                
                
                2.69Time
      accounts
                
                
                281,753
                
                
                
                9,358
                
                
                
                4.44
                
                
                
                280,093
                
                
                
                10,417
                
                
                
                4.98Total
      deposits
                
                
                523,061
                
                
                
                14,181
                
                
                
                3.62
                
                
                
                507,662
                
                
                
                15,646
                
                
                
                4.12FHLB
      advances
                
                
                249,426
                
                
                
                8,336
                
                
                
                4.46
                
                
                
                102,607
                
                
                
                3,729
                
                
                
                4.86Reverse
      repurchase agreements
                
                
                43,066
                
                
                
                985
                
                
                
                3.06
                
                
                
                8,990
                
                
                
                284
                
                
                
                4.23Total
      interest-bearing liabilities
                
                
                815,553
                
                
                
                23,502
                
                
                
                3.85
                
                
                
                619,259
                
                
                
                19,659
                
                
                
                4.25Non-interest-bearing
      deposits
                
                
                27,545
                
                
                
                
                
                
                
                
                
                
                
                11,269Other
      non-interest-bearing liabilities
                
                
                3,554
                
                
                
                
                
                
                
                
                
                
                
                1,519Total
      liabilities
                
                
                846,652
                
                
                
                
                
                
                
                
                
                
                
                632,047Equity
                
                
                112,580
                
                
                
                
                
                
                
                
                
                
                
                45,061Total
      liabilities and equity
                
                $
                959,232
                
                
                
                
                
                
                
                
                
                
                $
                677,108Net
      interest income
                
                
                
                
                
                $
                18,578
                
                
                
                
                
                
                
                
                
                
                $
                10,965Net
      interest rate spread
                
                
                
                
                
                
                
                
                
                
                2.13
                %
                
                
                
                
                
                
                
                
                
                
                1.88
                %Net
      interest-earning assets
                
                $
                124,229
                
                
                
                
                
                
                
                
                
                
                $
                49,310Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.64
                %
                
                
                
                
                
                
                
                
                
                
                2.19
                %Average
      of interest-earning assets tointerest-bearing
      liabilities
                
                
                
                
                
                
                
                
                
                
                115.23
                %
                
                
                
                
                
                
                
                
                
                
                107.96
                %
  24
  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 nine months ended September 30, 2008, our
liquidity ratio averaged 12.3%.  We believe that we have enough
sources of liquidity to satisfy our short- and long-term liquidity needs as of
September 30, 2008.  We presently maintain higher liquidity levels as
a result of the stock offering.  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 September 30, 2008, cash and
cash equivalents totaled $18.9 million.  Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled
$161.4 million at September 30, 2008.  On that date, we had $241.8
million in advances outstanding, with the ability to borrow an additional $37.8
million.  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
September 30, 2008, we had $53.0 million in loan commitments
outstanding.  In addition to commitments to originate loans, we had
$64.5 million in unused lines of credit to borrowers. Certificates of deposit
due within one year of September 30, 2008 totaled $334.0 million, or 56.4% of
total deposits. If
these deposits do not remain with us, we will be required to seek other sources
of funds, including loan 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 September 30, 2008. 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 nine
months ended September 30, 2008, we originated $310.0 million of loans, and
during the nine months ended September 30, 2007, we originated $235.7 million of
loans.  During the nine months ended September 30, 2008 and 2007, we
purchased securities of $122.2 million and $56.7 million,
respectively.
  Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances.  We experienced a net increase in total deposits
and securities sold under agreement to repurchase of $76.9 million and $50.0
million, respectively, for the nine months ended September 30, 2008 and a net
increase in total deposits of $117.3 million and a net decrease in securities
sold under agreement to repurchase of $15.2 million for the nine months ended
September 30, 2007.  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.
  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 increased
by $15.0 million for the nine months ended September 30, 2008, compared to an
increase of $123.7 million for the nine months ended September 30,
2007.  Federal Home Loan Bank advances have primarily been used to
fund loan demand. At September 30, 2008, we had the ability to borrow up to
$280.6 million from the Federal Home Loan Bank of New York.
  25
  BEACON
FEDERAL BANCORP, INC.
  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 September 30, 2008,
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 adequately
capitalized, regulatory approval is required to accept brokered
deposits.  If undercapitalized, capital distributions are limited, as
is asset growth and expansion, and capital restoration plans are
required.  At September 30, 2008 and December 31, 2007, 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.
 
