t72966_10k.htm

Recent Developments

The Dodd-Frank Act

On July 21, 2010, financial regulatory reform legislation entitled the Dodd-Frank Act was signed into law. The Dodd-Frank Act is implementing far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

●

Centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws and having the authority to promulgate rules intended to protect consumers in the financial product and services market. Institutions of under $10 billion in assets, such as Beacon Federal, will continue to be examined for consumer compliance by their primary banking regulator. However, the creation of this independent bureau could result in new regulatory requirements and raise the cost of regulatory compliance.

●

As of July 21, 2011, transferred the federal regulation of Beacon Federal from the Office of Thrift Supervision to the OCC, the primary federal regulator for national banks.

●

As of July 21, 2011, transferred supervision of all savings and loan holding companies, including Beacon Federal Bancorp, Inc., to the Board of Governors of the Federal Reserve System.

●

Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit Insurance Fund and increased the floor of the size of that fund.

●

Implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.

●

Made permanent the $250,000 per account limit for federal deposit insurance and provided unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions.

●

Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

●

Required that originators of certain securitized loans retain a portion of the credit risk, established reforms on mortgage loan origination and mandated regulatory rate-setting for certain debit card interchange fees.

Many aspects of the Dodd-Frank Act are subject to rulemaking and are taking effect over several years, making it difficult to anticipate the overall financial impact on Beacon Federal Bancorp, Inc., its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that increase capital requirements of Beacon Federal Bancorp, Inc. and/or Beacon Federal could require additional sources of capital in the future. We cannot determine the full impact of the new law on our business and operations at this time. Any legislative or regulatory changes in the future could adversely affect our operations and financial condition.

Federal Banking Regulation

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Beacon Federal may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets. Beacon Federal also may establish subsidiaries that may engage in certain activities not otherwise permissible for Beacon Federal, including real estate investment and securities and insurance brokerage.

The Dodd-Frank Act authorized depository institutions to commence paying interest on business checking accounts effective, July 21, 2011.

Capital Requirements. Federal regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the regulations, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

At December 31, 2011, Beacon Federal’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2011, Beacon Federal’s largest lending relationship with a single or related group of borrowers totaled $14.6 million, which represented 13.0% of unimpaired capital and surplus. Therefore, Beacon Federal was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings association, Beacon Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Beacon Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

Beacon Federal also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2011, Beacon Federal maintained approximately 105.05% of its portfolio assets in qualified thrift investments and met the QTL test in each of the prior twelve months.

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A federal savings association must file an application with the OCC for approval of a capital distribution if:

●

the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

●

the savings association would not be at least adequately capitalized following the distribution;

●

the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

●

the savings association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company, such as Beacon Federal, must still file a notice with the Federal Reserve Board at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.

A notice or application may be disapproved if:

●

the savings association would be undercapitalized following the distribution;

●

the proposed capital distribution raises safety and soundness concerns; or

●

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if the institution would be undercapitalized after making such distribution.

Liquidity. A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. We seek to maintain a ratio of 8% or greater of liquid assets and wholesale funding availability to total assets. For the year ended December 31, 2011, our liquidity ratio averaged 11.78%.

Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the savings association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. Beacon Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Beacon Federal. Beacon Federal Bancorp, Inc. is an affiliate of Beacon Federal. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The regulations require savings associations to maintain detailed records of all transactions with affiliates.

Beacon Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

(i)

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and

(ii)

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Beacon Federal’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Beacon Federal’s Board of Directors.

Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The OCC assumed the Office of Thrift Supervision’s enforcement authority as part of the Dodd-Frank Act regulatory restructuring. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, each federal banking agency prescribed certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the savings association’s capital:

●

well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

●

adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

●

undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);

●

significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and

●

critically undercapitalized (less than 2% tangible capital).

Generally, the OCC is required to appoint a receiver or conservator for a federal savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a federal savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, identification of the types and levels of activities in which the savings association will engage while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for a savings association required to submit a capital restoration plan must guarantee performance under the plan in an amount of the lesser of an amount equal to 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status. The guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized are subjected to additional supervisory restrictions such as a general prohibition on capital distributions and restrictions on asset growth and new lines of business. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2011, Beacon Federal met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. Deposit accounts at Beacon Federal are insured by the Deposit Insurance Fund of the FDIC, generally up to a maximum of $250,000 for each separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Pursuant to the Dodd-Frank Act, certain noninterest bearing checking accounts have unlimited coverage through December 31, 2012.

The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible capital. The FDIC may revise the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In 2009, the FDIC, in response to pressures on the Deposit Insurance Fund caused by bank and savings association failures, required all insured depository institutions to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. The estimated assessments were based on assumptions established by the FDIC, including 5% annual growth rate and certain projected assessment rate increases. That prepayment, which was due on December 30, 2009, amounted to approximately $4.6 million for Beacon Federal. The prepayment was recorded as a prepaid expense at December 31, 2009 and is being amortized to expense over three years. Any unused prepaid assessments would be returned to the institution in June 2013.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long term fund ratio of 2%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Beacon Federal. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, through the auspices of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2011, the FICO assessment was equal to .68 of a basis point of assessable assets less tangible capital.

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. Beacon Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, Beacon Federal is required to acquire and hold a designated amount of shares of capital stock in the Federal Home Loan Bank. As of December 31, 2011, Beacon Federal was in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted for by Beacon Federal are subject to state usury laws and federal laws concerning interest rates. Beacon Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:

●

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

●

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

●

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

●

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

●

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

●

Truth in Savings Act, governing uniformity in the disclosure of terms and conditions regarding interest and fees on new savings accounts; and

●

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Beacon Federal also are subject to the:

●

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

●

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

●

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

●

Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the American financial system to fund terrorist activities. Among other provisions, the USA PATRIOT Act and the related regulations required depository institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

●

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. Beacon Federal Bancorp, Inc. is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, Beacon Federal Bancorp, Inc. is registered with the Federal Reserve Board and subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Beacon Federal Bancorp, Inc. and its subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulatory oversight of savings and loan holding companies, including Beacon Federal Bancorp, Inc., was assumed by the Federal Reserve Board from the Office of Thrift Supervision in July 2011.

Permissible Activities. Under present law, the business activities of Beacon Federal Bancorp, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.

Federal law prohibits a savings and loan holding company, including Beacon Federal Bancorp, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings association, the Federal Reserve Board must consider factors such as the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive effects.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(i)

the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(ii)

the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Unlike bank holding companies, savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. That will eliminate the inclusion of certain instruments from Tier 1 capital, such as trust preferred securities, that are currently includable for bank holding companies. Instruments issued before May 19, 2010 by holding companies with less than $15 billion in consolidated assets (as of December 31, 2009) are grandfathered. There is a five year transition period from the July 21, 2010 date of enactment of the Dodd-Frank Act before the capital requirements will apply to savings and loan holding companies.

The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loans holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has indicated is generally applicable to savings and loan holding companies as well. The policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Beacon Federal Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.

Change in Control Laws and Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as Beacon Federal Bancorp, Inc. unless the Federal Reserve Board has been given 60 days’ prior written notice and has not disapproved the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under certain circumstances including where, as is the case with Beacon Federal Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Federal Securities Laws

Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in our October 2007 initial public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Principal Financial and Accounting Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

TAXATION

Federal Taxation

General. Beacon Federal Bancorp, Inc. and Beacon Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Beacon Federal Bancorp, Inc. and Beacon Federal.

Method of Accounting. For federal income tax purposes, Beacon Federal currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.

Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2011, Beacon Federal had no minimum tax credit carryforward.

Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2011, Beacon Federal had no net operating loss carryforward for federal income tax purposes.

Corporate Dividends. We may exclude from our income 100% of dividends received from Beacon Federal as a member of the same affiliated group of corporations.

Audit of Tax Returns. Beacon Federal’s federal income tax returns have not been audited in the most recent five-year period.

State Taxation

New York State Taxation. Beacon Federal Bancorp, Inc., Beacon Federal and Beacon Comprehensive Services Corporation report income on a calendar year basis to New York State. New York State franchise tax on corporations is imposed in an amount equal to the greater of (a) 7.5% of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) a nominal minimum tax. Entire net income is based on federal taxable income, subject to certain modifications. Alternative entire net income is equal to entire net income without certain modifications. Beacon Federal’s New York State tax returns for the years 2004 through 2006 have been audited.

Massachusetts State Taxation. Beacon Federal Bancorp, Inc., Beacon Federal and Beacon Comprehensive Services Corporation report income on a calendar year basis to the State of Massachusetts. Massachusetts imposes a tax of 10.5% on income taxable in Massachusetts. Income taxable in Massachusetts is based on federal taxable income, subject to certain modifications.

Tennessee State Taxation. Beacon Beacon Federal Bancorp, Inc., Beacon Federal and Beacon Comprehensive Services Corporation report net worth and income on a calendar year basis to Tennessee. Tennessee imposes a franchise tax on the greater of (a) net worth, or (b) the net book value of real and tangible property. The rate of tax is 0.25% of net worth or property, whichever is greater. Tennessee also imposes an excise tax of 6.5% on apportioned business income. Apportioned business income is federal taxable income, subject to certain modifications.

Maryland State Taxation. As a Maryland business corporation, Beacon Federal Bancorp, Inc. is required to file annual returns and pay annual fees to the State of Maryland.

ITEM 1A.

RISK FACTORS

An investment in our common stock involves risk. You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K before you decide to buy our common stock. It is possible that risks and uncertainties not listed below may arise or become material in the future and affect our business.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. In 2011 we made a provision for loan losses of $10.1 million, compared to a provision of $7.2 million in 2010. Our allowance for loan losses totaled $19.2 million at December 31, 2011 compared to $15.2 million at December 31, 2010. While our allowance for loan losses was 2.43% of total loans at December 31, 2011, material additions to our allowance could materially decrease our net income, and there can be no assurance that our allowance for loan losses will be adequate, particularly in the current very weak economic environment.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

Our loan portfolio has potentially greater risk due to our substantial number of home equity loans and other consumer loans.

At December 31, 2011, our home equity loans totaled $128.4 million, or 16.3% of our total loan portfolio. Our home equity loans are primarily secured by second mortgages, and the combined loan-to-value ratio (first and second mortgage liens) for home equity loans could be as high as 100%. At December 31, 2011, our consumer loans totaled $160.2 million, or 20.3% of our total loan portfolio, of which $134.5 million consisted of automobile loans, $18.9 million consisted of personal loans secured by other collateral, and $6.8 million consisted of unsecured personal loans. Home equity loans and consumer loans generally have greater risk than one- to four-family residential mortgage loans, particularly in the case of loans that are secured by second mortgages or by rapidly depreciable assets, such as automobiles, or that are unsecured. In these cases, we face the risk that collateral, when we have it, for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Particularly with respect to our home equity loans secured by second mortgages, decreases in real estate values could adversely affect the value of the property serving as collateral for our loans. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.

As a result of our large portfolio of home equity loans and consumer loans, it may become necessary to increase our provision for loan losses, which could reduce our profits. In addition, in March 2006 we began originating indirect automobile loans by or through third parties, which present greater risk than our direct automobile loans. At December 31, 2011, $115.7 million of our automobile loans were originated in this manner, and we expect to increase the origination of indirect automobile loans. See “Item 1. Business – Lending Activities – Consumer Loans” and “—Home Equity Loans.”

Our loan portfolio will have greater risk as we increase our commercial real estate and commercial business lending.

At December 31, 2011, our loan portfolio included $182.9 million of commercial real estate loans and $82.4 million of commercial business loans. We have significantly increased our originations of these loans in recent years and we intend to continue to increase our origination of these loans. Our commercial real estate loans and our commercial business loans increased to 23.2% and 10.5%, respectively, of our loan portfolio at December 31, 2011 compared to 10.0% and 7.5% of our total loan portfolio at December 31, 2005. These loans are considered to have greater credit risk than one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically depends on the successful operations and income stream of the borrowers’ business and the real estate securing the loan as collateral, which can be significantly affected by economic conditions. In addition, these loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family residential mortgage loans. Accordingly, an adverse development with respect to one loan or one credit relationship can expose us to greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral.

The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with significant commercial real estate loan portfolios to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, and possibly greater allowances for losses and capital levels. Since we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses due to the increased risks associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings. The banking regulators may also limit growth in these loan portfolios.

At December 31, 2011, the largest commercial real estate lending relationship consisted of loans totaling $14.6 million. See “Item 1. Business—Lending Activities—Commercial Real Estate Loans” and “—Commercial Business Loans.”

We operate in a highly regulated environment and may be adversely affected by actions taken by our banking regulators.

Beacon Federal is currently subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, and by the Federal Deposit Insurance Corporation, which insures its deposits. As a savings and loan holding company, the Company is currently subject to regulation and supervision by the Federal Reserve Bank of Philadelphia. Such regulation and supervision govern the activities in which financial institutions and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions (through the use of informal and formal regulatory agreements) on the operations of financial institutions, the classification of assets by financial institutions and the adequacy of financial institutions’ allowance for loan losses. Any actions taken by our banking regulators could have a material adverse impact on Beacon Federal and the Company.

