Beacon Federal Bancorp, Inc. - FORM 10-K - EX-13 - EXHIBIT 13

Attached files

file	filename
10-K - FORM 10-K - Beacon Federal Bancorp, Inc.	t70088_10k.htm
EX-32 - EXHIBIT 32 - Beacon Federal Bancorp, Inc.	ex32.htm
EX-23 - EXHIBIT 23 - Beacon Federal Bancorp, Inc.	ex23.htm
EX-31.2 - EXHIBIT 31.2 - Beacon Federal Bancorp, Inc.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Beacon Federal Bancorp, Inc.	ex31-1.htm

Exhibit 13

TABLE OF CONTENTS


Summary Consolidated Financial Data		2
Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Report of Independent Registered Public Accounting Firm		17
Consolidated Balance Sheets		18
Consolidated Statements of Operations		19
Consolidated Statements of Stockholders’ Equity and Comprehensive Income		20
Consolidated Statements of Cash Flows		21
Notes to Consolidated Financial Statements		23
Market for Common Stock and Stockholder Matters		64

BEACON FEDERAL BANCORP, INC.

The summary information presented below at or for each of the fiscal years presented is derived in part from the consolidated financial statements of Beacon Federal Bancorp, Inc. The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes included elsewhere in this Annual Report.


	At December 31,
	2010		2009		2008		2007		2006
	(In thousands)
Selected Financial Condition Data:

Total assets	$	1,032,478	$	1,066,897	$	1,021,343	$	877,990	$	607,669
Cash and cash equivalents		12,439		12,993		18,297		14,148		8,799
Trading account assets		―		―		23,337		―		―
Securities available for sale, at fair value		162,405		167,238		139,803		92,859		8,852
Securities held to maturity		10,321		14,561		23,315		29,488		37,706
Loans, net		792,553		816,061		770,695		708,993		537,097
Federal Home Loan Bank of New York stock, at cost		9,954		11,487		13,080		11,117		4,091
Securities sold under agreement to repurchase		70,000		70,000		70,000		20,000		15,227
FHLB advances		163,427		191,094		218,641		226,815		73,900
Deposits		677,384		693,297		626,467		514,488		471,137
Equity		109,710		101,259		102,085		113,174		44,245

	Years Ended December 31,
	2010		2009			2008			2007			2006
	(In thousands)
Selected Operating Data:

Interest income	$	53,937	$	55,637		$	56,312		$	43,765		$	32,347
Interest expense		22,627		27,161			31,335			27,531			18,075
Net interest income		31,310		28,476			24,977			16,234			14,272
Provision for loan losses		7,210		7,695			8,857			2,304			1,066
Net interest income after provision for loan losses		24,100		20,781			16,120			13,930			13,206
Noninterest income		4,712		3,390	(1)		(6,457	)(1)		3,092	(1)		3,054
Noninterest expense		20,360		18,670	(1)		15,047	(1)		13,075	(1)		12,070
Income (loss) before income taxes		8,452		5,501			(5,384	)		3,947			4,190
Income tax expense (benefit)		3,087		1,978			(2,380	)		1,528			1,876
Net income (loss)	$	5,365	$	3,523		$	(3,004	)	$	2,419		$	2,314

(1)	The securities impairment charges for previous years have been reclassified from noninterest expense into noninterest income to conform to the 2010 financial statement presentation. The amounts reclassified were $1,873 for 2009, $10,768 for 2008 and $201 for 2007.

BEACON FEDERAL BANCORP, INC.


	At or For the Years Ended December 31,
	2010			2009			2008			2007			2006

Selected Financial Ratios and Other Data:

Performance Ratios:
Return on assets (ratio of net income (loss) to average total assets)		0.50	%		0.34	%		(0.31	)%		0.34	%		0.41	%
Return on equity (ratio of net income (loss) to average equity)		5.09	%		3.70	%		(2.73	)%		3.92	%		5.26	%
Average interest rate spread (1)		2.75	%		2.49	%		2.14	%		1.84	%		2.33	%
Net interest margin (2)		3.03	%		2.79	%		2.61	%		2.28	%		2.56	%
Efficiency ratio (3)		56.52	%		60.89	%		88.14	%		67.99	%		70.17	%
Noninterest expense to average total assets		1.92	%		1.96	%		2.65	%		1.84	%		2.13	%
Average interest-earning assets to average interest-bearing liabilities		112.94	%		111.47	%		114.68	%		111.15	%		107.23	%
Average equity to average total assets		9.91	%		9.09	%		11.27	%		8.57	%		7.77	%

Asset Quality Ratios:
Nonperforming assets to total assets		1.38	%		1.28	%		0.47	%		0.16	%		0.16	%
Nonperforming loans to total loans		1.75	%		1.56	%		0.60	%		0.15	%		―	%
Allowance for loan losses to nonperforming loans		108.28	%		121.28	%		225.05	%		624.61	%	NM
Allowance for loan losses to total loans		1.90	%		1.89	%		1.36	%		0.96	%		0.96	%

Bank Capital Ratios:
Total capital (to risk-weighted assets)		13.42	%		12.35	%		12.81	%		13.88	%		11.74	%
Tier I capital (to risk-weighted assets)		12.17	%		11.10	%		11.56	%		12.75	%		10.51	%
Tier I capital		9.55	%		8.56	%		8.20	%		8.79	%		7.29	%

Per Share Data:
Basic and diluted earnings (loss) per share		$ 0.88			$ 0.54			$ (0.43	)		$ 0.10	(4)	NA
Book value per share		$ 17.05			$ 15.48			$ 13.32			$ 14.77		NA
Cash dividends declared		$ 0.20			$ 0.19			$ 0.12			―		NA
Dividend payout ratio		22.7	%		35.2	%	NM				―	%	NA

Other Data:
Number of full service offices		8			8			7			7			7
Full time equivalent employees		143			134			126			116			112

(1)	The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities for the year.

(2)	The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(3)	The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. NM – Not meaningful. NA – Not applicable.

(4)	For the period from the conversion date of October 1, 2007 to December 31, 2007

BEACON FEDERAL BANCORP, INC.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following section highlights information to assist with understanding the consolidated financial condition and results of operations of Beacon Federal Bancorp, Inc. and its subsidiaries (combined, the “Company”), for the past two years. The consolidated financial statements and related notes included elsewhere in this annual report should be read in conjunction with the discussions in this section. The matters discussed in this section contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made that are not historical facts are forward-looking and are based on estimates, forecasts and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The risks and uncertainties referred to above include, but are not limited to those described under “Private Securities Litigation Reform Act Safe Harbor Statement” of the Form 10-K.

Overview

General. Our results of operations depend mainly on our net interest income, which is the difference between the interest income earned on our loan and investment portfolios and interest expense we pay on our deposits and borrowings. Results of operations are also affected by fee income from banking operations, provisions for loan losses, gains on sales of loans, gains or losses on sales of securities, impairment losses on securities and other miscellaneous income. Our noninterest expense consists primarily of compensation and employee benefits, occupancy and equipment, marketing, general administrative expenses and income tax expense.

Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.

Economic Conditions. The national economy, as well as the local economies within our market areas, continue to be weak. The economy has been marked by high unemployment rates, rising numbers of foreclosures, declining home prices and contractions in business and consumer credit. The national unemployment rate remains high, at 9.4% as of December 2010, a slight 50 basis point improvement from the prior year. The unemployment rate in the Company’s primary market area in New York State is slightly below the national average at 8.2% in December 2010 compared to 8.9% in December 2009. The Federal Open Market Committee has kept the federal funds rate between 0.00% and 0.25% since December 2008. The reduced federal funds rate has helped to increase the Company’s net interest margin and net interest income by reducing the cost of funds. However, price competition for loans and deposits has remained high.

Operating Results. Net income for 2010 was $5.4 million, up $1.8 million from 2009’s net income of $3.5 million. The increase in net income resulted from an increase in net interest income and in service charges income and reduced other-than-temporary credit impairment losses on debt securities, partially offset by increased salaries and employee benefits, and occupancy and equipment expenses.

Financial Condition. Total assets decreased by $34.4 million to $1.03 billion at December 31, 2010 from $1.07 billion at December 31, 2009. The decrease was the result of a $23.5 million decrease in net loans, a $9.1 million decrease in securities and a $1.5 million decrease in FHLB stock, partially offset by a $1.8 million increase in loans held for sale. Deposits and Federal Home Loan Bank advances decreased $15.9 million and $27.7 million, respectively. Stockholders’ equity increased by $8.5 million, or 8.4%, to $109.7 million at December 31, 2010 from $101.3 million at December 31, 2009. The increase reflected primarily $5.4 million of net income and a $3.6 million decrease in net unrealized holding losses on investments, partially offset by cash dividends of $1.2 million.

BEACON FEDERAL BANCORP, INC.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses reflects management’s best estimate of probable loan losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

A substantial amount of our loan portfolio is collateralized by real estate. Appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, adequacy of the underlying collateral, financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are individually classified as impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining non-impaired loans by type of loan. We also analyze historical loan loss experience for the last four years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Bank’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

Securities Impairment. We periodically perform analyses to determine whether there has been an other-than-temporary decline in the value of one or more of our securities. Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Our held-to-maturity securities portfolio, consisting of debt securities for which we have a positive intent and ability to hold to maturity, is carried at amortized cost. We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed other-than-temporary, we adjust the cost basis of the security by writing down the security to estimated fair market value through a charge to current period operations for the credit portion of the loss, with the remaining portion of the loss related to all other factors charged to other comprehensive income, net of taxes. The market values of our securities are affected by changes in interest rates.

BEACON FEDERAL BANCORP, INC.

Comparison of Financial Condition at December 31, 2010 and December 31, 2009

Securities. Securities available for sale decreased by $4.8 million to $162.4 million at December 31, 2010 from $167.2 million at December 31, 2009. The decrease in securities available for sale was due to the Company using proceeds from maturing securities to fund relatively higher yielding loans. Securities held to maturity decreased by $4.2 million to $10.3 million at December 31, 2010, as a result of principal payments received and maturities occurring throughout the year.

Loans. Net loans, including loans held for sale, decreased $21.8 million to $795.2 million at December 31, 2010 from $817.0 million at December 31, 2009. During 2010 the Company originated $250.4 million of loans, offset by provision for loan losses of $7.2 million and scheduled principal payments.

During 2010 there was a $26.0 million decrease in residential 1-4 family real estate loans, a $19.4 million decrease in home equity loans, a $15.1 million decrease in commercial business loans and a $6.1 million decrease in auto – direct loans, partially offset by an increases in commercial real estate loans of $28.9 million, auto-indirect loans of $8.1 million, multi-family real estate loans of $3.1 million and construction real estate loans of $2.6 million.

Residential 1-4 family loans decreased 12.5% due to normal loan amortizations and an increase in mortgage refinances. Since January 1, 2009, we have been selling the majority of our new conforming 30- and 20-year fixed rate mortgages to Freddie Mac. Since originations of these loans during 2009 and 2010 have not been retained, the balance of 1-4 family loans has decreased. As our 20-year and 30-year portfolio mortgages have refinanced in the past year to take advantage of the reduction in mortgage rates, the majority of those refinanced mortgages have also been sold, thus further reducing our 1-4 family portfolio and increasing our mortgage servicing asset. While we still retain all products less than 20 years in the portfolio, overall originations of mortgages have declined approximately 41% in 2010 as compared to 2009 due to a decline in demand for new mortgages and refinancing in the markets we serve.

We have been willing to forgo home equity credits that demand interest rates we believe are too low for our underwriting standards to properly reflect an increased risk of default as compared with other loan products at this time, thus reducing the balance of home equity loans in our portfolio at December 31, 2010.

Commercial business loans decreased 14.9%, due primarily to a decrease in originations as compared to 2009. Originations declined $15.6 million from the prior year as there were fewer lending opportunities with the necessary collateral to meet the Bank’s underwriting standards.

Auto-direct consumer loans decreased 19.3% as the result of scheduled payments from the relatively higher originations that occurred during 2006 and 2007 outpacing recent originations. Average originations for 2006 and 2007 were $30.6 million per year, as compared to the last three years of average originations of $21.8 million per year.

Commercial real estate loans increased 24.6% due primarily to four new credits ranging from $3.5 million to $8.1 million, three of which are with customers the Bank already had an established relationship with.

Consumer indirect auto loans increased 7.3% due to originations of $52.5 million in 2010. Originations of indirect auto loans were $14.1 million in 2006, $40.0 million in 2007, $48.2 million in 2008, $67.7 million in 2009 and $52.5 million in 2010. The decrease in originations in 2010 compared to 2009 was a result of competitive pricing in the markets we serve.

Commercial multi-family loans increased 12.9% due to originations tripling from $3.1 million in 2009 to $9.3 million in 2010.

Construction loans increased 13.6% due to originations of $7.1 million for the year.

BEACON FEDERAL BANCORP, INC.

Federal Home Loan Bank of New York stock. FHLB stock decreased $1.5 million, or 13.4% from December 31, 2009, as a result of the decrease in FHLB advances over the same period. The Company is required to maintain FHLB stock in an amount equivalent to a percentage of FHLB borrowings.

Deposits. Deposits decreased by $15.9 million to $677.4 million at December 31, 2010, from $693.3 million at December 31, 2009, as we chose to let higher cost deposits leave the Bank. Certificates of deposit and money market accounts were the two categories of deposits that decreased during 2010, by $72.2 million, or 18.3%, and $13.3 million, or 8.5%, respectively. Savings accounts increased by $48.5 million, or 81.0%, and represented the largest dollar increase in our deposit accounts. CDARS, checking and noninterest-bearing checking increased by $11.3 million, or 93.1%, $10.9 million, or 21.1%, and $10.2 million, or 31.5%, respectively. These deposit category fluctuations reflected the Company’s efforts to continue to decrease the cost of funds by reducing the amount of rate sensitive certificates of deposit as a percentage of all deposits and targeting our marketing efforts on attracting new core deposits.

Borrowings. FHLB advances decreased by $27.7 million, or 14.5%, to $163.4 million at December 31, 2010 from $191.1 million at December 31, 2009 due to scheduled maturities. The Company also has access when necessary to alternative sources of financing, including brokered deposits, CDARS and the Borrower-in-Custody (“BIC”) program with the Federal Reserve Bank of New York.

