UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September
30, 2009





or





o
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ________________ to_________________





Commission
file number:  0-13649





BERKSHIRE BANCORP
INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
              
              94-2563513(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)





160 Broadway, New York, New
      York
                        
                        10038(Address of Principal Executive
      Offices)
                        
                        (Zip
Code)





Registrant's
Telephone Number, Including Area Code: (212)
791-5362





N/A


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)




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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.





Large accelerated filer ̈
            Accelerated filer ̈Non-accelerated filer ̈
            Smaller reporting companyx





(Do not
check if a smaller reporting company)





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





As of
November 11, 2009, there were 7,054,183 outstanding shares of the issuer's
Common Stock, $.10 par value.





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES





FORWARD-LOOKING
STATEMENTS





Forward-Looking Statements.
Statements in this Quarterly Report on Form 10-Q that are not based on
historical fact may be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.  Words such as
"believe", "may", "will", "expect", "estimate", "anticipate", "continue" or
similar terms identify forward-looking statements.  A wide variety of
factors could cause the actual results and experiences of Berkshire Bancorp Inc.
(the "Company") to differ materially from the results expressed or implied by
the Company's forward-looking statements.  Some of the risks and
uncertainties that may affect operations, performance, results of the Company's
business, the interest rate sensitivity of its assets and liabilities, and the
adequacy of its loan loss allowance, include, but are not limited to: (i)
deterioration in local, regional, national or global economic conditions which
could result, among other things, in an increase in loan delinquencies, a
decrease in property values, or a change in the housing turnover rate; (ii)
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial services industry; (iv) changes in competition; (v) changes in
consumer preferences, (vi) changes in banking technology; (vii) ability to
maintain key members of management, (viii) possible disruptions in the Company's
operations at its banking facilities, (ix) cost of compliance with new corporate
governance requirements, and other factors referred to in this Quarterly Report
and in Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2008.





Certain information customarily
disclosed by financial institutions, such as estimates of interest rate
sensitivity and the adequacy of the loan loss allowance, are inherently
forward-looking statements because, by their nature, they represent attempts to
estimate what will occur in the future.





The Company cautions readers not to
place undue reliance upon any forward-looking statement contained in this
Quarterly Report.  Forward-looking statements speak only as of the
date they were made and the Company assumes no obligation to update or revise
any such statements upon any change in applicable
circumstances.


2





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


QUARTERLY
REPORT ON FORM 10-Q





INDEX





Page
      No.PART
      I. FINANCIAL INFORMATIONItem
      1.
                                            Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2009 (unaudited) and December 31,
      2008
                                            4Consolidated
      Statements of Operations For The Three and Nine Months Ended September 30,
      2009 and 2008 (unaudited)
                                            5Consolidated
      Statements of Stockholders' Equity For The Nine Months Ended September 30,
      2009 and 2008 (unaudited)
                                            6Consolidated
      Statements of Cash Flows For The Nine Months Ended September 30, 2009 and
      2008 (unaudited)
                                            7Notes
      to Consolidated Financial Statements
                                            8Item
      2.
                                            Management's
      Discussion and Analysis of
      Financial Condition and Results of
      Operations
                                            26Item
      3.
                                            Quantitative
      and Qualitative Disclosure About
      Market Risk
                                            37Item
      4.
                                            Controls
      and Procedures
                                            47PART
      II OTHER INFORMATIONItem
      6.
                                            Exhibits
                                            48Signature
                                            49Index
      of Exhibits
                                            50




3




BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollars
in Thousands)


(unaudited)





September 30,
                  2009
                
                
                December 31,
                  2008ASSETSCash
      and due from banks
                
                $
                7,955
                
                
                $
                3,290Interest
      bearing deposits
                
                
                41,986
                
                
                
                69,097Federal
      funds sold
                
                
                —
                
                
                
                30,000Total
      cash and cash equivalents
                
                
                49,941
                
                
                
                102,387Investment
      Securities:Available-for-sale
                
                
                348,188
                
                
                
                298,763Held-to-maturity,
      fair value of $350in
      2009 and $362 in 2008
                
                
                344
                
                
                
                360Total
      investment securities
                
                
                348,532
                
                
                
                299,123Loans,
      net of unearned income
                
                
                441,449
                
                
                
                466,753Less:
      allowance for loan losses
                
                
                (10,756
                )
                
                
                (9,204
                )Net
      loans
                
                
                430,693
                
                
                
                457,549Accrued
      interest receivable
                
                
                4,471
                
                
                
                5,866Premises
      and equipment, net
                
                
                8,538
                
                
                
                8,844Goodwill,
      net
                
                
                18,549
                
                
                
                18,549Trade
      date securities receivable
                
                
                —
                
                
                
                13,431Other
      assets
                
                
                25,522
                
                
                