If our non-performing assets continue to increase, our earnings may decline.

At December 31, 2011, our non-performing assets totaled $45.6 million, or 4.44% of total assets, and have increased from $14.3 million or 1.38% of total assets at December 31, 2010. Our non-performing assets may continue to increase in future periods. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-performing loans or real estate owned. We must establish an allowance for loan losses for losses inherent in the loan portfolio that are both probable and reasonably estimable through current period provisions for loan losses, which are recorded as a charge to income. From time to time, we also write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from our overall supervision of operations and other income-producing activities.

Failure to achieve and maintain effective internal control over financial reporting in accordance with the rules of the Securities and Exchange Commission promulgated under Section 404 of the Sarbanes-Oxley Act could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.

Under rules of the Securities and Exchange Commission promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, we were required to furnish a report by our management on our internal control over financial reporting in our Form 10-K for the fiscal year ended December 31, 2011. In the course of our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011, which assessment was conducted during the fourth quarter of 2011 and the first quarter of 2012 in connection with the preparation of the 2011 audited financial statements and our Annual Report on Form 10-K for 2011, we identified a material weakness in our internal control over financial reporting resulting from:

Loan risk ratings and classification changes used to determine the allowance for loan losses and related provision as of and during the year ended December 31, 2011 were not consistently identified and evaluated in a timely manner. Impaired loans, including troubled debt restructurings, were also not consistently identified and evaluated in a timely manner;

·	For certain loans, documentation of loan approval during the year ended December 31, 2011 occurred after loan disbursement or renewal; and

·	Due to limitations of our information systems, it was difficult to generate reports to identify and aggregate related loans as part of managing credit risk.

Our independent registered public accounting firm also identified a material weakness in our internal control over financial reporting as stated in its Audit Report citing the deficiencies noted above. We have begun the process of remediating the deficiencies noted above. The material weakness in our internal control over financial reporting, as described in Item 9A, Controls and Procedures and in the Audit Report, of our Annual Report on Form 10-K for the year ended December 31, 2011, as well as any other weaknesses or deficiencies that may exist or hereafter arise or be identified, could harm our business and operating results, and could result in adverse publicity and a loss in investor confidence in the accuracy and completeness of our financial reports, which in turn could have a material adverse effect on our stock price. If such weaknesses are not properly remediated, they could adversely affect our ability to report our financial results on a timely and accurate basis.

Further declines in the value of certain investment securities could require write-downs, which would reduce our earnings.

During 2011 and 2010, we recognized other-than-temporary impairment credit losses of certain investment securities of $333,000 and $1.3 million, respectively. A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary. These factors include, but are not limited to, failure to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. An other-than-temporary impairment write-down would reduce our earnings.

The net realizable value of our investment securities could be lower than the fair values assigned to them under generally accepted accounting principles.

We determine the fair value of our investment securities based on the most recent quoted market price for such securities as of the applicable balance sheet date. We used quoted market prices to determine the amount of any unrealized losses that must be reflected in our other comprehensive income and the net book value of our investment securities. If we determine that a security is other-than-temporarily impaired, we use quoted market prices to determine the amount of the impairment loss and the adjusted cost basis for the security. If a quoted market price for a specific security is not available due to a lack of trading activity, we estimate its fair value based on the quoted market price of another security with similar characteristics, adjusted to reflect objectively measurable differences such as coupon rates and reset dates. In the absence of quoted market prices for the same or similar securities, or if there is no recognized market for the security, we use other valuation techniques to determine fair value, such as obtaining broker dealer valuations or estimating fair value based on valuation modeling. When fair value is based on the quoted market price for a security, adjustments to reflect discounts that could arise in the context of an actual sale, including block trade, liquidity and other discounts resulting from the inability of the market to absorb the number of shares offered for sale, are not considered. Consequently, the price at which the security could be sold in a market transaction could be significantly lower than the quoted market price for the security, particularly if the quoted market price is based on trades involving a small number of shares, the security has an infrequent trading history, the market for the security is illiquid, or a large number of shares must be sold. The risk that there will be a material difference between the fair value that we assign to a security and its net realizable value is particularly significant for certain securities we hold in our investment portfolio, including our “private label” collateralized mortgage obligations and our pooled trust preferred securities. If the net realizable value is lower than the fair value that we assign to a security, impairment losses could be required in the future.

The economic downturn and disruptions in the financial markets have adversely affected, and may continue to adversely affect, our business and results of operations.

The financial services industry and the capital markets have been, and may continue to be, adversely affected by the economic downturn and disruptions in the financial markets. These market disruptions were initially triggered by declines that impacted the value of subprime mortgages, which we do not originate or invest in, but spread to all mortgage and real estate asset classes and to nearly all asset classes, including equities. These market disruptions resulted in significant write-downs of asset values by financial institutions, causing many financial institutions to seek additional capital, merge with other financial institutions or, in some cases, go bankrupt.

Disruptions in the financial markets have also adversely affected, and may continue to adversely affect, the corporate bond and equity markets. Such disruptions have caused some lenders and institutional investors to reduce and, in some cases, cease to provide funding to certain borrowers, including other financial institutions. Increasingly volatile financial markets and reduced levels of business activity may continue to negatively impact Beacon Federal’s business, capital, liquidity, financial condition and results of operations.

Moreover, market and economic disruptions have affected, and may continue to affect, consumer confidence levels, consumer spending, personal bankruptcy rates, and levels of incurrence and default on consumer debt and home prices, among other factors, in certain of the markets in which we operate. Any of these factors, along with persistently high levels of unemployment, may result in a greater likelihood of reduced client interaction or elevated delinquencies on consumer and mortgage loans. This, in turn, could result in a higher level of loan losses and Beacon Federal’s allowances for loan losses, all of which could adversely affect Beacon Federal’s earnings.

In connection with significant government and central bank actions taken in late 2008 and through 2011, the U.S. economy began to see signs of stabilization in certain areas, and some early positive economic signs were observed in 2011. Despite these positive signs, there remains significant uncertainty regarding the sustainability and pace of economic recovery, unemployment levels, and the impact of the government’s unwinding of its extensive economic and market supports.

Recent negative developments in the financial industry and the credit markets may subject us to additional regulation.

As a result of the recent financial crisis, the potential exists for new federal or state laws and regulations regarding lending and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the credit markets, and the impact of new legislation in response to those developments, may negatively affect our operations by restricting our business operations, including our ability to originate or sell loans and pursue business opportunities. Compliance with such regulation also will likely increase our costs.

Financial reform legislation recently enacted has, among other things, created a new Consumer Financial Protection Bureau, will tighten capital standards and will result in new laws and regulations that are expected to increase our costs of operations.

In 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law significantly changed the current bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act provided that the Office of Thrift Supervision cease to exist one year from the date of the new law’s enactment, or July 21, 2011. All functions of OTS relating to federal savings associations and all rulemaking authority for federal savings associations were transferred to the OCC. The Federal Reserve Board assumed supervision and regulation all savings and loan holding companies that were formerly regulated by the OTS.

Currently, savings and loan holding companies do not have minimum regulatory capital requirements. Savings and loan holding companies, such as Beacon Federal, Inc., will ultimately be subject to consolidated regulatory capital requirements similar to those currently imposed on bank holding companies. The Dodd-Frank Act requires minimum leverage, or Tier 1 capital, and risk-based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.

As of July, 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act revised the base for FDIC deposit insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution, rather than deposits. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and noninterest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increased the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directed the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.

The Dodd-Frank Act required publicly traded companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorized the Securities and Exchange Commission to promulgate rules that allow shareholders to nominate their own candidates using a company’s proxy materials. It also provided that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives.

It is difficult to predict the specific impact that the Dodd-Frank Act and certain yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Our wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which include FHLB advances. Our financial flexibility could be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

Changes in interest rates could adversely affect our results of operation and financial condition.

Our ability to earn a profit largely depends on our net interest income, which has been and could continue to be negatively affected by changes in market interest rates. Net interest income is the difference between:

(1)

the interest income we earn on our interest-earning assets, such as loans and securities; and

(2)

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

Changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their loans in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Alternatively, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the current market value of our investment securities portfolio. Generally, the value of interest-earning investment securities moves inversely with changes in interest rates. At December 31, 2011, the fair value of our available-for-sale investment securities totaled $144.9 million. Unrealized losses, net of taxes, on these available-for-sale securities totaled $2.5 million at December 31, 2011 and are reported as a separate component of equity. Decreases in the fair value of securities available for sale in future periods would have an adverse effect on our equity.

We evaluate interest rate sensitivity by estimating the change in Beacon Federal’s economic value of equity over a range of interest rate scenarios. The economic value of equity analysis estimates 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. At December 31, 2011, in the event of an immediate 200 basis point increase in interest rates, the EVE model projects that we would experience a $23.8 million, or 19%, decrease in the economic value of equity. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Beacon Federal Bancorp, Inc.—Management of Market Risk.”

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Item 1. Business—Competition.”

We rely on our management team for the successful implementation of our business strategy.

Our future success will be largely due to the efforts of our senior management team consisting of Ross J. Prossner, President and Chief Executive Officer, J. David Hammond, Senior Vice President and Chief Lending Officer, Lisa Jones, Senior Vice President and Chief Financial Officer and Darren T. Crossett, Senior Vice President. The loss of services of one or more of these individuals may have a material adverse effect on our ability to implement our business plan. We have entered into a three-year employment agreement with Mr. Prossner and two-year employment agreements with Messrs. Crossett and Hammond and Ms. Jones.

Our ability to successfully complete acquisitions will affect our ability to grow our franchise and compete effectively in our market areas.

We have pursued a policy of growth through acquisitions over the years, particularly in view of the slow or flat population growth in our primary market area in upstate New York. Since 1980, we have acquired a total of ten credit unions. In the future, we will consider the possible acquisition of other banks, thrifts, credit unions and other financial services companies or branches to supplement internal growth. Our efforts to acquire other financial institutions and financial service companies or branches may not be successful. Numerous potential acquirors exist for most acquisition candidates, creating intense competition, which affects the purchase price for which the institution can be acquired. In many cases, our competitors have significantly greater resources than we have, and greater flexibility to structure the consideration for the transaction. We also may not be the successful bidder in acquisition opportunities that we pursue due to the willingness or ability of other potential acquirors to propose a higher purchase price or more attractive terms and conditions than we are willing or able to propose. We intend to continue to pursue acquisition opportunities in each of our market areas, although we currently have no understandings or agreements to acquire other financial institutions.

The risks presented by the acquisition of other financial institutions could adversely affect our financial condition and results of operations.

If we are successful in conducting acquisitions, we will be presented with many risks that could adversely affect our financial condition and results of operations. An institution that we acquire may have unknown asset quality issues or unknown or contingent liabilities that we did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses. The acquisition of other institutions also typically requires the integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating systems and internal controls, marketing programs and personnel of the acquired institution, in order to make the transaction economically advantageous. The integration process is complicated and time consuming, and could divert our attention from other business concerns and may be disruptive to our customers and the customers of the acquired institution. Our failure to successfully integrate an acquired institution could result in the loss of key customers and employees, and prevent us from achieving expected synergies and cost savings. Acquisitions also result in professional fees and may result in creating goodwill that could become impaired, thereby requiring us to recognize further charges. We may finance acquisitions with borrowed funds, thereby increasing our leverage and reducing our liquidity, or with potentially dilutive issuances of equity securities.

Our Information Systems May Experience an Interruption or Security Breach.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

We operate from our corporate office in East Syracuse, New York, and from our seven full-service branches located in Syracuse, Marcy and Rome, New York; Smartt and Smyrna, Tennessee; and Chelmsford, Massachusetts. The net book value of our premises, land and equipment was $12.7 million at December 31, 2011. The following tables set forth information with respect to our full-service banking offices, including the expiration date of leases with respect to leased facilities.

Location	Address	Leased or Owned	Year Acquired or Leased	Square Footage

Corporate Offices including full service branch	6611 Manlius Center Road East Syracuse, NY 13057	Leased (1)	2009		45,000
Full Service Branches:

Chelmsford	116 Chelmsford Street Chelmsford, MA 01824	Leased (2)	2010		2,100
Marcy	9085 Old River Road Marcy, NY 13403	Owned	2006		4,000
Rome	230 South James Street Rome, NY 13440	Owned	2006		3,200
Syracuse	6788 Northern Boulevard East Syracuse, NY 13057	Owned	1985		14,000
Smartt	5428 Manchester Highway Morrison, TN 37357	Owned	1982		2,200
Smyrna	105 Threat Industrial Road Smyrna, TN 37167	Owned	2000		12,500

(1)	Capital lease expires in June 2034.

(2)	Operating lease expires in July 2020.

ITEM 3.