Stockholders’ Equity. Stockholders’ equity increased by $8.5 million, or 8.4%, to $109.7 million at December 31, 2010 from $101.3 million at December 31, 2009. The increase reflected $5.4 million of net income, a $3.6 million decrease in net unrealized holding losses on investments, stock based compensation of $0.9 million and release of ESOP shares of $0.7 million, partially offset by cash dividends of $1.2 million and repurchase of common stock of $1.0 million.

Comparison of Operating Results for the Years Ended December 31, 2010 and 2009

Interest Income. Interest income decreased by $1.7 million, or 3.1%, to $53.9 million for the year ended December 31, 2010 from $55.6 million for the year ended December 31, 2009. The decrease resulted primarily from lower yields on securities and loans, partially offset by a higher average balance of both.

Interest income on loans for 2010 of $46.0 million decreased slightly by $0.3 million, or 1.0%, from 2009. The effect of a higher average balance of loans was more than offset by a lower average yield. The average balance on loans increased to $829.5 million for the year ended December 31, 2010 from $816.9 million for the year ended December 31, 2009. The average yield on loans declined 11 basis points to 5.55% for the year ended December 31, 2010 from 5.66% for the year ended December 31, 2009, which reflected a decline in the yield on loans indexed to prime, partially offset by the greater proportion of higher-yielding commercial real estate, commercial business and secured consumer loans in our loan portfolio during the 2010 period compared to the 2009 period.

Interest income on securities for 2010 of $7.3 million decreased by $1.4 million, or 16.0%, from 2009. Average yields on securities decreased 112 basis points to 3.97% for the year ended December 31, 2010 from 5.09% for the year ended December 31, 2009. The decrease in securities interest income from a decline in yields was partially offset by higher average balances of securities to $184.0 million from $171.0 million.

Interest Expense. Interest expense decreased by $4.5 million, or 16.7%, to $22.6 million for the year ended December 31, 2010 from $27.2 million for the year ended December 31, 2009. The decrease in interest expense reflected primarily lower average rates on deposits, partially offset by higher balances of deposits.

Interest expense on deposits decreased by $4.2 million, or 27.2%, to $11.3 million for the year ended December 31, 2010 from $15.6 million for the year ended December 31, 2009. The average rate paid on deposits decreased 72 basis points to 1.74% from 2.46%. The average balance of deposits increased to $653.5 million for the year ended December 31, 2010 from $632.6 million for the year ended December 31, 2009.

BEACON FEDERAL BANCORP, INC.

Interest expense on certificates of deposit decreased by $3.1 million, or 26.2%, to $8.7 million for the year ended December 31, 2010 from $11.8 million for the year ended December 31, 2009, due primarily to a decrease of 78 basis points in average certificate of deposit rates to 2.41% from 3.19% and a decrease in average balance of $9.1 million. Interest expense on money market accounts decreased to $1.8 million from $2.9 million, reflecting substantially lower average rates on such accounts, 1.15% in the 2010 period compared to 1.94% in the 2009 period, partially offset by higher average balances on such accounts, $161.0 million compared to $150.5 million.

Interest expense on borrowings decreased $0.3 million, to $11.3 million for the year ended December 31, 2010 from $11.6 million, due primarily to a lower average balance, partially offset by a higher average rate. The average balance on borrowings decreased to $261.0 million from $281.4 million. The interest rates paid on such borrowings increased to 4.32% from 4.12%.

Net Interest Income. Net interest income increased by $2.8 million, or 10.0%, to $31.3 million for the year ended December 31, 2010 from $28.5 million for the year ended December 31, 2009. The increase in net interest income was due to a higher interest rate spread and overall net interest-earning asset growth. Our net interest rate spread increased to 2.75% for the year ended December 31, 2010 from 2.49% for the year ended December 31, 2009 and the net interest margin increased to 3.03% from 2.79%. The higher interest rate spread was attributable to a lower cost of funds. The cost of funds decreased 50 basis points, while the yield on interest-earning assets declined by 24 basis points.

Average net interest-earning assets increased to $118.3 million for the year ended December 31, 2010 from $104.9 million for the year ended December 31, 2009. The increase in average net interest-earning assets was principally a result of a reduction in average borrowings of $24.2 million.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider specific and general components. The specific component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral, net of selling costs, or the present value of expected future cash flows. The general component covers loans that are not individually classified as impaired and is based on the historical loan loss experience for the last four years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Bank’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current national and local economic and business conditions.

We recorded a provision for loan losses of $7.2 million for the year ended December 31, 2010 compared to a provision for loan losses of $7.7 million for the year ended December 31, 2009. Provision of $6.4 million and $5.9 million related to commercial loans for 2010 and 2009, respectively. The provision was consistent with the prior year as the balance of gross loans decreased slightly, 2.9%, from the prior year while nonperforming loans increased 9.2%.

Net charge-offs for 2010 were $7.6 million, or 0.92% of average loans, compared to $2.6 million, or 0.32% of average loans, for 2009 and $5.1 million, or 0.68% of average loans, for 2008. Of the net charge-offs, $6.3 million, or 83%, were due to previously impaired loans which had been fully reserved. Of the total 2010 net charge-offs, 37% were from commercial real estate, 32% were from multi-family real estate, 13% were from indirect auto and 12% were from commercial loans.

BEACON FEDERAL BANCORP, INC.

The allowance for loan losses was $15.2 million at December 31, 2010, compared with $15.6 million at December 31, 2009. The ratio of the allowance for loan losses to total loans was 1.90% at December 31, 2010, compared with 1.89% at December 31, 2009. The ratio of the allowance for loan losses to nonperforming loans was 108.28% at December 31, 2010, compared with 121.28% at December 31, 2009.

Noninterest Income. Noninterest income increased $1.3 million, or 39.0%, to $4.7 million for the year ended December 31, 2010 from $3.4 million for the year ended December 31, 2009, resulting primarily from increases in service charges, commission and fee income and reduced other-than-temporary credit impairment losses on debt securities, partially offset by a decrease in the gain on sale of loans.

Service charge income increased $0.4 million, or 14.3%, to $3.5 million primarily due to an increase in debit card fees. The Bank is actively promoting debit card usage and core deposits that require debit card transactions in order to obtain an attractive rate of interest for depositors. The resulting increased debit card usage has lead to the increase in the debit card fee income.

Commission income represents primarily income from the sale of credit, life and disability insurance. The $0.2 million, or 25.5%, increase in commission income for the year was primarily the result of a lower experience rate of claims filed by the Company’s customers.

Other-than-temporary credit impairment losses on debt securities in 2010 was $1.3 million, a decrease of $0.4 million, or 26.2%, as compared to the other-than temporary credit impairment losses of $1.7 million in 2009. The other-than-temporary credit impairment for the year resulted primarily from four securities; two trust preferred securities and two private label collateralized mortgage obligations.

Gain on sale of loans for 2010 was $0.5 million, which was $0.1 million less than the gain on sale of loans for 2009 of $0.6 million, due to a 22.5% decline in originations compared to the prior year.

Noninterest Expense. Noninterest expense increased by $1.7 million, or 9.1%, to $20.4 million for the year ended December 31, 2010 from $18.7 million for the year ended December 31, 2009. The increase in noninterest expense was due primarily to increases in salaries and benefits, occupancy and equipment and other expense, partially offset by a decrease in the FDIC premium expense.

Salaries and employee benefits increased by $1.2 million, or 12.7%, to $10.7 million for the year ended December 31, 2010 from $9.5 million for the year ended December 31, 2009, due primarily to standard wage increases, a 6.7% increase in full-time equivalent staff and a 1% increase in group insurance.

Occupancy and equipment expense increased by $0.6 million, or 34.2%, to $2.4 million for the year ended December 31, 2010 from $1.8 million for the year ended December 31, 2009 due primarily to having a full twelve months of operating costs of the Company’s new branch and corporate headquarters location that was leased beginning in June 2009.

Other expense increased by $0.3 million, or 8.2%, to $3.9 million for the year ended December 31, 2010 from $3.6 million in 2009 due primarily to outsourcing the servicing of ATMs and increased debit card usage.

FDIC premium expense decreased by $0.4 million, or 26.4%, to $1.2 million for the year ended December 31, 2010 as a result of the FDIC special assessment on all insured institutions to rebuild the Deposit Insurance Fund that was levied in 2009.

Income Tax Expense. The provision for income taxes was $3.1 million for the year ended December 31, 2010, compared to $2.0 million for the year ended December 31, 2009. The increase was due to $3.0 million higher pre-tax income and a slightly higher effective tax rate. Our effective tax rate was 36.5% for 2010 compared to 36.0% for 2009.

BEACON FEDERAL BANCORP, INC.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

								For the Years Ended December 31,
	2010							2009							2008
	Average Outstanding Balance		Interest Earned/Paid		Yield / Rate			Average Outstanding Balance		Interest Earned/Paid		Yield / Rate			Average Outstanding Balance		Interest Earned/Paid		Yield / Rate
	(Dollars in thousands)
Interest-earning assets:
Loans	$	829,548	$	46,010		5.55	%	$	816,931	$	46,271		5.66	%	$	758,065	$	45,916		6.06	%
Securities		183,963		7,312		3.97			170,968		8,700		5.09			169,755		9,295		5.48
FHLB stock		11,128		598		5.37			12,476		625		5.01			13,127		732		5.58
Interest-earning deposits		8,172		17		0.21			18,535		41		0.22			14,300		369		2.58
Total interest-earning assets		1,032,811		53,937		5.22			1,018,910		55,637		5.46			955,247		56,312		5.90
Noninterest-earning assets		30,185							28,849							19,833
Total assets	$	1,062,996						$	1,047,759						$	975,080

Interest-bearing liabilities:
Savings	$	81,553	$	466		0.57		$	58,475	$	194		0.33		$	60,289	$	328		0.54
Money market accounts		160,951		1,848		1.15			150,538		2,920		1.94			139,671		4,781		3.42
Checking accounts		50,033		322		0.64			53,590		662		1.24			45,334		1,290		2.85
Time accounts		360,946		8,702		2.41			370,013		11,797		3.19			294,127		12,562		4.27
Total deposits		653,483		11,338		1.74			632,616		15,573		2.46			539,421		18,961		3.52
FHLB advances		183,288		7,796		4.25			207,487		8,952		4.31			243,736		10,833		4.44
Reverse repurchase agreements		70,001		2,708		3.87			70,000		2,244		3.21			49,836		1,541		3.09
Lease obligation		7,738		785		10.14			3,936		392		9.96			-		-		-
Total interest-bearing liabilities		914,510		22,627		2.47			914,039		27,161		2.97			832,993		31,335		3.76

Noninterest-bearing deposits		38,559							32,357							27,711
Other noninterest-bearing liabilities		4,620							6,166							4,440
Total liabilities		957,689							952,562							865,144
Stockholders’ equity		105,307							95,197							109,936
Total liabilities and equity	$	1,062,996						$	1,047,759						$	975,080

Net interest income			$	31,310						$	28,476						$	24,977

Net interest rate spread						2.75	%						2.49	%						2.14	%

Net interest-earning assets	$	118,301						$	104,871						$	122,254

Net interest margin						3.03	%						2.79	%						2.61	%

Average of interest-earning assets to
interest-bearing liabilities						112.94	%						111.47	%						114.68	%

BEACON FEDERAL BANCORP, INC.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of change in each.

	Years Ended December 31,									Years Ended December 31,
	2010 vs. 2009									2009 vs. 2008
	Increase									Increase
	(Decrease)						Total			(Decrease)						Total
	Due to						Increase			Due to						Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	680		$	(941	)	$	(261	)	$	3,470		$	(3,115	)	$	355
Securities		627			(2,015	)		(1,388	)		67			(662	)		(595	)
FHLB stock		(70	)		43			(27	)		(35	)		(72	)		(107	)
Interest-earning deposits		(22	)		(2	)		(24	)		84			(412	)		(328	)
Total interest-earning assets		1,215			(2,915	)		(1,700	)		3,586			(4,261	)		(675	)

Interest-bearing liabilities:
Checking and money market accounts	$	115		$	(1,527	)	$	(1,412	)	$	575		$	(3,064	)	$	(2,489	)
Savings accounts		96			176			272			(10	)		(124	)		(134	)
Certificates of Deposit		(282	)		(2,813	)		(3,095	)		2,822			(3,587	)		(765	)
Total deposits		(71	)		(4,164	)		(4,235	)		3,387			(6,775	)		(3,388	)
FHLB advances		(1,033	)		(123	)		(1,156	)		641			62			703
Reverse repurchase agreements		-			464			464			(1,572	)		(309	)		(1,881	)
Lease obligation		386			7			393			196			196			392
Total interest-bearing liabilities		(718	)		(3,816	)		(4,534	)		2,652			(6,826	)		(4,174	)

Change in net interest income	$	1,933		$	901		$	2,834		$	934		$	2,565		$	3,499

Management of Market Risk

General. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee, that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

BEACON FEDERAL BANCORP, INC.

Our interest rate sensitivity is monitored through the use of a net interest income simulation model, which generates estimates of the change in our net interest income over a range of interest rate scenarios. The modeling assumes loan prepayment rates, reinvestment rates and deposit decay rates based on historical experience and current economic conditions.

We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

	(i)	actively market adjustable-rate commercial loans;

	(ii)	actively market commercial business loans, which tend to have shorter terms and higher interest rates than residential mortgage loans, and which generate customer relationships that can result in higher non-interest-bearing demand deposit accounts;

	(iii)	lengthen the weighted average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding sources such as fixed-rate advances from the Federal Home Loan Bank of New York and brokered deposits;

	(iv)	invest in shorter- to medium-term securities;

	(v)	sell all conforming one- to four-family mortgage loans with maturities of 20 years or more;

	(vi)	use interest rate caps, as determined by the Asset/Liability Management Committee, to attempt to preserve net interest income in periods of rising short-term interest rates;

	(vii)	originate high volumes of consumer loans, which have shorter terms, including direct and indirect automobile loans; and

	(viii)	maintain high levels of capital.

Net Portfolio Value of Beacon Federal. The OTS requires the computation of amounts by which the net present value of an institution’s cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. The OTS provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio value. The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the OTS model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. The assumptions were expanded to include an increase and decrease of 50 basis points. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The OTS provides us the results of the interest rate sensitivity model, which is based on information we provide to the OTS to estimate the sensitivity of our net portfolio value.