                37,963Total
      assets
                
                $
                886,246
                
                
                $
                943,712LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                
                $
                57,778
                
                
                $
                51,312Interest
      bearing
                
                
                629,777
                
                
                
                674,797Total
      deposits
                
                
                687,555
                
                
                
                726,109Securities
      sold under agreements to repurchase
                
                
                57,000
                
                
                
                59,504Long
      term borrowings
                
                
                34,610
                
                
                
                45,272Subordinated
      debt
                
                
                22,681
                
                
                
                22,681Accrued
      interest payable
                
                
                3,005
                
                
                
                6,522Other
      liabilities
                
                
                4,220
                
                
                
                17,672Total
      liabilities
                
                
                809,071
                
                
                
                877,760Stockholders'
      equityPreferred
      stock - $.01 Par value:Authorized  —
      2,000,000 sharesIssued — 60,000
      sharesOutstandingSeptember
      30, 2009, 60,000 sharesDecember
      31, 2008, 60,000 shares
                
                
                1
                
                
                
                1Common
      stock - $.10 par valueAuthorized  —
      25,000,000 sharesIssued — 7,698,285
      sharesOutstanding
      —September
      30, 2009, 7,054,183 sharesDecember
      31, 2008, 7,054,183 shares
                
                
                770
                
                
                
                770Additional
      paid-in capital
                
                
                150,985
                
                
                
                150,985Accumulated
      Deficit
                
                
                (47,154
                )
                
                
                (39,795
                )Accumulated
      other comprehensive loss, net
                
                
                (21,016
                )
                
                
                (39,598
                )Treasury
      Stock at costSeptember
      30, 2009,  644,102 sharesDecember
      31, 2008,   644,102 shares
                
                
                (6,411
                )
                
                
                (6,411
                )Total
      stockholders' equity
                
                
                77,175
                
                
                
                65,952$
                886,246
                
                
                $
                943,712





The
accompanying notes are an integral part of these statements


4


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
Thousands, Except Per Share Data)


(unaudited)





For
      The
                    Three
      Months Ended
                    September
      30,
                  
                  
                  For
      The
                    Nine
      Months Ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008INTEREST
      INCOMELoans,
      including related fees
                  
                  $
                  7,290
                  
                  
                  $
                  8,296
                  
                  
                  $
                  22,510
                  
                  
                  $
                  24,597Investment
      securities
                  
                  
                  3,486
                  
                  
                  
                  5,793
                  
                  
                  
                  11,931
                  
                  
                  
                  20,914Federal
      funds sold andinterest
      bearing deposits
                  
                  
                  129
                  
                  
                  
                  433
                  
                  
                  
                  582
                  
                  
                  
                  857Total
      interest income
                  
                  
                  10,905
                  
                  
                  
                  14,522
                  
                  
                  
                  35,023
                  
                  
                  
                  46,368INTEREST
      EXPENSEDeposits
                  
                  
                  2,561
                  
                  
                  
                  5,623
                  
                  
                  
                  9,815
                  
                  
                  
                  19,711Short-term
      borrowings
                  
                  
                  595
                  
                  
                  
                  636
                  
                  
                  
                  1,770
                  
                  
                  
                  1,750Long-term
      borrowings
                  
                  
                  592
                  
                  
                  
                  840
                  
                  
                  
                  1,937
                  
                  
                  
                  2,450Total
      interest expense
                  
                  
                  3,748
                  
                  
                  
                  7,099
                  
                  
                  
                  13,522
                  
                  
                  
                  23,911Net
      interest income
                  
                  
                  7,157
                  
                  
                  
                  7,423
                  
                  
                  
                  21,501
                  
                  
                  
                  22,457PROVISION
      FOR LOAN LOSSES
                  
                  
                  1,000
                  
                  
                  
                  150
                  
                  
                  
                  1,550
                  
                  
                  
                  954Net
      interest income afterprovision
      for loan losses
                  
                  
                  6,157
                  
                  
                  
                  7,273
                  
                  
                  
                  19,951
                  
                  
                  
                  21,503NON-INTEREST
      INCOMEService
      charges on deposit accounts
                  
                  
                  126
                  
                  
                  
                  149
                  
                  
                  
                  364
                  
                  
                  
                  442Investment
      securities gains (losses) on sales
                  
                  
                  253
                  
                  
                  
                  (99
                  )
                  
                  
                  440
                  
                  
                  
                  (21
                  )Other
      income
                  
                  
                  123
                  
                  
                  
                  217
                  
                  
                  
                  475
                  
                  
                  
                  689Total
      non-interest income
                  
                  
                  502
                  
                  
                  
                  267
                  
                  
                  
                  1,279
                  
                  
                  
                  1,110NON-INTEREST
      EXPENSESalaries
      and employee benefits
                  
                  
                  2,339
                  
                  
                  
