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EX-23 - EXHIBIT 23 - Beacon Federal Bancorp, Inc.ex23.htm
EX-32 - EXHIBIT 32 - Beacon Federal Bancorp, Inc.ex32.htm
EX-13 - EXHIBIT 13 - Beacon Federal Bancorp, Inc.ex13.htm
EX-31.1 - EXHIBIT 31.1 - Beacon Federal Bancorp, Inc.ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Beacon Federal Bancorp, Inc.ex31-2.htm


 
 
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
 
FORM 10-K
 
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2009
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 No. 001-33713

 
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
 
 
incorporation or organization)
 
Identification  Number)
 
 
 
6611 Manlius Center Road, East Syracuse, New York
 
13057
 
 
(Address of Principal Executive Offices)
 
Zip Code
 
 
 
(315) 433-0111
 
(Registrant’s telephone number)
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
(Title of Class)
 
Name of exchange on which registered
 
Securities Registered Pursuant to Section 12(g) of the Act:   None
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.  YES  x  NO o.
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  YES o NO o.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o    Accelerated filer o          Non-accelerated filer o          Smaller reporting company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o   NO x
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  YES o   NO x
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o    NO x
 
As of March 12, 2010, 6,533,378 shares of the Registrant’s common stock, $0.01 par value, were issued and outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price as reported on the Nasdaq Global Market on June 30, 2009, was $52.8 million.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Stockholders of the Registrant, which is intended to be filed within 120 days of the Registrant’s fiscal year end, are incorporated by reference into Part III.
 
Portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2009 are incorporated by reference into Part II.

 
 

 

       
   
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
 
This Annual Report on Form 10-K  contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:
 
  ●
statements of our goals, intentions and expectations;
 
  ●
statements regarding our business plans, prospects, growth and operating strategies;
 
  ●
statements regarding the asset quality of our loan and investment portfolios; and
 
  ●
estimates of our risks and future costs and benefits.
 
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-K.
 
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
 
  ●
general economic conditions, either nationally or in our market areas, that are worse than expected;
 
  ●
competition among depository and other financial institutions;
 
  ●
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
 
  ●
adverse changes in the securities markets;
 
  ●
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
 
  ●
our ability to enter new markets successfully and capitalize on growth opportunities;
 
  ●
our ability to successfully integrate acquired entities;
 
  ●
changes in consumer spending, borrowing and savings habits;
 
  ●
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
 
  ●
changes in our organization, compensation and benefit plans;
 
  ●
changes in our financial condition or results of operations that reduce capital available to pay dividends;
 
  ●
regulatory changes or actions; and
 
 
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  ●
changes in the financial condition or future prospects of issuers of securities that we own.
 
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
 
As used in this Form 10-K, unless we specify otherwise, “we,” “us,” “our” and similar terms refer to Beacon Federal Bancorp, Inc., a Maryland corporation, or Beacon Federal, the wholly owned savings association subsidiary of Beacon Federal Bancorp, Inc., as indicated by the context.
 
 
ITEM 1.       BUSINESS
 
Beacon Federal Bancorp, Inc.
 
Beacon Federal Bancorp, Inc. (the “Company”) was incorporated in the State of Maryland in 2007.  We have not engaged in any significant business to date, other than owning all of the issued and outstanding stock of Beacon Federal, a federally chartered savings association that converted to a stock savings association in connection with our initial public offering of common stock in October 2007.  In the future, Beacon Federal Bancorp, Inc., as the holding company of Beacon Federal, is authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies.  See “—Supervision and Regulation—Holding Company Regulation” for a discussion of the activities that are permitted for savings and loan holding companies.  We currently have no understandings or agreements to acquire other financial institutions.  We may also borrow funds for reinvestment in Beacon Federal.
 
We completed our initial public offering of common stock in October 2007. In that offering, Beacon Federal Bancorp, Inc. sold 7,396,431 shares of common stock at $10.00 per share. After costs of $1.8 million directly attributable to the offering, net proceeds excluding the ESOP loan amounted to $66.2 million.  Beacon Federal Bancorp, Inc. contributed $36.1 million of the net proceeds of the offering to Beacon Federal.  In November 2008, Beacon Federal Bancorp, Inc. contributed an additional $10.0 million to Beacon Federal.
 
Our cash flow depends on earnings from the investment of the net proceeds from the offering that we retained, and any dividends we receive from Beacon Federal and shares repurchased.  Beacon Federal Bancorp, Inc. neither owns nor leases any property, but instead pays a fee to Beacon Federal for the use of its premises, equipment and furniture.  At the present time, we employ only persons who are officers of Beacon Federal to serve as officers of Beacon Federal Bancorp, Inc.  We do, however, use the support staff of Beacon Federal from time to time.  We pay a fee to Beacon Federal for the time devoted to Beacon Federal Bancorp, Inc. by employees of Beacon Federal.  However, these persons are not separately compensated by Beacon Federal Bancorp, Inc.  Beacon Federal Bancorp, Inc. may hire additional employees, as appropriate, to the extent it expands its business in the future.
 
Our executive offices are located at 6611 Manlius Center Road, East Syracuse, New York 13057.  Our telephone number at this address is (315) 433-0111. The Company also maintains a website at www.beaconfederal.com that includes important information on our Company, including a list of our products and services, branch locations, and current financial information.  In addition, we make available, without charge, through our website a link to our filings with the SEC, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any.  Information on our website should not be considered a part of this annual report.
 
Beacon Federal
 
General
 
We are a federally chartered savings association headquartered in East Syracuse, New York.  We were organized in 1953 as the Carrier Employees Federal Credit Union, serving the employees of Carrier Corporation in Syracuse, New York. During the 1980s, we grew through mergers with a number of smaller credit unions operating at Carrier Corporation production facilities throughout the United States, including credit unions in Collierville, Tennessee; Tyler, Texas; and McMinnville, Tennessee.
 
 
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In 1986, we changed our name to Beacon Federal Credit Union to enhance growth and diversify our membership by adding select employer groups. In the period through 1996, we added over 150 select employer groups to our membership. We also acquired by merger credit unions in Tyler, Texas; Syracuse, New York; and Concord, Massachusetts. As a result of these mergers, our total assets grew from $28 million in 1985 to over $133 million in 1996.
 
In July 1999, we converted our credit union charter to a federal mutual savings association charter and changed our name to Beacon Federal.  The purpose of our charter conversion was to facilitate our ability to grow by removing the field-of-membership constraints associated with the credit union charter and to allow us to diversify our loan portfolio to include more commercial loans and mortgage loans. As a federal savings association, we have continued to grow, merging with two credit unions in McMinnville, Tennessee in 2000 and 2001, one credit union in Syracuse, New York in 2003, and one credit union in Marcy, New York in 2006.
 
As a result of our acquisitions, we now serve a variety of market areas in economically diverse parts of the country. Moreover, since the completion of our acquisitions, we have expanded our lending and deposit-generating operations in these market areas, and we now maintain a substantial percentage of our operations outside of the upstate New York market area. The following table shows the loan (including loans held for sale and excluding allowance for loan losses) and deposit balances associated with each of our branch offices at December 31, 2009.
 
  Branch  
Total Loans
   
Total Deposits
 
       
   
(In thousands)
 
       
Syracuse, NY*(1)
  $ 614,788     $ 412,442  
Smartt, TN
    32,795       48,166  
Tyler, TX
    33,532       87,821  
Chelmsford, MA
    52,974       66,561  
Smyrna, TN
    70,121       18,347  
Marcy, NY
    21,524       38,370  
Rome, NY
    6,898       21,590  
Total
  $ 832,632     $ 693,297  

*(1)           This includes corporate office, Manlius Center Road and Court Street Road.
 
 We intend to continue to seek to grow by acquisitions of other financial institutions, including credit unions, and branch additions and acquisitions to the extent attractive acquisition opportunities are available, and subject to regulatory constraints.
 
 By operating in geographically and economically diverse market areas, we hope to reduce the negative impact on our overall operations of adverse economic conditions in any one of the market areas we serve.  Further, because demand for our deposit products often differs in our various market areas, we often reduce our overall funding costs by concentrating our deposit generating efforts in markets where demand is high. However, operating in geographically diverse markets does increase management time and expense.
 
 Our principal business consists of originating one- to four-family residential mortgage loans, consumer loans, home equity loans, commercial real estate loans, multi-family mortgage loans and commercial business loans. These loans are originated from our corporate office in East Syracuse, New York, and from our seven full-service branch offices located in East Syracuse, Marcy and Rome, New York; Smartt and Smyrna, Tennessee; Tyler, Texas and Chelmsford, Massachusetts. All loans originated in our branch offices are centrally underwritten in our corporate office.
 
 
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We attract retail deposits from the general public in the areas surrounding our main office and our branch offices.  We also utilize our internet website to generate loan applications and to attract retail deposits.  We retain in our portfolio all adjustable-rate loans that we originate as well as some fixed-rate one- to four-family residential mortgage loans.  While we also retain in our portfolio a portion of the long-term, fixed-rate one- to four-family residential mortgage loans that we originate, we also sell into the secondary mortgage market for interest risk management purposes.  We currently retain the servicing rights on all loans that we sell.
 
Our revenues are derived primarily from interest on loans and mortgage-backed and other investment securities.  We also generate revenues from fees and service charges, as well as from commissions on the sale of investment, tax preparation and insurance products offered by our subsidiary, Beacon Comprehensive Services, Inc.  Our primary sources of funds are deposits, principal and interest payments on securities and loans, and borrowings.
 
Market Area
 
We conduct operations from our corporate headquarters and seven retail branch offices located in New York, Massachusetts, Tennessee and Texas.  Our original office facility was located in East Syracuse, New York, which was formerly home to the headquarters of Carrier Corporation, a large industrial company specializing in heating and air conditioning equipment, which was our original sponsor company while operating as a credit union.  Two of the Tennessee branches are located in central Tennessee, one in Smyrna, a suburb of Nashville, and one in Smartt, a small town outside of McMinnville, Tennessee.  Two of our offices are the former offices of the Marcy Federal Credit Union, which was acquired in late 2006 and which is located in the Rome, New York area.  We operate a network of 23 free-standing ATMs in Onondaga and contiguous counties in New York and one ATM in Tennessee.  We are also a member of the Allpoint network, which provides our customers surcharge-free access to over 37,000 ATMs worldwide.  Our branch offices serve diverse market areas with different employment and economic characteristics.  Altogether, our office network provides us access to a relatively large population base for our products and services.
 
Our primary market area consists of the six counties in which we have our offices — Onondaga and Oneida Counties, New York, Middlesex County, Massachusetts, Rutherford and Warren Counties, Tennessee, and Smith County, Texas, and to a lesser extent contiguous counties.  The six counties had a total population of approximately 2.7 million in 2008.  Our corporate and branch offices in Onondaga County, New York are located in the Syracuse metropolitan area.  Onondaga County had a 2008 population of approximately 453,000, a median household income in 2008 of approximately $51,000, and a December 2009 unemployment rate of 7.6%.  Our Rome, New York offices are located in Oneida County, directly east of Onondaga County.  Oneida County had a 2008 population of approximately 232,000, a median household income in 2008 of approximately $45,000 and a December 2009 unemployment rate of 7.5%.  Onondaga County and Oneida County are both older, slow growth counties with urban populations in the larger cities (Syracuse, Rome and Utica, New York), and extensive rural areas.  Population growth in Onondaga and Oneida Counties was (1.2)% and (1.6)%, respectively, during the 2000 to 2008 period.  While traditionally manufacturing based, these two counties have experienced manufacturing job losses and a slow diversification of their economies over the past several decades.  The largest employers in Onondaga County include Upstate University Health System, Syracuse University, Wegmans Food Markets, Inc. and St. Joseph’s Hospital Health Center.  Currently, the largest private employer in Oneida County is the Turning Stone Casino Resort, which is a gambling enterprise of the Oneida Indian Nation of New York, and the largest private employer in Oneida County.
 
Our Chelmsford, Massachusetts office is located in Middlesex County, Massachusetts, which is near Boston.  Middlesex County had a 2008 population of approximately 1,482,000, a median household income in 2008 of approximately $78,000, and a December 2009 unemployment rate of 7.5%.  Population growth in Middlesex County was 1.1% from 2000 to 2008.  Middlesex County contains a relatively large, diversified economy, with higher incomes and educational characteristics typical of the Boston metropolitan area.
 
Our Smyrna, Tennessee office is located within the Nashville metropolitan area in Rutherford County.  Rutherford County had a 2008 population of approximately 249,000, a median household income in 2008 of approximately $54,000, and a December 2009 unemployment rate of 9.7%.  Rutherford County had population growth of 36.9% from 2000 to 2008.  The largest employers in Rutherford County include Nissan North American, Inc., Rutherford County Government, Middle Tennessee State University, Bridgestone/Firestone Inc., Ingram Book Company and the State Farm Insurance Company.
 