BEACON FEDERAL BANCORP, INC.

The table below sets forth, as of December 31, 2010, the OTS’s calculation of the estimated changes in the Bank’s net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


										NPV as a Percentage of Present Value of Assets (3)
Change in
Interest				Estimated Increase									Increase
Rates				(Decrease) in									(Decrease)
(basis		Estimated		NPV						NPV			(basis
points) (1)		NPV (2)		Amount			Percent			Ratio (4)			points)
	(Dollars in thousands)
	+300	$	78,249	$	(32,808	)		(30.0	)%		7.70	%		(262	)
	+200		91,824		(19,233	)		(17.0	)%		8.85	%		(147	)
	+100		103,297		(7,760	)		(7.0	)%		9.76	%		(56	)
	+50		106,582		(4,475	)		(4.0	)%		9.99	%		(33	)
	—		111,057		—			—			10.32	%		—
	-50		112,723		1,665			1.0	%		10.40	%		8
	-100		113,294		2,237			2.0	%		10.41	%		9

(1)

Assumes an instantaneous uniform change in interest rates at all maturities.

(2)

NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)

Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)

NPV Ratio represents NPV divided by the present value of assets.

The table above indicates that at December 31, 2010, in the event of a 200 basis point increase in interest rates, we would experience a 17% decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates, we would experience a 2% increase in net portfolio value.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

BEACON FEDERAL BANCORP, INC.

Net Interest Income. In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our internal net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a twelve-month period using historical data for assumptions such as loan prepayment rates and deposit decay rates, the current term structure for interest rates, and current deposit and loan offering rates. We then calculate what the net interest income would be for the same period in the event of an instantaneous 200 basis point increase or 100 basis point decrease in market interest rates. As of December 31, 2010, using our internal interest rate risk model, we estimated that our net interest income for the year ending December 31, 2011 would decrease by 2.6% in the event of an instantaneous 200 basis point increase in market interest rates, and would decrease by 0.2% in the event of an instantaneous 100 basis point decrease in market interest rates.

Liquidity and Capital Resources

Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of New York and maturities and sales of securities. In addition, we have the ability to collateralize borrowings in the wholesale markets. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 8.0% or greater. For the year ended December 31, 2010, our liquidity ratio averaged 11.1%. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2010.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of:

(i)

expected loan demand;

(ii)

expected deposit flows;

(iii)

yields available on interest-earning deposits and securities; and

(iv)

the objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2010, cash and cash equivalents totaled $12.4 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $162.4 million at December 31, 2010. On that date, we had $163.4 million of Federal Home Loan Bank advances outstanding and $1.7 million in limited recourse obligations related to loans sold, with the ability to borrow an additional $41.5 million.

BEACON FEDERAL BANCORP, INC.

At December 31, 2010, we had $43.5 million in loan commitments outstanding. In addition to commitments to originate loans, we had $60.5 million in unused lines of credit to borrowers. Certificates of deposit due within one year of December 31, 2010 totaled $192.4 million, or 28.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan and security sales, brokered deposits, CDARS, BIC and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2011. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activity is originating loans. During the year ended December 31, 2010, we originated $250.4 million of loans, and during the year ended December 31, 2009, we originated $323.2 million of loans. The reduction in originations was primarily a result of a decrease in the 1-4 family residential mortgage and consumer loan originations. 1-4 family residential mortgage originations decreased $61.5 million as a result of having a period of extraordinary demand for refinances in the first quarter of 2009, when many borrowers took advantage of what was then perceived to be historically low mortgage interest rates. Although interest rates have declined even further during 2010, the originations have decreased because of the large number of borrowers that had already refinanced in 2009. Consumer loan originations decreased $15.6 million due to heavy interest rate competition for auto loans, as a result of low or no interest rate financing being offered by automobile manufacturers and comparatively low rates offered from local credit unions in the Company’s operating areas.

We purchased $63.6 million of securities during the year ended December 31, 2010 compared to $76.6 million during the year ended December 31, 2009.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $15.9 million for the year ended December 31, 2010 compared to a net increase of $66.8 million for the year ended December 31, 2009. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During 2010, the Company repurchased 81,209 outstanding shares of its common stock at a total cost of $1.0 million. The Company paid cash dividends of $1.2 million for the year.

Federal Home Loan Bank advances decreased on a net basis by $27.7 million for the year ended December 31, 2010, compared to a decrease of $27.5 million for the year ended December 31, 2009. Historically, Federal Home Loan Bank advances have primarily been used to fund loan demand. At December 31, 2010, we had the ability to borrow up to $206.6 million ($41.5 million available) from the Federal Home Loan Bank of New York.

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2010, the Bank exceeded all regulatory capital requirements. Beacon Federal is considered “well capitalized” under regulatory guidelines. See “Item 1. Business—Supervision and Regulation—Federal Banking Regulation—Capital Requirements” contained in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may and are likely to expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make.

BEACON FEDERAL BANCORP, INC.

Recent Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The ASU expands the disclosures about the credit quality of financing receivables and the related allowance for credit losses. The ASU also requires disaggregation of existing disclosures by portfolio segment. The amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The adoption of this guidance on December 31, 2010 expanded the Company’s disclosures surrounding credit quality of financing receivables and the related allowance for credit losses.

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Beacon Federal Bancorp, Inc.

East Syracuse, New York

We have audited the accompanying consolidated balance sheets of Beacon Federal Bancorp, Inc. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beacon Federal Bancorp, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Horwath LLP

New York, New York

March 29, 2011

BEACON FEDERAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	December 31,			December 31,
	2010			2009

ASSETS

Cash and cash equivalents - cash and due from financial institutions	$	12,439		$	12,993
Interest-bearing deposits in other financial institutions		-			170
Securities available for sale		162,405			167,238
Securities held to maturity (fair value of $10,543 and $14,500, respectively)		10,321			14,561
Loans held for sale		2,692			940
Loans, net of allowance for loan losses of $15,240 and $15,631, respectively		792,553			816,061
Federal Home Loan Bank (“FHLB”) of New York stock		9,954			11,487
Premises and equipment, net		12,030			12,604
Accrued interest receivable		3,528			3,888
Foreclosed and repossessed assets		206			797
Bank-owned life insurance (“BOLI”)		10,639			10,488
Other assets		15,711			15,670
Total assets	$	1,032,478		$	1,066,897

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	677,384		$	693,297
Federal Home Loan Bank advances		163,427			191,094
Securities sold under agreement to repurchase		70,000			70,000
Accrued interest payable and other liabilities		4,218			3,511
Capital lease obligation		7,739			7,736
Total liabilities		922,768			965,638
Commitments and contingencies (Note 14)
Preferred stock, $.01 par value, 50,000,000 shares authorized;
none issued or outstanding
Common stock, $.01 par value, 100,000,000 shares authorized; 7,652,816 and
7,653,565 shares issued; 6,432,922 and 6,533,378 shares outstanding, respectively		76			76
Additional paid-in capital		74,092			73,156
Retained earnings-substantially restricted		51,185			47,019
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(3,286	)		(3,997	)
Accumulated other comprehensive loss, net		(1,866	)		(5,462	)
Treasury stock, 1,219,894 and 1,120,187 shares at cost, respectively		(10,491	)		(9,533	)
Total stockholders’ equity		109,710			101,259
Total liabilities and stockholders’ equity	$	1,032,478		$	1,066,897

See accompanying notes to consolidated financial statements.

BEACON FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

	Years Ended
	December 31,
	2010			2009
Interest and dividend income:
Loans, including fees	$	46,010		$	46,271
Securities		7,312			8,700
FHLB stock		598			625
Federal funds sold and other		17			41
Total interest income		53,937			55,637
Interest expense:
Deposits		11,338			15,573
FHLB advances		7,796			8,952
Securities sold under agreement to repurchase		2,708			2,244
Lease obligation		785			392
Total interest expense		22,627			27,161
Net interest income		31,310			28,476
Provision for loan losses		7,210			7,695
Net interest income after provision
for loan losses		24,100			20,781
Noninterest income:
Service charges		3,477			3,042
Commission and fee income		806			642
Change in cash surrender value of BOLI		152			119
Gain on sale of loans		485			595
Other-than-temporary impairment (OTTI) credit
loss on securities		(1,260	)		(1,707	)
OTTI loss on cost method equity investment		-			(166	)
Other		1,052			865
Total noninterest income		4,712			3,390
Noninterest expense:
Salaries and employee benefits		10,691			9,490
Occupancy and equipment		2,408			1,795
Advertising and marketing		492			478
Telephone, delivery and postage		751			730
Supplies		208			249
Audit and examination		686			651
FDIC premium expense		1,247			1,694
Other		3,877			3,583
Total noninterest expense		20,360			18,670
Income before income taxes		8,452			5,501
Income tax expense		3,087			1,978
Net income	$	5,365		$	3,523
Basic and diluted earnings per share	$	0.88		$	0.54

OTTI credit loss on securities:
Total OTTI loss on securities	$	1,432		$	1,763
Portion of OTTI loss recognized in other
comprehensive loss before income taxes		(172	)		(56	)
OTTI credit loss on securities	$	1,260		$	1,707

See accompanying notes to consolidated financial statements.

BEACON FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years Ended December 31, 2010 and 2009

(Dollars in thousands, except per share data)

															Accumulated
	Common Stock					Additional						Unearned			Other
	Shares			Amount		Paid-In			Retained			ESOP			Comprehensive			Treasury
	Outstanding			Issued		Capital			Earnings			Shares			(Loss)/Income			Stock			Total
Balance at January 1, 2009		7,662,315		$	76	$	72,160		$	42,833		$	(4,733	)	$	(8,251	)	$	-		$	102,085
Comprehensive income
Net income										3,523												3,523
Net change in unrealized gains (losses) on available for sale securities, net of taxes of $3,126																4,689						4,689
OTTI non-credit related loss on securities for which a portion of the OTTI has been recognized in income, net of taxes of $22																(34	)					(34	)
Other comprehensive income, net of tax																						4,655
Total comprehensive income																						8,178
Adjustment for adoption of ASC 320-10, net of taxes of $1,144										1,866						(1,866	)					-
Earned ESOP shares							(93	)					736									643
Stock-based compensation		(8,750	)				1,089															1,089
Cash dividends $0.19 per share										(1,203	)											(1,203	)
Repurchase of common stock		(1,120,187	)																(9,533	)		(9,533	)
Balance at December 31, 2009		6,533,378		$	76	$	73,156		$	47,019		$	(3,997	)	$	(5,462	)	$	(9,533	)	$	101,259
Comprehensive income
Net income										5,365												5,365
Net change in unrealized gains (losses) on available for sale securities, net of taxes of $1,297																3,708						3,708
OTTI non-credit related loss on securities for which a portion of the OTTI has been recognized in income, net of taxes of $60																(112	)					(112	)
Other comprehensive income, net of tax																						3,596
Total comprehensive income																						8,961
Earned ESOP shares							(24	)					711									687
Stock-based compensation		(9,147	)				888															888
Common stock issued under employee stock plan		8,398					72															72
Cash dividends $0.20 per share										(1,199	)											(1,199	)
Repurchase of common stock		(99,707	)																(958	)		(958	)
Balance at December 31, 2010		6,432,922		$	76	$	74,092		$	51,185		$	(3,286	)	$	(1,866	)	$	(10,491	)	$	109,710

See accompanying notes to consolidated financial statements.

BEACON FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Years Ended
	December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	5,365		$	3,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		7,210			7,695
Change in fair value of servicing assets		224			154
Depreciation and amortization		1,428			974
ESOP expense		687			643
Amortization of stock-based compensation expense		888			1,089
Amortization of net deferred loan costs		2,660			2,478
Net amortization of premiums and discounts on securities		607			58
Gain on sale of loans		(485	)		(595	)
Other-than-temporary impairment credit loss on securities		1,260			1,873
Originations of loans held for sale		(43,586	)		(90,336	)
Proceeds from loans held for sale		42,319			91,527
Proceeds from sale of trading account assets		-			23,337
Increase in cash surrender value of BOLI		(152	)		(119	)
Net change in:
Accrued interest receivable		360			97
Other assets		(2,660	)		(6,124	)
Accrued interest payable and other liabilities		710			(639	)
Net cash provided by operating activities		16,835			35,635
Cash flows from investing activities:
Purchase of FHLB stock		(1,642	)		(644	)
Redemption of FHLB stock		3,175			2,237
Securities held to maturity:
Maturities, prepayments and calls		4,170			8,707
Securities available for sale:
Purchases		(63,609	)		(76,612	)
Proceeds from maturity or call		72,637			55,218
Maturities of interest-bearing deposits		170			200
Loan originations and payments, net		12,869			(57,803	)
Purchase of premises and equipment		(854	)		(2,341	)
Proceeds from sale of foreclosed and repossessed assets		1,360			1,616
Net cash provided by (used for) investing activities	$	28,276		$	(69,422	)

Continued on following page

BEACON FEDERAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Continued

	Years Ended
	December 31,
	2010			2009
Cash flows from financing activities:

Net change in deposits	$	(15,913	)	$	66,830
Proceeds from FHLB advances		89,200			18,000
Repayment of FHLB advances		(116,867	)		(45,547	)
Repayment of lease obligation		-			(64	)
Issuance of common stock		72			-
Cash dividends		(1,199	)		(1,203	)
Repurchase of common stock		(958	)		(9,533	)
Net cash (used for) provided by financing activities		(45,665	)		28,483
Net change in cash and cash equivalents		(554	)		(5,304	)
Cash and cash equivalents at beginning of period		12,993			18,297
Cash and cash equivalents at end of period	$	12,439		$	12,993
Supplemental cash flow information:
Interest paid	$	22,656		$	27,737
Income taxes paid	$	6,149		$	4,514
Real estate and repossessions acquired in settlement of loans	$	769		$	2,264
Supplemental schedule of non-cash investing and financing activities:
Building acquired with capital lease obligation	$	-		$	7,800

See accompanying notes to consolidated financial statements.