                  2,395
                  
                  
                  
                  7,011
                  
                  
                  
                  7,211Net
      occupancy expense
                  
                  
                  477
                  
                  
                  
                  521
                  
                  
                  
                  1,529
                  
                  
                  
                  1,566Equipment
      expense
                  
                  
                  92
                  
                  
                  
                  97
                  
                  
                  
                  286
                  
                  
                  
                  289FDIC
      assessment
                  
                  
                  330
                  
                  
                  
                  128
                  
                  
                  
                  1,598
                  
                  
                  
                  366Data
      processing expense
                  
                  
                  119
                  
                  
                  
                  118
                  
                  
                  
                  329
                  
                  
                  
                  339Other
      than temporary impairment charges on securities
                  
                  
                  5,138
                  
                  
                  
                  94,346
                  
                  
                  
                  10,263
                  
                  
                  
                  94,346Other
                  
                  
                  842
                  
                  
                  
                  847
                  
                  
                  
                  2,615
                  
                  
                  
                  2,222Total
      non-interest expense
                  
                  
                  9,337
                  
                  
                  
                  98,452
                  
                  
                  
                  23,631
                  
                  
                  
                  106,339Loss
      before provision for taxes
                  
                  
                  (2,678
                  )
                  
                  
                  (90,912
                  )
                  
                  
                  (2,401
                  )
                  
                  
                  (83,726
                  )Provision
      (benefit) for income taxes
                  
                  
                  (285
                  )
                  
                  
                  (2,218
                  )
                  
                  
                  1,358
                  
                  
                  
                  (323
                  )Net
      loss
                  
                  $
                  (2,393
                  )
                  
                  $
                  (88,694
                  )
                  
                  $
                  (3,759
                  )
                  
                  $
                  (83,403
                  )Dividends
      on preferred stock
                  
                  
                  1,200
                  
                  
                  
                  —
                  
                  
                  
                  3,600
                  
                  
                  
                  —Loss
      allocated to common stockholders
                  
                  $
                  (3,593
                  )
                  
                  $
                  (88,694
                  )
                  
                  $
                  (7,359
                  )
                  
                  $
                  (83,403
                  )Net
      loss per common share:Basic
                  
                  $
                  (.51
                  )
                  
                  $
                  (12.57
                  )
                  
                  $
                  (1.04
                  )
                  
                  $
                  (11.82
                  )Diluted
                  
                  $
                  (.51
                  )
                  
                  $
                  (12.57
                  )
                  
                  $
                  (1.04
                  )
                  
                  $
                  (11.82
                  )Number
      of shares used to computenet
      income (loss) per common share:Basic
                  
                  
                  7,054
                  
                  
                  
                  7,054
                  
                  
                  
                  7,054
                  
                  
                  
                  7,054Diluted
                  
                  
                  7,054
                  
                  
                  
                  7,054
                  
                  
                  
                  7,054
                  
                  
                  
                  7,054Dividends
      per share
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  .10





The
accompanying notes are an integral part of these statements.


5


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY





For
The Nine Months Ended September 30, 2009 and 2008


(In
Thousands)


(Unaudited)





Common
                Shares
              
              
              Preferred
                Shares
              
              
              Common
                Stock
                Par
                Value
              
              
              Preferred
                Stock
                Par
                Value
              
              
              Additional
                paid-in
                capital
              
              
              Accumulated
                other
                comprehensive
                (loss),
      net
              
              
              Retained
                Earnings/
                (Accumulated
                deficit)
              
              
              Treasury
                stock
              
              
              Comprehensive
                income
                (loss)
              
              
              Total
                stockholders'
                equityBalance
      at January 1, 2008
              
              
              7,698
              
              
              
              —
              
              
              $
              770
              
              
              $
              —
              
              
              $
              90,986
              
              
              $
              (3,439
              )
              
              $
              42,352
              
              
              $
              (6,411
              )
              
              
              
              
              $
              124,258Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (83,403
              )
              
              
              
              
              
              
              (83,403
              )
              
              
              (83,403
              )Other
      comprehensive (loss) netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (33,200
              )
              
              
              
              
              
              
              
              
              
              
              (33,200
              )
              
              
              (33,200
              )Comprehensive
      (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (116,603
              )Cash
      dividends - common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (703
              )
              
              
              
              
              
              
              
              
              
              
              (703
              )Balance
      at September 30, 2008
              
              
              7,698
              
              
              
              —
              
              
              $
              770
              
              
              $
              —
              
              
              $
              90,986
              
              
              $
              (36,639
              )
              
              $
              (41,754
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              6,952Balance
      at January 1, 2009
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (39,598
              )
              
              $
              (39,795
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              65,952Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,759
              )
              
              
              
              
              
              
              (3,759
              )
              
              
              (3,759
              )Other
      comprehensive income netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,582
              
              
              
              
              
              
              
              
              
              
              
              18,582
              
              
              
              18,582Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              14,823Cash
      dividends - Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,600
              )
              
              
              
              
              
              
              
              
              
              
              (3,600
              )Balance
      at September 30, 2009
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (21,016
              )
              
              $
              (47,154
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              77,175


The accompanying notes are an
integral part of these statements.