 
 
 26
  BEACON
FEDERAL BANCORP, INC.
 Actual
and required capital amounts and ratios for the Bank are presented
below:
  To
      Be WellCapitalized
      UnderFor
      Capital
                
                
                Prompt
      CorrectiveActual
                
                
                Adequacy
      Purposes
                
                
                Action
      ProvisionsSeptember 30, 2008
      (Dollars in Thousands)
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioEquity
                
                $
                64,918Tax
      effect on FHLMC and FNMA preferredstock
      (1)
                
                
                2,469Unrealized
      loss on AFS securities, net
                
                
                6,143Tier
      1 (Core) Capital and Tangible Capital
                
                
                73,530
                
                
                
                7.23
                %
                
                $
                15,252
                
                
                
                1.50
                %General
      valuation allowance (2)
                
                
                8,587Deduction
      for low-level recourse
                
                
                (917
                )Total
      Capital to risk-weightedassets
                
                $
                81,200
                
                
                
                11.85
                %
                
                $
                54,817
                
                
                
                8.00
                %
                
                $
                68,522
                
                
                
                10.00
                %Tier
      1 (Core) Capital to risk-weighted
      assets
                
                $
                72,613
                
                
                
                10.60
                %
                
                $
                27,409
                
                
                
                4.00
                %
                
                $
                41,113
                
                
                
                6.00
                %Tier
      1 (Core) Capital to adjustedtotal
      assets
                
                $
                73,530
                
                
                
                7.23
                %
                
                $
                40,673
                
                
                
                4.00
                %
                
                $
                50,842
                
                
                
                5.00
                %
  (1)
      Includable as a result of announcementby
      Federal banking and thrift regulatoryagencies
      on October 17, 2008.(2)
      Limited to 1.25% of risk-weighted
assets.
  To
      Be WellCapitalized
      UnderFor
      Capital
                
                
                Prompt
      CorrectiveActual
                
                
                Adequacy
      Purposes
                
                
                Action
      ProvisionsDecember 31, 2007
      (Dollars in Thousands)
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioEquity
                
                $
                77,000Unrealized
      loss on AFS securities
                
                
                328Tier
      1 (Core) Capital and Tangible Capital
                
                
                77,328
                
                
                
                8.79
                %
                
                $
                13,189
                
                
                
                1.50
                %General
      valuation allowance
                
                
                6,827Deduction
      for low-level recourse
                
                
                (119
                )Total
      Capital to risk-weightedassets
                
                $
                84,036
                
                
                
                13.88
                %
                
                $
                48,439
                
                
                
                8.00
                %
                
                $
                60,549
                
                
                
                10.00
                %Tier
      1 (Core) Capital to risk-weighted
      assets
                
                $
                77,209
                
                
                
                12.75
                %
                
                $
                24,220
                
                
                
                4.00
                %
                
                $
                36,329
                
                
                
                6.00
                %Tier
      1 (Core) Capital to adjustedtotal
      assets
                
                $
                77,328
                
                
                
                8.79
                %
                
                $
                35,170
                
                
                
                4.00
                %
                
                $
                43,963
                
                
                
                5.00
                %
  27
 BEACON
FEDERAL BANCORP, INC.
 Asset
Quality
 
 General.  The
table below sets forth the amounts and categories of our non-performing assets
at the dates indicated.  At each date presented, we had no troubled
debt restructurings (loans for which a portion of interest or principal has been
forgiven and loans modified at interest rates materially less than current
market rates).
 
 September
      30,
                
                
                December
      31,2008
                
                
                2007(In
      Thousands)Nonaccrual
      loans
                
                $
                429
                
                
                $
                136Loans
      past due over 90 days still on accrual
                
                
                2,485
                
                
                
                735Impaired
      loans
                
                
                2,982
                
                
                
                222Total
      nonperforming loans
                
                
                5,896
                
                
                
                1,093Foreclosed
      and repossessed assets
                
                
                139
                
                
                
                319Total
      nonperforming assets
                
                $
                6,035
                
                
                $
                1,412Ratios:Nonperforming
      loans to total loans
                
                
                0.77
                %
                
                
                0.15
                %Nonperforming
      assets to total assets
                
                
                0.60
                %
                
                
                0.16
                %
  The
average balance of impaired loans for the nine months ended September 30, 2008
and interest income recognized during the period that the loans were impaired
was $1.4 million and $22,000, respectively.
  At
September 30, 2008, we had 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.
 