BEACON FEDERAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2010 and 2009

(Dollars in thousands)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Effective for all interim and annual periods ending after September 15, 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB to be applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Beacon Federal Bancorp, Inc. (“Company”); the Company’s wholly owned subsidiary, Beacon Federal (“Bank” or “Beacon Federal”); and the Bank’s wholly owned subsidiary, Beacon Comprehensive Services (“BCSC”). The Company’s principal business is the business of the Bank. Inter-company transactions and balances are eliminated in consolidation.

The Bank provides financial services through its offices in New York, Massachusetts, Texas, and Tennessee. Its primary deposit products are checking, savings, money market and term certificate accounts, and its primary lending products are residential mortgage, commercial, and direct and indirect consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Further, operations of the Bank are managed and financial performance is evaluated on an institution-wide basis. As a result, all of the Bank’s operations are considered by management to be aggregated in one reportable operating segment. The Bank’s subsidiary, BCSC, sells insurance and investment products and provides tax-preparation services.

Conversion: On October 1, 2007, Beacon Federal completed its conversion from a mutual savings association to a capital stock savings association. A new holding company, Beacon Federal Bancorp, Inc., was established as part of the conversion. The public offering was consummated through the sale and issuance by the Company of 7,396,431 shares of common stock at $10 per share. Net proceeds of $66,212 were raised in the stock offering, after deduction of estimated conversion costs of $1,835 and excluding $5,917 which was loaned by the Company to a trust for the Employee Stock Ownership Plan (the ESOP), enabling it to purchase 591,714 shares of common stock in the offering.

Voting rights are held and exercised exclusively by the stockholders of the Company. Deposit account holders continue to be insured by the FDIC. A liquidation account was established in the amount of $44,708, which represented the Bank’s total equity as of March 31, 2007, the latest balance sheet date in the final prospectus used in the conversion.

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

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and write-down for other-than-temporary impairment losses on securities are particularly subject to change.

BEACON FEDERAL BANCORP, INC.

Cash and Cash Equivalents: Cash and cash equivalents include cash and deposits with other financial institutions with original maturities under 90 days. Net cash flows are reported for customer loan and deposit transactions. Cash and cash equivalents include interest-bearing deposits in other financial institutions of $1,167 and $6,496 at December 31, 2010 and 2009, respectively.

Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized gains and losses reported in other comprehensive loss, net of tax. The Company does not purchase securities for trading purposes.

The Bank is a member of the Federal Home Loan Bank of New York. The required investment in the common stock is based upon a certain percentage of the Bank’s assets and advances. Federal Home Loan Bank stock is carried at cost, which represents redemption value, and periodically evaluated for impairment based on ultimate recovery of par value. Dividends received on such stock are reported as income.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the interest method based upon anticipated prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating if losses are other-than-temporary, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the Company’s intent to sell the security or whether it is more likely than not that it will be required to sell the security before the anticipated recovery of its remaining amortized cost basis and (4) evaluation of cash flows to determine if they have been adversely affected.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at the principal balance outstanding, net of deferred loan costs and allowance for loan losses. Interest income is accrued daily on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments.

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. 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 nonaccrual 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 nonaccrual status, 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 amounts are repaid so that the loan is less than 120 days delinquent.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in the Bank’s judgment, deserve current recognition in estimating probable losses.

BEACON FEDERAL BANCORP, INC.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows, or loans otherwise adversely classified. The general component covers non-impaired loans and is based on the historical loan loss experience for the last four years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Bank’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions.

A loan is impaired when full payment under the loan terms is not expected. Multi-family, commercial business and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The Bank is subject to periodic examination by regulatory agencies that may require the Bank to record increases in the allowances based on their evaluation of available information. There can be no assurance that the Bank’s regulators will not require further increases to the allowances.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Foreclosed assets also include properties for which the Bank has taken physical possession, even though formal foreclosure proceedings have not taken place.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings, including the capital lease, and related components, are depreciated using the straight-line method with useful lives ranging from 4 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.

Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Accrued Interest Receivable: Interest on securities and loans is accrued as earned. Accrued interest receivable as of December 31, 2010 and 2009 is summarized as follows:


	December 31,
	2010		2009
Securities	$	662		$	814
Loans		2,866			3,074
	$	3,528		$	3,888

Bank Owned Life Insurance: In accordance with FASB ASC 325-30, “Investments-Other-Investments in Insurance Contracts,” Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

BEACON FEDERAL BANCORP, INC.

Mortgage Servicing Rights: Mortgage servicing rights on originated loans that have been sold or securitized for sale are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. For purposes of measuring impairment during the year ended December 31, 2008, the rights were stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic used for stratification was the type of loan, including coupon and loan age. The amount of impairment recognized in non-interest expense was the amount by which the capitalized mortgage servicing rights for a stratum exceeded their fair value. Capitalized servicing rights reported in other assets were amortized in proportion to and over the period of estimated net servicing revenues.

On January 1, 2009, the Company adopted the subsequent measurement provisions included in FASB ASC 860-50-35, “Transfers and Servicing-Servicing Assets and Liabilities,” and transferred its mortgage servicing rights from a class using the amortization method to the fair value method. There was no cumulative effect adjustment recognized at the adoption date, since the carrying value approximated the fair value of the mortgage servicing rights. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model includes assumptions that market participants would use in estimating future net servicing income, including the discount rate, prepayment rate, ancillary income, float earnings rate, inflation rate, cost to service, acquisition costs and delinquency rates.

Stock-based Compensation: Companies are required to measure and record compensation expense for stock options and other share-based payments on the instruments’ fair value on the date of grant. The Company uses the modified prospective method. Stock-based compensation expense is recognized over the straight-line basis over the requisite service period for all awards.

Comprehensive Income: Comprehensive income consists of net income and the unrealized gains and losses on securities available for sale (AFS), net of taxes, which is also recognized as a separate component of stockholders’ equity.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Employee Stock Ownership Plan (“ESOP”): The cost of shares issued to the ESOP, but not yet committed to be released, is shown as a reduction of stockholders’ equity. For ESOP shares committed to be released, the Bank recognizes compensation expense equal to the average fair values of the shares committed to be released during the period in accordance with the provisions of FASB ASC 718-40-30, “Compensation-Stock Compensation-Employee Stock Ownership Plans.” To the extent that the fair value of the ESOP shares differs from the cost of such shares, the difference is charged or credited to stockholders’ equity as additional paid-in capital. Dividends on allocated ESOP shares are charged to retained earnings. Dividends on allocated ESOP shares are either paid to participants of the ESOP or used to repay the ESOP loan and related accrued interest. Dividends on unallocated ESOP shares are used to repay the ESOP loan and related accrued interest.

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

BEACON FEDERAL BANCORP, INC.

Income Taxes: Provisions for income taxes are based on taxes currently payable or refundable, and deferred taxes which are based on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reported in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

Subsequent Events: Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC and noted no subsequent events requiring financial statement recognition or disclosure.

Reclassification: Reclassifications are made to prior years’ consolidated financial statements, when necessary, to conform to the current year’s presentation. These reclassifications have no effect on net income as previously reported.

New Accounting Pronouncements

BEACON FEDERAL BANCORP, INC.

Note 2 – Securities

The amortized cost, unrealized gross gains and losses and fair values of securities at December 31, 2010 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2010	Cost		Gains		Losses			Value

Held to maturity:
Debt securities:
Mortgage-backed securities - Residential	$	3,726	$	139	$	-		$	3,865
Collateralized mortgage obligations - Private issuer		4,264		41		(123	)		4,182
Collateralized mortgage obligations - Government agency		2,331		165		-			2,496
Total	$	10,321	$	345	$	(123	)	$	10,543

Available for sale:
Debt securities:
Treasuries	$	100	$	-	$	-		$	100
Agencies		7,997		45		(55	)		7,987
Pooled trust preferred securities		11,566		-		(6,120	)		5,446
Mortgage-backed securities - Residential		41,677		1,613		(256	)		43,034
Collateralized mortgage obligations - Private issuer		15,547		442		(1,010	)		14,979
Collateralized mortgage obligations - Government agency		88,528		2,399		(68	)		90,859
Total	$	165,415	$	4,499	$	(7,509	)	$	162,405

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

BEACON FEDERAL BANCORP, INC.

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2009	Cost		Gains		Losses			Value

Held to maturity:
Debt securities:
Mortgage-backed securities - Residential	$	4,850	$	116	$	-		$	4,966
Collateralized mortgage obligations - Private issuer		6,652		5		(323	)		6,334
Collateralized mortgage obligations - Government agency		3,059		141		-			3,200
Total	$	14,561	$	262	$	(323	)	$	14,500

Available for sale:
Debt securities:
Treasuries	$	100	$	1	$	-		$	101
Agencies		26,002		21		(51	)		25,972
Pooled trust preferred securities		12,755		-		(7,743	)		5,012
Mortgage-backed securities - Residential		39,629		1,646		(22	)		41,253
Collateralized mortgage obligations - Private issuer		23,242		13		(4,955	)		18,300
Collateralized mortgage obligations - Government agency		74,512		2,164		(76	)		76,600
Total	$	176,240	$	3,845	$	(12,847	)	$	167,238

Maturities of debt securities at December 31, 2010 are summarized as follows:

	Held to Maturity				Available for Sale
	Amortized		Fair		Amortized		Fair
December 31, 2010	Cost		Value		Cost		Value

Due within one year	$	-	$	-	$	-	$	-
Due after one through five years		-		-		8,097		8,087
Due after five through ten years		-		-		-		-
Due after ten years		-		-		11,566		5,446
		-		-		19,663		13,533
Mortgage-backed securities - Residential		3,726		3,865		41,677		43,034
Collateralized mortgage obligations - Private issuer		4,264		4,182		15,547		14,979
Collateralized mortgage obligations - Government agency		2,331		2,496		88,528		90,859
	$	10,321	$	10,543	$	165,415	$	162,405

BEACON FEDERAL BANCORP, INC.

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

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2010	Value		loss			Value		loss			Value		loss

Agencies	$	1,940	$	(55	)	$	-	$	-		$	1,940	$	(55	)
Pooled trust
preferred securities		-		-			5,446		(6,120	)		5,446		(6,120	)
Mortgage backed
securities - Residential		13,620		(256	)		-		-			13,620		(256	)
CMOs - Private issuer		-		-			12,145		(1,133	)		12,145		(1,133	)
CMOs - Government Agency		9,357		(68	)		-		-			9,357		(68	)
	$	24,917	$	(379	)	$	17,591	$	(7,253	)	$	42,508	$	(7,632	)

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2009	Value		loss			Value		loss			Value		loss

Agencies	$	5,953	$	(51	)	$	-	$	-		$	5,953	$	(51	)
Pooled trust
preferred securities		-		-			5,012		(7,743	)		5,012		(7,743	)
Mortgage backed
securities - Residential		3,263		(22	)		-		-			3,263		(22	)
CMOs - Private issuer		574		(3	)		20,142		(5,275	)		20,716		(5,278	)
CMOs - Government Agency		9,801		(76	)		-		-			9,801		(76	)
	$	19,591	$	(152	)	$	25,154	$	(13,018	)	$	44,745	$	(13,170	)

No assurance can be made that the credit quality of the securities with unrealized losses at December 31, 2010 will not deteriorate in the future which may require future reductions in income for other-than-temporary impairment (“OTTI”) credit losses.

Pooled Trust Preferred Securities (PTPS) (6 issues with unrealized loss). The unrealized losses on the Company’s pooled trust preferred securities, which are backed by financial institution issuers, were caused by general market conditions for financial institutions, which is an industry sector that is relatively out of favor, and the resulting lack of liquidity in the market for securities issued by or backed by financial institutions. Management of the Company does not intend to sell the securities and does not believe the Company will be required to sell the securities before recovery of their amortized cost basis, which may be upon maturity. The Company used a discounted cash flow (“DCF”) analysis to provide an estimate of the present value of expected future cash flows which was more than the carrying amount for three of the six PTPS with unrealized losses. The predominate factor in the present value of expected cash flows being greater than the carrying amount was the Company holding senior tranche positions in those securities, providing a priority in receipt of the cash flows estimated to be collected. Accordingly, the Company did not consider the unrealized losses on those three securities to be other-than-temporary credit-related losses at December 31, 2010.

BEACON FEDERAL BANCORP, INC.

Our PTPS were rated “A” (investment grade), or lower, and the lowest was rated “C” (highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations), as discussed below under the caption “Other-Than-Temporary Impairments.”

Mortgage-backed Securities (5 issues with unrealized loss) and Collateralized Mortgage Obligations (12 issues with unrealized loss). The unrealized losses on the Company’s mortgage-backed securities and collateralized mortgage obligations were caused primarily by decreased liquidity and larger non-credit risk premiums for these securities. Management of the Company does not intend to sell the securities and does not believe the Company will be required to sell the securities before recovery of their amortized cost basis, which may be upon maturity. Accordingly, the Company did not consider the unrealized losses on those securities to be other-than-temporary credit-related losses at December 31, 2010.

Mortgage-backed securities, and to a lesser extent, collateralized mortgage obligations (CMOs) are issued by federal agencies, primarily FNMA and FHLMC, and private issuers. Of the Company’s fifty-three CMOs, forty are government agency and thirteen are privately issued. Of the $ 1,201 of unrealized losses on CMOs, $1,133 of the losses are on privately issued securities, which generally carry a higher yield and greater degree of credit risk and liquidity risk than agency issues. Three privately issued CMOs with unrealized losses were rated investment grade or better and four privately issued CMOs were rated less than investment grade (including three subprime securities) with the lowest rated “Caa3.”

Agencies (1 issue with unrealized loss). The unrealized loss on the Company’s agency security was caused primarily by one agency security that was purchased for Community Redevelopment Act purposes and held for collateral with Senior Housing. The agency security has a one-time call in 2011, and if not called the agency security matures in 2015.

Individual debt securities in an unrealized loss position greater than 12 months and below investment grade with the lowest rating by security type as of December 31, 2010, are as follows:

Description	Class		Amortized Cost		Fair Value		Unrealized Loss			Lowest Credit Rating
CMOs - Private Issuer:
CWALT 2006-19CB		A14	$	3,490	$	3,151	$	(339	)		C
CWALT 2005-J11		1A10		2,057		1,966		(91	)	Caa1
ARMT 2005-3		4A1		2,960		2,533		(427	)	Caa1
First Horizon ALT 2006		1A1		2,043		1,889		(154	)	C

Trust Preferred Securities:
Alesco Preferred Funding IV		B-1		579		141		(438	)		C
Alesco Preferred Funding Ltd		A-1		2,113		1,248		(865	)	CCC+
US Capital Funding III 12/01/35		A-2		2,966		900		(2,066	)		C
US Capital Funding I 05/01/34		B-2		551		70		(481	)		C
MMCAPS Fund XVIII Ltd		A-1		2,712		1,543		(1,169	)	BBB

BEACON FEDERAL BANCORP, INC.