LEGAL PROCEEDINGS

Beacon Federal Bancorp, Inc. and Beacon Federal are subject to various legal actions arising in the normal course of business. At December 31, 2011, we were not involved in any legal proceedings that were material to our financial condition or results of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) 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, 2011 was 781. 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 two-year period ended December 31, 2011. 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 2011	High		Low		Dividends
Quarter ended March 31, 2011	$	14.90	$	11.47	$	.05
Quarter ended June 30, 2011	$	14.59	$	13.30	$	.05
Quarter ended September 30, 2011	$	13.95	$	12.95	$	.05
Quarter ended December 31, 2011	$	14.00	$	13.10	$	.07

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

Our Board of Directors has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements, see Item 1. Business- Regulation and Supervision-Federal Banking Regulation-Capital Requirements for additional information on the 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.

	(b)	Not Applicable.

	(c)

(d)

(c)

Maximum Number

Total Number of

(or Approximate

(a)

(b)

Shares (or Units)

Dollar Value) of

Total Number

Average Price

Purchased as

Shares (or Units)

of Shares

Paid per

Part of Publicly

That May Yet Be

(or Units)

Announced Plans

Purchased Under the

Period

Purchased

(or Unit)

or Programs

Plans or Programs)

October 1, 2011 through October 31, 2011

1,000

13.26

1,000

80,802

November 1, 2011 through November 30, 2011

75,000

13.88

75,000

5,802

December 1, 2011 through December 31, 2011

600

13.56

600

5,202

Total

76,600

13.87

76,600

On April 29, 2010, the Board of Directors authorized the Company’s fourth stock repurchase program of 326,669 shares.

ITEM 6.

SELECTED FINANCIAL DATA

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 audited consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K.

	At December 31,
	2011		2010		2009		2008			2007
	(In Thousands)
Selected Financial Condition Data:

Total assets	$	1,026,829	$	1,032,478	$	1,066,897	$	1,021,343		$	877,990
Cash and cash equivalents		43,724		12,439		12,993		18,297			14,148
Trading account assets		-		-		-		23,337			-
Securities available for sale, at fair value		144,896		162,405		167,238		139,803			92,859
Securities held to maturity		6,975		10,321		14,561		23,315			29,488
Loans, net		773,341		792,553		816,061		770,695			708,993
Federal Home Loan Bank of New York stock, at cost and other restricted stock		12,605		9,954		11,487		13,080			11,117
Securities sold under agreement to repurchase and other short-term borrowings		73,000		70,000		70,000		70,000			20,000
Federal Home Loan Bank Advances		148,427		163,427		191,094		218,641			226,815
Deposits		680,856		677,384		693,297		626,467			514,488
Stockholders’ Equity		112,070		109,710		101,259		102,085			113,174

	Years Ended December 31,
	2011		2010		2009		2008			2007
	(In Thousands)
Selected Operating Data:

Interest income	$	49,796	$	53,937	$	55,637	$	56,312		$	43,765
Interest expense		18,678		22,627		27,161		31,335			27,531
Net interest income		31,118		31,310		28,476		24,977			16,234
Provision for loan losses		10,062		7,210		7,695		8,857			2,304
Net interest income after provision for loan losses		21,056		24,100		20,781		16,120			13,930
Noninterest income		9,920		4,712		3,390		(6,457	)		3,092
Noninterest expense		22,294		20,360		18,670		15,047			13,075
Income (loss) before income taxes		8,682		8,452		5,501		(5,384	)		3,947
Income tax expense (benefit)		2,951		3,087		1,978		(2,380	)		1,528
Net income (loss)	$	5,731	$	5,365	$	3,523	$	(3,004	)	$	2,419

	At or For the Years Ended December 31,
	2011			2010			2009			2008			2007

Selected Financial Ratios and Other Data:

Performance Ratios:
Return on assets (ratio of net income (loss) to average total assets)		0.55	%		0.50	%		0.34	%		(0.31	)%		0.34	%
Return on equity (ratio of net income (loss) to average equity)		4.99	%		5.09	%		3.70	%		(2.73	)%		3.92	%
Average interest rate spread(1)		2.81	%		2.75	%		2.49	%		2.14	%		1.84	%
Net interest margin(2)		3.07	%		3.03	%		2.79	%		2.61	%		2.28	%
Efficiency ratio(3)		54.33	%		56.52	%		60.89	%		88.14	%		67.99	%
Noninterest expense to average total assets		2.13	%		1.92	%		1.96	%		2.65	%		1.84	%
Average interest-earning assets to average interest-bearing liabilities		114.24	%		112.94	%		111.47	%		114.68	%		111.15	%
Average equity to average total assets		10.94	%		9.91	%		9.09	%		11.27	%		8.57	%

Asset Quality Ratios:
Nonperforming assets to total assets		4.44	%		1.38	%		1.28	%		0.47	%		0.16	%
Nonperforming loans to total loans		5.54	%		1.75	%		1.56	%		0.60	%		0.15	%
Allowance for loan losses to nonperforming loans		43.88	%		108.28	%		121.28	%		225.05	%		624.61	%
Allowance for loan losses to total loans		2.43	%		1.90	%		1.89	%		1.36	%		0.96	%

Bank Capital Ratios:
Total capital (to risk-weighted assets)		14.53	%		13.42	%		12.35	%		12.81	%		13.88	%
Tier I capital (to risk-weighted assets)		13.28	%		12.17	%		11.10	%		11.56	%		12.75	%
Tier I capital		10.32	%		9.55	%		8.56	%		8.20	%		8.79	%

Per Share Data:
Basic earnings (loss) per share	$	0.95		$	0.88		$	0.54		$	(0.43	)	$	0.10	(4)
Diluted earnings (loss) per share	$	0.93		$	0.88		$	0.54		$	(0.43	)	$	0.10	(4)
Book value per share	$	18.10		$	17.05		$	15.48		$	13.32		$	14.77
Cash dividends declared	$	0.22		$	0.20		$	0.19		$	0.12		$	-
Dividend payout ratio		23.7	%		22.7	%		35.2	%	NM		%		-	%

Other Data:
Number of full service offices		7			8			8			7			7
Full time equivalent employees		137			143			134			126			116

(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.

(4)

For the period from the conversion date of October 1, 2007 to December 31, 2007.

NM – Not meaningful.

ITEM 7.

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 on Form 10-K 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”.

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, continues 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 8.5% as of December 2011, a 90 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 8.0% in December 2011 compared to 8.2% in December 2010. 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 2011 was $5.7 million, up $0.3 million from 2010’s net income of $5.4 million. The increase in net income resulted primarily from a $3.4 million gain on the sale of the Company’s Tyler, Texas branch, a $0.9 million decrease in other-than-temporary credit impairment losses on debt securities, a $0.7 million increase in service charge income and a $0.1 million decrease in income tax expense, which more than offset $1.9 million increase in noninterest expense and a $2.9 million increase in provision for loan losses. The provision for loan losses increased from the prior year due to an increase in nonperforming loans. Noninterest expense increased as a result of primarily higher salaries and employee benefits, occupancy and equipment expenses and other noninterest expenses.

Financial Condition. Total assets decreased by $5.6 million to $1.03 billion at December 31, 2011. The decline was the result of a $19.2 million decrease in net loans and a $20.8 million decrease in securities, partially offset by a $31.3 million increase in cash and cash equivalents. Deposits increased by $3.5 million to $680.9 million at December 31, 2011. Federal Home Loan Bank advances decreased by $15.0 million to $148.4 million at December 31, 2011. Stockholders’ equity increased by $2.4 million, or 2.2%, to $112.1 million at December 31, 2011 from $109.7 million at December 31, 2010. The increase reflected primarily $5.7 million of net income and $1.9 million of amortization of stock-based compensation and ESOP expense, partially offset by $3.6 million in repurchases of common stock and cash dividends paid of $1.3 million.

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.

Comparison of Financial Condition at December 31, 2011 and December 31, 2010

Cash and Cash Equivalents. Cash increased by $31.3 million to $43.7 million at December 31, 2011 from $12.4 million at December 31, 2010 due primarily to an increase in new customer deposits.

Securities. Securities available for sale decreased by $17.5 million to $144.9 million at December 31, 2011 from $162.4 million at December 31, 2010. 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 $3.3 million to $7.0 million at December 31, 2011, as a result of principal payments received and maturities occurring throughout the year.

Loans. Net loans decreased by $19.2 million to $773.3 million at December 31, 2011 from $792.5 million at December 31, 2010 due primarily to the sale of loans to MidSouth in conjunction with the Tyler, Texas branch sale, a $2.9 million increase in the allowance for loan losses and scheduled principal payments, partially offset by loan originations of $256.4 million.

During 2011, there was a $29.3 million decrease in home equity loans, a $9.0 million decrease in construction real estate loans, a $6.7 million decrease in automobile – direct loans, a $4.0 million decrease in automobile - indirect loans, partially offset by increases in commercial real estate loans of $21.5 million, multi-family real estate loans of $8.9 million and commercial 1-4 family real estate loans of $5.0 million.

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, resulting in our decision to reduce the balance of home equity loans in our portfolio at December 31, 2011. Construction real estate loans decreased by 40.8% to $13.0 million at December 31, 2011 due to loan payoffs.

Automobile-direct consumer loans decreased 26.3% as the result of scheduled payments from the relatively higher originations that occurred during 2006 and 2007 which outpaced recent originations. Consumer indirect automobile loans decreased 3.4% to $115.7 million at December 31, 2011 as a result of competitive pricing in the markets we serve.

Commercial real estate loans increased 14.7% to $167.9 million at December 31, 2011 due primarily to hiring a new commercial lending officer. Commercial multi-family loans and commercial 1-4 family loans increased by 33.1% and 49.4%, respectively, due to a higher volume of loan originations.

Foreclosed and Repossessed Assets. Foreclosed and repossessed assets increased by $1.7 million to $1.9 million at December 31, 2011. These assets consisted primarily of commercial real estate and 1-4 family, residential real estate.

Deposits. Deposits increased by $3.5 million to $680.9 million at December 31, 2011, from $677.4 million at December 31, 2010. Money market accounts and noninterest-bearing checking increased during 2011 by $63.1 million, or 44.3%, and $4.7 million, or 11.0%, respectively. In contrast, certificates of deposit, savings accounts and interest-bearing checking decreased during 2011 by $57.6 million, $6.4 million and $0.3 million, respectively. These deposit category fluctuations reflected the Company’s efforts to continue to decrease cost of funds by reducing the amount of rate sensitive certificates of deposit as a percentage of total deposits and targeting our marketing efforts on attracting new lower cost core deposits.

Borrowings. FHLB advances decreased by $15.0 million, or 9.2%, to $148.4 million at December 31, 2011 from $163.4 million at December 31, 2010 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 $2.4 million, or 2.2%, to $112.1 million at December 31, 2011 from $109.7 million at December 31, 2010. The increase reflected $5.7 million of net income, stock based compensation of $1.0 million and release of ESOP shares of $0.9 million, partially offset by cash dividends paid of $1.3 million, a $0.6 million increase in net unrealized holding losses on investments and repurchase of common stock of $3.6 million.

Comparison of Operating Results for the Years Ended December 31, 2011 and 2010

Interest Income. Interest income decreased by $4.1 million, or 7.7%, to $49.8 million for the year ended December 31, 2011 from $53.9 million for the year ended December 31, 2010. The decrease resulted primarily from lower average yields and lower average balances on securities and loans.

Interest income on loans decreased by $2.7 million, or 5.8%, to $43.3 million for 2011. The decline was due primarily to a lower average yield and average balance, to a lesser extent. The average yield on loans declined 25 basis points to 5.30% for the year ended December 31, 2011 from 5.55% for the year ended December 31, 2010, which reflected a decline in the yield on loans indexed to prime, partially offset by the greater proportion of higher-yielding commercial real estate and multi-family real estate loans in our loan portfolio during 2011 compared to 2010. The average balance on loans decreased to $817.6 million for the year ended December 31, 2011 from $829.5 million for the year ended December 31, 2010 due primarily to the sale of loans to MidSouth in conjunction with the Tyler, Texas branch sale.

Interest income on securities decreased by $1.3 million, or 18.3% to $6.0 million for 2011. Average yields on securities decreased 47 basis points to 3.50% for the year ended December 31, 2011 from 3.97% for the year ended December 31, 2010 due to purchases of new securities at lower yields. The average balance on securities decreased to $170.6 million for 2011 from $184.0 million for 2010 due to maturing securities.

Interest Expense. Interest expense decreased by $3.9 million, or 17.5%, to $18.7 million for the year ended December 31, 2011 from $22.6 million for the year ended December 31, 2010. The decrease in interest expense reflected primarily lower average rates on certificates of deposit and savings and money market accounts, and lower average balances on certificates of deposit and borrowings.

Interest expense on deposits decreased by $2.9 million, or 25.7%, to $8.4 million for the year ended December 31, 2011 from $11.3 million for the year ended December 31, 2010. The average rate paid on deposits decreased 45 basis points to 1.29% for 2011 from 1.74% in 2010 due to lower market rates. The average balance of deposits decreased to $653.2 million for the year ended December 31, 2011 from $653.5 million for the year ended December 31, 2010.