 
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Our office in Smartt, Tennessee, is located in Warren County, which is approximately 50 miles southeast of Smyrna.  Warren County had a 2008 population of approximately 40,000, a median household income in 2008 of approximately $35,000, and a December 2009 unemployment rate of 12.7%.  Population growth in Warren County was 4.1% from 2000 to 2008.  Warren County is a rural market area with a single population center of McMinnville.  This market area has a small overall population base, and a large manufacturing component.  The largest employer in Warren County is Bridgestone, a tire manufacturer in the central Tennessee region.  Warren County also has a large employment base in the nursery and related industries.
 
Our Tyler, Texas office is located in Smith County.  Smith County had a 2008 population of approximately 201,000, a median household income in 2008 of approximately $47,000, and a December 2009 unemployment rate of 8.0%.  Population growth in Smith County was 15.2% from 2000 to 2008.  The Smith County market area contains a relatively large population center in the city of Tyler.  The Tyler economy includes a large health care industry and education-based employment at the University of Texas at Tyler, and also has a large manufacturing employment base.  Currently, the largest employers in Smith County include the Trinity Mother Frances Health Care Center, the East Texas Medical Center, Brookshire Grocery Company, Tyler Independent School District, Trane Company, Wal-Mart, Carrier Corporation and the University of Texas Health Center.
 
Competition
 
We face strong competition from other savings institutions, commercial banks, credit unions and finance companies in originating real estate and consumer loans and in attracting deposits.
 
We attract deposits through our branch office system.  Competition for deposits is principally from other savings institutions, commercial banks and credit unions located in our market areas, as well as mutual funds, internet banking and other alternative investments.  We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates.  Based on branch deposit data provided by the Federal Deposit Insurance Corporation (“FDIC”), at June 30, 2009, our share of deposits was 7.37% in Warren County, Tennessee and 4.91% in Onondaga County, New York.  Our market share was less than 3.0% in all other counties in our market areas.
 
Lending Activities
 
Our principal lending activity is the origination of real estate mortgage loans to purchase or refinance one- to four-family residential real estate.  We also originate a significant number of home equity loans, indirect auto loans and other consumer loans, along with commercial business loans, commercial real estate loans and multi-family real estate mortgage loans.  At December 31, 2009, one- to four-family residential mortgage loans totaled $219.9 million, or 26.6% of our loan portfolio, consumer loans totaled $168.2 million, or 20.4% of our loan portfolio, home equity loans totaled $177.0 million, or 21.4% of our loan portfolio, commercial business loans totaled $101.0 million, or 12.2% of our loan portfolio, commercial real estate loans totaled $117.5 million, or 14.2% of our loan portfolio, construction loans totaled $19.4 million, or 2.3% of our loan portfolio, and multi-family real estate mortgage loans totaled $23.9 million, or 2.9% of our loan portfolio.

 
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Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, excluding loans held for sale, by type of loan at the dates indicated.
 
   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Real estate loans:
                             
One- to four-family residential
  $ 219,863       26.6 %   $ 218,233       28.1 %   $ 212,812       29.9 %   $ 120,615       22.3 %   $ 81,991       18.2 %
Multi-family                                   
    23,862       2.9       20,960       2.7       19,442       2.7       14,187       2.6       12,132       2.7  
Commercial
    117,499       14.2       98,889       12.7       76,697       10.8       61,526       11.4       44,897       10.0  
Construction
    19,392       2.3       19,068       2.5       8,690       1.2       5,286       1.0       4,474       1.0  
Commercial business loans
    101,022       12.2       86,165       11.1       70,181       9.9       51,017       9.5       32,312       7.1  
Home equity
    176,988       21.4       193,498       24.9       203,576       28.6       194,088       35.9       189,846       42.0  
Consumer loans
    168,189       20.4       139,696       18.0       119,992       16.9       93,312       17.3       86,017       19.0  
Total loans
  $ 826,815       100 %   $ 776,509       100.0 %   $ 711,390       100.0 %   $ 540,031       100.0 %   $ 451,669       100.0 %
                                                                                 
Other items:
                                                                               
Net deferred loan costs
    4,877               4,732               4,430               2,258               1,916          
Allowance for loan losses
    (15,631 )             (10,546 )             (6,827 )             (5,192 )             (4,437 )        
                                                                                 
Total loans, net
  $ 816,061             $ 770,695             $ 708,993             $ 537,097             $ 449,148          
 
 
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Loan Portfolio Maturities and Yields.  The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2009.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
 
   
Commercial Mortgage Loans
   
Residential Mortgage Loans
   
Construction Loans
   
Multi-family Loans
 
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
 
(Dollars in thousands)
 
Due During the Years
Ending December 31,
                                               
2010
  $ 7,096       6.32 %   $ 2,911       5.43 %   $ 17,102       3.42 %   $ 2,914       5.40 %
2011
    2,921       6.21       1,508       6.99                          
2012
    10,024       5.30       77       6.54       2,290       6.25       786       6.00  
2013 to 2014
    3,791       5.78       2,085       6.06                   4,500       6.50  
2015 to 2019
    53,181       6.28       13,711       5.37                   5,361       7.15  
2020 to 2024
    11,981       6.33       54,107       4.95                   3,113       5.89  
2025 and beyond
    28,505       5.65       145,464       5.82                   7,188       6.63  
                                                                 
Total
  $ 117,499       6.03 %   $ 219,863       5.59 %   $ 19,392       3.75 %   $ 23,862       6.46 %
 
   
Commercial Business Loans
   
Consumer
   
Home Equity
   
Total
 
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
 
(Dollars in thousands)
 
Due During the Years
Ending December 31,
                                               
2010
  $ 46,428       3.75 %   $ 3,674       8.55 %   $ 1,724       5.34 %   $ 81,849       4.27 %
2011
    2,368       5.72       8,847       7.11       1,454       5.27       17,098       6.59  
2012
    7,195       6.51       18,244       6.86       1,814       5.42       40,430       6.30  
2013 to 2014
    11,605       6.07       88,862       6.34       18,149       4.79       128,992       6.08  
2015 to 2019
    26,048       6.18       43,232       6.54       80,088       5.28       221,621       5.92  
2020 to 2024
    5,084       6.84       3,494       7.97       41,267       6.27       119,046       5.74  
2025 and beyond
    2,294       6.72       1,836       6.76       32,492       6.90       217,779       6.01  
                                                                 
Total
  $ 101,022       5.11 %   $ 168,189       6.58 %   $ 176,988       5.76 %   $ 826,815       5.81 %
 
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2009 that are contractually due after December 31, 2010.
 
   
Due After December 31, 2010
 
   
Fixed Rate
   
Adjustable Rate
   
Total
 
   
(In thousands)
 
Real estate loans:
                 
Commercial
  $ 29,174     $ 81,229     $ 110,403  
One- to four-family residential
    173,121       43,831       216,952  
Construction
    2,290             2,290  
Multi-family                                   
    12,238       8,710       20,948  
Commercial business loans
    43,967       10,627       54,594  
Consumer                                     
    164,474       41       164,515  
Home equity                                     
    139,264       36,000       175,264  
                         
Total loans
  $ 564,528     $ 180,438     $ 744,966  
 
One- to Four-Family Residential Mortgage Loans.  A substantial part of our lending is the origination of one- to four-family residential mortgage loans. At December 31, 2009, $219.9 million, or 26.6% of our total loan portfolio, consisted of these loans.  We offer residential mortgage loans that conform to Freddie Mac underwriting standards (conforming loans) and non-conforming loans.  Our loans have fixed-rates and adjustable-rates, with maturities of up to 30 years, and maximum loan amounts generally of up to $1.0 million.
 
 
9

 
 
We currently offer fixed-rate conventional mortgage loans with terms of up to 30 years that are fully amortizing with monthly or bi-weekly loan payments, and adjustable-rate mortgage loans that provide an initial fixed interest rate for one, three, five, seven or ten years and that amortize over a period up to 30 years.
 
Our one- to four-family residential mortgage loans are generally conforming loans, underwritten according to Freddie Mac guidelines.  We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is currently $417,000 for single-family homes.  We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.”  We only originate fixed-rate jumbo loans with terms of 15 years or greater, and adjustable-rate jumbo loans with an initial fixed-rate period of one, three, five, seven or ten years.
 
We will originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 95%.  We require private mortgage insurance for all loans with loan-to-value ratios in excess of 80%, except we will waive private mortgage insurance on loans with a loan-to-value ratio up to 90% for borrowers who agree to an extra 25 basis points on their loan rate.  In addition, we will originate loans with a combined loan-to-value ratio of 95%, based on an 80% loan-to-value first lien and a 15% loan-to-value home equity loan. As of December 31, 2009, $51.3 million, or 23.3%, of our residential loan portfolio had loan-to-value ratios in excess of 80%.
 
We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgages.  Depending on market interest rates and our capital and liquidity position, we may retain all of our newly originated longer-term fixed-rate residential mortgage loans or we may sell all or a portion of such loans in the secondary mortgage market to government sponsored entities, including Federal Home Loan Bank of New York and  Freddie Mac, or other purchasers. We currently retain the servicing rights on all loans sold in order to generate fee income and reinforce our commitment to customer service.  For the year ended December 31, 2009, we received servicing fees of $853,000.  As of December 31, 2009, the principal balance of loans serviced for others totaled $125.0 million.
 
We currently offer several adjustable-rate mortgage loans secured by residential properties with interest rates that are fixed for an initial period ranging from one year to ten years.  We offer adjustable-rate mortgage loans that are fully amortizing.  After the initial fixed period, the interest rate on adjustable-rate mortgage loans is generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board, subject to periodic and lifetime limitations on interest rate changes.  All of our adjustable-rate mortgage loans with initial fixed-rate periods of one, three and five years have initial and periodic caps of two percentage points on interest rate changes, with a cap of six percentage points for the life of the loan.  Our adjustable-rate mortgage loans with an initial fixed-rate period of seven or ten years have an initial cap of five percentage points on changes in the interest rate, with a two percentage point cap on subsequent changes and a cap of five percentage points for the life of the loan.  We offer fully amortizing convertible adjustable-rate mortgage loans with principal and interest payments due on the note’s first payment date.  The convertible adjustable-rate mortgage loans have an option for the borrower to convert the variable interest rate to a fixed interest rate on specified rate change dates, for a conversion fee.  We also offer fully amortizing “Interest First” adjustable-rate mortgage loans with interest only payments due until the first rate change date, then principal and interest due thereafter for the remaining term of the loan.
 
Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans.   We underwrite convertible adjustable-rate mortgage loan applications on the basis of the applicant’s qualifications assuming a two-percentage point increase to the initial note rate on loans fixed for an initial period of one year, and at the initial note rate for loans fixed for an initial period of three, five, seven or ten years.  We underwrite all of the “Interest First” adjustable-rate mortgage loan applications on the basis of the applicant’s qualifications assuming the maximum principal and interest payment after the initial fixed interest period, and the allowable annual and lifetime caps for the loan program.
 
Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans, primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default.
 
 
10

 
 
While we offer a limited number of “interest only” loans, where the borrower pays interest for an initial period after which the loan converts to a fully amortizing loan, we do not offer “Option ARM” or negative amortization loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.
 
We require title insurance on all of our one- to four-family residential mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements.  We do not conduct environmental testing on residential mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan.
 
Multi-Family Residential Mortgage Loans. Loans secured by multi-family residential real estate totaled $23.9 million, or 2.9% of our total loan portfolio, at December 31, 2009.  Multi-family real estate mortgage loans generally are secured by multi-family rental properties, such as apartment buildings.  At December 31, 2009, we had 40 multi-family residential mortgage loans with an average loan balance of approximately $597,000.  The majority of these loans have adjustable interest rates.
 
In underwriting multi-family residential mortgage loans, we consider a number of factors, which include the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 115%), the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties.  Multi-family residential mortgage loans are originated in amounts up to 80% of the appraised value of the property securing the loan.  Personal guarantees are usually obtained from multi-family mortgage borrowers.
 
Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.  At December 31, 2009, our largest multi-family residential mortgage loan had an outstanding balance of $4.5 million and was secured by a seven unit condominium building.  The loan is currently performing in accordance with its terms.
 