 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 September
30, 2008, classified assets consisted of substandard assets of $3.4 million and
doubtful assets of $3.2 million.  Substandard assets and doubtful
assets were $5.2 million and $441,000, respectively, at December 31,
2007.  As of September 30, 2008 we had $14.3 million of assets
designated as special mention, compared to $12.4 million at December 31,
2007.  These assets were primarily secured by commercial real estate
and commercial business assets.
  28
  BEACON
FEDERAL BANCORP, INC.
 Allowance for
losses.  The following table sets forth activity in our
allowance for loan losses for the periods indicated.
  Nine
      Months EndedSeptember
      30,2008
                
                
                2007(In
      Thousands)Beginning
      balance
                
                $
                6,827
                
                
                $
                5,192Provision
      for loan losses
                
                
                5,857
                
                
                
                1,394Loans
      charged off
                
                
                (2,582
                )
                
                
                (801
                )Recoveries
                
                
                224
                
                
                
                251Ending
      balance
                
                $
                10,326
                
                
                $
                6,036Ratios:Annualized
      net charge-offs to average loansoutstanding
                
                
                0.42
                %
                
                
                0.12
                %Allowance
      for loan losses to nonperformingloans
      at end of period
                
                
                175.14
                %
                
                
                778.84
                %Allowance
      for loan losses to total loans atend
      of period
                
                
                1.35
                %
                
                
                0.90
                %
  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:
 
 September
      30, 2008
                
                
                December
      31, 2007Fixed
                
                
                Variable
                
                
                Fixed
                
                
                VariableRate
                
                
                Rate
                
                
                Rate
                
                
                Rate(Dollars
      in Thousands)Commitments
      to make loans
                
                $
                30,907
                
                
                $
                22,095
                
                
                $
                24,470
                
                
                $
                21,067Unused
      lines of credit and lettersof
      credit
                
                $
                7,005
                
                
                $
                57,481
                
                
                $
                4,459
                
                
                $
                42,874Range
      of fixed-rate commitments
                
                
                4.49%-15.00
                %
                
                
                -
                
                
                
                4.49%-15.00
                %
                
                
                -
 
 29
  BEACON
FEDERAL BANCORP, INC.
 
 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 was as
follows:
  September
      30, 2008
                
                
                December
      31, 2007Contract
                
                
                Fair
                
                
                Contract
                
                
                FairAmount
                
                
                Value
                
                
                Amount
                
                
                Value(Dollars
      in Thousands)Standby
      letters of credit
                
                $
                1,391
                
                
                $
                -
                
                
                $
                736
                
                
                $
                -Limited
      recourse obligationsrelated
      to loans sold
                
                $
                917
                
                
                $
                -
                
                
                $
                119
                
                
                $
                -
 
 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 million to the FHLB of New
York.  Approximately $30.4 million has been sold through September 30,
2008.  Under the agreement, the Bank has a maximum guarantee of
$917,000 at September 30, 2008.  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
guarantee.
 
 Recent Accounting
Pronouncements
 
 The
following paragraphs summarize recent accounting pronouncements:
 
 In
September 2006, the Emerging Issues Task Force (EITF) Issue 06-4, “Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements” was ratified.  This EITF
addresses accounting for an arrangement which splits life insurance benefits
between an employer and employee.  The Issue requires the employer to
recognize a liability for future benefits payable to the employee under this
arrangement.  The effects of applying this Issue must be recognized as
either a change in accounting principle through a cumulative-effect adjustment
to stockholders’ equity or through the retrospective application to all prior
periods.   The Issue is effective for fiscal years beginning
after December 15, 2007.  EITF Issue 06-4 was adopted January 1, 2008
and did not have a material impact on the Company’s financial position or
results of operation.
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
define fair value, establish a framework for measuring fair value and expand
disclosures about fair values.  The Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years.  SFAS No. 157 was
adopted January 1, 2008 for financial assets and liabilities and did not have a
material impact on the Company’s financial position or results of
operation.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.”  SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value.  Entities shall report unrealized gains and losses on
those items, which the fair value option has been elected in
earnings.  SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  SFAS
No. 159 was adopted January 1, 2008 and did not have a material impact on the
Company’s financial position or results of operation.
  30
 BEACON
FEDERAL BANCORP, INC.
 In
November 2007, the SEC issued Staff Accounting Bulletin No. 109 (SAB 109),
“Written Loan Commitments Recorded at Fair Value Through
Earnings.”  SAB 109 supercedes SAB 105, “Application of Accounting
Principles to Loan Commitments,” and indicates that the expected net future cash
flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings.  The guidance in SAB 109 is applied on a prospective
basis to derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007.  SAB 109 was adopted January 1,
2008 and did not have a material impact on the Company’s financial position or
results of operation.
 