The Company’s nine investment securities that are in an unrealized loss position and rated below investment grade were all originally purchased at investment grade. Beginning with the second half of 2008, factors outside the Company’s control impacted the fair value of these securities and will likely continue to do so for the foreseeable future. These factors include, but are not limited to, issuer credit deterioration, issuer deferral and default rates, potential failure or government seizure of underlying financial institutions, ratings agency actions, and regulatory actions. As a result of changes in these and various other factors during 2009 and 2010, Moody’s Investors Service and Standard & Poor’s downgraded multiple CMO and Trust Preferred Securities, including securities that are held by the Company. Of the Company’s fifty-three CMOs, four are now considered to be below investment grade and in an unrealized loss position. Of the Company’s six trust preferred securities, five are now considered to be below investment grade and in an unrealized loss position. The deteriorating economic, credit and financial conditions experienced in 2008 and carrying through 2010 have resulted in illiquid and inactive financial markets and severely depressed prices for these securities.

The below investment grade for those securities in the table above was only one factor evaluated in determining whether it was appropriate to recognize an other-than-temporary impairment. Since the securities were below investment grade, we performed additional cash flow analysis in determining if the unrealized losses on the below investment grade securities are considered to be other-than-temporary.

Of our four CMOs in unrealized loss positions with below investment grade rating, we have determined that all but one is other than temporarily impaired. The ARMT 2005-3 investment is not considered other-than-temporarily impaired due to management not having an intention to sell the investment and not believing we will be required to sell the investment before recovery of its amortized cost basis and the underlying mortgages experiencing a relatively low amount of delinquencies and foreclosures of 9.1% and an average FICO score of 745 for the underlying mortgage borrowers.

Of the five PTPS securities in unrealized loss positions with below investment grade rating, we have determined that three are other-than-temporarily impaired. The Alesco Preferred Funding Ltd Class A-1 and MMCAPS Fund XVIII Ltd investments are not considered other-than-temporarily impaired due to management not having an intention to sell the investments and not believing we will be required to sell the investments before recovery of their amortized cost basis and the underlying collateral not deteriorating. Due to uncertainty in the credit markets broadly, and the lack of both trading and new issuance in pooled trust preferred securities, market price indications generally reflect the illiquidity in these markets and not the credit quality of the individual securities. Due to this illiquidity, it is unlikely that the Company would be able to recover its investment in these securities if they were sold at this time. The Company has the intent and ability to hold these securities until a recovery of amortized cost basis, which may be at maturity. Based on an assessment of the credit quality of the underlying issuers and the Company’s senior tranche positions in the two trust preferred securities, we did not consider the investment in these securities to be other-than-temporarily impaired at December 31, 2010. The Company will continue to monitor the market price of these securities and the default rates of the underlying issuers and continue to evaluate these securities for possible other-than-temporary impairment.

Other-Than-Temporary Impairments. In estimating other-than-temporary impairment losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the Company’s intent to sell the security or whether it is more likely than not that it will be required to sell the security before the anticipated recovery of its remaining amortized cost basis and (4) evaluation of cash flows to determine if they have been adversely affected.

BEACON FEDERAL BANCORP, INC.

OTTI credit losses on debt securities recognized in noninterest income during the year ended December 31, 2010 and OTTI non-credit losses recognized in accumulated other comprehensive loss (“AOCL”) at December 31, 2010 are summarized in the table below. Also included in the table is the lowest credit rating of each security and the percentage of defaults and delinquencies in the underlying banks and loans supporting each trust preferred and CMO security, respectively, as of December 31, 2010:

					Non-Credit		Lowest
	Fair		OTTI Credit Loss		Loss in AOCL		Credit		Default /
Description	Value		During 2010		December 31, 2010		Rating		Delinquency
Trust preferred securities:
US Capital Funding III 12/01/35	$	900	$	6	$	2,066		C		29.7	%
Alesco Preferred Funding IV		141		458		438		C		39.3	%
US Capital Funding I 05/01/34		70		136		481		C		21.2	%
		1,111		600		2,985
Collateralized mortgage
obligations:
GMAC 2003-J9		958		35		-	Aaa			4.7	%
CWALT 2005-J11		1,966		46		91	Caa1			21.9	%
CWALT 2006-19CB		3,151		169		339		C		18.9	%
First Horizon Alt 2006		1,889		366		154		C		14.2	%
JPMMT 2007-S3		2,052		44		-		C		14.6	%
		10,016		660		584
	$	11,127	$	1,260	$	3,569

The Company recognized an OTTI credit loss on trust preferred securities of $600 during the year ended December 31, 2010. The Company used a DCF analysis to provide an estimate of the OTTI credit loss, which resulted from the fair value amount being less than the carrying amount. Inputs to the discount model included default rates, deferrals of interest, over-collateralization tests, interest coverage tests and other factors. For debt securities with credit ratings below “AA” (not high quality), the Company discounts the expected cash flows at the current yield used to accrete the beneficial interest in accordance with FASB ASC 325-40-35, “Investments-Other-Beneficial Interests in Securitized Financial Assets.” The accretable yield for the beneficial interest on the date of evaluation is the excess of estimated cash flows over the beneficial interest’s reference amount. The reference amount is equal to the initial investment minus cash received to date minus other-than-temporary impairments recognized to date plus the yield accreted to date. The increase in the defaults and deferrals contributed to the OTTI credit loss. For those trust preferred securities with OTTI credit losses, defaults and deferrals provided by a third-party broker increased by $46.8 million as of December 31, 2010 as compared to December 31, 2009.

With regard to our PTPS CDO valuations, unrealized losses are larger than OTTI for two primary reasons:

The discount rate used in assessing OTTI is the purchased yield of a bond, which is constant. Therefore, changes in OTTI are purely a function of changes in the amount and timing of projected future cash flows, but are not influenced by the market’s required rate of return for these cash flows (their discount rate). Fair value measures, however, incorporate the market’s perception of the risk of a bond’s future cash flows. Given that the credit quality of PTPS collateral has deteriorated significantly since the onset of the credit crisis, the riskiness of all PTPS CDO bonds has increased, pushing the discount rates used to value them well above their coupon rates. This risk premium is the primary reason that the fair values of most PTPS CDOs are significantly below their amortized costs.

BEACON FEDERAL BANCORP, INC.

During the height of the credit bubble in late 2007 and early 2008, there was tremendous demand for PTPS CDOs, and competition among dealers for PTPS compressed collateral credit spreads to artificially tight levels. When the credit bubble burst, demand for PTPS declined and PTPS credit spreads increased. This increase in credit spreads reduced the fair value of PTPS collateral, which by extension reduced the fair value of PTPS CDOs.

Although the third party model we use captures the illiquidity premium embedded in the yields of benchmark, publicly traded PTPS, we do not incorporate the illiquidity that currently exists in the PTPS CDO market itself. The PTPS CDO market is severely dislocated and opaque, and features a small number of sophisticated hedge funds bidding for PTPS assets held by a large number of institutions. As a result, trades have occurred over a wide range of prices that we believe contain excessive discounts for distressed sales, illiquidity and complexity, and are therefore not an accurate measure of the fair value of PTPS CDOs.

The Company recognized an OTTI credit loss on collateralized mortgage obligations of $660 during the year ended December 31, 2010. The Company used a DCF analysis to provide an estimate of the OTTI credit loss, which resulted from the fair value amount being less than the carrying amount. Inputs to the DCF analysis include prepayment rate, default rate, delinquencies, loss severities and percentage of non-performing assets. For debt securities with credit ratings below “AA” (high quality), the Company discounts the expected cash flows at the current yield used to accrete the beneficial interest, which is in accordance with the subsequent measurement provisions of FASB ASC 325-40-35, “Investments-Other-Beneficial Interests in Securitized Financial Assets.” The accretable yield for the beneficial interest on the date of evaluation is the excess of estimated cash flows over the beneficial interest’s reference amount. The reference amount is equal to the initial investment minus cash received to date minus other-than-temporary impairments recognized to date plus the yield accreted to date. The increase in the percentage of delinquent loans and decrease in credit support contributed to the OTTI credit loss.

OTTI credit loss of $1,035 related to two trust preferred securities for the prior year ended December 31, 2009. An OTTI loss of $672 related to four collateralized mortgage obligations for the year ended December 31, 2009.

The following table summarizes the change in OTTI credit related losses on debt securities, exclusive of tax effects, for the years ended December 31, 2010 and 2009:

	Years ended December 31,
	2010		2009
Credit related impairments with a portion
recognized in other comprehensive
loss:
Beginning balance	$	3,293	$	1,586
Credit related impairments on portions
of OTTI previously recognized in other
comprehensive loss		1,260		1,707
Ending balance	$	4,553	$	3,293

BEACON FEDERAL BANCORP, INC.

Note 3 – Loans

Loans, net are summarized as follows:

	December 31,
	2010			2009

Residential real estate:
1-4 family	$	182,832		$	208,876
Home equity		157,629			176,988
Total Residential real estate		340,461			385,864
Commercial:
Commercial business		85,960			101,022
Commercial real estate		146,433			117,499
Multi-family real estate		26,944			23,862
Commercial - 1-4 family real estate		10,024			10,987
Construction		22,030			19,392
Total Commercial		291,391			272,762
Consumer:
Auto - indirect		119,723			111,624
Auto - direct		25,459			31,562
Other consumer - secured		18,669			17,821
Other consumer - unsecured		7,495			7,182
Total Consumer		171,346			168,189
Gross loans		803,198			826,815

Net deferred loan costs		4,595			4,877
Allowance for loan losses		(15,240	)		(15,631	)
	$	792,553		$	816,061

BEACON FEDERAL BANCORP, INC.

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2010 and 2009.

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	2010
	Residential
	Real Estate			Commercial			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,590		$	11,251		$	2,787		$	3		$	15,631
Provision for loan losses		(80	)		6,999			256			35			7,210
Charge-offs		(295	)		(6,183	)		(1,542	)		-			(8,020	)
Recoveries		73			3			343			-			419
Ending balance	$	1,288		$	12,070		$	1,844		$	38		$	15,240

Period-end allowance balance attributed to loans:
Individually evaluated for impairment	$	715		$	6,430		$	-		$	-		$	7,145
Collectively evaluated for impairment		573			5,640			1,844			38			8,095

Loan balance individually evaluated for impairment	$	2,406		$	33,099		$	-					$	35,505
Loan balance collectively evaluated for impairment		338,055			258,292			171,346						767,693
	$	340,461		$	291,391		$	171,346					$	803,198


		2009
	Residential
	Real Estate			Commercial			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,534		$	6,677		$	2,322		$	13		$	10,546
Provision for loan losses		206			5,877			1,622			(10	)		7,695
Charge-offs		(162	)		(1,311	)		(1,737	)		-			(3,210	)
Recoveries		12			8			580			-			600
Ending balance	$	1,590		$	11,251		$	2,787		$	3		$	15,631

Period-end allowance balance attributed to loans:
Individually evaluated for impairment	$	-		$	7,054		$	-		$	-		$	7,054
Collectively evaluated for impairment		1,590			4,197			2,787			3			8,577

Loan balance individually evaluated for impairment	$	-		$	32,636		$	-					$	32,636
Loan balance collectively evaluated for impairment		385,864			240,126			168,189						794,179
	$	385,864		$	272,762		$	168,189					$	826,815

The adequacy of the allowance for loan losses for all loan classes is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors. 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. 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 qualitative adjustments to historical loss experience, maintained to cover uncertainties that affect our estimate of probable losses for each loan type. Portions of the general allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment.

We evaluate the allowance for loan losses for all loan classes 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 for the general allowance 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.

A general loan loss allowance is provided on all loans not specifically identified as impaired (“non-impaired loans”). The allowance is determined first based on a quantitative analysis using a loss migration methodology. The loans are stratified by type and the historical loss migration is tracked for the various stratifications. Loss experience is quantified for the most recent four years and if considered necessary by management, weighted to give more weight to the most recent losses. That loss experience is then applied to the stratified portfolio at each quarter end.

BEACON FEDERAL BANCORP, INC.

The stratification of the non-impaired loan portfolio resulted in a quantitative general loan loss allowance of $8.1 million at December 31, 2010, compared to $8.6 million at December 31, 2009.

Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the migration analysis within parameters. The qualitative adjustments are based on the factors below. Generally, the factors are considered to have no significant impact to our historical migration ratios. However, if information exists to warrant adjustment to the migration analysis, changes are made in accordance with parameters supported by narrative and/or statistical analysis. Each of the factors below could be adjusted by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following ten factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:

●	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;

●	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 the quality of our loan review system and the degree of oversight by the Board of Directors;

●	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.

The qualitative loan loss allowance on the non-impaired loan portfolio was $4.2 million at December 31, 2010 and $6.0 million at December 31, 2009.

For homogeneous loan pools, such as 1-4 family residential mortgages, home equity lines of credit and consumer loans, the Company uses payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on a monthly basis by the Bank's collection area and on a quarterly basis with respect to determining the adequacy of the allowance for loan losses. The payment status of these homogeneous pools at December 31, 2010 is included in the aging of the recorded investment of past due loans table. In addition, the total nonperforming portion of these homogeneous loan pools at December 31, 2010 is presented in the recorded investment in nonaccrual loans table.

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.

BEACON FEDERAL BANCORP, INC.

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are automatically placed on non-accrual status when payment of principal or interest is more than 120 days delinquent. Restructured loans are placed on non-accrual status if collection of principal or interest in full is in doubt. Collateral-dependent loans may be placed on nonaccrual status if the estimated proceeds, less costs to sell, of the collateral is less than the carrying value of the loan.

When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. At any time a loan is less than 120 days delinquent and we expect to collect principal and interest in full, the loan will return to accrual status.