Commercial Real Estate Loans.  We originate commercial real estate loans secured primarily by office buildings. As of December 31, 2009, we had one commercial real estate loan participation.  Loans secured by commercial real estate totaled $117.5 million, or 14.2% of our total loan portfolio, at December 31, 2009, and consisted of 155 loans outstanding with an average loan balance of approximately $758,000, although there are a large number of loans with balances substantially greater than this average.  A majority of our commercial real estate loans are secured by properties located in upstate New York and in the Nashville, Tennessee area.
 
Our commercial real estate loans are primarily written as five- or 10-year adjustable-rate mortgages.  Amortization of these loans is typically based on 20- to 25-year payout schedules.  We also originate 10- to 15-year fixed-rate, fully amortizing loans.  Margins generally range from 200 basis points to 500 basis points above the applicable Federal Home Loan Bank advance rate.
 
In the underwriting of commercial real estate loans, we generally lend up to 75% of the property’s appraised value.  We base our decisions to lend on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 115%), computed after deduction for a vacancy factor and property expenses we deem appropriate.  Personal guarantees are usually obtained from commercial real estate borrowers.  We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.
 
 
11

 
 
Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans.  Commercial real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.  At December 31, 2009, our largest commercial real estate loan had an outstanding balance of $5.4 million, was secured by properties located in East Syracuse, NY, and was performing in accordance with its terms.
 
Construction Loans.  We originate a limited number of construction loans for the purchase of developed lots and raw land and for the construction of single-family residences.  Construction loans are offered to individuals for the construction of their personal residences (owner-occupied), and to qualified developers.  At December 31, 2009, construction loans totaled $19.4 million, or 2.3% of total loans.  At December 31, 2009, the commitment to advance additional portions of these construction loans totaled $4.2 million.
 
We grant construction loans to area builders, often in conjunction with development loans.  In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property.  Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to 80% of actual construction costs and a 75% loan-to-completed-appraised-value ratio.  Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers.  In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction.  We commit to provide the permanent mortgage financing on most of our construction loans on income-producing property.
 
Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser.  We generally also review and inspect each property before disbursement of funds during the term of the construction loan.
 
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions.  If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.  Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property.  In the event we make a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed.  Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs.  In addition, the ultimate sale or rental of the property may not occur as anticipated.
 
Commercial Business Loans. We make various types of secured and unsecured commercial business loans to customers in our market area for the purpose of acquiring equipment and other general business purposes.  The terms of these loans generally range from less than one year to a maximum of ten years.  The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a lending rate that is determined internally, or a short-term market rate index such as the prime rate or 90-day LIBOR rate.  At December 31, 2009, we had 395 commercial loans outstanding with an aggregate balance of $101.0 million, or 12.2% of our total loans.  As of December 31, 2009, the average commercial business loan balance was approximately $255,000, although there are a large number of loans with balances substantially greater than this average. At December 31, 2009, we had $26.3 million in unsecured commercial business loans. Substantially all of our commercial business loans are made to borrowers located in upstate New York and the Nashville, Tennessee area.
 
 
12

 
 
Commercial credit decisions are based upon our credit assessment of the loan applicant. We determine the applicant’s ability to repay in accordance with the proposed terms of the loans and we assess the risks involved. An evaluation is made of the applicant to determine character and capacity to manage.  Personal guarantees of the principals are usually obtained.  In addition to evaluating the loan applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan.  Credit agency reports of the applicant’s credit history supplement our analysis of the applicant’s creditworthiness.  We may also check with other banks and conduct trade investigations.  Collateral supporting a secured transaction is analyzed to determine its marketability.  Commercial business loans generally have higher interest rates than residential loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral.  Our pricing of commercial business loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships.  At December 31, 2009, our largest commercial business loan was made to a borrower located in East Syracuse, NY.  This loan had an outstanding balance of $8.0 million and is currently performing in accordance with its terms.
 
Home Equity Loans.  We offer home equity loans, which are primarily secured by first or second mortgages on one- to four-family residences. At December 31, 2009, home equity loans totaled $177.0 million, or 21.4% of total loans. Additionally, at December 31, 2009, our home equity lines of credit committed to be advanced totaled $38.2 million.  We offer home equity loan products, including both installment loans and revolving credit loans.
 
The underwriting standards for home equity loans include a title review, a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan, and the value of the collateral securing the loan.  The combined loan-to-value ratio (first and second mortgage liens) for home equity loans can be as high as 95%.  A home equity loan originated along with a home purchase loan requires the borrower to pay closing costs. Home equity loans are offered with both fixed and variable interest rates, and installment fixed home equity loans have repayment terms of up to 20 years.  At December 31, 2009, our largest home equity loan had an outstanding balance of $1.8 million, and was performing in accordance with its terms.
 
Home equity loans secured by second mortgages have greater risk than residential mortgage loans secured by first mortgages.  We face the risk that the collateral will be insufficient to compensate us for loan losses. When customers default on their loans, we attempt to foreclose on the property or seize the collateral securing the loan.  However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loan activities, decreases in real estate values could adversely affect the value of property used as collateral for our loans.
 
Consumer Loans. As a former credit union, we have traditionally originated a large volume of consumer loans, primarily direct automobile loans. In March 2006, we began to originate indirect automobile loans and we have established relationships with a number of automobile dealers in Central New York. While direct automobile loans as a percentage of our total loans have decreased in recent years and are expected to continue to decrease, indirect automobile loans are expected to increase as a percentage of our total loans.  For new automobiles, our lending policy provides that the amount financed can be up to 100% of the value of the vehicle, plus applicable taxes and dealer charges (i.e., warranty and insurance charges).  For used automobiles, our lending policy provides that the amount of the loan should not exceed the “loan value” of the vehicle, as established by industry guides. The interest rates offered on automobile loans are generally the same for new and late-model used automobiles.  Full insurance coverage must be maintained on the financed vehicle, and Beacon Federal must be named loss payee on the policy.  At December 31, 2009, we had $143.2 million of automobile loans, which amounted to 17.4% of our total loans. At December 31, 2009, indirect automobile loans totaled $111.6 million.
 
We offer a variety of other consumer loans, principally to customers with acceptable credit ratings residing in our primary market area. Our other consumer loans generally consist of secured and unsecured personal loans, motorcycle and motor home loans and boat loans.  Other consumer loans totaled $25.0 million, or 3.0% of our total loans at December 31, 2009. Unsecured personal loans totaled $7.2 million at December 31, 2009.
 
Consumer loans have greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles, motorcycles, motor homes and boats.  In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.  In addition, consumer loan collections depend on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
 
 
13

 
 
Loan Originations, Purchases, Sales, Participations and Servicing.  Lending activities are conducted primarily by our loan personnel operating at our corporate and branch office locations.  All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate Freddie Mac underwriting guidelines to the extent applicable.  We originate both adjustable-rate and fixed-rate loans.  Our ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates.  Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand.  Most of our commercial real estate, multi-family real estate and commercial business loans are generated by referrals from accountants and other professional contacts.  Most of our one- to four-family residential mortgage loan, consumer loan and home equity loan originations are generated by referrals from brokers, loan originators, walk-in business, our internet website, and from automobile dealers participating in our indirect auto loan program.  We also advertise extensively throughout our market areas.
 
We decide whether to retain the loans that we originate or sell loans in the secondary market after evaluating current and projected market interest rates, our interest rate risk objectives, our liquidity needs and other factors.  We sold $90.9 million of residential mortgage loans (all fixed-rate loans, with terms of 15 years or longer) during the year ended December 31, 2009. We had $940,000 in loans held for sale in the secondary market at December 31, 2009.
 
At December 31, 2009, we were servicing loans owned by others with a principal balance of $125.0 million.  Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.  We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities.
 
Loan Approval Procedures and Authority.  Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by Beacon Federal’s Board of Directors.  The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan.  To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.
 
Beacon Federal’s policies and loan approval limits are established by the Board of Directors.  Aggregate lending relationships in amounts up to $500,000 that are secured by real estate, and in amounts up to $200,000 if unsecured, may be approved by specified loan officers. All loans in excess of the individual officer limits must be approved by the Officers’ Loan Committee, consisting of Beacon Federal’s Chief Executive Officer and Senior Vice Presidents. All loans in excess of the Officers’ Loan Committee limit ($500,000) and less than $1.0 million must be approved by the Executive Committee of the Board of Directors. Loans in excess of $1.0 million are approved by the full Board of Directors.
 
We require appraisals by independent, licensed, third-party appraisers of all real property securing loans.  All appraisers are approved by the Board of Directors annually.

 
14

 

Non-Performing and Problem Assets
 
When a loan is 15 days past due, we send the borrower a delinquency notice.  When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency, and we attempt to contact the borrower directly to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date.  If necessary, subsequent late charges and delinquency notices are issued and the account will be monitored on a regular basis thereafter.  By the 90th day of delinquency, we will send the borrower a final demand for payment and we may recommend foreclosure.  Any of our officers can accelerate these time frames in consultation with certain of our executive officers.  A summary report of all loans 30 days or more past due is provided to the Board of Directors of Beacon Federal monthly.
 
Loans are automatically placed on non-accrual status when payment of principal or interest is more than 120 days delinquent.  Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured.  When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.  The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 120 days delinquent.
 
Non-Performing Assets.  The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.  At December 31, 2009, we had one troubled debt restructuring of $3.0 million which is included in non-accrual loans.
 
   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Non-accrual loans:
                             
Real estate loans:
                             
Construction                                    
  $ 510     $     $     $     $  
Multi-family                                    
    3,753       607                    
Commercial                                    
    5,763       2,439                    
One- to four-family residential
    1,151       179       84             23  
Commercial business loans
    710       486                   652  
Consumer loans                                        
    2                         17  
Home equity                                        
    172             52              
Total non-accrual loans
    12,061       3,711       136             692  
                                         
Loans greater than 90 days delinquent and still accruing:
                                       
Real estate loans:
                                       
Commercial
            788                    
Multifamily
                  619              
One- to four-family residential
    101             96       4        
Commercial business loans
    669       177                    
Consumer loans                                        
            10       20              
Home equity                                        
    57                         44  
                                         
Total loans greater than 90 days delinquent and still accruing
    827       975       735       4       44  
                                         
Impaired commercial business loans
                222              
Total non-performing loans 
    12,888       4,686       1,093       4       736  
                                         
Foreclosed and repossessed assets:
                                       
Real estate:
                                       
Home Equity
    37       61                    
Commercial
    710             108       869        
Home Equity
                87              
One- to four-family residential
                      25        
Repossessed assets                                        
    50       88       124       58       174  
Total foreclosed and repossessed assets
    797       149       319       952       174  
                                         
Total non-performing assets
  $ 13,685     $ 4,835     $ 1,412     $ 956     $ 910  
                                         
Ratios:
                                       
Non-performing loans to total loans
    1.56 %     0.60 %     0.15 %     %     0.16 %
Non-performing assets to total assets
    1.28 %     0.47 %     0.16 %     0.16 %     0.18 %

 
15

 

At December 31, 2009, Beacon Federal 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 borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or impaired.
 
Interest income that would have been recorded for the year ended December 31, 2009, had nonaccruing loans been current according to their original terms amounted to $328,000.  Interest of $219,000 was recognized on these loans and is included in net income for the year ended December 31, 2009.
 
Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
 
   
Loans Delinquent For
       
   
60-89 Days
   
90 Days and Over
   
Total
 
   
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
   
                                             (Dollars in thousands)
 
At December 31, 2009
                                   
Real estate loans:
                                   
Construction                                  
        $       1     $ 510       1     $ 510  
Commercial                                  
                7       5,763       7       5,763  
One- to four-family residential
                5       1,252       5       1,252  
Multi-family                                  
    2       734       6       3,753       8       4,487  
Commercial business loans
    6       1,242       8       1,379       14       2,621  
Consumer loans                                     
    7       30       1       2       8       32  
Home equity                                     
    2       75       6       229       8       304  
Total                                  
    17     $ 2,081       34     $ 12,888       51     $ 14,969  
                                                 
At December 31, 2008
                                               
Real estate loans:
                                               
Commercial                                  
    4     $ 2,417       3     $ 3,227       7     $ 5,644  
One- to four-family residential
                2       179       2       179  
Multi-family                                  
    1       2,418       1       607       2       3,025  
Commercial business loans
    3       724       3       663       6       1,387  
Consumer loans                                     
    13       103       1       10       14       113  
Home equity                                     
    7       286                   7       286  
Total                                  
    28     $ 5,948       10     $ 4,686       38     $ 10,634  
                                                 
At December 31, 2007
                                               
Real estate loans:
                                               
One- to four-family residential
    1     $ 45       2     $ 180       3     $ 225  
Multi-family                                  
                1       619       1       619  
Commercial business loans
    1       68                   1       68  
Consumer loans                                     
    6       76       1       20       7       96  
Home equity                                     
    1       77       1       52       2       129  
Total                                  
    9     $ 266       5     $ 871       14     $ 1,137  
                                                 
At December 31, 2006
                                               
Real estate loans:
                                               
One- to four-family residential
    2     $ 47       1     $ 4       3     $ 51  
Construction
    1       150                   1       150  
Consumer loans                                     
    4       61                   4       61  
Home equity                                     
    2       67                   2       67  
Total                                  
    9     $ 325       1     $ 4       10     $ 329  
                                                 
At December 31, 2005
                                               
Real estate loans:
                                               
One- to four-family residential
    3     $ 81       1     $ 23       4     $ 104  
Commercial business loans
                2       652       2       652  
Consumer loans                                     
    11       57       11       17       22       74  
Home equity                                     
                1       44       1       44  
Total                                  
    14     $ 138       15     $ 736       29     $ 874  
 
 
16

 
 
Foreclosed and Repossessed Assets.  Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate until sold.  When property is acquired it is recorded at the lower of cost or estimated fair value at the date of foreclosure, establishing a new cost basis.  Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property.  Holding costs and declines in estimated fair value result in charges to expense after acquisition. In addition, we periodically repossess certain collateral, including automobiles and other titled vehicles. At December 31, 2009, we had $747,000 in foreclosed real estate and $50,000 in repossessed assets.
 