6




BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





For The Nine Months Ended
                  September 30,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (3,759
                )
                
                $
                (83,403
                )Adjustments
      to reconcile net loss to net cashprovided
      by (used in) operating activities:Realized
      (gains) losses on investment securities sold
                
                
                (440
                )
                
                
                21Other
      than temporary impairment charges on securities
                
                
                10,263
                
                
                
                94,346Net
      amortization (accretion) of premiums ofinvestment
      securities
                
                
                708
                
                
                
                (178
                )Depreciation
      and amortization
                
                
                402
                
                
                
                463Provision
      for loan losses
                
                
                1,550
                
                
                
                954Decrease
      in accrued interest receivable
                
                
                1,395
                
                
                
                1,957Decrease
      (increase) in other assets
                
                
                25,872
                
                
                
                (24,884
                )(Decrease)
      in accrued interest payableand
      other liabilities
                
                
                (16,969
                )
                
                
                (3,904
                )Net
      cash provided by (used in) operating activities
                
                
                19,022
                
                
                
                (14,628
                )Cash
      flows from investing activities:Investment
      securities available for salePurchases
                
                
                (205,666
                )
                
                
                (240,478
                )Sales,
      maturities and calls
                
                
                164,292
                
                
                
                413,487Investment
      securities held to maturityMaturities
                
                
                16
                
                
                
                16Net
      decrease (increase) in loans
                
                
                25,306
                
                
                
                (41,641
                )Acquisition
      of premises and equipment
                
                
                (96
                )
                
                
                (66
                )Net
      cash (used in) provided by investing activities
                
                
                (16,148
                )
                
                
                131,318Cash
      flows from financing activities:Net
      increase (decrease) in non interest bearing deposits
                
                
                6,466
                
                
                
                (5,066
                )Net
      decrease in interest bearing deposits
                
                
                (45,020
                )
                
                
                (63,454
                )Decrease
      in securities sold under agreementsto
      repurchase
                
                
                (2,504
                )
                
                
                (5,870
                )Proceeds
      from long term debt
                
                
                —
                
                
                
                25,000Repayment
      of long term debt
                
                
                (10,662
                )
                
                
                (9,293
                )Dividends
      paid on preferred stock
                
                
                (3,600
                )
                
                
                —Dividends
      paid on common stock
                
                
                —
                
                
                
                (703
                )Net
      cash (used in) financing activities
                
                
                (55,320
                )
                
                
                (59,386
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (52,446
                )
                
                
                57,304Cash
      and cash equivalents at beginning of period
                
                
                102,387
                
                
                
                47,193Cash
      and cash equivalents at end of period
                
                $
                49,941
                
                
                $
                104,497Supplemental
      disclosure of cash flow information:Cash
      used to pay interest
                
                $
                17,039
                
                
                $
                28,397Cash
      used to pay taxes, net of refunds
                
                $
                1,330
                
                
                $
                1,790





The accompanying notes are an
integral part of these statements.


7


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements


September
30, 2009 and 2008





NOTE
1. General





Berkshire Bancorp Inc., a Delaware
corporation, is a bank holding company registered under the Bank Holding Company
Act of 1956.  References herein to "Berkshire", the "Company" or "we"
and similar pronouns, shall be deemed to refer to Berkshire Bancorp Inc. and its
consolidated subsidiaries unless the context otherwise
requires.  Berkshire's principal activity is the ownership and
management of its indirect wholly-owned subsidiary, The Berkshire Bank (the
"Bank"), a New York State chartered commercial bank.  The Bank is
owned through Berkshire's wholly-owned subsidiary, Greater American Finance
Group, Inc. ("GAFG").





In August 2009, the Federal Deposit
Insurance Corporation and the New York State Banking Department approved the
Bank's application to open a new bank branch in Teaneck, New Jersey. We expect
to open the branch in the fourth quarter of fiscal 2009.





The accompanying financial statements
of Berkshire Bancorp Inc. and subsidiaries includes the accounts of the parent
company, Berkshire Bancorp Inc., and its wholly-owned subsidiaries: The
Berkshire Bank, GAFG and East 39, LLC.