Interest expense on certificates of deposit decreased by $2.8 million, or 32.2%, to $5.9 million for the year ended December 31, 2011 from $8.7 million for the year ended December 31, 2010, due primarily to a decrease of 50 basis points in average certificate of deposit rates to 1.91% in 2011 from 2.41% in 2010 as a result of low market rates, and a decrease in the average balance of $52.1 million. The average balance of certificates of deposit declined as management emphasized increasing core deposit balances.

Interest expense on borrowings decreased $1.0 million, to $10.3 million for the year ended December 31, 2011, due primarily to a lower average balance, partially offset by a higher average rate. The average balance on borrowings decreased to $235.3 million in 2011 from $261.0 million in 2010 due primarily to maturing advances. The interest rates paid on such borrowings increased to 4.36% from 4.32%.

Net Interest Income. Net interest income decreased by $0.2 million, or 0.6%, to $31.1 million for the year ended December 31, 2011 from $31.3 million for the year ended December 31, 2010. The decrease in net interest income was due to an increase in nonaccrual loans, which more than offset a higher interest rate spread. Our nonaccrual loans increased from $10.3 million at December 31, 2010 to $31.4 million at December 31, 2011.

Our net interest rate spread increased to 2.81% for the year ended December 31, 2011 from 2.75% for the year ended December 31, 2010 and the net interest margin increased to 3.07% in 2011 from 3.03% in 2010. The higher interest rate spread was attributable to a lower cost of funds. The cost of funds decreased 37 basis points, while the yield on interest-earning assets declined by 31 basis points.

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 $10.1 million for the year ended December 31, 2011 compared to a provision for loan losses of $7.2 million for the year ended December 31, 2010. The provision for loan losses was higher than last year due primarily to a higher level of nonperforming loans at December 31, 2011. Nonperforming loans increased to $43.6 million or 5.5% of loans as of December 31, 2011, compared to $14.1 million or 1.7% of loans as of December 31, 2010.

As previously disclosed in the Company’s Form 10-Q, in preparation for our exam conducted by the OCC regulators during 2011, the Company conducted an extensive external loan review to validate the quality and value of the commercial loan portfolio. The external review covered over 75% of the commercial loan portfolio, which ultimately prompted the Company to enhance its loan rating process leading to the increase in our classified assets. The allowance for loan losses was $19.2 million, or 2.43% of total loans at December 31, 2011 compared to $15.2 million, or 1.90% of total loans at December 31, 2010. The ratio of the allowance for loan losses to nonperforming loans was 43.88% at December 31, 2011, compared with 108.28% at December 31, 2010. The ratio of the allowance for loan losses to nonperforming loans decreased as a result of an increase in nonperforming loans. Of the $43.6 million of nonperforming loans at December 31, 2011, $42.7 million were impaired. The amount of impaired loans increased $32.4 million when compared to December 31, 2010. We evaluate impaired loans for specific credit loss and although impaired loans increased 312.6%, the amount of the allowance for loan losses or impaired loans only increased 190.8% when compared to December 31, 2010, primarily due to the majority of impaired loans being well collateralized.

Net charge-offs for 2011 were $6.2 million, or 0.75% of average loans, compared to $7.6 million, or 0.92% of average loans for 2010. Net charge-offs were related primarily to commercial loans, and to a lesser extent, residential real estate and consumer loans.

Noninterest Income. Noninterest income increased by $5.2 million, or 110.5%, to $9.9 million for the year ended December 31, 2011 from $4.7 million for the year ended December 31, 2010, resulting primarily from a $3.4 million gain on the sale of the Company’s Tyler, Texas branch, a $0.9 million decrease in other-than-temporary credit impairment losses on debt securities and a $0.7 million increase in service charge income.

During December 2011, Beacon Federal recognized a $3.4 million gain on sale of its Tyler, Texas branch operations to MidSouth Bank, N.A., a subsidiary of MidSouth. MidSouth assumed $79.4 million of deposits associated with the branch for a premium of 4%, based upon deposits of $73.9 million as of July 31, 2011 and purchased $23.8 million of loans, or 99% of the principal loan balances, as well as premises and equipment and accrued interest.

Other-than-temporary credit impairment losses on debt securities in 2011 was $0.3 million, a decrease of $0.9 million, or 73.5%, as compared to the other-than temporary credit impairment losses of $1.3 million in 2010. The other-than-temporary credit impairment for 2011 resulted primarily from four securities; one trust preferred security and three private label collateralized mortgage obligations.

Service charge income increased $0.7 million, or 20.4%, to $4.2 million in 2011 related primarily 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 is leading to the increase in the debit card fee income.

Noninterest Expense. Noninterest expense increased by $1.9 million, or 9.5%, to $22.3 million for the year ended December 31, 2011 from $20.4 million for the year ended December 31, 2010. The increase in noninterest expense was due primarily to increases in salaries and benefits, occupancy and equipment and other noninterest expense, partially offset by a decrease in the FDIC premium expense.

Salaries and employee benefits increased by $0.6 million, or 5.9%, to $11.3 million for the year ended December 31, 2011 from $10.7 million for the year ended December 31, 2010, due to compensation increases and related benefits, and to a lesser extent, additional stock option expense due to two additional grants and additional ESOP expense due to the increase in the Company’s stock price. During 2011, six employees were added to our lending operations to primarily support additional regulatory requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Occupancy and equipment expense increased by $0.4 million, or 17.4%, to $2.8 million for the year ended December 31, 2011 from $2.4 million for the year ended December 31, 2010 as a result of primarily higher real estate taxes associated with the Bank’s home office and equipment maintenance costs and depreciation expenses.

FDIC premium expense decreased by $0.3 million, or 24.5%, to $0.9 million for the year ended December 31, 2011 as a result of a decrease in the deposit insurance assessment rate due to the change implemented by the FDIC in the basis for calculating insurance premiums.

Other noninterest expense increased by $1.0 million, or 26.9%, to $4.9 million for the year ended December 31, 2011 from $3.9 million in 2010 due primarily to higher loan collection costs and loan servicing expenses and a $184,000 increase in losses due to the decrease in the fair value of mortgage servicing rights.

Income Tax Expense. The provision for income taxes was $2.9 million for the year ended December 31, 2011, compared to $3.1 million for the year ended December 31, 2010. The decrease was due primarily to a lower effective tax rate. Our effective tax rate was 34.0% for 2011 compared to 36.5% for 2010.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and rates, and certain other information for the years 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,
	2011							2010							2009
	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	$	817,577	$	43,339		5.30	%	$	829,548	$	46,010		5.55	%	$	816,931	$	46,271		5.66	%
Securities		170,573		5,972		3.50			183,963		7,312		3.97			170,968		8,700		5.09
FHLB stock		9,959		472		4.74			11,128		598		5.37			12,476		625		5.01
Interest-earning deposits		16,879		13		0.08			8,172		17		0.21			18,535		41		0.22
Total interest-earning assets		1,014,988		49,796		4.91			1,032,811		53,937		5.22			1,018,910		55,637		5.46
Noninterest-earning assets		33,983							30,185							28,849
Total assets	$	1,048,971						$	1,062,996						$	1,047,759

Interest-bearing liabilities:
Savings	$	112,962	$	545		0.48		$	81,553	$	466		0.57		$	58,475	$	194		0.33
Money market accounts		167,500		1,368		0.82			160,951		1,848		1.15			150,538		2,920		1.94
Checking accounts		63,896		615		0.96			50,033		322		0.64			53,590		662		1.24
Time accounts		308,841		5,892		1.91			360,946		8,702		2.41			370,013		11,797		3.19
Total deposits		653,199		8,420		1.29			653,483		11,338		1.74			632,616		15,573		2.46
FHLB advances		157,533		6,765		4.29			183,288		7,796		4.25			207,487		8,952		4.31
Reverse repurchase agreements		70,001		2,708		3.87			70,001		2,708		3.87			70,000		2,244		3.21
Lease obligation		7,741		785		10.14			7,738		785		10.14			3,936		392		9.96
Total interest-bearing liabilities		888,474		18,678		2.10			914,510		22,627		2.47			914,039		27,161		2.97

Noninterest-bearing deposits		45,050							38,559							32,357
Other noninterest-bearing liabilities		683							4,620							6,166
Total liabilities		934,207							957,689							952,562
Stockholders’ equity		114,764							105,307							95,197
Total liabilities and equity	$	1,048,971						$	1,062,996						$	1,047,759

Net interest income			$	31,118						$	31,310						$	28,476

Net interest rate spread						2.81	%						2.75	%						2.49	%

Net interest-earning assets	$	126,514						$	118,301						$	104,871

Net interest margin						3.07	%						3.03	%						2.79	%

Average of interest-earning assets to interest-bearing liabilities						114.24	%						112.94	%						111.47	%

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,
	2011 vs. 2010									2010 vs. 2009
	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	$	(648	)	$	(2,023	)	$	(2,671	)	$	680		$	(941	)	$	(261	)
Securities		(510	)		(830	)		(1,340	)		627			(2,015	)		(1,388	)
FHLB stock		(60	)		(66	)		(126	)		(70	)		43			(27	)
Interest-earning deposits		11			(15	)		(4	)		(22	)		(2	)		(24	)
Total interest-earning assets		(1,207	)		(2,934	)		(4,141	)		1,215			(2,915	)		(1,700	)

Interest-bearing liabilities:
Checking and money market accounts	$	196		$	(383	)	$	(187	)	$	115		$	(1,527	)	$	(1,412	)
Savings accounts		160			(81	)		79			96			176			272
Certificates of Deposit		(1,153	)		(1,657	)		(2,810	)		(282	)		(2,813	)		(3,095	)
Total deposits		(797	)		(2,121	)		(2,918	)		(71	)		(4,164	)		(4,235	)
FHLB advances		(1,104	)		73			(1,031	)		(1,033	)		(123	)		(1,156	)
Reverse repurchase agreements		-			-			-			-			464			464
Lease obligation		-			-			-			386			7			393
Total interest-bearing liabilities		(1,901	)		(2,048	)		(3,949	)		(718	)		(3,816	)		(4,534	)

Change in net interest income	$	694		$	(886	)	$	(192	)	$	1,933		$	901		$	2,834

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, 2011, our liquidity ratio averaged 11.8%. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2011.

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, 2011, cash and cash equivalents totaled $43.7 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $144.9 million at December 31, 2011. On that date, we had $148.4 million of Federal Home Loan Bank advances outstanding and $2.0 million in limited recourse obligations related to loans sold, with the ability to borrow an additional $44.4 million.

At December 31, 2011, we had $47.9 million in loan commitments outstanding. In addition to commitments to originate loans, we had $53.3 million in unused lines of credit to borrowers. Certificates of deposit due within one year of December 31, 2011 totaled $163.9 million, or 24.1% 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, 2011, we originated $256.4 million of loans, and during the year ended December 31, 2010, we originated $250.4 million of loans. The increase in originations was primarily a result of an increase in commercial loans and residential real estate loans, to a lesser extent. Commercial loans and residential real estate loans increased by $6.2 million and $3.8 million, respectively, while consumer loans decreased by $4.0 million. The increase in commercial loan originations was due in part to the hiring of a new loan officer in our Chelmsford, MA branch. Residential real estate originations increased as a result of having extraordinary demand for refinances, especially during the fourth quarter of 2011, when many borrowers took advantage of low mortgage interest rates. Consumer loan originations continue to decrease due to heavy interest rate competition for automobile 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 $40.8 million of securities during the year ended December 31, 2011 compared to $63.6 million during the year ended December 31, 2010.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net increase in total deposits of $82.9 million for the year ended December 31, 2011 compared to a net decrease of $15.9 million for the year ended December 31, 2010. Of such deposits, $79.4 million were assumed by the buyer of the Bank’s Tyler, Texas branch operations in December 2011. 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 2011, the Company repurchased 258,372 outstanding shares of its common stock at a total cost of $3.6 million. The Company paid cash dividends of $1.3 million for the year.

Federal Home Loan Bank advances decreased on a net basis by $15.0 million for the year ended December 31, 2011, compared to a decrease of $27.7 million for the year ended December 31, 2010. Historically, Federal Home Loan Bank advances have primarily been used to fund loan demand. At December 31, 2011, we had the ability to borrow up to $192.8 million ($44.4 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, 2011, 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”.

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.

Recent Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable constitutes a troubled debt restructuring (“TDR”) by clarifying the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. The Company adopted ASU 2011-02, including the disclosures deferred by ASU 2011-01, for the quarterly reporting period ending September 30, 2011. In accordance with ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011. No additional loans were classified as troubled debt restructurings or additional allowance for loan losses was required under ASU 2011-02. Refer to Note 3 to Consolidated Financial Statements for the other required disclosures of ASU 2011-02.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” The ASU requires entities to present items of net income and other comprehensive income either in one continuous statement – referred to as the statement of comprehensive income – or in two separate, but consecutive, statements of net income and other comprehensive income. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will not materially impact the Company.