Classification of Assets.  Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.  Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.  As of December 31, 2009, we had $16.7 million of assets designated as special mention.
 
When we classify assets as either substandard or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent.  The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.  Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our principal federal regulator, the OTS, which can require that we establish additional loss allowances.  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 December 31, 2009, classified assets consisted of substandard assets of $13.5 million, doubtful assets of $2.4 million and no loss assets.  As of December 31, 2009, our largest substandard asset was secured by first mortgage lien on undeveloped land, with a principal balance of $3.0 million.
 
Allowance for Loan Losses
 
We provide for loan losses based on the allowance method.  Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.  We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. generally accepted accounting principles.  The allowance for loan losses consists of two components:
 
 
 (1)
specific allowances established for any impaired loans for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows or loans otherwise adversely classified; and
 
 
 (2)
general allowances for loan losses for each loan type based on the historical loan loss experience for the last four years, including adjustments to historical loss experience, maintained to cover uncertainties that affect our estimate of probable losses for each loan type.
 
The adjustments to historical loss experience are based on our evaluation of several factors, including:
 
 
●  
changes in lending policies and procedures, including underwriting standards;
 
 
●  
changes in collection, charge-off and recovery practices;
 
 
●  
changes in the nature and volume of the loan portfolio;
 
 
17

 
 
 
●  
changes in the experience, ability, and depth of lending management;
 
 
●  
changes in the volume and severity of past due loans, non-accrual loans, troubled debt restructurings, and adversely classified loans;
 
 
●  
changes in the value of underlying collateral for collateral-dependent loans;
 
 
●  
the existence and effect of any concentrations of credit and changes in the level of such concentrations;
 
 
●  
changes in current, national and local economic and business conditions; and
 
 
●  
the effect of other external factors such as competition and legal and regulatory requirements.
 
We evaluate the allowance for loan losses based upon the combined total of the specific and general components.  Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase.  In contrast, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
 
We originate one- to four-family residential mortgage loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 95%.  We require private mortgage insurance for all loans with loan-to-value ratios in excess of 80%, except we will waive private mortgage insurance on loans with a loan-to-value ratio up to 90% for borrowers who agree to an extra 25 basis points on their loan rate.  In addition, we will originate loans with a combined loan-to-value ratio of 95%, based on an 80% loan-to-value first lien and a 15% loan-to-value home equity loan. As of December 31, 2009, $51.3 million, or 23.3%, of our residential loan portfolio had loan-to-value ratios in excess of 80%.  These loans are reviewed on a regular basis by management to determine whether any probable losses exist, if any, as a result of declines in collateral value.
 
Commercial real estate loans generally have greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers.  In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
 
Commercial business loans involve a higher risk of default than residential loans of like duration since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of collateral, if any.  Loans secured by multi-family residential mortgages generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family mortgages typically depends upon the successful operation of the related real estate property.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
 
Construction loans generally have greater credit risk than traditional one- to four-family residential mortgage loans.  The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements.  In the event we make a loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed.  These events may adversely affect the borrower and the collateral value of the property.  Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs.  In addition, the ultimate sale or rental of the property may not occur as anticipated.
 
 
18

 
 
We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly.  While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.  In addition, as an integral part of their examination process, the OTS periodically reviews the allowance for loan losses.  The OTS may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
 
There were no changes in our non-accrual or charge-off policies during 2009.  Interest income on mortgage and commercial loans is discontinued at the time the loan is 120 days delinquent unless the loan is well-secured and in process of collection.  Accrued interest income on consumer loans are typically charged off no later than 120 days past due.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
 
All interest accrued, but not received for loans placed on non-accrual, is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 120 days delinquent.  We do not presently originate any loans with terms that allow for minimum payments less than the interest accrued on the loan.
 
The following table sets forth activity in our allowance for loan losses for the years indicated.
 
   
At or For the Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 10,546     $ 6,827     $ 5,192     $ 4,437     $ 3,454  
                                         
Charge-offs:
                                       
Real estate loans:
                                       
Construction
          (138 )                  
Commercial
    (1,179 )     (277 )     (108 )            
One- to four-family residential
    (39 )     (40 )     (15 )            
Multifamily
                      (32 )      
Commercial business loans
    (132 )     (3,806 )     (277 )     (560 )      
Consumer loans
    (1,737 )     (1,098 )     (504 )     (409 )     (590 )
Home equity
    (123 )     (63 )     (68 )     (2 )     (96 )
Total charge-offs
    (3,210 )     (5,422 )     (972 )     (1,003 )     (686 )
                                         
Recoveries:
                                       
Real estate loans:
                                       
Multifamily
                             
Commercial business loans
    8       4             355       393  
Consumer loans
    580       280       293       331       51  
Home equity
    12             10       6        
Total recoveries
    600       284       303       692       444  
                                         
Net charge-offs
    (2,610 )     (5,138 )     (669 )     (311 )     (242 )
Provision for loan losses
    7,695       8,857       2,304       1,066       1,225  
                                         
Balance at end of year
  $ 15,631     $ 10,546     $ 6,827     $ 5,192     $ 4,437  
                                         
Ratios:
                                       
Net charge-offs to average loans outstanding (annualized)
    0.32 %     1.40 %     0.11 %     0.06 %     0.06 %
Allowance for loan losses to non-performing loans at end of year
    121.28 %     225.05 %     624.61 %  
NM
   
NM
 
Allowance for loan losses to total loans at end of year
    1.89 %     1.36 %     0.96 %     0.96 %     0.98 %
 

NM-Not meaningful.

 
19

 

Allocation of Allowance for Loan Losses.  The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated.  The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Allowance for
Loan Losses
   
Percent of
Loans in Each
Category to
Total Loans
   
Allowance for
Loan Losses
   
Percent of
Loans in Each
Category to
Total Loans
   
Allowance for
Loan Losses
   
Percent of
Loans in Each
Category to
Total Loans
 
         
(Dollars in thousands)
       
                                     
Real estate loans:
                                   
One- to four-family residential
  $ 1,545       26.6 %   $ 1,157       28.1 %   $ 190       29.9 %
Multi-family
    1,495       2.9       369       2.7       200       2.7  
Commercial
    4,949       14.2       2,162       12.7       1,444       10.8  
Construction
    110       2.3             2.5             1.2  
Commercial business loans
    4,201       12.2       3,549       11.1       2,597       9.9  
Home equity                                      
    541       21.4       987       24.9       970       28.6  
Consumer loans
    2,790       20.4       2,322       18.0       1,426       16.9  
Total                                      
  $ 15,631       100 %   $ 10,546       100.0 %   $ 6,827       100.0 %
 
   
At December 31,
 
   
2006
   
2005
 
   
Allowance for
Loan Losses
   
Percent of
Loans in Each
Category to
Total Loans
   
Allowance for
Loan Losses
   
Percent of
Loans in Each
Category to
Total Loans
 
   
(Dollars in thousands)
 
Real estate loans:
                       
One- to four-family residential
  $ 896       22.3 %   $ 827       18.2 %
Multi-family
    431       2.6       223       2.7  
Commercial
    703       11.4       680       10.0  
Construction
    34       1.0       15       1.0  
Commercial business loans
    340       9.5       605       7.1  
Home equity                                      
    433       35.9       788       42.0  
Consumer loans
    2,355       17.3       1,299       19.0  
Total                                  
  $ 5,192       100.0 %   $ 4,437       100.0 %
 
Investments
 
The asset/liability management committee, consisting of Beacon Federal’s President and Chief Executive Officer, Senior Vice President and Principal Financial Officer, two members of its Board of Directors and one additional officer of Beacon Federal, has primary responsibility for establishing and overseeing Beacon Federal’s investment policy, subject to oversight by our entire Board of Directors.  Authority to make investments under approved guidelines is delegated to the President and Chief Executive Officer and his designated investment officers. These officers are authorized to execute investment transactions up to $10 million per transaction with the prior approval of the committee. All investment transactions are reported to the Board of Directors for ratification at the next regular board meeting.
 
The investment policy is reviewed at least annually by the asset/liability management committee, and any changes to the policy are subject to ratification by the full Board of Directors.  This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, and consistency with our interest rate risk management strategy.
 
Our current investment policy requires that we invest primarily in debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises.  The policy also permits investments in mortgage-backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations (“CMOs”) issued or backed by securities issued by these government-sponsored enterprises, as well as securities rated as “A” or higher issued by private issuers.  The investment policy also permits investments in “A”-rated asset-backed securities, bankers acceptances, money market funds and federal funds.
 
 
20

 
 
Our current investment policy does not permit investment in common stock of government agencies and government sponsored enterprises or in equity securities, other than our required investment in the capital stock of the Federal Home Loan Bank of New York.  As a federal savings association, Beacon Federal is not permitted to invest in equity securities.  This general restriction does not apply to Beacon Federal Bancorp, Inc.
 
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10 requires that, at the time of purchase, we designate a security as held-to-maturity, available-for-sale, or trading, depending on our ability and intent.  Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost.
 
Our securities portfolio at December 31, 2009, consisted of $46.1 million of mortgage-backed securities issued or guaranteed by the United States Government or United States Government-sponsored enterprises, $79.6 million of United States Government Agency collateralized mortgage obligations, $25.0 million of “private label” collateralized mortgage obligations, $26.1 million of debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises, and $5.0 million of pooled trust preferred securities.
 
United States Government and Federal Agency Obligations.  While United States Government and federal agency securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and as an interest rate risk hedge in the event of significant mortgage loan prepayments.
 
Mortgage-Backed Securities.  We invest in mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Our policy allows us to purchase privately-issued mortgage-backed securities rated “A” or higher, although in practice we generally limit purchases of such securities to those rated “AAA.” We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae.
 
Mortgage-backed securities are created by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the underlying mortgages.  Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages.  The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Beacon Federal.  Some securities pools are guaranteed as to payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements.  However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities.  In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations.  Finally, mortgage-backed securities are assigned lower risk weightings for purposes of calculating our risk-based capital level.
 
Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities.  We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
 
CMOs are debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics.  The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. See Note 3 of Notes to Consolidated Financial Statements for further information regarding collateralized mortgage obligations.
 
 
21

 
 
Other-Than-Temporary Impairment (“OTTI”) Losses.  We review securities with significant declines in fair value on a periodic basis to determine whether they should be considered temporarily or other-than-temporarily impaired.  If a decline in the fair value of equity securities is determined to be other-than-temporary, we are required to reduce the carrying value of the security to its fair value and record a non-cash impairment charge in the amount of the decline, net of tax effect, against our current income.  If a decline in the fair value of debt securities is determined to be other-than-temporary, we are required to reduce the carrying amount of the debt security to its fair value and record a non-cash impairment charge to earnings for the portion of decline due to credit loss, with the remaining decline charged directly to other comprehensive income.  For the year ended December 31, 2009, we recorded an aggregate impairment charge to earnings of $1.7 million on four collateralized mortgage obligations and two trust preferred securities.
 