The year-end recorded investment of nonaccrual loans, segregated by class of loans, were as follows:

	December 31
	2010		2009
Residential real estate:
1-4 family	$	1,059	$	1,151
Home equity		158		172
Commercial:
Commercial business		984		710
Commercial real estate		4,633		5,763
Multi-family real estate		3,200		3,753
Construction		314		510
Consumer:
Other consumer - unsecured		-		2
	$	10,348	$	12,061

BEACON FEDERAL BANCORP, INC.

An aging analysis of past due loans, segregated by class of loans, as of December 31, 2010 was as follows:

													Accruing Loans
	30-59 Days		60-89 Days		90-119 Days		120 Days		Current		Total		90 or More
	Past Due		Past Due		Past Due		and Greater		Loans		Loans		Days Past Due
Residential real estate:
1-4 family	$	303	$	-	$	345	$	1,059	$	181,125	$	182,832	$	345
Home equity		470		235		185		158		156,581		157,629		185
Commercial:
Commercial business		2,276		555		543		984		81,602		85,960		543
Commercial real estate		361		668		-		4,633		140,771		146,433		-
Multi-family real estate		-		-		-		3,200		23,744		26,944		-
Commercial - 1-4 family real estate		-		-		1,500		-		8,524		10,024		1,500
Construction		-		-		-		314		21,716		22,030		-
Consumer:
Auto - indirect		1,750		33		-		-		117,940		119,723		-
Auto - direct		141		7		-		-		25,311		25,459		-
Other consumer - secured		82		-		-		-		18,587		18,669		-
Other consumer - unsecured		28		6		2		-		7,459		7,495		2
Total	$	5,411	$	1,504	$	2,575	$	10,348	$	783,360	$	803,198	$	2,575

Impaired loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged-off when deemed uncollectible, with the balance remaining as an impaired loan until either the full principal is received or the loan is charged-off.

BEACON FEDERAL BANCORP, INC.

Year-end impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
2010
Residential real estate:
1-4 family	$	881	$	-	$	881	$	881	$	5	$	422	$	15
Commercial:
Commercial business		4,225		245		2,593		2,838		1,333		2,376		18
Commercial real estate		6,540		2,390		1,516		3,906		846		5,321		20
Multi-family real estate		4,117		1,297		1,126		2,423		430		4,009		162
Construction		314		-		314		314		130		37		1
Total	$	16,077	$	3,932	$	6,430	$	10,362	$	2,744	$	12,165	$	216

2009
Commercial:
Commercial business	$	1,173	$	27	$	1,146	$	1,173	$	731	$	608	$	36
Commercial real estate		5,763		-		5,763		5,763		2,132		2,726		121
Multi-family real estate		3,532		-		3,532		3,532		1,130		1,746		41
Construction		510		-		510		510		110		22		-
Total	$	10,978	$	27	$	10,951	$	10,978	$	4,103	$	5,102	$	198

Credit quality indicators. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators. For non-commercial loans, management analyzes primarily historical payment experience, credit documentation and current economic trends. Additionally, for commercial loans, management tracks loans based on risk ratings. We use the following definitions for risk ratings:

Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

BEACON FEDERAL BANCORP, INC.

The following table presents risk rated classified loans by class of commercial loan.

	December 31, 2010
	Special Mention		Substandard		Doubtful
Commercial business	$	1,435	$	7,793	$	846
Commercial real estate		2,903		11,477		-
Multi-family real estate		-		2,561		741
Commercial - 1-4 family real estate		285		1,500		-
Construction		1,269		314		-
	$	5,892	$	23,645	$	1,587

Loan modifications. As of December 31, 2010, the Company had the following restructured loans classified by type of concession made:

Type of concession	# of Loans		Unpaid principal balance		Allocated allowance

Commercial loans - non collateral-dependent
Interest-only for 6 to 12 months		9	$	1,766	$	1,098

Commercial loans - collateral-dependent
Interest-only for 6 to 12 months		8	$	4,922	$	927
Interest-only for 24 months at a below-market interest rate		1		1,501		-
Term extended and interest rate reduced (reduced to market rate)		2		598		154

Residential 1-4 family loan - non collateral-dependent
Term extended and interest rate reduced to below-market rate		1	$	881	$	5

At December 31, 2010, there were $3,412 of restructured loans classified as nonaccrual loans and nonperforming loans. At December 31, 2009, there were $2,961 of restructured loans classified as nonaccrual loans and nonperforming loans.

Based on the underwriting at the time of the restructuring, the Company makes a determination whether or not the loan is a troubled debt restructuring (“TDR”). Restructured loans are not considered TDRs when the loan terms are consistent with the Company’s current product offerings and the borrowers meet the Company’s current underwriting standards with regard to financial condition, payment history and collateral.

The Company considers a TDR to be any restructured loan where a debtor’s financial difficulties leads to a concession being granted in order to maximize the probability of repayment that would not otherwise have been considered. The restructured terms must be of a nature that the debtor could not obtain similar funds with a source other than the Bank, or could only obtain similar funds at effective rates so high that it could not afford to pay them.

The Company had two TDRs totaling $2,382 as of December 31, 2010. A TDR of $1,501 was included in impaired and nonaccrual loans, while the remaining $881 TDR was included in impaired loans on accrual status. There are no commitments to lend additional funds on either TDR loan. As of December 31, 2009, there was one TDR of $2,961, which was included in impaired and nonaccrual loans status.

BEACON FEDERAL BANCORP, INC.

Note 4 – Premises and Equipment, net

Premises and equipment, net of accumulated depreciation are summarized as follows:

	December 31,
	2010			2009

Land	$	744		$	744
Buildings and improvements		5,150			4,149
Capital lease for building		7,800			7,800
Furniture, fixtures and equipment		4,423			4,628
		18,117			17,321
Accumulated depreciation		(6,087	)		(4,717	)
	$	12,030		$	12,604

Depreciation expense was $1,428 and $974 for the years ended December 31, 2010 and 2009, respectively.

The Company has a capital lease for the corporate headquarters and branch located on Manlius Center Road, East Syracuse, New York. The lease term is for 25 years with two, five-year lease renewal options.

Following is a summary of future minimum lease payments, exclusive of real estate taxes and operating expenses.

	December 31,
	2010

January 1, 2011 through December 31, 2011	$	782
January 1, 2012 through December 31, 2012		782
January 1, 2013 through December 31, 2013		782
January 1, 2014 through December 31, 2014		821
January 1, 2015 through December 31, 2015		860
Thereafter		17,194
Total minimum lease payments		21,221
Less amount representing interest		13,482
Present value of net minimum lease	$	7,739

Note 5 – Foreclosed and Repossessed Assets

Foreclosed and repossessed assets were as follows:

	December 31,
	2010		2009

Foreclosed and repossessed assets	$	206	$	797

There was no activity in the allowance for losses for any years covered by the consolidated financial statements.

BEACON FEDERAL BANCORP, INC.

Note 6 – Mortgage Servicing Rights

Mortgage loans, including securitized loans, serviced for others at December 31, 2010 and December 31, 2009 were $140,787 and $125,025, respectively. Custodial escrow balances maintained in connection with loans serviced for others were $956 and $1,019 at December 31, 2010 and December 31, 2009, respectively.

	Years Ended December 31,
	2010			2009

Beginning balance	$	900		$	505
Adoption of fair value method on January 1, 2009		-			(192	)
Additions		356			741
Change in fair value included in noninterest expense		(224	)		(154	)
Ending balance	$	1,032		$	900

The fair value of the mortgage servicing rights were determined using discount rates ranging from 9.25% to 10.75%, depending upon the stratification of the specific right, expected annual prepayment rates ranging primarily from 6.3% to 30.2% (15.5% to 19.3% in 2009), weighted-average life of prepayable loans of 5.5 years (3.8 years in 2009), ancillary income of $10 per loan annually, cost to service of $55 per loan annually, acquisition costs of $10 per loan annually, float earnings rate of 0.25% per annum, foreclosure costs of $500 per loan annually and a 15 to 30 day delinquency rate of 5%.

Note 7 – Deposits

Deposits are summarized as follows:

	December 31,
Description and interest rate	2010		2009

Noninterest-bearing checking	$	42,468	$	32,292
Interest-bearing checking accounts		62,757		51,824
Savings accounts		108,335		59,868
Money market accounts		142,450		155,740
Total transaction accounts		356,010		299,724
Certificates:
Less than 2.00%		154,851		76,348
2.00 - 2.99%		86,474		161,313
3.00 - 3.99%		64,419		120,361
4.00 - 4.99%		15,630		32,472
5.00 - 5.99%		-		3,079
Total certificates		321,374		393,573
Total deposits	$	677,384	$	693,297

BEACON FEDERAL BANCORP, INC.

At December 31, 2010 and 2009, brokered deposits were $73,959 and $62,670, respectively. Brokered deposits represent an alternative source of funds and currently have a lower interest rate than local, retail deposits. Brokered deposits are highly susceptible to withdrawl if rates are not competitive.

Time deposits of $100 or more at December 31, 2010 and December 31, 2009 were $123,501 and $136,809, respectively. Generally, deposits in excess of $250 are not Federally insured.

Scheduled maturities of time deposits for the next five years were as follows:

	December 31,
	2010

First year	$	192,422
Second year		61,063
Third year		42,342
Fourth year		20,443
Fifth year		5,104
	$	321,374

Interest expense on deposits was as follows:

	Years Ended December 31,
	2010		2009

Checking and money market accounts	$	2,170	$	3,582
Savings accounts		466		194
Certificates		8,702		11,797
	$	11,338	$	15,573

BEACON FEDERAL BANCORP, INC.

Note 8 - Borrowings

Fixed-rate advances from FHLB of New York payable at their maturity dates are summarized as follows:

	Weighted-Average
	Interest Rate			December 31,
Maturity	December 31, 2010			2010			2009

Within one year		3.05	%	$	10,000		$	27,667
Second year		4.54	%		121,427			10,000
Third year		3.39	%		22,000			121,427
Fourth year		0.00	%		-			22,000
Fifth year		-			-			-
Thereafter		3.11	%		10,000			10,000
				$	163,427		$	191,094
Weighted-average rate					4.02	%		4.22	%

At December 31, 2010, interest rates on advances ranged from 2.82% to 4.95%. At December 31, 2010, the advances were collateralized by first mortgage loans under a blanket lien arrangement and securities of $151,427 and $55,151, respectively. At December 31, 2009, the advances were collateralized by first mortgage loans under a blanket lien arrangement and securities of $172,065 and $64,755, respectively. Based on this collateral and the Bank’s holdings of FHLB stock, the Bank was eligible to borrow up to an additional $41,487at December 31, 2010. There would be prepayment penalities assessed should the Bank prepay any of the borrowings.

BEACON FEDERAL BANCORP, INC.

Securities sold under agreement to repurchase were as follows:

	Interest Rate		December 31,
Maturity	December 31, 2010		2010			2009

August 4, 2013		3.78%	$	10,000		$	10,000
August 19, 2013		3.70%		10,000			10,000
September 4, 2013		3.37%		10,000			10,000
January 22, 2018		3.83%		10,000			10,000
January 24, 2018		3.45%		10,000			10,000
May 1, 2018		4.35%		20,000			20,000
			$	70,000		$	70,000
Fair value of pledged securities			$	75,287		$	78,901
Average balance of borrowings			$	70,001		$	70,000
Maximum balance at any month end			$	70,000		$	70,000
Average rate at year end				3.83	%		3.32	%
Average rate for year				3.80	%		3.21	%

Note 9 – Benefit Plans

401 (K) Plan: Participants are permitted to make elective deferrals to a maximum of 75% of their compensation, not to exceed the annual Internal Revenue Service’s published maximum contribution. The Bank shall contribute to each eligible participant’s account an amount equal to 60% of the participant’s elective deferrals up to a maximum of 6% of compensation. The Bank shall have the right to make a discretionary contribution. Participants are fully vested after five years of service. Expense for the years ended December 31, 2010 and 2009 was $205 and $180, respectively.

Employee Stock Ownership Plan (“ESOP”): In conjunction with the stock offering, $5,917 was loaned by the Company to a trust for the ESOP, enabling it to purchase 591,714 shares of common stock. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares released will be allocated to each eligible participant based on the ratio of each participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants.

Participating employees are those which complete at least 1,000 hours of service during the plan year, which begins January 1. Participant benefits become 20% vested after one year of service, and 20% for each additional year of service until benefits are 100% vested after 5 years of service. The Bank makes at least minimum annual contributions to the ESOP equal to the ESOP’s debt service, less dividends on unallocated and allocated (if any) ESOP shares used to repay the ESOP loan. Dividends on allocated ESOP shares are charged to retained earnings. Dividends on allocated and unallocated ESOP shares were used to repay the ESOP loan and related accrued interest during the years ended December 31, 2010 and December 31, 2009. The ESOP shares are pledged as collateral on the ESOP loan. As the loan is repaid, shares are released from collateral and allocated to participating employees, based on the proportion of loan principal and interest repaid and compensation of the participants. ESOP expense for 2010 and 2009 was $687 and $643, respectively. The number of ESOP shares allocated, shares released for allocation and unreleased shares at December 31, 2010 were 191,990, 71,136 and 328,588, respectively. The fair value of unreleased ESOP shares at December 31, 2010 and 2009 was $3,877 and $3,757, respectively.

BEACON FEDERAL BANCORP, INC.

Equity Incentive Plan: The Company has an equity incentive program (the “2008 Plan”) for directors, officers and employees of the Bank. Under this program, the Company authorized the award of up to 739,643 shares pursuant to grants of stock options and up to 295,857 shares of common stock may be issued as restricted stock awards. As of December 31, 2010, the Company has authorization to grant up to 251,503 additional shares of Company common stock for these instruments. The Plan provides for the grant of stock options, stock appreciation rights, restricted stock and unrestricted stock. Options expire ten years from the date of the grant. All stock options and stock awards granted are vested over a three-year period.

Under the measurement provisions of FASB ASC 718-10-30 and FASB ASC 718-10-35, “Compensation-Stock Compensation,” compensation expense is recognized based on the fair value of awards granted which includes restricted stock and stock options, at the grant date and is recognized on a straight-line basis over the requisite service period, generally defined as the vesting period. The Company has estimated the fair value of awards granted under its stock option plan utilizing the Black-Scholes pricing model.