In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance will not materially impact the Company.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. Included in the ASU are requirements to disclose additional quantitative disclosures about unobservable inputs for all Level 3 fair value measurements, as well as qualitative disclosures about the sensitivity inherent in recurring Level 3 fair value measurements. The ASU is effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not materially impact the Company.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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.

Our interest rate sensitivity is monitored primarily through financial modeling of economic value of equity estimation (market value of assets less market value of liabilities) and net interest income. Both measures are highly assumption dependent and change on a regular basis as the balance sheet and interest rates change, however, taken together they represent in management’s opinion a reasonable view of the Company’s interest rate risk position.

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

	(vii)	maintain high levels of capital.

Economic Value of Equity of Beacon Federal. The Company currently utilizes an outside vendor model to analyze interest rate sensitivity. The current model evaluates interest rate sensitivity by estimating the change in the Company’s economic value of equity (“EVE”) over a range of interest rate scenarios. The EVE analysis estimates 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 EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared. 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 Company’s outside vendor provides us the results of the interest rate sensitivity model on a quarterly basis, which is based on information we provide to them to estimate the sensitivity of our economic value of equity.

The information provided below sets forth, as of December 31, 2011, the calculation of the estimated changes in the Bank’s economic value of equity 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.

Change in Interest Rates (basis points) (1)	EVE (2), Gross of Reserves		Estimated Increase (Decrease) in EVE						EVE Ratio (3)			Increase (Decrease) in EVE Ratio (in basis points)
Change in Interest Rates (basis points) (1)	EVE (2), Gross of Reserves		Amount			Percent			EVE Ratio (3)			Increase (Decrease) in EVE Ratio (in basis points)
(Dollars in thousands)
+300	$	82,789	$	(44,202	)		(34.8	)%		8.39	%		(366	)
+200		103,205		(23,785	)		(18.7	)%		10.20	%		(185	)
+100		117,415		(9,576	)		(7.5	)%		11.35	%		(70	)
—		126,990		—			—			12.05	%		—
-100		133,088		6,097			4.8	%		12.47	%		41

(1)

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

(2)

EVE is the market value of assets less the market value of liabilities at each specific rate shock environment.

(3)

EVE ratio represents the calculated EVE in each rate scenario divided by the value of assets in that scenario.

The table above indicates that at December 31, 2011, in the event of a 200 basis point increase in interest rates, we would experience a 19% decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates, we would experience a 5% increase in economic value of equity.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in economic value of equity. Modeling changes in economic value of equity 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 economic 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 economic value of equity tables provides 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.

Net Interest Income. In addition to EVE 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, 2011, using our internal interest rate risk model, we estimated that our net interest income for the year ending December 31, 2012 would decrease by 7% in the event of an instantaneous 200 basis point increase in market interest rates, and would decrease by 4% in the event of an instantaneous 100 basis point decrease in market interest rates.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk using our internal net interest income model. Modeling changes in our internal net interest income model 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, our interest rate model assumes 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 our internal net interest income model provides 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.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years then ended. We also have audited Beacon Federal Bancorp Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Beacon Federal Bancorp Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting as disclosed in Item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on Beacon Federal Bancorp, Inc.’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in the accompanying Management’s Report on Internal Control over Financial Reporting as disclosed in Item 9A. Certain deficiencies in the Company’s credit risk and loan administration functions aggregated to a material weakness in internal controls over financial reporting at December 31, 2011. As a result of Beacon Federal Bancorp, Inc.’s credit administration process, the following deficiencies existed:

·	For certain loans, documentation of loan approval during the year ended December 31, 2011 occurred after loan disbursement or renewal.

·	Due to limitations of Beacon Federal Bancorp, Inc.’s information systems, it was difficult to generate reports to identify and aggregate related loans as part of managing credit risk.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2011 financial statements.

In our opinion, because of the effects of the material weakness described above, Beacon Federal Bancorp, Inc. has not maintained effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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, 2011 and 2010, and the results of its operations and its cash flows for each of the years ended December 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.

Crowe Horwath LLP

New York, New York

March 30, 2012

Beacon Federal Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	December 31,
	2011			2010

ASSETS

Cash and cash equivalents - cash and due from financial institutions	$	43,724		$	12,439
Securities available for sale		144,896			162,405
Securities held to maturity (fair value of $7,207 and $10,543, respectively)		6,975			10,321
Loans held for sale		1,350			2,692
Loans, net of allowance for loan losses of $19,150 and $15,240, respectively		773,341			792,553
Federal Home Loan Bank (“FHLB”) of New York stock and other restricted stock		12,605			9,954
Premises and equipment, net		12,755			12,030
Accrued interest receivable		3,174			3,528
Foreclosed and repossessed assets		1,946			206
Bank-owned life insurance (“BOLI”)		10,994			10,639
Other assets		15,069			15,711
Total assets	$	1,026,829		$	1,032,478

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	680,856		$	677,384
Federal Home Loan Bank advances		148,427			163,427
Securities sold under agreement to repurchase and other short-term borrowings		73,000			70,000
Accrued interest payable and other liabilities		4,733			4,218
Capital lease obligation		7,743			7,739
Total liabilities		914,759			922,768
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; 7,670,993 and 7,652,816 shares issued; 6,192,727 and 6,432,922 shares outstanding, respectively		76			76
Additional paid-in capital		75,555			74,092
Retained earnings-substantially restricted		55,616			51,185
Unearned Employee Stock Ownership Plan (“ESOP”) shares		(2,568	)		(3,286	)
Accumulated other comprehensive loss, net		(2,490	)		(1,866	)
Treasury stock, 1,478,266 and 1,219,894 shares at cost, respectively		(14,119	)		(10,491	)
Total stockholders’ equity		112,070			109,710
Total liabilities and stockholders’ equity	$	1,026,829		$	1,032,478

Note 2 – Securities

The amortized cost, unrealized gross gains and losses and fair values of securities at December 31, 2011 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011	Cost		Gains		Losses			Value

Held to maturity:
Debt securities:
Mortgage-backed securities - Residential	$	2,682	$	129	$	-		$	2,811
Collateralized mortgage obligations - Private issuer		2,461		40		(100	)		2,401
Collateralized mortgage obligations - Government agency		1,832		163		-			1,995
Total	$	6,975	$	332	$	(100	)	$	7,207

Available for sale:
Debt securities:
Treasuries	$	100	$	1	$	-		$	101
Agencies		3,000		7		-			3,007
Pooled trust preferred securities		10,402		-		(6,168	)		4,234
Mortgage-backed securities - Residential		47,149		1,897		(8	)		49,038
Collateralized mortgage obligations - Private issuer		11,669		146		(1,674	)		10,141
Collateralized mortgage obligations - Government agency		76,627		1,766		(18	)		78,375
Total	$	148,947	$	3,817	$	(7,868	)	$	144,896

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.

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

The proceeds from maturities or calls of securities are $55.8 million and $72.6 million for the years ended December 31, 2011 and 2010, respectively. There were no gross gains or gross losses recognized from calls of securities during the years ended December 31, 2011 and 2010.

Maturities of debt securities at December 31, 2011 are summarized as follows:

	Held to Maturity				Available for Sale
	Amortized		Fair		Amortized		Fair
December 31, 2011	Cost		Value		Cost		Value

Due within one year	$	-	$	-	$	-	$	-
Due after one through five years		-		-		100		101
Due after five through ten years		-		-		2,000		2,006
Due after ten years		-		-		11,402		5,235
		-		-		13,502		7,342
Mortgage-backed securities - Residential		2,682		2,811		47,149		49,038
Collateralized mortgage obligations - Private issuer		2,461		2,401		11,669		10,141
Collateralized mortgage obligations - Government agency		1,832		1,995		76,627		78,375
	$	6,975	$	7,207	$	148,947	$	144,896

At year-end 2011 and 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

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, 2011	Value		loss			Value		loss			Value		loss

Pooled trust preferred securities	$	-	$	-		$	4,234	$	(6,168	)	$	4,234	$	(6,168	)
Mortgage backed securities - Residential		3,031		(8	)		-		-			3,031		(8	)
CMOs - Private issuer		3,046		(367	)		6,018		(1,407	)		9,064		(1,774	)
CMOs - Government Agency		3,609		(18	)		-		-			3,609		(18	)
	$	9,686	$	(393	)	$	10,252	$	(7,575	)	$	19,938	$	(7,968	)

	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	)

No assurance can be made that the credit quality of the securities with unrealized losses at December 31, 2011 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, 2011.

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 (1 issue with unrealized loss) and Collateralized Mortgage Obligations (7 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, 2011.

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-one CMOs, forty-one are government agency and ten are privately issued. Of the $ 1,792 of unrealized losses on CMOs, $1,774 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. Two privately issued CMOs with unrealized losses were rated investment grade and four privately issued CMOs with unrealized losses were rated subprime securities with the lowest rated “Ca.”

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, 2011, are as follows:

Description	Class		Amortized Cost		Fair Value		Unrealized Loss			Lowest Credit Rating
CMOs - Private Issuer:
CWALT 2006-19CB		A14	$	3,197	$	2,576	$	(621	)	C
ARMT 2005-3		4A1		2,133		1,618		(515	)	Caa1
First Horizon ALT 2006		1A1		1,645		1,377		(268	)	D
				6,975		5,571		(1,404	)
Trust Preferred Securities:
Alesco Preferred Funding IV		B-1		455		62		(393	)	C
US Capital Funding III 12/01/35		A-2		2,966		1,050		(1,916	)	C
US Capital Funding I 05/01/34		B-2		551		200		(351	)	C
				3,972		1,312		(2,660	)
			$	10,947	$	6,883	$	(4,064	)

The Company’s six 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-one CMOs, three are now considered to be below investment grade and in an unrealized loss position greater than 12 months. Three of the Company’s six trust preferred securities are considered to be below investment grade and in an unrealized loss position greater than 12 months. The deteriorating economic, credit and financial conditions 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 three CMOs in unrealized loss positions greater than 12 months 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 8.8% and an average FICO score of 741 for the underlying mortgage borrowers.

We have determined that all three of the PTPS securities in unrealized loss positions greater than 12 months with below investment grade rating are other-than-temporarily impaired. 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 not to sell or will not more likely than not be required to sell the other three PTPS 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, we did not consider the investment in these securities to be other-than-temporarily impaired at December 31, 2011. 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.

OTTI credit losses on debt securities recognized in noninterest income during the year ended December 31, 2011 and OTTI non-credit losses recognized in accumulated other comprehensive loss (“AOCL”) at December 31, 2011 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, 2011:

					Non-Credit			Lowest
	Fair		OTTI Credit Loss		Loss in AOCL			Credit	Default/
Description	Value		During 2011		December 31, 2011			Rating	Delinquency
Trust preferred securities:
Alesco Preferred Funding IV	$	62	$	123	$	393		C		42.1	%


Collateralized mortgage obligations:
CWALT 2006-19CB		2,576		98		621		C		21.2	%
First Horizon Alt 2006		1,377		81		268		D		19.4	%
JPMMT 2007-S3		1,430		31		(6	)	C		19.3	%
		5,383		210		883
Total	$	5,445	$	333	$	1,276

The Company recognized an OTTI credit loss on trust preferred securities of $123 during the year ended December 31, 2011. 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 decreased by $18.9 million as of December 31, 2011 as compared to December 31, 2010.

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.

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 significant 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 $210 during the year ended December 31, 2011. 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.

An OTTI credit loss of $600 was related to three trust preferred securities for the prior year ended December 31, 2010. An OTTI credit loss of $660 was related to five collateralized mortgage obligations for the year ended December 31, 2010.

The following table summarizes the change in OTTI credit related losses on debt securities, exclusive of tax effects, for the years ended December 31, 2011 and 2010:

	Years ended December 31,
	2011		2010
Credit related impairments with a portion recognized in other comprehensive loss:
Beginning balance	$	4,553	$	3,293
Credit related impairments on portions of OTTI previously recognized in other comprehensive loss		333		1,260
Ending balance	$	4,886	$	4,553

Note 3 – Loans, Net

Loans, net are summarized as follows:

	December 31,
	2011			2010

Residential real estate:
1-4 family	$	185,509		$	182,832
Home equity		128,370			157,629
Total Residential real estate		313,879			340,461
Commercial :
Commercial business		82,383			85,960
Commercial real estate		167,955			146,433
Multi-family real estate		35,854			26,944
Commercial - 1-4 family real estate		14,979			10,024
Construction		13,034			22,030
Total Commercial		314,205			291,391
Consumer:
Auto - indirect		115,712			119,723
Auto - direct		18,758			25,459
Other consumer - secured		18,934			18,669
Other consumer - unsecured		6,765			7,495
Total Consumer		160,169			171,346
Gross loans		788,253			803,198
Net deferred loan costs		4,238			4,595
Allowance for loan losses		(19,150	)		(15,240	)
	$	773,341		$	792,553

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2011 and 2010.