Investment Securities Portfolio.  The following tables set forth the composition of our investment securities portfolio at the dates indicated.
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
                                     
Securities held to maturity:
                                   
Mortgage-backed securities:
                                   
Freddie Mac
  $ 1,091     $ 1,101     $ 1,566     $ 1,547     $ 2,701     $ 2,658  
Ginnie Mae
    3       3       3       3       4       4  
Fannie Mae
    3,756       3,862       4,722       4,747       5,509       5,429  
Collateralized mortgage obligations
    9,711       9,534       17,024       15,658       21,274       20,941  
Total
  $ 14,561     $ 14,500     $ 23,315     $ 21,955     $ 29,488     $ 29,032  
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
   
Amortized
Cost
   
Fair Value
 
   
(In thousands)
 
Securities available for sale:
                                   
Agencies
  $ 26,002     $ 25,972     $ 3,000     $ 3,003     $ 16,000     $ 16,081  
Treasuries
    100       101       100       103       150       151  
Agency preferred stock
                            5,650       5,785  
Pooled trust preferred securities
    12,755       5,012       12,318       4,783       14,523       14,524  
Mortgage-backed securities
    39,629       41,253       47,508       48,642       9,715       9,825  
Collateralized mortgage obligations
    97,754       94,900       90,627       83,272       47,370       46,493  
Total
  $ 176,240     $ 167,238     $ 153,553     $ 139,803     $ 93,408     $ 92,859  
 
 
22

 

Investment Securities Portfolio Maturities and Yields.  The composition and maturities of the investment securities portfolio at December 31, 2009 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the repricing characteristics, or the impact of prepayments or early redemptions that may occur.
 
   
One Year or Less
   
More than One Year
through Five Years
   
More than Five Years
through Ten Years
   
More than Ten Years
   
Total Securities
 
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
 Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Fair Value
   
Weighted
Average
Yield
 
   
(Dollars in thousands)
 
                                                                   
Securities held to maturity:
                                                                 
Mortgage-backed securities
  $       %   $ 358       4.5 %   $ 710       4.50 %   $ 3,782       4.62 %   $ 4,850     $ 4,966       4.59 %
Collateralized mortgage obligations
          %           %     2,302       6.07 %     7,409       4.85 %     9,711       9,534       5.14 %
Total:
  $       %   $ 358       4.5 %   $ 3,012       5.07 %   $ 11,191       4.77 %   $ 14,561     $ 14,500       4.96 %
                                                                                         
Securities available for sale:
                                                                                       
Treasuries
    100       2.38 %           %           %           %     100       101       2.38 %
Agencies
                11,005       2.66       9,997       2.50       5,000       4.00       26,002       25,972       2.86  
Pooled trust preferred
                                        12,755       0.99       12,755       5,012       0.99  
Mortgage-backed securities
                            5,628       4.30       34,001       5.14       39,629       41,253       5.02  
Collateralized mortgage obligations
          %     1,406       5.50 %     9,222       3.87 %     87,126       5.14 %     97,754       94,900       5.03 %
Total
  $ 100       2.38 %   $ 12,411       2.98 %   $ 24,847       3.42 %   $ 138,882       4.72 %   $ 176,240     $ 167,238       4.41 %
                                                                                         
 
 
23

 

Sources of Funds
 
General.  Deposits traditionally have been our primary source of funds for our lending and investment activities.  We also borrow, primarily from the Federal Home Loan Bank of New York to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds.  Our additional sources of funds are the proceeds of loan sales, scheduled loan payments, maturing investments, loan prepayments, collateralized wholesale borrowings, retained earnings and income on other earning assets.
 
Deposits.  We generate deposits primarily from the areas in which our branch offices are located.  We rely on our competitive pricing, convenient locations and customer service to attract and retain deposits.  We offer a variety of deposit accounts with a range of interest rates and terms.  Our deposit accounts consist of savings accounts, health savings accounts, certificates of deposit, NOW accounts, money market accounts, non-interest bearing checking accounts and individual retirement accounts.  We accept brokered deposits and at December 31, 2009, we had $62.7 million in brokered deposits compared to $77.5 million a year ago. Brokered deposits represent an alternative and immediate source of funds and currently bear a lower interest rate than local, retail deposits. Brokered deposits are highly susceptible to withdrawal if the rates we pay on such deposits are not competitive.  Included in brokered deposits are Certificate of Deposit Account Registry Service (“CDARS”) deposits which amounted to $12.1 million at December 31, 2009.
 
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis.  Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, interest rates paid by competitors and our deposit growth goals.
 
At December 31, 2009, we had a total of $393.6 million in certificates of deposit, of which $242.0 million had remaining maturities of one year or less.  Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.
 
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Balance
   
Percent
   
Weighted
Average
Rate
   
Balance
   
Percent
   
Weighted
Average
Rate
   
Balance
   
Percent
   
Weighted
Average
Rate
 
   
(Dollars in thousands)
 
                                                       
Noninterest-bearing checking
  $ 32,292       4.6 %     %   $ 30,496       4.9 %     %   $ 24,611       4.8 %     %
Interest bearing checking
    51,824       7.5       0.61       50,339       8.0       2.4       38,472       7.5       4.0  
Savings accounts                                
    59,868       8.6       0.28       56,734       9.1       0.4       59,989       11.7       1.0  
Money market accounts
    155,740       22.5       1.41       147,268       23.5       3.0       128,258       24.9       4.4  
Certificates of deposit
    393,573       56.8       2.74       341,630       54.5       3.7       263,158       51.1       4.9  
                                                                         
Total deposits
  $ 693,297       100.0 %     1.72 %   $ 626,467       100.0 %     3.0 %   $ 514,488       100.0 %     4.0 %
 
 
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As of December 31, 2009, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $136.8 million.  The following table sets forth the maturity of those certificates as of December 31, 2009.
 
 
Maturity Period
 
At
December 31, 2009
 
     
(In thousands)
 
         
 
Three months or less                                           
  $ 25,343  
 
Over three months through six months
    31,730  
 
Over six months through one year
    42,950  
 
Over one year to three years
    31,118  
 
Over three years                                           
    5,668  
           
 
Total                                           
  $ 136,809  
 
The following table sets forth the amount and maturities of time deposits at December 31, 2009.
 
       
Amount Due in
 
       
2010
One Year or
Less
   
2011
1-2 Years
   
2012
2-3 Years
   
2013
3-4 Years
   
2014
4-5 Years
   
Total
 
       
(In thousands)
 
 
Interest Rate
                                     
 
Less than 2.00%
    $ 66,812     $ 9,536     $     $     $     $ 76,348  
      2.00% - 2.99%       97,014       36,418       25,838       1,884       159       161,313  
    3.00% - 3.99%       57,951       13,546       6,976       22,972       18,916       120,361  
    4.00% - 4.99%       17,107       9,726       3,782       1,857             32,472  
    5.00% - 5.99%       3,079                               3,079  
                                                       
 
Total
    $ 241,963     $ 69,226     $ 36,596     $ 26,713     $ 19,075     $ 393,573  

The following table sets forth time deposits classified by interest rate as of the dates indicated.
 
       
At December 31,
 
       
2009
   
2008
   
2007
 
       
(In thousands)
 
                       
 
Interest Rate
                   
 
  Less than 2.00%
    $ 76,348     $ 576     $  
    2.00% - 2.99%       161,313       21,948       66  
    3.00% - 3.99%       120,361       236,718       20,529  
    4.00% - 4.99%       32,472       72,165       85,382  
    5.00% - 5.99%       3,079       10,223       157,181  
                               
 
Total
    $ 393,573     $ 341,630     $ 263,158  
 
 
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Borrowings.  Our borrowings consist of advances from the Federal Home Loan Bank of New York and securities sold under agreements to repurchase.  At December 31, 2009, we had the ability to borrow up to an additional $44.1 million from the Federal Home Loan Bank of New York.  At December 31, 2009, we had callable advances from the Federal Home Loan Bank of New York of $100.0 million.  See “Liquidity and Capital Resources” for further discussion of borrowing capacity with the Federal Home Loan Bank of New York.  The following tables set forth information regarding balances and interest rates on all of our borrowings at the dates and for the years indicated.

FHLB of New York Advances:
 
At or For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
   
(Dollars in thousands)
 
                   
Balance at end of year
  $ 191,094     $ 218,641     $ 226,815  
Average balance during year
  $ 207,487     $ 243,736     $ 130,944  
Maximum outstanding at any month end
  $ 218,641     $ 262,007     $ 226,815  
Weighted average interest rate at end of year
    4.22 %     4.29 %     4.62 %
Average interest rate during year (1)
    4.31 %     4.44 %     4.82 %
 

(1)      The weighted average rate paid is based on the weighted-average balances determined on a monthly basis.

Securities Sold Under Agreements to Repurchase:
 
At or For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
   
(Dollars in thousands)
 
                   
Balance at end of year
  $ 70,000     $ 70,000     $ 20,000  
Average balance during year
  $ 70,000     $ 49,836     $ 9,659  
Maximum outstanding at any month end
  $ 70,000     $ 70,000     $ 20,000  
Weighted average interest rate at end of year
    3.32 %     3.15 %     4.35 %
Average interest rate during year (1)
    3.21 %     3.09 %     4.23 %
 

(1)      The weighted average rate paid is based on the weighted-average balances determined on a monthly basis.

Subsidiary Activities
 
Beacon Federal Bancorp, Inc. owns 100% of the common stock of Beacon Federal. Beacon Federal owns 100% of the common stock of Beacon Comprehensive Services, Inc.  Beacon Comprehensive Services, Inc. is a New York corporation that sells tax preparation services, as well as investment and insurance products on an agency basis, primarily to customers of Beacon Federal.
 
Expense and Tax Allocation
 
Beacon Federal entered into an agreement with Beacon Federal Bancorp, Inc. to provide it with certain administrative support services, whereby Beacon Federal will be compensated at not less than the fair market value of the services provided.  In addition, Beacon Federal and Beacon Federal Bancorp, Inc. entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
 
Personnel
 
As of December 31, 2009, we had 127 full-time employees and 13 part-time employees.  Our employees are not represented by any collective bargaining group.  Management believes that it has a good working relationship with our employees.

 
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SUPERVISION AND REGULATION
 
General
 
Beacon Federal is examined and supervised by the Office of Thrift Supervision (“OTS”) and is subject to examination by the FDIC.  This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors.  Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates.  Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating).  Under Federal law, an institution may not disclose its CAMELS rating to the public.  Beacon Federal also is a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the twelve regional banks in the Federal Home Loan Bank System.  Beacon Federal also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters.  The OTS examines Beacon Federal and prepares reports for the consideration of its Board of Directors on any operating deficiencies.  Beacon Federal’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Beacon Federal’s mortgage documents.
 
Any change in these laws or regulations, whether by the FDIC, the Federal Reserve, the OTS or Congress, could have a material adverse impact on Beacon Federal Bancorp, Inc., Beacon Federal and their operations.
 
Beacon Federal Bancorp, Inc., a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the OTS.  Beacon Federal Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
 
Certain of the regulatory requirements that are applicable to Beacon Federal and Beacon Federal Bancorp, Inc. are described below.  This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Beacon Federal and Beacon Federal Bancorp, Inc. and is qualified in its entirety by reference to the actual statutes and regulations.
 
Proposed Federal Legislation

                Legislation has been introduced in the United States Senate and House of Representatives that would implement sweeping changes to the current bank regulatory structure described in this section.  A bill passed by the House would eliminate Beacon Federal’s current primary federal regulator, the OTS, by merging the OTS into the Comptroller of the Currency (the primary federal regulator for national banks). The House legislation would authorize the Comptroller of the Currency to charter savings banks, which would be under the supervision of the Division of Thrift Supervision of the Comptroller of the Currency.  The House bill would also establish a Financial Stability Oversight Council and grant the Board of Governors of the Federal Reserve System exclusive authority to regulate all bank and thrift holding companies.  If the House bill is enacted, Beacon Federal Bancorp, Inc. would become a holding company subject to supervision by the Federal Reserve Board as opposed to the OTS, and would become subject to the Federal Reserve’s regulations.

The Senate proposal would remove bank and bank holding company regulatory powers from the Board of Governors of the Federal Reserve System with respect to banks with assets of less than $50 billion, and merge the OTS into the Office of the Comptroller of the Currency.  Under this proposal, federal savings banks and savings and loan holding companies that were regulated by the OTS would become subject to supervision and regulation by the Office of the Comptroller of the Currency, while state-chartered banks, thrifts and their holding companies with assets below $50 billion would be regulated by the Federal Deposit Insurance Corporation.

Both the House bill and the Senate proposal would establish new government bureaucracies empowered to write consumer protection rules and, in certain cases, to conduct examinations and implement enforcement actions with respect thereto.  We believe the creation of such consumer protection bureaucracies will result in an increase in our compliance costs.
 
 
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Federal Banking Regulation
 
Business Activities.  A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OTS.  Under these laws and regulations, Beacon Federal may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets.  Beacon Federal also may establish subsidiaries that may engage in activities not otherwise permissible for Beacon Federal, including real estate investment and securities and insurance brokerage.
 