We have prepared the accompanying
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") for interim financial
reporting.  These consolidated financial statements, including the
notes thereto, are unaudited and, in our opinion, include all adjustments,
consisting of normal recurring adjustments and accruals, necessary for a fair
presentation of our consolidated balance sheets, operating results, and cash
flows for the periods presented.  Operating results for the periods
presented are not necessarily indicative of the results that may be expected for
the remaining quarter of fiscal 2009 due to a variety of
factors.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") have been omitted in
accordance with the rules and regulations of the SEC.  These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in our 2008
Annual Report on Form 10-K.





NOTE
2.  Trust Preferred Securities.





As of May 18 2004, the Company
established Berkshire Capital Trust I, a Delaware statutory trust,
("BCTI").  The Company owns all the common capital securities of
BCTI.  BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTI's common capital securities, in the Company
through the purchase of $15.464 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2004 Debentures") issued by the
Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating rate, three month LIBOR plus 2.70%, currently
3.20%.





On April 1, 2005, the Company
established Berkshire Capital Trust II, a Delaware statutory trust,
("BCTII").  The Company owns all the common capital securities of
BCTII.  BCTII issued $7.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2005 Debentures") issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%, currently
2.36%.


8


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
2. - (continued)
 
 Based on current interpretations of the
banking regulators, the 2004 Debentures and 2005 Debentures (collectively, the
"Debentures") qualify under the risk-based capital guidelines of the Federal
Reserve as Tier 1 capital, subject to certain limitations. The Debentures are
callable by the Company, subject to any required regulatory approvals, at par,
in whole or in part, at any time after five years from the date of
issuance.  The Company's obligations under the Debentures and related
documents, taken together, constitute a full, irrevocable and unconditional
guarantee on a subordinated basis by the Company of the obligations of BCTI and
BCTII under the preferred capital securities sold by BCTI and BCTII to
investors.  Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") 810, Consolidations, precludes consideration of
the call option embedded in the preferred capital securities when determining if
the Company has the right to a majority of BCTI and BCTII expected residual
returns. Accordingly, BCTI and BCTII are not included in the consolidated
balance sheet of the Company.
 
 The Federal Reserve has issued guidance
on the regulatory capital treatment for the trust-preferred securities issued by
BCTI and BCTII.  This rule would retain the current maximum percentage
of total capital permitted for Trust Preferred Securities at 25%, but would
enact other changes to the rules governing Trust Preferred Securities that
affect their use as part of the collection of entities known as "restricted core
capital elements."  The rule was to become effective on March 31,
2009.  However, on March 23, 2009 the Federal Reserve adopted a rule
extending the compliance date for tighter limits to March 31, 2011 in light of
the current stressful financial conditions.  Management has evaluated
the effects of this rule and does not anticipate a material impact on the
Company's capital ratios when the proposed rule is finalized.
 
 NOTE
3.  Series A Preferred Stock.
 
 On October 31, 2008, the Company sold
an aggregate of 60,000 shares of its 8% Non-Cumulative Mandatorily Convertible
Perpetual Series A Preferred Stock (the "Series A Preferred Shares") at $1,000
per share, or $60 million in the aggregate, to the Company's Chairman of the
Board and majority stockholder, and two non-affiliated
investors.  Each Series A Preferred Share bears non-cumulative cash
dividends at the rate of 8% per annum, payable quarterly, is mandatorily
convertible into 123.153 shares of our Common Stock on October 31, 2011, unless
previously redeemed, and is redeemable at the option of the Company between
April 30, 2009 and November 1, 2010 at a redemption price of
$1,100.  So long as any share of Series A Preferred Shares remains
outstanding, unless the full dividends for the most recent dividend payment date
have been paid or declared, no dividends may be paid or declared on the
Company's Common Stock.  For the three and nine month periods ended
September 30, 2009, we declared and paid cash dividends of $1.2 million and $3.6
million. respectively, on the Series A Preferred Shares.
  9
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
4.  Loss Per Share
 
 Loss per common share is calculated by
dividing loss available to common stockholders by the weighted average common
stock outstanding, excluding stock options from the calculation.  In
calculating diluted earnings per share, the dilutive effect of stock options is
calculated using the average market price for the Company's common stock during
the period. There is no effect for dilutive shares for the three and nine months
ended September 30, 2009 and 2008 due to the net loss incurred. The following
table presents the calculation of earnings per common share for the periods
indicated:
 
 For The Three Months EndedSeptember 30, 2009
                      
                      
                      September 30, 2008Income
                        (Loss)
                        (numerator)
                      
                      
                      Shares
                        (denominator)
                      
                      
                      Per
                        share
                        amount
                      
                      
                      Income
                        (numerator)
                      
                      
                      Shares
                        (denominator)
                      
                      
                      Per
                        share
                        amount(In
      thousands, except per share data)Basic
      earnings (loss) per shareNet
      (loss)
                      
                      $
                      (2,393
                      )
                      
                      
                      