The assumptions used in the Black-Scholes pricing model were as follows:

	Years Ended
	December 31,
	2010			2009

Expected dividend yield		2.00	%		-	%
Risk-free interest rate		2.26	%		-	%
Expected life of options (in years)		6.0			-
Expected volatility		36.82	%		-	%

The expected dividend yield is based on the current quarterly dividend in effect at the time of the grant. The risk-free interest rate is based on the 7-year U.S. Treasury Constant. The expected life of options is based on the average of the option life of ten years and vesting period of three years. The expected volatility is based on the Company’s historical trading activity.

Stock option compensation expense is as follows:

	Years Ended
	December 31,
	2010		2009

Pre-tax	$	273	$	249
After-tax		164		149
Basic and diluted earnings per share	$	0.03	$	0.02

At December 31, 2010, the total unrecognized expense related to non-vested stock options was approximately $499 and is expected to be recognized over the weighted-average period of 1.81 years.

BEACON FEDERAL BANCORP, INC.

A summary of the Company’s stock option activity under the Plan is as follows:

						Weighted-
						Average
				Weighted-		Remaining
				Average		Contractual		Aggregate
	Number			Exercise		Term in		Intrinsic
	of Shares			Price		Years		Value
Outstanding at January 1, 2009		444,134		$	8.23		9.90		-
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(39,000	)		-		-		-
Outstanding at December 31, 2009		405,134		$	8.23		8.90	$	474

Granted		155,065		$	9.06		9.48	$	425
Exercised		(8,398	)	$	8.23
Forfeited		(24,291	)
Outstanding at December 31, 2010		527,510		$	8.47		8.36	$	1,756
Exercisable at December 31, 2010		261,285		$	8.23		7.90	$	933
At December 31, 2010 share options
expected to vest in the future		263,705		$	8.71		8.81	$	815

During the year ended December 31, 2010 proceeds from stock option exercises totaled $72 and the related windfall tax benefits from exercise were approximately $6. There were no stock option exercises during 2009.

A summary of the Company’s restricted stock award expense is as follows:

	Years Ended
	December 31,
	2010		2009

Pre-tax	$	614	$	840
After-tax		368		504
Basic and diluted earnings per share	$	0.06	$	0.08

At December 31, 2010, the total unrecognized expense related to restricted stock awards was approximately $496 and is expected to be recognized over the weighted-average period of 0.90 years.

BEACON FEDERAL BANCORP, INC.

A summary of the Company’s non-vested stock award activity for the period ended December 31, 2010 is as follows:

	Number			Weighted-
	of			Average
	Nonvested			Grant Date
	Shares			Fair Value
Nonvested at January 1, 2010		154,776		$	8.23
Granted		-			-
Vested		(72,860	)		8.23
Forfeited		(9,045	)		8.23
Nonvested at December 31, 2010		72,871		$	8.23

Restricted stock awards that vested during the year had a fair value of $600 and $842 for the years ended December 31, 2010 and December 31, 2009, respectively.

Supplemental Executive Retirement Plan (“SERP”): The President and CEO of the Company and Bank will receive 40% of his highest base salary paid during either the current plan year or any of the previous three full plan years before retirement, including amounts deferred to any tax-qualified or non-qualified employee benefit plans, payable for the remainder of his lifetime with a guarantee of 180 monthly payments. If the President and CEO dies before receiving all monthly payments, his beneficiary will be paid the present value of the remaining payments in a lump sum. Plan benefits vest at the rate of 20% per year and become fully vested on death or disability. SERP expense is recognized over the remaining service period of the President and CEO based upon the present value of benefits expected to be provided under the SERP. SERP expense for the years ended December 31, 2010 and 2009 was $329 and $183, respectively.

Note 10 – Income Taxes

Income tax expense (benefit) was as follows:

	Years Ended December 31,
	2010			2009

Current:
Federal	$	4,034		$	4,027
State		592			618
		4,626			4,645
Deferred:
Federal		(1,230	)		(2,300	)
State		(309	)		(367	)
		(1,539	)		(2,667	)
Total income tax expense	$	3,087		$	1,978

BEACON FEDERAL BANCORP, INC.

The provision for income taxes differs from the Federal statutory corporate tax rate as follows:

	Years Ended December 31,
	2010			2009

Federal statutory rate of 34% times financial statement income (loss)	$	2,874		$	1,870
Effect of:
BOLI income		(51	)		(40	)
State taxes, net of federal benefit		187			165
Other, net		77			(17	)
Total income tax expense (benefit)	$	3,087		$	1,978

Effective tax rate		36.5	%		36.0	%

The components of the net deferred tax assets included in other assets are summarized as follows:


	December 31,
	2010		2009

Deferred tax assets:
Allowance for loan losses	$	5,761	$	5,854
Unrealized loss on securities available for sale		1,143		3,540
Impairment loss on securities		1,692		1,251
Deferred compensation		260		136
Capitalized interest		445		-
Incentive compensation plans		227		130
Mortgage servicing rights		216		132
Nonaccrual interest		372		-
Other		121		11
		10,237		11,054

Deferred tax liabilities:
Net deferred loan costs		1,737		1,853
Accumulated depreciation		386		217
Other		12		24
		2,135		2,094
Net deferred tax assets	$	8,102	$	8,960

The Company has determined that no valuation allowance is necessary as it is more likely than not that the gross deferred tax assets will be realized through carryback of future deductions to taxable income in prior years, future reversals of existing temporary differences, and through future taxable income.

BEACON FEDERAL BANCORP, INC.

At December 31, 2010 and 2009, the Company had $190 of unrecognized tax benefits, which would affect the effective tax rate if recognized. The Company anticipates that the unrecognized tax benefits will change significantly in the next twelve months due to an expected reversal as a result of the expiration of the statute of limitations during the third quarter of 2011. We are subject to U.S. Federal income taxes, as well as State of New York, Massachusetts, Texas and Tennessee income taxes. Income tax returns filed for the tax years ended December 31, 2007 through December 31, 2009 remain open to examination by these jurisdictions. We recognize interest and penalties related to tax positions in income tax expense in accordance with the recognition provisions under FASB ASC 740-10-25. We incurred no interest or penalties during 2010 or 2009.

The change in the balance of gross unrecognized tax benefits is summarized as follows:


	Years Ended December 31,
	2010		2009

Beginning balance	$	190	$	190
Increases (decreases)- prior year tax positions		-		-
Decreases-settlements with taxing authorities		-		-
Decreases-expiration of statute of limitations		-		-
Ending balance	$	190	$	190

The Bank computes its tax bad debt deduction using the specific charge-off method. As a result of the Bank’s assets exceeding $500,000, the tax bad debt reserve was being amortized into taxable income over a four-year period, beginning in 2006 and ending in 2009. There was no tax bad debt reserve at December 31, 2010 or December 31, 2009.

Note 11 – Related Party Transactions

Loans to principal officers, directors and their affiliates were as follows:

	Year Ended
	December 31,
	2010

Balance, beginning of year	$	1,474
Additions		1,472
Repayments		(213	)
Other		(846	)
Balance, end of year	$	1,887

During 2010, a director of both the Company and the Bank resigned from his position as a member of those respective boards of directors. As of December 31, 2010, the former director’s outstanding loan has been removed from the balance of related party loans as he is no longer considered to be a related party to the Company.

Deposits from principal officers, directors and their affiliates at December 31, 2010 and 2009 were $707 and $593, respectively.

BEACON FEDERAL BANCORP, INC.

Note 12 – Earnings Per Share

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

	Years Ended December 31,
	2010		2009

Basic earnings per share:

Net income	$	5,365	$	3,523
Less dividends paid:
Common stock		1,169		1,158
Participating securities		30		45

Undistributed earnings	$	4,166	$	2,320

Weighted-average basic shares outstanding		5,985		6,258
Add: weighted-average participating securities outstanding		146		257
Total weighted-average basic shares and participating securities outstanding		6,131		6,515

Distributed earnings per share	$	0.20	$	0.18
Undistributed earnings per share		0.68		0.36
Net income per share	$	0.88	$	0.54

Diluted earnings per share:

Undistributed earnings	$	4,166	$	2,320

Total weighted-average basic shares and participating securities outstanding		6,131		6,515
Add: Dilutive stock options		21		-
Total weighted-average diluted shares and participating securities outstanding		6,152		6,515

Distributed earnings per share	$	0.20	$	0.18
Undistributed earnings per share		0.68		0.36
Net income per share	$	0.88	$	0.54

Anti-dilutive option shares		9		17

BEACON FEDERAL BANCORP, INC.

Note 13 – Bank Capital Requirements

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. At December 31, 2010 the Bank met all capital adequacy requirements. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2010 and 2009, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Actual and required capital amounts and ratios for the Bank are presented below:


												To Be Well
												Capitalized Under
							For Capital					Prompt Corrective
	Actual						Adequacy Purposes					Action Provisions
December 31, 2010	Amount			Ratio			Amount		Ratio			Amount		Ratio

Equity	$	97,165
Disallowed deferred tax assets		(192	)
Unrealized loss on AFS securities		1,866
Tier 1 (Core) Capital and Tangible Capital		98,839			9.55	%	$	15,531		1.50	%
General valuation allowance (1)		9,981
Deduction for low-level recourse		(1,665	)
Total Capital to risk-weighted assets	$	107,155			13.42	%	$	63,877		8.00	%	$	79,847		10.00	%
Tier 1 (Core) Capital to risk-weighted assets	$	97,174			12.17	%	$	31,939		4.00	%	$	47,908		6.00	%
Tier 1 (Core) Capital to adjusted total assets	$	98,839			9.55	%	$	41,415		4.00	%	$	51,768		5.00	%
(1) Limited to 1.25% of risk-weighted assets.

												To Be Well
												Capitalized Under
							For Capital					Prompt Corrective
	Actual						Adequacy Purposes					Action Provisions
December 31, 2009	Amount			Ratio			Amount		Ratio			Amount		Ratio

Equity	$	86,597
Unrealized loss on AFS securities		5,462
Tier 1 (Core) Capital and Tangible Capital		92,059			8.56	%	$	16,140		1.50	%
General valuation allowance (1)		10,175
Deduction for low-level recourse		(1,665	)
Total Capital to risk-weighted assets	$	100,569			12.35	%	$	65,121		8.00	%	$	81,401		10.00	%
Tier 1 (Core) Capital to risk-weighted assets	$	90,394			11.10	%	$	32,561		4.00	%	$	48,841		6.00	%
Tier 1 (Core) Capital to adjusted total assets	$	92,059			8.56	%	$	43,041		4.00	%	$	53,801		5.00	%
(1) Limited to 1.25% of risk-weighted assets.

BEACON FEDERAL BANCORP, INC.

The Qualified Thrift Lender test requires that at least 65% of assets be maintained in housing-related finance and other specified areas. If this test is not met, limits are placed on growth, branching, new investments, FHLB advances, and dividends or the Bank must convert to a commercial bank charter. Management believes that this test has been met.

Note 14 – Commitments and Financial Guarantees

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used and commitments are generally made for 180 days or less. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Standby letters of credit are unconditional commitments issued by the Bank to guarantee the performance of the borrower to a third party. The guarantees in general extend for a term of up to one year and are fully collateralized by general corporate assets.

The contractual amount of financial instruments with off-balance sheet risk was as follows:


	December 31, 2010				December 31, 2009
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to make loans	$	12,438	$	31,019	$	23,785	$	20,362
Unused lines of credit	$	3,704	$	56,828	$	6,985	$	55,367
Range of fixed-rate commitments		3.25%-15.00%		-		3.25%-15.00%		-

The following instruments are considered financial guarantees and are carried at fair value. The contract amount and fair value of these instruments was as follows:


	December 31, 2010				December 31, 2009
	Contract		Fair		Contract		Fair
	Amount		Value		Amount		Value
Standby letters of credit	$	1,191	$	-	$	1,041	$	-
Limited recourse obligations related to loans sold	$	1,664	$	-	$	1,665	$	-

Loans sold to the Federal Home Loan Bank (FHLB) of New York under the Mortgage Partnership Finance program are sold with recourse. The Bank has an annual agreement that allows selling residential loans up to $50.0 million to the FHLB of New York. Approximately $48.6 million has been sold through December 31, 2010 under the current and previous agreements. Under the agreements, the Bank has a maximum credit enhancement of $1.7 million at December 31, 2010. Based upon a favorable payment history, the Bank does not anticipate recognizing any losses on these residential loans, and accordingly, has not recorded a liability for the credit enhancement.

BEACON FEDERAL BANCORP, INC.

The Company has an operating lease for its Chelmsford, MA branch premises, with a noncancelable 10 year term ending in 2020. The Company has the option to extend the lease for an additional two five-year terms upon completion of the initial term. Rental expense included in operating expenses amounted to $24 in 2010. The future minimum rental commitments as of December 31, 2010 are as follows:

2011	$	72
2012		72
2013		72
2014		72
2015		76
Thereafter		377
Total	$	741

Note 15 – Fair Value Measurements and Financial Instruments

Fair Value Measurements

General. The Company follows the provisions of FASB ASC 820-10, “Fair Value Measurements,” for financial assets and liabilities. FASB ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the “inputs”) into three broad levels.

The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Valuation Techniques. Securities available for sale are carried at fair value on a recurring basis utilizing Level 1, Level 2 and Level 3 inputs. For U.S. Treasuries, the Company obtains fair values using quoted prices in the U.S. Treasury market. For agencies, mortgage-backed securities, and collateralized mortgage obligations, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve.

For trust preferred securities, the Company obtains fair values using a discounted cash flow analysis. The analysis considers the structure and term of the trust preferred securities and the financial condition of the underlying financial institution issuers. Specifically, the analysis details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults. Assumptions used in the analysis include default rate, deferral of interest, over-collateralization test, interest coverage test and other factors. For debt securities with credit ratings below “AA” (not high quality), the Company discounts the expected cash flows at the current yield used to accrete the beneficial interest in accordance with the subsequent measurement provisions of FASB ASC 325-40-35, “Investments-Other-Beneficial Interests in Securitized Financial Assets.” The accretable yield for the beneficial interest on the date of evaluation is the excess of estimated cash flows over the beneficial interest’s reference amount. The reference amount is equal to the initial investment minus cash received to date minus other-than-temporary impairments recognized to date plus the yield accreted to date.