Capital Requirements.  OTS regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
 
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS, based on the risks believed inherent in the type of asset.  Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships.  The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values.  Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.  Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association.  In assessing an institution’s capital adequacy, the OTS takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
 
At December 31, 2009, Beacon Federal’s capital exceeded all applicable requirements.
 
Loans-to-One Borrower.  Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus.  An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.  As of December 31, 2009, Beacon Federal’s largest lending relationship with a single or related group of borrowers totaled $11.3 million, which represented 11.1% of unimpaired capital and surplus.  Therefore, Beacon Federal was in compliance with the loans-to-one borrower limitations.
 
Qualified Thrift Lender Test. As a federal savings association, Beacon Federal must satisfy the qualified thrift lender, or “QTL,” test.  Under the QTL test, Beacon Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period.  “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
 
Beacon Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
 
 
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A savings association that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions set forth in the Home Owners’ Loan Act.  At December 31, 2009, Beacon Federal maintained approximately 105.51% of its portfolio assets in qualified thrift investments and met the QTL test in each of the prior twelve months.
 
Capital Distributions. OTS regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account.  A savings association must file an application for approval of a capital distribution if:
 
  ●
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
 
  ●
the savings association would not be at least adequately capitalized following the distribution;
 
  ●
the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition; or
 
  ●
the savings association is not eligible for expedited treatment of its filings.
 
Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the OTS at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
 
The OTS may disapprove a notice or application if:
 
  ●
the savings association would be undercapitalized following the distribution;
 
  ●
the proposed capital distribution raises safety and soundness concerns; or
 
  ●
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
 
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.
 
Liquidity.  A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.  We seek to maintain a ratio of 8% or greater of liquid assets and wholesale funding availability to total assets.  For the year ended December 31, 2009, our liquidity ratio averaged 12.70%.
 
Community Reinvestment Act and Fair Lending Laws.  All savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income borrowers.  In connection with its examination of a federal savings association, the OTS is required to assess the savings association’s record of compliance with the Community Reinvestment Act.  In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes.  A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities.  The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice.  Beacon Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
 
 
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Transactions with Related Parties.  A federal savings association’s authority to engage in transactions with its affiliates is limited by OTS regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System.  An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Beacon Federal.  Beacon Federal Bancorp, Inc. is an affiliate of Beacon Federal.  In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements.  In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates.  Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association.  In addition, OTS regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.  Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.  The OTS requires savings associations to maintain detailed records of all transactions with affiliates.
 
Beacon Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board.  Among other things, these provisions require that extensions of credit to insiders:
 
 
 (i)
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
 
 
 (ii)
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Beacon Federal’s capital.
 
In addition, extensions of credit in excess of certain limits must be approved by Beacon Federal’s Board of Directors.
 
Beacon Federal is in compliance with Regulation O.
 
Enforcement.  The OTS has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.  Formal enforcement action by the OTS may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator.  Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day.  The FDIC also has the authority to terminate deposit insurance or to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution.  If action is not taken by the Director, the FDIC has authority to take action under specified circumstances.
 
Standards for Safety and Soundness.  Pursuant to the Federal Deposit Insurance Act, the OTS requires each federal banking agency to prescribe certain standards for all insured depository institutions.  These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate.  The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.  If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
 
 
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Prompt Corrective Action Regulations.  Under the prompt corrective action regulations, the OTS is required and authorized to take supervisory actions against undercapitalized savings associations.  For this purpose, a savings association is placed in one of the following five categories based on the savings association’s capital:
 
  ●
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
 
  ●
adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
 
  ●
undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);
 
  ●
significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and
 
  ●
critically undercapitalized (less than 2% tangible capital).
 
Generally, the OTS is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames.  The regulations also provide that a capital restoration plan must be filed with the OTS within 45 days of the date a savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.”  The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities in which the savings association will engage while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association.  Any holding company for the savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the OTS, or the amount necessary to restore the savings association to adequately capitalized status.  This guarantee remains in place until the OTS notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OTS has the authority to require payment and collect payment under the guarantee.  Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations.  The OTS may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
 
At December 31, 2009, Beacon Federal met the criteria for being considered “well-capitalized.”
 
Insurance of Deposit Accounts. Deposit accounts at Beacon Federal are insured by the Deposit Insurance Fund of the FDIC, generally up to a maximum of $100,000 for each separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. However, the FDIC increased the deposit insurance available on all deposit accounts to $250,000, effective until December 31, 2013. In addition, certain noninterest-bearing transaction accounts maintained with financial institutions participating in the FDIC’s Temporary Liquidity Guarantee Program are fully insured regardless of the dollar amount until June 30, 2010.  Beacon Federal has opted to participate in one component of the FDIC’s Temporary Liquidity Guarantee Program.  See “—Temporary Liquidity Guarantee Program.”
 
The FDIC imposes an assessment against all depository institutions for deposit insurance.  This assessment is based on the risk category of the institution and, prior to 2009, ranged from 5 to 43 basis points of the institution’s deposits.  On December 22, 2008, the FDIC published a final rule that raised the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) effective for the first quarter of 2009.  On February 27, 2009, the FDIC issued a final rule that altered the way the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009 and thereafter.
 
 
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Under the rule, the FDIC first establishes an institution’s initial base assessment rate.  This initial base assessment rate ranges, depending on the risk category of the institution, from 12 to 45 basis points.  The FDIC then adjusts the initial base assessment (higher or lower) to obtain the total base assessment rate.  The adjustments to the initial base assessment rate are based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits.  The total base assessment rate ranges from 7 to 77.5 basis points of the institution’s deposits.  Additionally, on May 22, 2009, the FDIC issued a final rule that imposed a special 5 basis points assessment on each FDIC-insured depository institution’s assets, minus its Tier 1 capital as of June 30, 2009, which was collected on September 30, 2009. The special assessment was capped at 10 basis points of an institution’s domestic deposits.  This special assessment resulted in an additional non-interest expense of $479,000 based on our assets and Tier 1 capital level as of June 30, 2009. In addition, the FDIC may assess additional special premiums in the future.
 
The FDIC has adopted a final rule pursuant to which all insured depository institutions were required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.  Under the rule, this pre-payment was due on December 30, 2009.  The assessment rate for the fourth quarter of 2009 and for 2010 will be based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 will be equal to the modified third quarter assessment rate plus an additional 3 basis points.  In addition, each institution’s base assessment rate for each period will be calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Based on our deposits and assessment rate at September 30, 2009, our prepayment amount was approximately $4.6 million.
 
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
 
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the year ended December 31, 2009, the FICO assessment was equal to 26 basis points for each $100 in domestic deposits maintained at an institution.
 
Temporary Liquidity Guarantee Program.  On October 14, 2008, the FDIC announced a new program – the Temporary Liquidity Guarantee Program.  This program has two components. One guarantees newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid principal and interest on an FDIC -guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument.  The guarantee will remain in effect until June 30, 2012. In return for the FDIC’s guarantee, participating institutions will pay the FDIC a fee based on the amount and maturity of the debt.  Beacon Federal opted not to participate in this component of the Temporary Liquidity Guarantee Program.
 
The other component of the program provides full federal deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2009. An annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to insured depository institutions that have not opted out of this component of the Temporary Liquidity Guarantee Program.  Beacon Federal opted to participate in this component of the Temporary Liquidity Guarantee Program.
 
 
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U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program. The Emergency Economic Stabilization Act of 2008 was enacted in October 2008 and provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the legislation is the U.S. Treasury’s Capital Purchase Program (“CPP”) under the Troubled Asset Relief Program.  CPP provides direct equity investment in perpetual preferred stock by the U.S. Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and dividends.  The CPP provides for a minimum investment of one percent of total risk-weighted assets and a maximum investment equal to the lesser of three percent of total risk-weighted assets or $25 billion. Participation in the program is not automatic and is subject to approval by the U.S. Treasury.  The Company opted not to participate in the CPP.
 
Prohibitions Against Tying Arrangements.  Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
 
Federal Home Loan Bank System.  Beacon Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank System provides a central credit facility primarily for member institutions.  As a member of the Federal Home Loan Bank of New York, Beacon Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 5.0% of its borrowings from the Federal Home Loan Bank, or 0.3% of assets, whichever is greater.  As of December 31, 2009, Beacon Federal was in compliance with this requirement.
 
Other Regulations
 
Interest and other charges collected or contracted for by Beacon Federal are subject to state usury laws and federal laws concerning interest rates.  Beacon Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:
 
  ●
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
 
  ●
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
 
  ●
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
 
  ●
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
 
  ●
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
 
  ●
Truth in Savings Act, governing uniformity in the disclosure of terms and conditions regarding interest and fees on new savings accounts; and
 
  ●
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
 
 
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The operations of Beacon Federal also are subject to the:
 
  ●
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
 
  ●
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
 
  ●
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
 
  ●
Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the American financial system to fund terrorist activities.  Among other provisions, the USA PATRIOT Act and the related regulations of the OTS require savings associations operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
 
  ●
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
 
Holding Company Regulation
 
General.  Beacon Federal Bancorp, Inc. is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act.  As such, Beacon Federal Bancorp, Inc. is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements.  In addition, the OTS has enforcement authority over Beacon Federal Bancorp, Inc. and its subsidiaries.  Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.  Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board.
 
Permissible Activities. Under present law, the business activities of Beacon Federal Bancorp, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies.  A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity.  A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain additional activities authorized by OTS regulations.
 
Federal law prohibits a savings and loan holding company, including Beacon Federal Bancorp, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the OTS.  It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured.  In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
 
 
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The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
 
 
(i)
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
 
 
(ii)
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
 
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
 
Federal Securities Laws
 
Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934.  We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
 
The registration under the Securities Act of 1933 of shares of common stock issued in our October 2007 initial public offering does not cover the resale of those shares.  Shares of common stock purchased by persons who are not our affiliates may be resold without registration.  Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933.  If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks.  In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
 
Sarbanes-Oxley Act of 2002
 
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Principal Financial and Accounting Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.  We expect to be required to include the attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting beginning with the year ending December 31, 2010.
 
TAXATION
 
Federal Taxation
 
General.  Beacon Federal Bancorp, Inc. and Beacon Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Beacon Federal Bancorp, Inc. and Beacon Federal.
 
 
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Method of Accounting.  For federal income tax purposes, Beacon Federal currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns.  The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
 
Minimum Tax.  The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.”  The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount.  Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income.  Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.  At December 31, 2009, Beacon Federal had no minimum tax credit carryforward.
 
Net Operating Loss Carryovers.  A financial institution may carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years.  At December 31, 2009, Beacon Federal had no net operating loss carryforward for federal income tax purposes.
 
Corporate Dividends.  We may exclude from our income 100% of dividends received from Beacon Federal as a member of the same affiliated group of corporations.
 
Audit of Tax Returns.  Beacon Federal’s federal income tax returns have not been audited in the most recent five-year period.
 
State Taxation
 
New York State Taxation.  Beacon Federal Bancorp, Inc. and Beacon Federal report income on a calendar year basis to New York State.  New York State franchise tax on corporations is imposed in an amount equal to the greater of (a) 8.0% (for 2002) and 7.5% (for 2003 and forward) of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) a nominal minimum tax.  Entire net income is based on federal taxable income, subject to certain modifications.  Alternative entire net income is equal to entire net income without certain modifications.  Beacon Federal’s New York State tax returns for the years 2004 through 2006 have been audited.
 
Massachusetts Sate Taxation.  Beacon Federal Bancorp, Inc. and Beacon Federal report income on a calendar year basis to the State of Massachusetts.  Massachusetts imposes a tax of 10.5% on income taxable in Massachusetts.  Income taxable in Massachusetts is based on federal taxable income, subject to certain modifications.
 
Tennessee State Taxation.  Beacon Federal Bancorp, Inc. and Beacon Federal report net worth and income on a calendar year basis to Tennessee.  Tennessee imposes a franchise tax on the greater of (a) net worth, or (b) the net book value of real and tangible property.  The rate of tax is 0.25% of net worth or property, whichever is greater.  Tennessee also imposes an excise tax of 6.5% on apportioned business income.  Apportioned business income is federal taxable income, subject to certain modifications.
 
Texas State Taxation. Beacon Federal Bancorp, Inc. and Beacon Federal report net worth and income on a calendar year basis to the State of Texas.  Texas franchise tax is the greater of the tax due on (a) net taxable capital, or (b) net taxable earned surplus.  Net taxable capital is shareholders’ equity apportioned to Texas.  The tax rate on net taxable capital is 0.25%.  Net taxable earned surplus is federal taxable income, subject to certain modifications, apportioned to Texas.  The tax rate on net taxable earned surplus is 4.5%.
 