                      
                      
                      
                      
                      $
                      (88,694
                      )Dividends
      paid to preferred shareholders
                      
                      
                      (1,200
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      (loss) available to common stockholders
                      
                      
                      (3,593
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (.51
                      )
                      
                      
                      (88,694
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (12.57
                      )Effect
      of dilutive securities options
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Diluted
      earnings (loss)per shareNet
      (loss) available to  common stockholders plus assumed
      conversions
                      
                      $
                      (3,593
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (.51
                      )
                      
                      $
                      (88,694
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (12.57
                      )
 
 For The Nine Months EndedSeptember 30, 2009
                      
                      
                      September 30, 2008Income
                        (Loss)
                        (numerator)
                      
                      
                      Shares
                        (denominator)
                      
                      
                      Per
                        share
                        amount
                      
                      
                      Income
                        (numerator)
                      
                      
                      Shares
                        (denominator)
                      
                      
                      Per
                        share
                        amount(In
      thousands, except per share data)Basic
      earnings (loss) per shareNet
      (loss)
                      
                      $
                      (3,759
                      )
                      
                      
                      
                      
                      
                      
                      
                      $
                      (83,403
                      )Dividends
      paid to preferred shareholders
                      
                      
                      (3,600
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      —Net
      (loss) available to common stockholders
                      
                      
                      (7,359
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (1.04
                      )
                      
                      
                      (83,403
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (11.82
                      )Effect
      of dilutive securities options
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Diluted
      earnings (loss)per shareNet
      (loss) available to  common stockholders plus assumed
      conversions
                      
                      $
                      (7,359
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (1.04
                      )
                      
                      $
                      (83,403
                      )
                      
                      
                      7,054
                      
                      
                      $
                      (11.82
                      )
 
 Options to purchase 2,076 common shares
at a weighted average exercise price of $8.29 were not included in the dilutive
earnings per common share for the three and nine months ended September 30, 2009
and 2008 as these options are anti-dilutive.
  10
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
5. Loan Portfolio
 
 The following table sets forth
information concerning the Company's loan portfolio by type of loan at the dates
indicated:
 
 September 30, 2009
                      
                      
                      December 31, 2008Amount
                      
                      
                      % of
                        Total
                      
                      
                      Amount
                      
                      
                      % of
                        Total(Dollars
      in thousands)Commercial
      and professional loans
                      
                      $
                      49,414
                      
                      
                      
                      11.2
                      %
                      
                      $
                      68,418
                      
                      
                      
                      14.6
                      %Secured
      by real estate1-4
      family
                      
                      
                      131,517
                      
                      
                      
                      29.7
                      
                      
                      
                      140,150
                      
                      
                      
                      30.0Multi
      family
                      
                      
                      3,563
                      
                      
                      
                      0.8
                      
                      
                      
                      4,031
                      
                      
                      
                      0.9Non-residential
      (commercial)
                      
                      
                      257,337
                      
                      
                      
                      58.2
                      
                      
                      
                      254,831
                      
                      
                      
                      54.4Consumer
                      
                      
                      524
                      
                      
                      
                      0.1
                      
                      
                      
                      460
                      
                      
                      
                      0.1Total
      loans
                      
                      
                      442,355
                      
                      
                      
                      100.0
                      %
                      
                      
                      467,890
                      
                      
                      
                      100.0
                      %Deferred
      loan fees
                      
                      
                      (906
                      )
                      
                      
                      
                      
                      
                      
                      (1,137
                      )Allowance
      for loan losses
                      
                      
                      (10,756
                      )
                      
                      
                      
                      
                      
                      
                      (9,204
                      )Loans,
      net
                      
                      $
                      430,693
                      
                      
                      
                      
                      
                      
                      $
                      457,549
 
 As of September 30, 2009, nonaccrual
loans totalled $13.52 million compared to $130,000 as of December 31, 2008. At
September 30, 2009 there were no loans contractually past due 90 days or more
but still accruing interest as compared to $99,000 at December 31,
2008.
 
 The following table sets forth
information concerning the Company's nonaccrual loans by type of loan at the
dates indicated:
 
 September 30,
                        2009
                      
                      
                      December 30,
                        2008(In thousands)Residential
      1-4 Family
                      
                      $
                      39
                      
                      
                      $
                      130Commercial
      Real Estate
                      
                      
                      13,485
                      
                      
                      
                      —Total
      Nonaccrual Loans
                      
                      $
                      13,524
                      
                      
                      $
                      130
 
 The increase in nonaccrual commercial
real estate loans is primarily due to one loan which is in the process of
foreclosure.
  11
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
6. Investment Securities
 
 The following is a summary of held to
maturity investment securities:
  September 30, 2009Amortized
                        Cost
                      