	2011
	Residential
	Real Estate			Commercial			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,288		$	12,070		$	1,844		$	38		$	15,240
Provision for loan losses		774			8,295			1,031			(38	)		10,062
Charge-offs		(545	)		(4,660	)		(1,389	)		-			(6,594	)
Charge-offs for loans transferred to held for sale		(240	)		-			-			-			(240	)
Recoveries		16			150			516			-			682
Ending balance	$	1,293		$	15,855		$	2,002		$	-		$	19,150

Year-end allowance balance attributed to loans:
Individually evaluated for impairment	$	16		$	7,966		$	-		$	-		$	7,982
Collectively evaluated for impairment		1,277			7,889			2,002			-			11,168

Loan balance individually evaluated for impairment	$	3,232		$	39,524		$	-		$	-		$	42,756
Loan balance collectively evaluated for impairment		310,647			274,681			160,169			-			745,497
	$	313,879		$	314,205		$	160,169		$	-		$	788,253

	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

Year-end allowance balance attributed to loans:
Individually evaluated for impairment	$	5		$	2,739		$	-		$	-	$	2,744
Collectively evaluated for impairment		1,283			9,331			1,844			38		12,496

Loan balance individually evaluated for impairment	$	881		$	9,481		$	-		$	-	$	10,362
Loan balance collectively evaluated for impairment		339,580			281,910			171,346			-		792,836
	$	340,461		$	291,391		$	171,346		$	-	$	803,198

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

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 should be charged-off.

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.

The stratification of the non-impaired loan portfolio resulted in a quantitative general loan loss allowance of $3.5 million at December 31, 2011, compared to $3.9 million at December 31, 2010.

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. 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 $7.7 million at December 31, 2011 and $8.6 million at December 31, 2010.

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, 2011 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, 2011 is presented in the recorded investment in nonaccrual loans table.

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.

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.

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.

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

	December 31
	2011		2010
Residential real estate:
1-4 family	$	250	$	1,059
Home equity		632		158
Commercial :
Commercial business		18,128		984
Commercial real estate		9,764		4,633
Multi-family real estate		755		3,200
Commercial - 1-4 family real estate		1,648		-
Construction		267		314
	$	31,444	$	10,348

An aging analysis of past due loans, segregated by class of loans, as of December 31, 2011 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	$	60	$	199	$	250	$	-	$	185,000	$	185,509	$	-
Home equity		672		232		84		548		126,834		128,370		-
Commercial :
Commercial business		4,042		717		401		91		77,132		82,383		-
Commercial real estate		1,834		-		400		1,738		163,983		167,955		-
Multi-family real estate		-		-		-		755		35,099		35,854		-
Commercial - 1-4 family real estate		15		50		-		1,648		13,266		14,979		-
Construction		-		1,126		-		208		11,700		13,034		-
Consumer:
Auto - indirect		2,306		104		-		-		113,302		115,712		-
Auto - direct		109		4		-		-		18,645		18,758		-
Other consumer - secured		92		-		-		-		18,842		18,934		-
Other consumer - unsecured		37		1				-		6,727		6,765		-
Total	$	9,167	$	2,433	$	1,135	$	4,988	$	770,530	$	788,253	$	-

Nonperforming loans totaled $43.6 million for the year ended December 31, 2011. Of the $43.6 million of nonperforming loans, $31.4 million are on nonaccrual status. Of the $31.4 million loans on nonaccrual status $20.6 million are current and $10.8 million are past due. Large groups of smaller balance homogenous loans consisted of consumer and residential real estate loans that totaled $0.9 million for the year ended December 31, 2011 and these loans were collectively evaluated for impairment.

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 are set forth in the following tables.

	December 31, 2011										Year Ended December 31, 2011
	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized

Residential real estate:
1-4 family	$	3,232	$	-	$	3,232	$	3,232	$	16	$	877	$	31
Commercial :
Commercial business		23,361		5,493		17,705		23,198		6,878		2,076		96
Commercial real estate		14,889		7,050		6,607		13,657		734		2,852		63
Multi-family real estate		1,772		452		303		755		91		755		-
Commercial - 1-4 family real estate		1,647		1,500		147		1,647		88		1,537		-
Construction		267		-		267		267		175		15		-
Total	$	45,168	$	14,495	$	28,261	$	42,756	$	7,982	$	8,112	$	190

	December 31, 2010										Year Ended December 31, 2010
	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized

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

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. The Company uses 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

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

	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial business	$	29,086	$	19,993	$	25,602	$	7,702		82,383
Commercial real estate		135,280		9,663		22,507		505		167,955
Multi-family real estate		33,045		2,054		-		755		35,854
Commercial- 1-4 family real estate		12,361		489		1,981		148		14,979
Construction		11,898		415		513		208		13,034
	$	221,670	$	32,614	$	50,603	$	9,318		314,205

	December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial business	$	75,886	$	1,435	$	7,793	$	846		85,960
Commercial real estate		132,053		2,903		11,477		-		146,433
Multi-family real estate		23,642		-		2,561		741		26,944
Commercial - 1-4 family real estate		8,239		285		1,500		-		10,024
Construction	$	20,447		1,269		314		-		22,030
		260,267	$	5,892	$	23,645	$	1,587		291,391

Loan modifications. The Company had the following restructured loans classified by type of concession made:

	December 31, 2011
Type of concession	# of Loans		Unpaid principal balance		Allocated allowance
			(Dollars in thousands)

Commercial loans - collateral-dependent
Interest-only for 6 to 12 months		10	$	4,095	$	826
Term extended and interest rate reduced (reduced to market rate)		13		10,454		1,837

Residential 1-4 family loan - non collateral-dependent
Term extended and interest rate reduced to below-market rate		2	$	3,232	$	95

	December 31, 2010
Type of concession	# of Loans		Unpaid principal balance		Allocated allowance
			(Dollars in thousands)
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, 2011 and 2010, there were $4,445 and $3,412, respectively, 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.

During the periods ended December 31, 2011 and 2010, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

We establish a specific allowance when loans are determined to be impaired, including troubled debt restructurings. Loss 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 Company has allocated specific allowance for loan losses of $2.0 million and $5 to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and December 31, 2010, respectively. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of December 31, 2011 and 2010.

Following is a summary of troubled debt restructurings during the year ended December 31, 2011:

			Pre-modification		Post-modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Residential real estate:
1-4 family		2	$	3,232	$	3,232
Commercial business		9		7,147		7,147
Commercial real estate		5		6,148		6,148
Total		16	$	16,527	$	16,527

Following is a summary of troubled debt restructurings at December 31, 2011:

	Number of		Recorded
	Contracts		Investment
Residential real estate:
1-4 family		2	$	3,232
Commercial business		9		7,230
Commercial real estate		5		5,492
Total		16	$	15,954

The Company had ten TDRs totaling $12,195 as of December 31, 2011, which were included in impaired loans on accrual status since these loans were performing in accordance with the restructured terms.

Troubled debt restructurings that have occurred during the previous twelve months, which subsequently defaulted during the year ended December 31, 2011 totaled $3.4 million, of which $1.6 million were commercial real estate loans and $1.8 million were commercial business loans.

At December 31, 2010, there were two TDRs totaling $2,382. 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.

The terms of certain other loans were modified during the year ended December 31, 2011 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2011 of $1.8 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default or any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

In general, a delay in payment is considered to be insignificant if it is less than three months.

Note 4 – Premises and Equipment, net

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

	December 31,
	2011			2010

Land	$	654		$	744
Buildings and improvements		5,137			5,150
Capital lease for building		7,800			7,800
Furniture, fixtures and equipment		5,193			4,423
		18,784			18,117
Accumulated depreciation		(6,029	)		(6,087	)
	$	12,755		$	12,030

Depreciation expense was $1,526 and $1,428 for the years ended December 31, 2011 and 2010, 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,
	2011

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
January 1, 2016 through December 31, 2016		860
Thereafter		16,334
Total minimum lease payments		20,439
Less amount representing interest		12,696
Present value of net minimum lease	$	7,743

The Company has an operating lease for its Chelmsford, MA branch premises, with a non-cancelable 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 $72 and $24 in 2011 and 2010, respectively.

The future minimum rental payments as of December 31, 2011 are as follows:

2012	$	72
2013		72
2014		72
2015		76
2016		82
Thereafter		295
Total	$	669

Note 5 – Foreclosed and Repossessed Assets

Foreclosed and repossessed assets were as follows:

	December 31,
	2011		2010

Foreclosed and repossessed assets	$	1,946	$	206

There was no activity in the allowance for losses on foreclosed and repossessed assets for any years covered by the consolidated financial statements.

Note 6 – Mortgage Servicing Rights

Mortgage loans, including securitized loans, serviced for others at December 31, 2011 and 2010 were $137,976 and $140,787, respectively. Custodial escrow balances maintained in connection with loans serviced for others were $1,091 and $956 at December 31, 2011 and 2010, respectively. The activity in mortgage servicing rights for the years ended December 31, 2011 and 2010 were as follows:

	Years Ended December 31,
	2011			2010

Beginning balance	$	1,032		$	900
Additions		166			356
Change in fair value included in noninterest expense		(408	)		(224	)
Ending balance	$	790		$	1,032

The fair value of the mortgage servicing rights were determined using discount rates ranging from 9.25% to 10.25%, depending upon the stratification of the specific right, expected annual prepayment rates ranging primarily from 6.0% to 39.2% (6.3% to 30.2% at December 31, 2010), weighted-average life of prepayable loans of 11.4 years (5.5 years at December 31, 2010), 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%.

Servicing fee income, which is reported on the income statement as noninterest income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. Servicing fees totaled $0.4 million and $0.9 million for the years ended December 31, 2011 and 2010, respectively. Late fees and ancillary fees related to loan servicing are not material.

Note 7 – Deposits

Deposits are summarized as follows:


	December 31,
Description and interest rate	2011		2010

Noninterest-bearing checking	$	47,152	$	42,468
Interest-bearing checking accounts		62,453		62,757
Savings accounts		101,897		108,335
Money market accounts		205,565		142,450
Total transaction accounts		417,067		356,010
Certificates:
Less than 1.00%		78,578		45,521
1.00 -1.99%		93,668		109,330
2.00 - 2.99%		36,824		86,474
3.00 - 3.99%		49,186		64,419
4.00 - 4.99%		5,533		15,630
Total certificates		263,789		321,374
Total deposits	$	680,856	$	677,384

At December 31, 2011 and 2010, brokered deposits were $80,849 and $73,959, 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, 2011 and 2010 were $166,484 and $123,501, 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,
	2011

First year	$	163,856
Second year		63,186
Third year		32,911
Fourth year		3,724
Fifth year		112
	$	263,789

Interest expense on deposits was as follows:

	Years Ended December 31,
	2011		2010

Checking and money market accounts	$	1,983	$	2,170
Savings accounts		545		466
Certificates		5,892		8,702
	$	8,420	$	11,338

Note 8 - Borrowings

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

	Weighted-Average									Weighted-Average
	Interest Rate			December 31,						Interest Rate
Maturity	December 31, 2011			2011			2010			December 31, 2010

Within one year		4.54	%	$	121,427		$	10,000			3.05	%
Second year		3.39	%		22,000			121,427			4.54	%
Third year		-			-			22,000			3.39	%
Fourth year		-			-			-			-
Fifth year		-			-			-			-
Thereafter		3.39	%		5,000			10,000			3.11	%
				$	148,427		$	163,427
Weighted-average rate					4.33	%		4.02	%

At December 31, 2011, interest rates on advances ranged from 3.07% to 4.95%. At December 31, 2011, the advances were collateralized by first mortgage loans under a blanket lien arrangement and securities of $153,443 and $41,465, respectively. 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. Based on this collateral and the Bank’s holdings of FHLB stock, the Bank was eligible to borrow up to an additional $44,445 at December 31, 2011. There would be prepayment penalities assessed should the Bank prepay any of the borrowings.

Securities sold under agreement to repurchase were as follows:

	Interest Rate			December 31,
Maturity	December 31, 2011			2011			2010

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				$	83,469		$	75,287
Average balance of borrowings				$	70,001		$	70,001
Maximum balance at any month end				$	70,000		$	70,000
Average rate at year end					3.83	%		3.83	%
Average rate for year					3.87	%		3.87	%

In addition, the Bank has other short-term borrowings of $3.0 million at December 31, 2011 related to its investment in other restricted securities.

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, 2011 and 2010 was $226 and $205, 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, 2011 and 2010. 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 2011 and 2010 was $930 and $687, respectively. The number of ESOP shares allocated, shares released for allocation and unreleased shares at December 31, 2011 were 263,108, 71,852 and 256,754, respectively. The number of ESOP shares allocated, shares released for allocation and unreleased shares at December 31, 2010 were 191,990, 71,118 and 328,606, respectively. The fair value of unreleased ESOP shares at December 31, 2011 and 2010 was $3,561 and $3,877, respectively.

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, 2011, the Company has authorization to grant up to 105,103 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 during 2011 to be $3.72 per award 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,
	2011			2010

Expected dividend yield		2.00	%		2.00	%
Risk-free interest rate		2.37	%		2.26	%
Expected life of options (in years)		6.0			6.0
Expected volatility		34.25	%		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 experience. The expected volatility is based on the Company’s historical trading activity.