 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.  The
Company is currently reviewing the applications of SFAS No. 160 and SFAS No. 141
(R).  At September 30, 2008, 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.  The Company is currently reviewing
the applications of SFAS No. 161.
 
 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
October 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active.”  The FSP was effective upon issuance.  FSP
SFAS No. 157 provides clarification of SFAS No. 157, “Fair Value Measurements,”
in determining the fair value of a financial asset when the market for that
financial asset is not active.  Application issues include
consideration of the entity’s own assumptions when measuring fair value when
relevant observable inputs do not exist; available observable inputs in a market
that is not active should be considered when measuring fair value; and market
quotes when assessing the relevance of observable and unobservable data
available to measure fair value.  FSP SFAS No. 157 did not have a
material impact on the Company’s financial position or results of
operation.
 
 31
 
 BEACON
FEDERAL BANCORP, INC.
 
 ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
 
 General.  Because
the majority of our assets and liabilities are sensitive to changes in interest
rates, our most significant form of market risk is interest rate
risk.  We are vulnerable to an increase in interest rates to the
extent that our interest-bearing liabilities mature or reprice more quickly than
our interest-earning assets. As a result, a principal part of our business
strategy is to manage interest rate risk and limit the exposure of our net
interest income to changes in market interest rates.
  Our
interest rate sensitivity is monitored through the use of a net interest income
simulation model, which generates estimates of the change in our net interest
income over a range of interest rate scenarios. The modeling assumes loan
prepayment rates, reinvestment rates and deposit decay rates based on historical
experience and current economic conditions.
 
 Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off-balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  The
Office of Thrift Supervision simulation model uses a discounted cash flow
analysis and an option-based pricing approach to measuring the interest rate
sensitivity of net portfolio value.  The Office of Thrift Supervision
provides us the results of the interest rate sensitivity model, which is based
on information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.
 
 Net Interest
Income.In addition to NPV calculations, we analyze our
sensitivity to changes in interest rates through a net interest income
model.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, such as loans and securities, and
the interest we pay on our interest-bearing liabilities, such as deposits and
borrowings.  In the model, we estimate what our net interest income
would be for a twelve-month period using historical data for assumptions such as
loan prepayment rates and deposit decay rates, the current term structure for
interest rates, and current deposit and loan offering rates. The net interest
income is then estimated for the same period in the event of an instantaneous
200 basis point parallel increase or decrease in market interest
rates.
 
 As of
September 30, 2008, our exposure to interest rate risk has not changed
significantly from disclosures included in the Annual Report on Form 10-K for
the year ended December 31, 2007, as filed with the SEC.
 
 32
  BEACON
FEDERAL BANCORP, INC.
 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.
  33
  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
applicable.
 
 Item
2 – Unregistered Sales of Equity Securities and Use of Proceeds.
 
 (a)
              There
      were no sales of unregistered equity securities during the period covered
      by this Report.(b)
              Not
      applicable.(c)
              There
      were no issuer repurchases of equity securities during the period covered
      by this Report.
 
 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
              Stock
      Certificate of Beacon Federal Bancorp, Inc. (1)10.1
              Form
      of Employee Stock Ownership Plan (1)10.2
              Form
      of Employment Agreement for Chief Executive Officer (1)10.3
              Form
      of Employment Agreement for Chief Financial Officer (1)10.4
              Form
      of Employment Agreement for Executive Officers (1)10.5
              Form
      of Change in Control Agreement (1)10.6
              Beacon
      Federal Excess Benefit Plan (1)10.7
              Beacon
      Federal Annual Cash Incentive Plan (1)10.8
              Supplemental
      Executive Retirement Plan (2)21
              Subsidiaries
      of Registrant (1)31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.0
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.
  34
  BEACON
FEDERAL BANCORP, INC.
 (1)
              Incorporated
      by reference into this document from the Exhibits filed with the
      Securities and Exchange Commission in the Registration Statement on Form
      S-1, and any amendments thereto, Registration No.
    333-143522.(2)
              Incorporated
      by reference to the Current Report on Form 8-K of Beacon Federal Bancorp,
      Inc. filed with the Securities and Exchange Commission on December 28,
      2007.
  35
 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:
      November
      14,2008
              BY:
              /s/ Ross J.
      ProssnerRoss
      J. Prossner, President and Chief Executive OfficerBY:
              /s/ Lisa M.
      JonesLisa
      M. Jones, Vice-President and Principal Financial andAccounting
      Officer






36