                      
                      Gross
                        unrealized
                        gains
                      
                      
                      Gross
                        unrealized
                        losses
                      
                      
                      Fair
                        value(In
      thousands)U.S.
      Government Agencies
                      
                      $
                      344
                      
                      
                      $
                      6
                      
                      
                      $
                      —
                      
                      
                      $
                      350
 
 The following is a summary of
available-for-sale investment securities:
 
 September 30, 2009Amortized
                          Cost
                        
                        
                        Gross
                          unrealized
                          gains
                        
                        
                        Gross
                          unrealized
                          losses
                        
                        
                        Fair
                          value(In
      thousands)U.S.
      Treasuries
                        
                        $
                        30,257
                        
                        
                        $
                        75
                        
                        
                        $
                        —
                        
                        
                        $
                        30,332U.S.
      Government Agencies
                        
                        
                        55,323
                        
                        
                        
                        217
                        
                        
                        
                        (80
                        )
                        
                        
                        55,460Municipal
      obligations
                        
                        
                        1,973
                        
                        
                        
                        361
                        
                        
                        
                        —
                        
                        
                        
                        2,334Mortgage-backed
      securities
                        
                        
                        152,004
                        
                        
                        
                        2,579
                        
                        
                        
                        (608
                        )
                        
                        
                        153,975Corporate
      notes
                        
                        
                        34,329
                        
                        
                        
                        490
                        
                        
                        
                        (14,657
                        )
                        
                        
                        20,162Auction
      Rate Securities
                        
                        
                        88,128
                        
                        
                        
                        92
                        
                        
                        
                        (18,899
                        )
                        
                        
                        69,321Marketable
      equitysecurities
      and other
                        
                        
                        17,698
                        
                        
                        
                        115
                        
                        
                        
                        (1,209
                        )
                        
                        
                        16,604Totals
                        
                        $
                        379,712
                        
                        
                        $
                        3,929
                        
                        
                        $
                        (35,453
                        )
                        
                        $
                        348,188
 
 The Company has investments in certain
debt and equity securities that have unrealized losses or may be otherwise
impaired, but an other-than-temporary impairment has not been recognized in the
financial statements as management believes the decline is due to the credit
markets coupled with the interest rate environment. The following table
indicates the length of time individual securities have been in a continuous
unrealized loss position at September 30, 2009 (in thousands):
 
 Less than 12 months
                        
                        
                        12 months or longer
                        
                        
                        TotalFair Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized
                          LossesDescription
      of SecuritiesU.S.
      Government Agencies
                        
                        $
                        14,727
                        
                        
                        $
                        69
                        
                        
                        $
                        9,989
                        
                        
                        $
                        11
                        
                        
                        $
                        24,716
                        
                        
                        $
                        80Mortgage-backed
      securities
                        
                        
                        21,295
                        
                        
                        
                        42
                        
                        
                        
                        12,299
                        
                        
                        
                        566
                        
                        
                        
                        33,594
                        
                        
                        
                        608Corporate
      notes
                        
                        
                        1,120
                        
                        
                        
                        6
                        
                        
                        
                        7,007
                        
                        
                        
                        14,651
                        
                        
                        
                        8,127
                        
                        
                        
                        14,657Auction
      Rate Securities
                        
                        
                        4,697
                        
                        
                        
                        727
                        
                        
                        
                        51,828
                        
                        
                        
                        18,172
                        
                        
                        
                        56,525
                        
                        
                        
                        18,899Subtotal,
      debt securities
                        
                        
                        41,839
                        
                        
                        
                        844
                        
                        
                        
                        81,123
                        
                        
                        
                        33,400
                        
                        
                        
                        122,962
                        
                        
                        
                        34,244Marketable
      equity securities and other
                        
                        
                        903
                        
                        
                        
                        132
                        
                        
                        
                        2,056
                        
                        
                        
                        1,077
                        
                        
                        
                        2,959
                        
                        
                        
                        1,209Total
      temporarilyimpaired
      securities
                        
                        $
                        42,742
                        
                        
                        $
                        976
                        
                        
                        $
                        83,179
                        
                        
                        $
                        34,477
                        
                        
                        $
                        125,921
                        
                        
                        $
                        35,453
  12
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
6. - (continued)
 
 During the quarter ended September 30,
2009, the Company recorded other than temporary impairment ("OTTI") pre-tax
charges of approximately $5.14 million which were charged against earnings in
the Consolidated Statement of Operations. The OTTI charge included $2.14 million
on a $2.63 million investment at cost in a corporate note as the result of the
issuer's bankruptcy proceedings and the discontinuation of interest payments.
The OTTI charge also included $3.0 million on a $10.0 million investment at cost
in a trust preferred security based upon an analysis of cash flows and defaults
by several banks involved with the security.
 