Stock option compensation expense is as follows:

	Years Ended
	December 31,
	2011		2010

Pre-tax	$	468	$	273
After-tax		281		164
Basic and diluted earnings per share	$	0.05	$	0.03

At December 31, 2011, the total unrecognized expense related to non-vested stock options was approximately $577 and is expected to be recognized over the weighted-average period of 1.83 years.

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, 2010		405,134		$	8.23		8.90	$	474
Granted		155,065			9.06		9.48		425
Exercised		(8,398	)		8.23				15
Forfeited		(24,291	)		8.28
Outstanding at December 31, 2010		527,510		$	8.47		8.36	$	1,756

Granted		153,735		$	12.60		9.08	$	195
Exercised		(24,732	)		8.48				128
Forfeited		(7,168	)		10.67
Outstanding at December 31, 2011		649,345		$	9.42		7.76		2,887
Exercisable at December 31, 2011		399,050		$	8.32		7.08	$	2,215
At December 31, 2011 share options expected to vest in the future		247,075		$	11.19		8.84	$	663

During the year ended December 31, 2011 proceeds from stock option exercises totaled $210 and the related windfall tax benefits from exercise were approximately $31.

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.

During the years ended December 31, 2011 and 2010, common stock options of 6,489 shares and 0 shares, respectively, were surrendered to satisfy tax withholding obligations.

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

	Years Ended
	December 31,
	2011		2010

Pre-tax	$	495	$	614
After-tax		297		368
Basic and diluted earnings per share	$	0.05	$	0.06

At December 31, 2011, there was no unrecognized expense related to restricted stock awards.

A summary of the Company’s non-vested stock award activity for the year ended December 31, 2011 is as follows:

	Number			Weighted-
	of			Average
	Nonvested			Grant Date
	Shares			Fair Value
Nonvested at January 1, 2011		72,871		$	8.23
Granted		-			-
Vested		(72,702	)		8.23
Forfeited		(169	)		8.23
Nonvested at December 31, 2011		-		$	-

Restricted stock awards that vested during the year had a fair value of $598 and $600 for the years ended December 31, 2011 and 2010, 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, 2011 and 2010 was $369 and $329, respectively.

Note 10 – Income Taxes

Income tax expense was as follows:

	Years Ended December 31,
	2011			2010

Current:
Federal	$	4,274		$	4,034
State		878			592
		5,152			4,626
Deferred:
Federal		(1,755	)		(1,230	)
State		(446	)		(309	)
		(2,201	)		(1,539	)
Total income tax expense	$	2,951		$	3,087

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

	Years Ended December 31,
	2011			2010


Federal statutory rate of 34% times financial statement income	$	2,952		$	2,874
Effect of:
BOLI income		(120	)		(51	)
State taxes, net of federal benefit		285			187
Other, net		(166	)		77
Total income tax expense	$	2,951		$	3,087

Effective tax rate		34.0	%		36.5	%

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

	December 31,
	2011		2010

Deferred tax assets:
Allowance for loan losses	$	7,307	$	5,761
Unrealized loss on securities available for sale		416		1,143
Impairment loss on securities		2,814		1,692
Deferred compensation		403		260
Capitalized interest		748		445
Incentive compensation plans		332		227
Mortgage servicing rights		373		216
Nonaccrual interest		223		372
Other		112		121
		12,728		10,237

Deferred tax liabilities:
Net deferred loan costs		1,617		1,737
Accumulated depreciation		354		386
Other		39		12
		2,010		2,135
Net deferred tax assets	$	10,718	$	8,102

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 future reversals of existing temporary differences and through future taxable income.

At December 31, 2011 and 2010, the Company had $0 and $190 of unrecognized tax benefits, which would affect the effective tax rate if recognized. The Company is subject to U.S. Federal income taxes, as well as State of New York, Massachusetts, Texas (through 2010) and Tennessee income taxes. Income tax returns filed for the tax years ended December 31, 2008 through December 31, 2010 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 2011 or 2010.

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

	Years Ended December 31,
	2011			2010

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

Note 11 – Related Party Transactions

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

	Year Ended
	December 31,
	2011

Balance, beginning of year	$	1,887
Additions		45
Repayments		(632	)
Balance, end of year	$	1,300

Deposits from principal officers, directors and their affiliates at December 31, 2011 and 2010 were $894 and $707, respectively.

Note 12 – Earnings Per Share

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements. 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 year. Basic and diluted earnings per share are summarized as follows:

	Years Ended
	December 31,
	2011		2010

Basic earnings per share:

Net income	$	5,731	$	5,365
Less dividends paid:
Common stock		1,285		1,169
Participating securities		15		30

Undistributed earnings	$	4,431	$	4,166

Weighted-average basic shares outstanding		5,978		5,985
Add: weighted-average participating securities outstanding		67		146
Total weighted-average basic shares and participating securities outstanding		6,045		6,131

Distributed earnings per share	$	0.22	$	0.20
Undistributed earnings per share		0.73		0.68
Net income per share	$	0.95	$	0.88

Diluted earnings per share:

Undistributed earnings	$	4,431	$	4,166

Total weighted-average basic shares and participating securities outstanding		6,045		6,131
Add: Dilutive stock options		111		21
Total weighted-average diluted shares and participating securities outstanding		6,156		6,152


Distributed earnings per share	$	0.21	$	0.20
Undistributed earnings per share		0.72		0.68
Net income per share	$	0.93	$	0.88

Anti-dilutive option shares		11		9

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, 2011 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, 2011 and 2010, 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.

100

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, 2011	Amount			Ratio			Amount		Ratio				Amount		Ratio
Equity	$	104,512
Disallowed deferred tax assets		(673	)
Unrealized loss on AFS securities		2,490
Tier 1 (Core) Capital and Tangible Capital		106,329			10.32	%	$	15,453		1.50	%
General valuation allowance (1)		9,815
Deduction for low-level recourse		(2,036	)
Total Capital to risk-weighted assets	$	114,108			14.53	%	$	62,818		8.00	%		$	78,522		10.00	%
Tier 1 (Core) Capital to risk-weighted assets	$	104,293			13.28	%	$	31,409		4.00	%		$	47,113		6.00	%
Tier 1 (Core) Capital to adjusted total assets	$	106,329			10.32	%	$	41,208		4.00	%		$	51,510		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, 2010	Amount			Ratio			Amount		Ratio				Amount		Ratio
Equity	$	97,200
Disallowed deferred tax assets		(192	)
Unrealized loss on AFS securities		1,866
Tier 1 (Core) Capital and Tangible Capital		98,874			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	$	107,190			13.42	%	$	63,877		8.00	%		$	79,847		10.00	%
Tier 1 (Core) Capital to risk- weighted assets	$	97,209			12.17	%	$	31,939		4.00	%		$	47,908		6.00	%
Tier 1 (Core) Capital to adjusted total assets	$	98,874			9.55	%	$	41,415		4.00	%		$	51,768		5.00	%
(1) Limited to 1.25% of risk-weighted assets.

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.

101

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, 2011					December 31, 2010
	Fixed			Variable		Fixed			Variable
	Rate			Rate		Rate			Rate
Commitments to make loans	$	25,616		$	22,318	$	12,438		$	31,019
Unused lines of credit	$	2,279		$	51,060	$	3,704		$	56,828
Range of fixed-rate commitments		3.375%-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, 2011					December 31, 2010
	Contract			Fair		Contract			Fair
	Amount			Value		Amount			Value
Standby letters of credit	$	1,621		$	-	$	1,191		$	-
Limited recourse obligations related to loans sold	$	2,036		$	-	$	1,664		$	-

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 agreement that allows selling residential loans up to $90.0 million to the FHLB of New York. Approximately $57.6 million has been sold through December 31, 2011 under the current and previous agreements. Under the agreements, the Bank has a maximum credit enhancement of $2.0 million at December 31, 2011. 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.

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.

102

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.

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.

103

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 2012. 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 statement of income 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. The Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and are included with other noninterest expense on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

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 $5.0 million in notional value, matched against $5.4 million of interest rate lock commitments at December 31, 2011. The interest rate lock commitments included in other assets and forward sales contracts recognized in other liabilities amounted to $145 and $41, respectively, at December 31, 2011 and were accounted for at fair value as an undesignated derivative with a $56 fair value gain on the interest rate lock commitments and a $121 gain on the mandatory forward sales contracts recognized in noninterest income for the year ended December 31, 2011. 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 relate 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.

104

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.

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, 2011, 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	$	3,007	$	-	$	3,108
Pooled trust preferred securities		-		-		4,234		4,234
Mortgage-backed securities - Residential		-		49,038		-		49,038
Collateralized mortgage obligations - Private issuer		-		10,141		-		10,141
Collateralized mortgage obligations - Government agency		-		78,375		-		78,375
	$	101	$	140,561	$	4,234	$	144,896

Loans held for sale	$	-	$	1,350	$	-	$	1,350

Mortgage servicing rights	$	-	$	790	$	-	$	790

Loan commitment derivatives	$	-	$	145	$	-	$	145

Liabilities

Sales contract derivatives	$	-	$	41	$	-	$	41

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 $5 as of December 31, 2011.

105

The following table summarizes financial assets 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 - Residential		-		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.

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,
	2011			2010

Beginning balance	$	5,446		$	5,012
Transfers into Level 3		-			-
Capitalized interest		-			9
Principal paydowns		(1,041	)		(590	)
Total gains (losses):
Realized in income		(123	)		(600	)
Unrealized in other comprehensive income		(48	)		1,615
Ending balance	$	4,234		$	5,446

106

Financial Assets Measured at Fair Value on a Non-Recurring Basis. Assets measured at fair value on a non-recurring basis at December 31, 2011, include impaired loans of $31.1 million, net of allowance for loan losses of $4.5 million, utilizing level 3 inputs. At December 31, 2010 there were impaired loans of $3.7 million, net of allowance for loan losses of $2.7 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, 2011 was as follows (dollars in thousands):


Balance at January 1, 2011	$	2,744
Provision for loan losses		6,286
Loans charged off		(4,660	)
Recoveries		150
Balance at December 31, 2011	$	4,520

Nonfinancial assets measured on a non-recurring basis at December 31, 2011 and 2010 include foreclosed and repossessed assets of $1,946 and $206, respectively, utilizing Level 3 inputs. There was no provision for losses on these assets during 2011 or 2010.

Financial Instruments

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

	December 31,				December 31,
	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	$	43,724	$	43,724	$	12,439	$	12,439
Securities available for sale		144,896		144,896		162,405		162,405
Securities held to maturity		6,975		7,207		10,321		10,543
Loans held for sale		1,350		1,350		2,692		2,692
Loans, net		773,341		786,152		792,553		812,908
Mortgage servicing rights		790		790		1,032		1,032
FHLB stock and other restricted stock		12,605		N/A		9,954		N/A
Accrued interest receivable		3,174		3,174		3,528		3,528

Financial liabilities:
Deposits		680,856		678,108		677,384		683,008
Federal Home Loan Bank advances		148,427		152,433		163,427		172,049
Securities sold under agreement to repurchase and other short-term borrowings		73,000		79,158		70,000		77,464
Accrued interest payable	$	1,454	$	1,454	$	1,492	$	1,492

107

The methods and assumptions, not previously presented, 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 and other restricted 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 – Gain on Sale of Branch Operations

During December 2011, Beacon Federal sold its Tyler, Texas branch operations to MidSouth Bank, N.A., a subsidiary of MidSouth Bancorp, Inc., (“MidSouth”). MidSouth assumed $79.4 million of deposits associated with the branch for a premium of 4%, based upon deposits of $73.9 million as of July 31, 2011 and purchased $23.8 million of loans, or 99% of the principal loan balances, as well as premises and equipment and accrued interest.