BEACON FEDERAL BANCORP, INC.

In determining the amount of currently performing collateral for purposes of modeling the expected future cash flows, management analyzed the default and deferral history. This review indicated significant increases in the number and amount of defaults and deferrals by the financial institution issuers. We assume that all deferrals will default, and 10% recoveries for deferrals and no recoveries for the failed banks. Additionally, management has noted the correlation between the rising levels of nonperforming loans as a percent of tangible equity plus loan loss reserves, by those issuers that have defaulted and/or, deferred interest payments. Therefore management has used this ratio as a primary indicator to project the levels of future defaults for fair value analysis purposes.

Given that the Federal Reserve Board approved PTPS as a source of Tier 1 capital in 1996, the short history of PTPSs and the scarcity of bank defaults prior to the credit crisis has left us with limited data with which to estimate recoveries. A 10% recovery was obtained for Silver State Bancorp’s PTPS, and developments in the bankruptcy proceedings for Corus Bank and Washington Mutual provide some support for an assumption of positive recoveries. However, until further recovery data emerges from the bankruptcy proceedings of numerous PTPS issuers, we believe it is prudent to assume zero recoveries for all failed banks.

With regard to currently deferring issuers, Moody’s preferred stock research reveals that, historically, 71% of issuers that suspended dividends eventually defaulted. Given the historically high default risk of deferring issuers, and the current stress on the banking system, we apply a conservative assumption that all deferring issuers will default immediately. As it is likely that some deferring issuers will eventually cure, a development that is already underway with the acquisition of deferring banks by stronger banks, we assume a 10% recovery on all deferrals and projected defaults.

Subsequent to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) we expect that banks with total assets greater than $15 billion will call their PTPS within the first six months of 2013. To account for future growth and consolidation expected in the industry, we assume banks that currently have $13 billion in total assets will reach the $15 billion threshold by early 2013. We believe that profitable, well capitalized banks will begin to call PTPS with fixed rate coupons above 9%, or floating rate coupons with spreads above 325 basis points. We are assuming that these prepayments will occur sometime in the middle of 2011. In addition, we are assuming prepayments of 5% every five years to account for further industry growth and isolated prepayments unrelated to the Dodd-Frank Act.

We assume that all auction calls will fail due to the dramatic decline in value of PTPS pools below the par value of PTPS CDO liabilities.

Under the ASC 825-10-25 election, all mortgage loans originated and intended for sale in the secondary market are carried at fair value, utilizing Level 2 inputs as determined based on quotes in the secondary market of outstanding commitments to sell our loans from investors. The fair value election was made to match changes in the value of these loans with the value of the loan commitment derivatives. None of the loans held for sale are in a delinquent status. Fair value gains or losses on loans held for sale are reported on the income statement in the line “Gain on sale of loans.”

The Company estimates fair values on mortgage servicing rights using Level 2 inputs, which include discounted cash flows based on current market pricing. For purposes of measuring impairment, the rights are stratified based on the predominant risk characteristics of the underlying loans. The predominant characteristic currently used for stratification is type of loan, including coupon and loan age. The fair value of each stratification of servicing portfolio is estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. A fair value analysis is also obtained from an independent third party agent. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.

BEACON FEDERAL BANCORP, INC.

Derivative instruments used in the ordinary course of business consist of mandatory forward sales contracts and interest rate lock commitments. The Company manages interest rate risk and hedges the interest rate lock commitments through mandatory forward sales contracts, which have fair value changes opposite to market movements. Generally, in an interest rate lock commitment, the borrower locks-in the current market rate for a fixed-rate loan. The mandatory forward sales contract is a loans sales agreement in which the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specific price on or before a specific date.

The Company had outstanding forward sales contracts of $3.3 million in notional value, matched against $3.3 million of interest rate lock commitments at December 31, 2010. The interest rate lock commitments included in other assets and forward sales contracts recognized in other liabilities amounted to $0 and $74, respectively, at December 31, 2010 and were accounted for at fair value as an undesignated derivative with a $20 fair value loss on the interest rate lock commitments and a $117 loss on the mandatory forward sales contracts recognized in noninterest income for the year ended December 31, 2010. The fair value of the Company’s derivative financial instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Company. Forward contracts and loan commitments are recorded at fair value utilizing Level 2 inputs. The Company believes that it has enough sources of liquidity to satisfy future cash requirements as they related to these derivative instruments.

Impaired loans are carried at fair value on a non-recurring basis utilizing Level 3 inputs, consisting of appraisals of underlying collateral and discounted cash flow analysis. A loan is impaired when full payment under the loan terms is not expected. Multi-family, commercial business and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted based on non-observable inputs and the related nonrecurring fair value measurement adjustments and have generally been classified as Level 3. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Nonfinancial assets measured at fair value on a non-recurring basis include foreclosed and repossessed assets. Assets acquired through, or instead of, loan foreclosure and by repossession are initially recorded at fair value utilizing level 3 inputs based on recent appraisals less costs to sell when acquired, establishing a new cost basis. The fair value under such appraisals is determined by using one of the following valuation techniques: income, cost or comparable sales.

BEACON FEDERAL BANCORP, INC.

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table summarizes financial assets and liabilities measured at fair value on a recurring basis at December 31, 2010, segregated by the level of the inputs within the hierarchy used to measure fair value:

	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
Assets	(Level 1)		(Level 2)		(Level 3)		Value

Available for sale securities:
Debt securities:
U.S. Treasury and agencies	$	100	$	7,987	$	-	$	8,087
Pooled trust preferred securities		-		-		5,446		5,446
Mortgage-backed securities		-		43,034		-		43,034
Collateralized mortgage obligations - Private issuer		-		14,979		-		14,979
Collateralized mortgage obligations - Government agency		-		90,859		-		90,859
	$	100	$	156,859	$	5,446	$	162,405

Loans held for sale	$	-	$	2,692	$	-	$	2,692

Mortgage servicing rights	$	-	$	1,032	$	-	$	1,032

Liabilities

Sales contract derivatives	$	-	$	74	$	-	$	74

The aggregate fair value exceeded the aggregate unpaid principal balance of loans held for sale that are carried at fair value under ASC 825-10-25 by $34 as of December 31, 2010.

BEACON FEDERAL BANCORP, INC.

The following table summarizes financial assets measured at fair value on a recurring basis at December 31, 2009, segregated by the level of the inputs within the hierarchy used to measure fair value:


	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
Assets	(Level 1)		(Level 2)		(Level 3)		Value

Securities available for sale:
Debt securities:
U.S. Treasury and agencies	$	101	$	25,972	$	-	$	26,073
Pooled trust preferred securities		-		-		5,012		5,012
Mortgage-backed securities		-		41,253		-		41,253
Collateralized mortgage obligations - Private issuer		-		18,300		-		18,300
Collateralized mortgage obligations - Government agency		-		76,600		-		76,600
	$	101	$	162,125	$	5,012	$	167,238

Loans held for sale	$	-	$	940	$	-	$	940

Mortgage servicing rights	$	-	$	900	$	-	$	900

Loan commitment derivatives	$	-	$	79	$	-	$	79

Liabilities

Sales contract derivatives	$	-	$	17	$	-	$	17

The aggregate fair value exceeded the aggregate unpaid principal balance of loans held for sale that are carried at fair value under ASC 825-10-25 by $13 as of December 31, 2009.

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3). A reconciliation of the beginning and ending balances for trust preferred securities using Level 3 inputs was as follows (dollars in thousands):


	Years ended December 31,
	2010			2009

Beginning balance	$	5,012		$	-
Transfers into Level 3		-			3,874
Capitalized interest		9			-
Principal paydowns		(590	)		(475	)
Total gains or losses (realized/unrealized)
Included in earnings		(600	)		(1,035	)
Included in other comprehensive income		1,615			2,648
Ending balance	$	5,446		$	5,012

BEACON FEDERAL BANCORP, INC.

Financial Assets Measured at Fair Value on a Non-Recurring Basis. Assets measured at fair value on a non-recurring basis at December 31, 2010, include impaired loans of $7.6 million, net of allowance for loan losses of $2.7 million, utilizing level 3 inputs. At December 31, 2009 there were impaired loans of $6.9 million, net of allowance for loan losses of $4.1 million, utilizing level 3 inputs. The impaired loans are collateral dependent.

The activity in the allowance for losses on impaired loans during the year ended December 31, 2010 was as follows (dollars in thousands):


Balance at January 1, 2010	$	4,103
Provision for loan losses		5,155
Loans charged off		(6,281	)
Recoveries		(233	)
Balance at December 31, 2010	$	2,744

Nonfinancial Assets Measured at Fair Value on a Non-Recurring Basis. Nonfinancial assets measured on a non-recurring basis at December 31, 2010 and December 31, 2009 includes foreclosed and repossessed assets of $206 and $797, respectively, utilizing Level 3 inputs. There was no provision for losses on these assets.

Financial Instruments

Carrying amount and estimated fair values of financial instruments were as follows:

	December 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	$	12,439	$	12,439	$	12,993	$	12,993
Interest-bearing deposits		-		-		170		170
Securities available for sale		162,405		162,405		167,238		167,238
Securities held to maturity		10,321		10,543		14,561		14,500
Loans held for sale		2,692		2,692		940		940
Loans, net		792,553		812,908		816,061		812,186
FHLB stock		9,954		N/A		11,487		N/A
Accrued interest receivable		3,528		3,528		3,888		3,888

Financial liabilities:
Deposits		677,384		683,008		693,297		699,514
Federal Home Loan Bank advances		163,427		172,049		191,094		201,123
Securities sold under agreement to repurchase		70,000		77,464		70,000		75,829
Accrued interest payable	$	1,492	$	1,492	$	1,522	$	1,522

BEACON FEDERAL BANCORP, INC.

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. It is not practicable to determine the fair value of FHLB stock due to the restriction placed on its transferability. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

The discounted cash flow models used to determine fair value are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows.

Note 16 – Parent Company Only Financial Statements

The following balance sheets, statements of operations and statements of cash flows for Beacon Federal Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto.

BALANCE SHEETS

(Dollars in thousands)

	December 31,
ASSETS	2010			2009

Cash and cash equivalents	$	9,402		$	10,971
Investment in Bank		97,200			86,597
ESOP note receivable		3,215			3,851
Total assets	$	109,817		$	101,419

LIABILITIES AND STOCKHOLDERS’ EQUITY

Other liabilities	$	107		$	160
Common stock		76			76
Additional paid-in capital		74,092			73,156
Retained earnings-substantially restricted		51,185			47,019
Unearned ESOP shares		(3,286	)		(3,997	)
Accumulated other comprehensive loss, net		(1,866	)		(5,462	)
Treasury stock		(10,491	)		(9,533	)
Total stockholders’ equity		109,710			101,259
Total liabilities and stockholders’ equity	$	109,817		$	101,419

BEACON FEDERAL BANCORP, INC.

STATEMENTS OF OPERATIONS

(Dollars in Thousands)


	Years Ended December 31,
	2010		2009
Interest and dividend income:
Interest income on ESOP note receivable	$	125	$	144
Interest income-other		55		102
Total interest and dividend income		180		246
Noninterest expense		173		290
Income (loss) before income taxes and equity in undistributed income (loss) of Bank		7		(44	)
Income taxes		-		9
Net income (loss) before equity in undistributed income of Bank		7		(53	)
Equity in undistributed income of Bank		5,358		3,576
Net income	$	5,365	$	3,523

BEACON FEDERAL BANCORP, INC.

STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	Years Ended December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	5,365		$	3,523
Adjustments to reconcile net income to net cash used for operating activities:
Equity in undistributed net income of Bank		(5,358	)		(3,576	)
Change in other liabilities		(53	)		18
Net cash used for operating activities		(46	)		(35	)
Cash flows from investing activities:
Repayment of ESOP loan		634			656
Net cash provided by investing activities		634			656
Cash flows from financing activities:
Repurchase of common stock		(958	)		(9,533	)
Cash dividends		(1,199	)		(1,203	)
Net cash used for financing activities		(2,157	)		(10,736	)
Net decrease in cash and cash equivalents		(1,569	)		(10,115	)
Cash and cash equivalents at beginning of year		10,971			21,086
Cash and cash equivalents at end of year	$	9,402		$	10,971

MARKET FOR COMMON STOCK AND STOCKHOLDER MATTERS

Our shares of common stock are traded on the Nasdaq Global Market under the symbol “BFED.” The approximate number of holders of record of our common stock as of December 31, 2010 was 850. Certain of our shares of common stock are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

The following table presents quarterly market and cash dividend information for our common stock for the period ended December 31, 2010. Our common stock began trading on the Nasdaq Global Market on October 2, 2007. Accordingly, no information prior to this date is available. The following market data was provided by the Nasdaq Stock Market.


Fiscal 2010	High		Low		Dividends
Quarter ended March 31, 2010	$	9.04	$	8.23	$	.05
Quarter ended June 30, 2010	$	9.50	$	8.47	$	.05
Quarter ended September 30, 2010	$	10.63	$	8.70	$	.05
Quarter ended December 31, 2010	$	11.80	$	10.01	$	.05

Fiscal 2009	High		Low		Dividends
Quarter ended March 31, 2009	$	8.20	$	6.71	$	.04
Quarter ended June 30, 2009	$	9.50	$	8.00	$	.05
Quarter ended September 30, 2009	$	9.50	$	8.85	$	.05
Quarter ended December 31, 2009	$	9.70	$	8.75	$	.05

Our Board of Directors has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements. In determining whether and in what amount to pay a cash dividend, our Board of Directors takes into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any cash dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

The sources of funds for the payment of cash dividends are interest and principal payments with respect to Beacon Federal Bancorp, Inc.’s loan to the Employee Stock Ownership Plan, and dividends from Beacon Federal.

On April 29, 2010, the Company announced an authorization to repurchase up to 326,669 of its outstanding shares in open market transactions or privately negotiated transactions in accordance with securities laws and regulations. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities. The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion. There were no treasury stock purchases during the fourth quarter of 2010.

Beacon Federal Bancorp, Inc. - FORM 10-K - EX-13 - EXHIBIT 13 - March 29, 2011

Attached files

Beacon Federal Bancorp, Inc. Reports