Maryland State Taxation.  As a Maryland business corporation, Beacon Federal Bancorp, Inc. is required to file annual returns and pay annual fees to the State of Maryland.

 
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ITEM 1A.     RISK FACTORS
 
An investment in our common stock involves risk.  You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K before you decide to buy our common stock.  It is possible that risks and uncertainties not listed below may arise or become material in the future and affect our business.
 
The economic recession and disruptions in the financial markets have adversely affected, and may continue to adversely affect, our business and results of operations.
 
The financial services industry and the capital markets have been, and may continue to be, adversely affected by the economic recession and disruptions in the financial markets. These market disruptions were initially triggered by declines that impacted the value of subprime mortgages, which we do not originate or invest in, but spread to all mortgage and real estate asset classes and to nearly all asset classes, including equities. These market disruptions resulted in significant write-downs of asset values by financial institutions, causing many financial institutions to seek additional capital, merge with other financial institutions or, in some cases, go bankrupt.
 
Disruptions in the financial markets have also adversely affected, and may continue to adversely affect, the corporate bond and equity markets. Such disruptions have caused some lenders and institutional investors to reduce and, in some cases, cease to provide funding to certain borrowers, including other financial institutions. Increasingly volatile financial markets and reduced levels of business activity may continue to negatively impact Beacon Federal’s business, capital, liquidity, financial condition and results of operations.
 
Moreover, market and economic disruptions have affected, and may continue to affect, consumer confidence levels, consumer spending, personal bankruptcy rates, and levels of incurrence and default on consumer debt and home prices, among other factors, in certain of the markets in which we operate. Any of these factors, along with persistently high levels of unemployment, may result in a greater likelihood of reduced client interaction or elevated delinquencies on consumer and mortgage loans. This, in turn, could result in a higher level of loan losses and Beacon Federal’s allowances for loan losses, all of which could adversely affect Beacon Federal’s earnings.
 
In connection with significant government and central bank actions taken in late 2008 and in 2009, the U.S. economy began to see signs of stabilization in certain areas, and some early positive economic signs were observed in late 2009. Despite these positive signs, there remains significant uncertainty regarding the sustainability and pace of economic recovery, unemployment levels, the impact of the government’s unwinding of their extensive economic and market supports, which may accelerate in 2010, and Beacon Federal’s delinquency and loan loss trends.
 
 
Lack of consumer confidence in financial institutions may decrease our level of deposits.
 
Our level of deposits may be affected by lack of consumer confidence in financial institutions, which has resulted in large numbers of depositors unwilling to maintain deposits that are not insured by the FDIC. In some cases, depositors have withdrawn deposits and invested uninsured funds in investments perceived as being more secure, such as securities issued by the U.S. Treasury. These consumer preferences may cause us to be forced to pay higher interest rates to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.
 
Economic conditions may adversely affect our liquidity.
 
In the past year, significant declines in the values of mortgage-backed securities and derivative securities issued by financial institutions, government sponsored entities, and major commercial and investment banks has led to decreased confidence in financial markets among borrowers, lenders, and depositors, as well as disruption and extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. As a result, many lenders and institutional investors have reduced or ceased to provide funding to borrowers. Continued turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
 
 
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Recent negative developments in the financial industry and the credit markets may subject us to additional regulation.
 
As a result of the recent financial crisis, the potential exists for new federal or state laws and regulations regarding lending and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the credit markets, and the impact of new legislation in response to those developments, may negatively affect our operations by restricting our business operations, including our ability to originate or sell loans and pursue business opportunities. Compliance with such regulation also will likely increase our costs.
 
Future legislative or regulatory actions responding to financial and market weakness could affect us adversely. There can be no assurance that actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.
 
In response to the financial crises affecting the banking system and financial markets, the U.S. Congress has passed legislation and the U.S. Treasury has promulgated programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the financial services industry.  Specifically, Congress adopted the Emergency Economic Stabilization Act of 2008, under which the U.S. Treasury has the authority to expend up to $700 billion to assist in stabilizing and providing liquidity to the U.S. financial system. On October 14, 2008, the U.S. Treasury announced the Capital Purchase Program, under which it will purchase up to $250 billion of non-voting senior preferred shares of certain qualified financial institutions in an attempt to encourage financial institutions to build capital to increase the flow of financing to businesses and consumers and to support the economy. In addition, Congress temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2013. The FDIC has also announced the creation of the Temporary Liquidity Guarantee Program which is intended to strengthen confidence and encourage liquidity in financial institutions by temporarily guaranteeing newly issued senior unsecured debt of participating organizations and providing full coverage for noninterest-bearing transaction deposit accounts (such as business checking accounts, interest-bearing transaction accounts paying 50 basis points or less and lawyers’ trust accounts), regardless of dollar amount until December 31, 2009.  Finally, in February 2009, the American Recovery and Reinvestment Act of 2009 was enacted, which is intended to expand and establish government spending programs and provide tax cuts to stimulate the economy. The U.S. government continues to evaluate and develop various programs and initiatives designed to stabilize the financial and housing markets and stimulate the economy, including the U.S. Treasury’s recently announced Financial Stability Plan and the recently announced foreclosure prevention program.
 
The potential exists for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders.  Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and limited credit availability currently being experienced.  In addition, new laws, regulations, and other regulatory changes will increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. Our FDIC insurance premiums have increased, and may continue to increase, because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. New laws, regulations, and other regulatory changes, along with negative developments in the financial services industry and the credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.
 
Our expenses will increase as a result of increases in FDIC insurance premiums.
 
The FDIC imposes an assessment against institutions for deposit insurance.  Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits.  If this reserve ratio drops below 1.15% or the FDIC expects that it to do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).
 
 
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Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio.  As of June 30, 2009, the designated reserve ratio was 0.40% of estimated insured deposits at March 31, 2009.  On February 27, 2009, the FDIC issued a final rule that alters the way the FDIC calculates federal deposit insurance assessment rates. Under the rule, the FDIC first establishes an institution’s initial base assessment rate.  This initial base assessment rate ranges from 12 to 45 basis points, depending on the risk category of the institution.  The FDIC then adjusts the initial base assessment (higher or lower) to obtain the total base assessment rate.  The adjustments to the initial base assessment rate are based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits.  The total base assessment rate ranges from 7 to 77.5 basis points of the institution’s deposits. Additionally, on May 22, 2009, the FDIC issued a final rule that imposes a special 5 basis point assessment on each FDIC-insured depository institution’s assets, minus its Tier 1 capital as of June 30, 2009, which was paid on September 30, 2009. The special assessment was capped at 10 basis points of an institution’s domestic deposits. This special assessment resulted in additional noninterest expense of $479,000 during 2009.
 
The FDIC has adopted a final rule pursuant to which all insured depository institutions prepaid their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.  Under the rule, this pre-payment was due on December 30, 2009.  The assessment rate for the fourth quarter of 2009 and for 2010 was based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 will be equal to the modified third quarter assessment rate plus an additional 3 basis points.  In addition, each institution’s base assessment rate for each period was calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Our initial prepayment amount was approximately $4.6 million, of which $4.3 million existed at December 31, 2009.
 
The Emergency Economic Stabilization Act of 2008 temporarily increased the limit on FDIC insurance coverage for deposits to $250,000, which was further extended through December 31, 2013. The FDIC also took action to provide federal insurance coverage for newly-issued senior unsecured debt and noninterest-bearing transaction and certain NOW accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums.
 
These actions will significantly increase our noninterest expense in 2010 and in future years as long as the increased premiums are in place.
 
Further declines in the value of certain investment securities could require write-downs, which would reduce our earnings.
 
During 2009 and 2008, we recognized other-than-temporary impairment credit losses of certain investment securities of $1.7 million and $10.8 million, respectively.  A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary. These factors include, but are not limited to, failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. An other-than-temporary impairment write-down would reduce our earnings.
 
 
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The net realizable value of our investment securities could be lower than the fair values assigned to them under generally accepted accounting principles.
 
We determine the fair value of our investment securities based on the most recent quoted market price for such securities as of the applicable balance sheet date.  We used quoted market prices to determine the amount of any unrealized losses that must be reflected in our other comprehensive income and the net book value of our investment securities.  If we determine that a security is other-than-temporarily impaired, we use quoted market prices to determine the amount of the impairment loss and the adjusted cost basis for the security.  If a quoted market price for a specific security is not available due to a lack of trading activity, we estimate its fair value based on the quoted market price of another security with similar characteristics, adjusted to reflect objectively measurable differences such as coupon rates and reset dates.  In the absence of quoted market prices for the same or similar securities, or if there is no recognized market for the security, we use other valuation techniques to determine fair value, such as obtaining broker dealer valuations or estimating fair value based on valuation modeling.  When fair value is based on the quoted market price for a security, adjustments to reflect discounts that could arise in the context of an actual sale, including block trade, liquidity and other discounts resulting from the inability of the market to absorb the number of shares offered for sale, are not considered.  Consequently, the price at which the security could be sold in a market transaction could be significantly lower than the quoted market price for the security, particularly if the quoted market price is based on trades involving a small number of shares, the security has an infrequent trading history, the market for the security is illiquid, or a large number of shares must be sold.  The risk that there will be a material difference between the fair value that we assign to a security and its net realizable value is particularly significant for certain securities we hold in our investment portfolio, including our “private label” collateralized mortgage obligations and our pooled trust preferred securities.  If the net realizable value is lower than the fair value that we assign to a security, impairment losses could be required in the future.
 
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
 
We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.  In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions.  If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance.  In 2009 we made a provision for loan losses of $7.7 million, compared to a provision of $8.9 million in 2008.  Our allowance for loan losses totaled $15.6 million at December 31, 2009 compared to $10.5 million at December 31, 2008.  While our allowance for loan losses was 1.89% of total loans at December 31, 2009, material additions to our allowance could materially decrease our net income, and there can be no assurance that our allowance for loan losses will be adequate, particularly in the current very weak economic environment.
 
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs.  Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
 
Our loan portfolio has potentially greater risk due to our substantial number of home equity loans and other consumer loans.
 
At December 31, 2009, our home equity loans totaled $177.0 million, or 21.4% of our total loan portfolio.  Our home equity loans are primarily secured by second mortgages, and the combined loan-to-value ratio (first and second mortgage liens) for home equity loans could be as high as 100%. At December 31, 2009, our consumer loans totaled $168.2 million, or 20.4% of our total loan portfolio, of which $143.2 million consisted of automobile loans, $17.8 million consisted of personal loans secured by other collateral, and $7.2 million consisted of unsecured personal loans.  Home equity loans and consumer loans generally have greater risk than one- to four-family residential mortgage loans, particularly in the case of loans that are secured by second mortgages or by rapidly depreciable assets, such as automobiles, or that are unsecured.  In these cases, we face the risk that collateral, when we have it, for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Particularly with respect to our home equity loans secured by second mortgages, decreases in real estate values could adversely affect the value of the property serving as collateral for our loans. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.
 
As a result of our large portfolio of home equity loans and consumer loans, it may become necessary to increase our provision for loan losses, which could reduce our profits.  In addition, in March 2006 we began originating indirect automobile loans by or through third parties, which present greater risk than our direct automobile loans.  At December 31, 2009, $111.6 million of our automobile loans were originated in this manner, and we expect to increase the origination of indirect automobile loans.  See “Item 1.  Business – Lending Activities – Consumer Loans” and “—Home Equity Loans.”
 
 
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Our loan portfolio will have greater risk as we increase our commercial real estate and commercial business lending.
 
At December 31, 2009, our loan portfolio included $117.5 million of commercial real estate loans and $101.0 million of commercial business loans.  We have significantly increased our originations of these loans in recent years and we intend to continue to increase our origination of these loans. Our commercial real estate loans and our commercial business loans increased to 14.2% and 12.2%, respectively, of our loan portfolio at December 31, 2009 compared to10.0% and 7.1% of our total loan portfolio at December 31, 2005. These loans are considered to have greater credit risk than one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically depends on the successful operations and income stream of the borrowers’ business and the real estate securing the loan as collateral, which can be significantly affected by economic conditions.  In addition, these loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family residential mortgage loans.  Accordingly, an adverse development with respect to one loan or one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.  Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral.
 
The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with significant commercial real estate loan portfolios to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, and possibly greater allowances for losses and capital levels.  Since we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses due to the increased risks associated with these types of loans.  Any increase to our allowance for loan losses would adversely affect our earnings.
 
At December 31, 2009, the largest commercial real estate lending relationship consisted of loans totaling $11.3 million. See “Item 1. Business—Lending Activities—Commercial Real Estate Loans” and “—Commercial Business Loans.”
 