The following summarizes the assets sold, liabilities transferred and net cash outflows in connection with the sale of the branch operations:

Assets Sold:
Loans, net of allowance for loan losses of $240	$	23,761
Accrued interest on loans		50
Premises and equipment, net		56
		23,867
Liabilities Transferred:
Deposits		79,426
Accrued interest payable and other liabilities		5
		79,431
Net liabilities transferred		(55,564	)
Gain on sale of branch operations		3,392
Net cash outflows in connection with sale of branch operations	$	(52,172	)

108

Maryland		26-0706826
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6611 Manlius Center Road, East Syracuse, New York		13057
(Address of Principal Executive Offices)		Zip Code

Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC
(Title of Class)		Name of exchange on which registered

Branch	Total Loans		Total Deposits
	(In thousands)

Syracuse, NY*(1)	$	616,618	$	480,698
Smartt, TN		25,053		31,646
Chelmsford, MA		52,736		79,961
Smyrna, TN		74,888		25,529
Marcy, NY		12,672		43,372
Rome, NY		7,631		19,650
Total	$	789,598	$	680,856

	At December 31,
	2008						2007
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	208,608			26.8	%	$	206,192			29.0	%
Multi-family		20,960			2.7			19,442			2.7
Commercial		108,514			14.0			83,317			11.7
Construction		19,068			2.5			8,690			1.2
Commercial business loans		86,165			11.1			70,181			9.9
Home equity		193,498			24.9			203,576			28.6
Consumer loans		139,696			18.0			119,992			16.9
Total loans	$	776,509			100.0	%	$	711,390			100.0	%

Other items:
Net deferred loan costs		4,732						4,430
Allowance for loan losses		(10,546	)					(6,827	)
Total loans, net	$	770,695					$	708,993

PART I			2

	ITEM 1.	BUSINESS	2
	ITEM 1A.	RISK FACTORS	37
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	43
	ITEM 2.	PROPERTIES	43
	ITEM 3.	LEGAL PROCEEDINGS	44
	ITEM 4.	MINE SAFETY DISCLOSURES	44

PART II			44

	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	44
	ITEM 6.	SELECTED FINANCIAL DATA	46
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	48
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	58
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	60
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	111
	ITEM 9A.	CONTROLS AND PROCEDURES	111
	ITEM 9B.	OTHER INFORMATION	112

PART III			112

	ITEM 10.	DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	112
	ITEM 11.	EXECUTIVE COMPENSATION	112
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	112
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	112
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	113

PART IV			114

	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	114

	Commercial Mortgage Loans					One- to Four-Family Residential Mortgage Loans					Construction Loans					Multi-family Loans
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years
Ending December 31,
2012	$	13,306		5.41	%	$	0		0	%	$	13,034		4.36	%	$	453		5.25	%
2013		2,574		5.62			15		5.50			0		0			0		0
2014		2,707		5.42			86		5.63			0		0			4,302		6.50
2015 to 2016		15,656		6.12			1,065		5.33			0		0			2,279		6.11
2017 to 2021		63,391		5.40			12,839		4.76			0		0			13,235		4.95
2022 to 2026		15,443		5.51			66,687		4.35			0		0			8,424		5.26
2027 and beyond		69,857		5.06			104,817		5.09			0		0			7,161		5.17
Total	$	182,934		5.34	%	$	185,509		4.80	%	$	13,034		4.36	%	$	35,854		5.33	%

	Due After December 31, 2012
	Fixed Rate		Adjustable Rate		Total
	(In thousands)
Real estate loans:
Commercial	$	61,068	$	108,560	$	169,628
One- to four-family residential		155,529		29,980		185,509
Multi-family		9,549		25,852		35,401
Commercial business loans		36,493		7,955		44,448
Consumer		156,044		376		156,420
Home equity		91,716		36,001		127,717
Total loans	$	510,399	$	208,724	$	719,123

	# of Loans		Unpaid principal balance		Allocated allowance
	(Dollars in thousands)
Commercial loans – collateral-dependent
Interest-only for 6 to 12 months		10		4,095		826
Term extended and interest rate reduced (reduced to market rate)		13		10,454		1,837

Residential 1-4 family loan – non collateral-dependent Term extended and interest rate reduced to below –market rate		2		3,232		95

	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At December 31, 2011
Real estate loans:
Construction		2	$	1,126		1	$	208		3	$	1,334
Commercial		1		50		9		3,786		10		3,836
One- to four-family residential		1		199		1		250		2		449
Multi-family		—		—		2		755		2		755
Commercial business loans		4		717		3		492		7		1,209
Consumer loans		15		109		—		—		15		109
Home equity		3		232		15		632		18		864
Total		26	$	2,433		31	$	6,123		57	$	8,556

At December 31, 2010
Real estate loans:
Construction		—	$	—		2	$	314		2	$	314
Commercial		1		668		11		6,133		12		6,801
One- to four-family residential		—		—		7		1,404		7		1,404
Multi-family		—		—		7		3,200		7		3,200
Commercial business loans		7		555		14		1,527		21		2,082
Consumer loans		9		46		1		2		10		48
Home equity		7		235		11		343		18		578
Total		24	$	1,504		53	$	12,923		77	$	14,427

At December 31, 2009
Real estate loans:
Construction		—	$	—		1	$	510		1	$	510
Commercial		—		—		8		5,816		8		5,816
One- to four-family residential		—		—		4		1,199		4		1,199
Multi-family		2		734		6		3,753		8		4,487
Commercial business loans		6		1,242		8		1,379		14		2,621
Consumer loans		7		30		1		2		8		32
Home equity		2		75		6		229		8		304
Total		17	$	2,081		34	$	12,888		51	$	14,969

At December 31, 2008
Real estate loans:
Commercial		4	$	2,417		3	$	3,227		7	$	5,644
One- to four-family residential		—		—		2		179		2		179
Multi-family		1		2,418		1		607		2		3,025
Commercial business loans		3		724		3		663		6		1,387
Consumer loans		13		103		1		10		14		113
Home equity		7		286		—		—		7		286
Total		28	$	5,948		10	$	4,686		38	$	10,634

At December 31, 2007
Real estate loans:
One- to four-family residential		1	$	45		2	$	180		3	$	225
Multi-family		—		—		1		619		1		619
Commercial business loans		1		68		—		—		1		68
Consumer loans		6		76		1		20		7		96
Home equity		1		77		1		52		2		129
Total		9	$	266		5	$	871		14	$	1,137

	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Securities held to maturity:
Mortgage-backed securities – residential	$	—		—	%	$	73		4.50	%	$	307		4.50	%
Collateralized mortgage obligations		—		—	%		—		—	%		1,264		6.31	%
Total	$	—		—	%	$	73		4.50	%	$	1,571		5.95	%

Securities available for sale:
Treasuries	$	—		—	%	$	100		0.75	%	$	—		—	%
Agencies		—		—			—		—			2,000		3.05
Pooled trust preferred		—		—			—		—			—		—
Mortgage-backed securities – residential		—		—			—		—			11,425		4.59
Collateralized mortgage obligations		—		—			—		—			12,887		4.38
Total	$	—		—	%	$	100		0.75	%	$	26,312		4.37	%

	More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Securities held to maturity:
Mortgage-backed securities – residential	$	2,302		1.68	%	$	2,682	$	2,811		3.52	%
Collateralized mortgage obligations		3,029		4.15	%		4,293		4,396		4.79	%
Total	$	5,331		3.81	%	$	6,975	$	7,207		4.30	%

Securities available for sale:
Treasuries	$	—		—	%	$	100	$	101		0.75	%
Agencies		1,000		2.00			3,000		3,007		2.70
Pooled trust preferred		10,402		1.16			10,402		4,234		1.16
Mortgage-backed securities – residential		35,724		4.24			47,149		49,038		4.32
Collateralized mortgage obligations		75,409		4.41			88,296		88,516		4.40
Total	$	122,535		4.06	%	$	148,947	$	144,896		4.11	%

Maturity Period	At December 31, 2011
	(Dollars in thousands)

Three months or less	$	29,674
Over three months through six months		21,929
Over six months through one year		41,736
Over one year to three years		72,001
Over three years		1,144
Total	$	166,484

	Amount Due in
	2012 One Year or Less		2013 1-2 Years		2014 2-3 Years		2015 3-4 Years		2016 4-5 Years		Total
	(In thousands)
Interest Rate
Less than 1.00%	$	67,208	$	11,161	$	209	$	—	$	—	$	78,578
1.00%-1.99%		57,259		22,468		13,449		380		112		93.668
2.00% - 2.99%		28,754		5,019		859		2,192				36,824
3.00% - 3.99%		6,894		22,746		18,394		1,152		—		49,186
4.00% - 4.99%		3,741		1,792		—		—		—		5,533
5.00% - 5.99%		—		—		—		—		—		—
Total	$	163,856	$	63,186	$	32,911	$	3,724	$	112	$	263,789

FHLB of New York Advances:	At or For the Years Ended December 31,
	2011			2010			2009
	(Dollars in thousands)

Balance at end of year	$	148,427		$	163,427		$	191,094
Average balance during year	$	157,533		$	183,288		$	207,487
Maximum outstanding at any month end	$	170,927		$	191,094		$	218,641
Weighted average interest rate at end of year		4.33	%		4.02	%		4.22	%
Average interest rate during year (1)		4.29	%		4.25	%		4.31	%

Securities Sold Under Agreements to Repurchase:	At or For the Years Ended December 31,
	2011			2010			2009
	(Dollars in thousands)

Balance at end of year	$	70,000		$	70,000		$	70,000
Average balance during year	$	70,001		$	70,001		$	70,000
Maximum outstanding at any month end	$	70,000		$	70,000		$	70,000
Weighted average interest rate at end of year		3.83	%		3.83	%		3.32	%
Average interest rate during year (1)		3.87	%		3.87	%		3.21	%

															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, 2010		6,533,378		$	76	$	73,156		$	47,019		$	(3,997	)	$	(5,462	)	$	(9,533	)	$	101,259
Comprehensive income
Net income		-			-		-			5,365			-			-			-			5,365
Unrealized gains 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
Comprehensive income
Net income		-			-		-			5,731			-			-			-			5,731
Unrealized losses on available for sale securities, net of taxes of ($168)		-			-		-			-			-			(252	)		-			(252	)
OTTI non-credit related loss on securities for which a portion of the OTTI has been recognized in income, net of taxes of ($248)		-			-		-			-			-			(372	)		-			(372	)
Other comprehensive loss, net of tax		-			-		-			-			-			-			-			(624	)
Total comprehensive income		-			-		-			-			-			-			-			5,107
Earned ESOP shares							212			-			718			-			-			930
Stock-based compensation		(66	)		-		963			-			-			-			-			963
Tax effect of stock-based compensation		-			-		132			-			-			-			-			132
Common stock issued under employee stock plan		24,732			-		210			-			-			-			-			210
Cash dividends, $0.22 per share		-			-		-			(1,300	)		-			-			-			(1,300	)
Common stock surrendered to satisfy tax withholding obligations of stock-based compensation		(6,489	)		-		(54	)		-			-			-			-			(54	)
Repurchase of common stock		(258,372	)		-		-			-			-			-			(3,628	)		(3,628	)
Balance at December 31, 2011		6,192,727		$	76	$	75,555		$	55,616		$	(2,568	)	$	(2,490	)	$	(14,119	)	$	112,070

See accompanying notes to consolidated financial statements.

(a)(1) Financial Statements

The following documents are included in Exhibit 13 of this Form 10-K.

	(A)	Report of Independent Registered Public Accounting Firm

	(B)	Consolidated Balance Sheets - at December 31, 2011 and 2010

	(C)	Consolidated Statements of Income - Years ended December 31, 2011 and 2010

	(D)	Consolidated Statements of Stockholders’ Equity and Comprehensive Income - Years ended December 31, 2011 and 2010

	(E)	Consolidated Statements of Cash Flows - Years ended December 31, 2011 and 2010

	(F)	Notes to Consolidated Financial Statements.

(a)(2) Financial Statement Schedules

	None.

(b)	Not applicable

(c)	Not applicable

(a)(3)	Exhibits

3.1	Articles of Incorporation of Beacon Federal Bancorp, Inc. (1)
3.2	Bylaws of Beacon Federal Bancorp, Inc. (1)
4	Form of Common Stock Certificate of Beacon Federal Bancorp, Inc. (1)
10.1	Employee Stock Ownership Plan (1)
10.2	Employment Agreement with Ross J. Prossner (2)
10.3	Employment Agreement with J. David Hammond (2)
10.4	Employment Agreement with Darren T. Crossett (2)
10.5	Employment Agreement with Lisa M. Jones (3)
10.6	Form of Change in Control Agreement (2)
10.7	Beacon Federal Excess Benefit Plan (4)
10.8	Beacon Federal Annual Cash Incentive Plan (1)
10.9	Beacon Federal Supplemental Executive Retirement Plan (5)
10.10	Beacon Federal 2008 Equity Incentive Plan (6)
21	Subsidiaries of Registrant (1)
23	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document(7)
101.SCH	XBRL Taxonomy Extension Schema Document(7)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document(7)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document(7)
101.LAB	XBRL Extension Label Linkbase Document(7)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document(7)

		BEACON FEDERAL BANCORP, INC.

Date: March 30, 2012	By:	/s/ Ross J. Prossner
		Ross J. Prossner
		Chief Executive Officer, President and Director
		(Duly Authorized Representative)

Signatures	Title	Date

/s/ Ross J. Prossner	President, Chief Executive
Ross J. Prossner	Officer and Director	March 30, 2012
	(Principal Executive Officer)

/s/ Lisa M. Jones	Senior Vice President and Chief	March 30, 2012
Lisa M. Jones	Financial Officer (Principal Financial and Accounting Officer)

/s/ Timothy P. Ahern	Chairman of the Board	March 30, 2012
Timothy P. Ahern

/s/ John W. Altmeyer	Director	March 30, 2012
John W. Altmeyer

/s/ Edward H. Butler	Director	March 30, 2012
Edward H. Butler

/s/ Thomas Driscoll	Director	March 30, 2012
Thomas Driscoll

/s/ David R. Hill	Director	March 30, 2012
David R. Hill

/s/ Gail M. Kinsella	Director	March 30, 2012
Gail M. Kinsella