Changes in interest rates could adversely affect our results of operation and financial condition.
 
Our ability to earn a profit largely depends on our net interest income, which has been and could continue to be negatively affected by changes in market interest rates.  Net interest income is the difference between:
 
 
 (1)
the interest income we earn on our interest-earning assets, such as loans and securities; and
 
 
 (2)
the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
 
Changes in interest rates can affect the average life of loans and mortgage-backed and related securities.  A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their loans in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Alternatively, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable rate loans.
 
Changes in interest rates also affect the current market value of our investment securities portfolio.  Generally, the value of interest-earning investment securities moves inversely with changes in interest rates.  At December 31, 2009, the fair value of our available-for-sale investment securities totaled $167.2 million.  Unrealized losses, net of taxes, on these available-for-sale securities totaled $5.5 million at December 31, 2009 and are reported as a separate component of equity.  Decreases in the fair value of securities available for sale in future periods would have an adverse effect on our equity.
 
We evaluate interest rate sensitivity by estimating the change in Beacon Federal’s net portfolio value over a range of interest rate scenarios.  Net portfolio value is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.  At December 31, 2009, in the event of an immediate 200 basis point increase in interest rates, the OTS model projects that we would experience a $21.8 million, or 25%, decrease in net portfolio value.  See “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations of Beacon Federal Bancorp, Inc.—Management of Market Risk.”
 
 
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Strong competition within our market areas may limit our growth and profitability.
 
Competition in the banking and financial services industry is intense.  In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere.  Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide.  In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis.  Our profitability depends upon our continued ability to successfully compete in our market areas.  If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Item 1. Business—Competition.”
 
We rely on our management team for the successful implementation of our business strategy.
 
Our future success will be largely due to the efforts of our senior management team consisting of Ross J. Prossner, President and Chief Executive Officer, J. David Hammond, Senior Vice President and Chief Lending Officer and Darren T. Crossett, Senior Vice President and Chief Operating Officer. The loss of services of one or more of these individuals may have a material adverse effect on our ability to implement our business plan. We have entered into a three-year employment agreement with Mr. Prossner and two-year employment agreements with Messrs. Crossett and Hammond.
 
Our ability to successfully complete acquisitions will affect our ability to grow our franchise and compete effectively in our market areas.
 
We have pursued a policy of growth through acquisitions over the years, particularly in view of the slow or flat population growth in our primary market area in upstate New York.  Since 1980, we have acquired a total of ten credit unions.  In the future, we will consider the possible acquisition of other banks, thrifts, credit unions and other financial services companies or branches to supplement internal growth.  Our efforts to acquire other financial institutions and financial service companies or branches may not be successful.  Numerous potential acquirors exist for most acquisition candidates, creating intense competition, which affects the purchase price for which the institution can be acquired.  In many cases, our competitors have significantly greater resources than we have, and greater flexibility to structure the consideration for the transaction.  We also may not be the successful bidder in acquisition opportunities that we pursue due to the willingness or ability of other potential acquirors to propose a higher purchase price or more attractive terms and conditions than we are willing or able to propose.  We intend to continue to pursue acquisition opportunities in each of our market areas, although we currently have no understandings or agreements to acquire other financial institutions.
 
The risks presented by the acquisition of other financial institutions could adversely affect our financial condition and results of operations.
 
If we are successful in conducting acquisitions, we will be presented with many risks that could adversely affect our financial condition and results of operations.  An institution that we acquire may have unknown asset quality issues or unknown or contingent liabilities that we did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses.  The acquisition of other institutions also typically requires the integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating systems and internal controls, marketing programs and personnel of the acquired institution, in order to make the transaction economically advantageous.  The integration process is complicated and time consuming, and could divert our attention from other business concerns and may be disruptive to our customers and the customers of the acquired institution.  Our failure to successfully integrate an acquired institution could result in the loss of key customers and employees, and prevent us from achieving expected synergies and cost savings.  Acquisitions also result in professional fees and may result in creating goodwill that could become impaired, thereby requiring us to recognize further charges.  We may finance acquisitions with borrowed funds, thereby increasing our leverage and reducing our liquidity, or with potentially dilutive issuances of equity securities.
 
 
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ITEM 1B.    UNRESOLVED STAFF COMMENTS  Not applicable.
 
ITEM 2.     PROPERTIES
 
We operate from our corporate office in East Syracuse, New York, and from our eight full-service branches located in Syracuse, Marcy and Rome, New York; Smartt and Smyrna, Tennessee; Tyler, Texas; and Chelmsford, Massachusetts. The net book value of our premises, land and equipment was $12.6 million at December 31, 2009.  The following tables set forth information with respect to our full-service banking offices, including the expiration date of leases with respect to leased facilities.
 
Location
 
Address
 
Leased or
Owned
 
Year Acquired or
Leased
 
Square
Footage
                 
Corporate Offices including full service branch
 
6611 Manlius Center Road
East Syracuse, NY 13057
 
Leased (1)
 
2009
 
45,000
 
Full Service Branches:
               
                 
Chelmsford
 
7 Summer Street
Chelmsford, MA  01824
 
Leased (2)
 
2003
 
1,600
Marcy
 
9085 Old River Road
Marcy, NY  13403
 
Owned
 
2006
 
4,000
Rome
 
230 South James Street
Rome, NY  13440
 
Owned
 
2006
 
3,200
Syracuse
 
6311 Court Street Road
East Syracuse, NY 13057
 
Owned
 
1985
 
14,000
 
Smartt
 
5428 Manchester Highway
Morrison, TN  37357
 
Owned
 
1982
 
2,200
 
Smyrna
 
105 Threat Industrial Road
Smyrna, TN  37167
 
Owned
 
2000
 
12,500
Tyler
 
1330 Old Omen Road
Tyler, TX  75701
 
Owned
 
1993
 
4,500
­                                

(1)           Capital lease expires in June 2034.
(2)           Operating lease expires in July 2010.
 
ITEM 3.  LEGAL PROCEEDINGS
 
Beacon Federal Bancorp, Inc. and Beacon Federal are subject to various legal actions arising in the normal course of business.   At December 31, 2009, we were not involved in any legal proceedings that were material to our financial condition or results of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
During the three months ended December 31, 2009, no matters were submitted to a vote of security holders of Beacon Federal Bancorp, Inc. through the solicitation of proxies or otherwise.
 
 
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ITEM 5. 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
(a)
The information required by this item is incorporated by reference to our Annual Report to Shareholders which is attached as Exhibit 13 hereto. No equity securities were sold during the year ended December 31, 2009 that were not registered under the Securities Act.
 
 
(b)
Not Applicable.
 
 
(c)
Not Applicable.
           
 
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ITEM 6.
SELECTED FINANCIAL DATA
 
Not required for smaller reporting companies.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference to our Annual Report to Shareholders, included as Exhibit 13 to this Form 10-K.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Not required for smaller reporting companies.
 
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The consolidated financial statements included in our Annual Report to Shareholders included as Exhibit 13 to this Form 10-K are incorporated herein by reference.
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not Applicable.
 
ITEM 9A(T).CONTROLS AND PROCEDURES
 
(a)           Evaluation of disclosure controls and procedures.
 
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.
 
(b)           Management’s Report on Internal Control over Financial Reporting
 
Management of Beacon Federal Bancorp, Inc., and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control is designed under the supervision of management, including our Chief Executive Officer and Chief Operating Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
 
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
 
 
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
 
As of December 31, 2009, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2009 is effective using these criteria. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
(c)           Changes in internal control.
 
As disclosed in the Company’s previously filed Form 10-Q for the period ended September 30, 2009, management had concluded that the Company had a material weakness in its internal control over the financial reporting for other-than-temporary impairment (“OTTI”) on certain securities.  Specifically, the Company did not have controls designed to ensure the information provided by a third-party consultant was being utilized properly in the Company’s model used to calculate OTTI.
 
By the end of the fourth quarter of 2009, all of the control enhancements related to accounting for OTTI that were put in place during the fourth quarter had operated effectively for a period of time sufficient to enable management to conclude that the material weakness had been remediated. These enhancements included an additional calculation that management uses to ensure the reasonableness of the information provided by the third-party consultant and an additional level of review of the OTTI calculations.
 
Management has concluded that as of December 31, 2009, these corrective actions have remediated the Company’s previously reported material weakness in internal control over financial reporting. There were no other changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
 
ITEM 9B.     OTHER INFORMATION
 
Not Applicable.
 
 
ITEM 10.      DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item is incorporated by reference to “Proposal 1 – Election of Directors” of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
ITEM 11.      EXECUTIVE COMPENSATION
 
The information required by this item is incorporated by reference to “Proposal 1 – Election of Directors”  of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is incorporated by reference to the “Security Ownership of Certain Beneficial Owners” and “Compensation Committee Interlocks and Insider Participation” sections of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated by reference to the “Transactions with Certain Related Persons” section of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this item is incorporated by reference to “Item 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” of the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders.
 
 
ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)(1)  Financial Statements
 
The following documents are included in Exhibit 13 of this Form 10-K.  
 
 
(A)  
Report of Independent Registered Public Accounting Firm
 
 
(B)  
Consolidated Balance Sheets - at December 31, 2009 and 2008
 
 
(C)  
Consolidated Statements of Operations - Years ended December 31, 2009 and 2008
 
 
(D)  
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2009 and 2008
 
 
(E)  
Consolidated Statements of Cash Flows - Years ended December 31, 2009 and 2008
 
 
(F)
Notes to Consolidated Financial Statements.
           
(a)(2)  Financial Statement Schedules
 
 None.
 
(b)            Not applicable
 
(c)            Not applicable
 
(a)(3)       Exhibits
 
3.1
Articles of Incorporation of Beacon Federal Bancorp, Inc. (1)
3.2
Bylaws of Beacon Federal Bancorp, Inc. (1)
4
Form of Common Stock Certificate of Beacon Federal Bancorp, Inc. (1)
10.1
Employee Stock Ownership Plan (1)
10.2
Employment Agreement with Ross J. Prossner (2)
 
 
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10.3 Employment Agreement with J. David Hammond (2)
10.4 Employment Agreement with Darren T. Crossett (2)
10.5 Form of Change in Control Agreement (2)
10.6 Beacon Federal Excess Benefit Plan (3)
10.7 Beacon Federal Annual Cash Incentive Plan (1)
10.8 Beacon Federal Supplemental Executive Retirement Plan (4)
10.9 Beacon Federal 2008 Equity Incentive Plan (5)
13 Annual Report to Stockholders
21 Subsidiaries of Registrant (1)
23 Consent of Independent Registered Public Accounting Firm.
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  Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

(1)
Incorporated by reference to the Registration Statement on Form S-1 of Beacon Federal Bancorp, Inc. (File No. 333-143522), originally filed with the Securities and Exchange Commission on June 5, 2007.
(2)
Filed with the Securities and Exchange Commission on October 4, 2007 on Form 8K.
(3)
Filed with the Securities and Exchange Commission on October 31, 2008 on Form 8K.
(4)
Filed with the Securities and Exchange Commission on December 28, 2007 on Form 8K.
(5)
Incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement for the Special Meeting of Stockholders (File No. 001-33713), as filed with the Securities and Exchange Commission on October 9, 2008.
 
 
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Pursuant to the requirements of Section 13 or 15(d) 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.  
         
Date:
March 19, 2010
By:
/s/ Ross J. Prossner
 
      Ross J. Prossner  
      Chief Executive Officer, President and Director  
      (Duly Authorized Representative)  
 
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
Signatures
 
     Title
 
 
Date
/s/ Ross J. Prossner
 
President, Chief Executive
 
 
Ross J. Prossner    Officer and Director (Principal  
March 19, 2010
    Executive Officer)    
         
/s/ Lisa M. Jones
 
Vice President and Principal
 
March 19, 2010
Lisa M. Jones
  Financial and Accounting  
   
Officer (Principal Financial and
Accounting Officer)
 
         
/s/ Timothy P. Ahern
 
Chairman of the Board
 
March 19, 2010
Timothy P. Ahern
       
         
/s/ John W. Altmeyer
 
Director
 
March 19, 2009
John W. Altmeyer
       
         
/s/ Robert Berger
 
Director and Vice Chairman of the Board
 
March 19, 2010
Robert Berger        
         
/s/ Edward H. Butler
 
Director
 
March 19, 2010
Edward H. Butler
       
         
/s/ Thomas Driscoll
 
Director
 
March 19, 2010
Thomas Driscoll
       
         
/s/ David R. Hill
 
Director
 
March 19, 2010
David R. Hill        
 
 
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