 The Company had a total of 31 debt
securities, excluding auction rate securities, with a fair market value of
$66.44 million which were temporarily impaired at September 30,
2009.  The total unrealized loss on these securities was approximately
$15.35 million, all of which is substantially attributable to changes in
interest rates which have decreased the market value of these securities. The
remaining unrealized loss of approximately $18.90 million is on 13 auction rate
securities which have declined in value due to the auction failures beginning in
February 2008. We have the intention to hold all these securities to maturity,
if necessary, and we believe we will not be required to sell these securities
prior to maturity. Therefore, the unrealized losses associated with these
securities are not considered to be other than temporary.
 
 The Company also had 7 equity
securities with an aggregated fair market value of approximately $3.0 million
which were temporarily impaired at September 30, 2009. The total unrealized loss
on these securities was approximately $1.21 million.  Based upon our
review of the available information, such unrealized losses are not considered
to be other than temporary.
 
 The amortized cost and fair value of
investment securities available for sale and held to maturity, by contractual
maturity, at September 30, 2009 are shown below.  Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
 
 September 30, 2009Available for Sale
                        
                        
                        Held to MaturityAmortized
                          Cost
                        
                        
                        Fair
                          Value
                        
                        
                        Amortized
                          Cost
                        
                        
                        Fair
                          Value(In
      thousands)Due
      in one year or less
                        
                        $
                        45,906
                        
                        
                        $
                        41,805
                        
                        
                        $
                        —
                        
                        
                        $
                        —Due
      after one through five years
                        
                        
                        57,745
                        
                        
                        
                        58,667
                        
                        
                        
                        —
                        
                        
                        
                        —Due
      after five through ten years
                        
                        
                        7,863
                        
                        
                        
                        7,478
                        
                        
                        
                        —
                        
                        
                        
                        —Due
      after ten years
                        
                        
                        162,371
                        
                        
                        
                        154,313
                        
                        
                        
                        344
                        
                        
                        
                        350Auction
      rate securities
                        
                        
                        88,128
                        
                        
                        
                        69,321
                        
                        
                        
                        —
                        
                        
                        
                        —Marketable
      equity securities and other
                        
                        
                        17,699
                        
                        
                        
                        16,604
                        
                        
                        
                        —
                        
                        
                        
                        —Totals
                        
                        $
                        379,712
                        
                        
                        $
                        348,188
                        
                        
                        $
                        344
                        
                        
                        $
                        350
  13
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 NOTE
6. - (continued)
 
 Gross gains realized on the sales of
investment securities for the nine months ended September 30, 2009 and 2008 were
approximately $494,000 and $247,000, respectively. Gross losses on the sales of
investment securities for the nine months ended September 30, 2009 and 2008 were
approximately $54,000 and $268,000, respectively.
 
 As of September 30, 2009, securities
sold under agreements to repurchase with a book value of approximately $57.0
million were outstanding.  The book value of the securities pledged
for these repurchase agreements was $64.6 million. As of September 30, 2009, the
Company did not have any investment securities of any one issuer where the
carrying value exceeded 10% of shareholders' equity.
 
 NOTE
7. Deposits
 
 The following table summarizes the
composition of the average balances of major deposit categories:
 
 Nine Months Ended
                          September 30, 2009
                        
                        
                        Twelve Months Ended
                          December 31, 2008Average
                          Amount
                        
                        
                        Average
                          Yield
                        
                        
                        Average
                          Amount
                        
                        
                        Average
                          Yield(Dollars in thousands)Demand
      deposits
                        
                        $
                        54,825
                        
                        
                        
                        —
                        
                        
                        $
                        54,452
                        
                        
                        
                        —NOW
      and money market
                        
                        
                        23,814
                        
                        
                        
                        0.35
                        %
                        
                        
                        39,849
                        
                        
                        
                        1.58
                        %Savings
      deposits
                        
                        
                        178,500
                        
                        
                        
                        1.30
                        
                        
                        
                        247,923
                        
                        
                        
                        2.84Time
      deposits
                        
                        
                        426,918
                        
                        
                        
                        2.50
                        
                        
                        
                        456,803
                        
                        
                        
                        3.79Total
      deposits
                        
                        $
                        684,057
                        
                        
                        
                        1.91
                        %
                        
                        $
                        799,027
                        
                        
                        
                        3.13
                        %
  14





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
8. Comprehensive Income (Loss)





The Company follows the provisions of
FASB ASC 220, Comprehensive Income, ("ASC 220") which includes net income as
well as certain other items which result in a change to equity during the
period.  The following table presents the components of comprehensive
income (loss), based on the provisions of ASC 220:





For The Nine Months EndedSeptember
      30, 2009
                      
                      
                      September
      30, 2008Before tax
                        amount
                      
                      
                      Tax
                        (expense)
                        benefit
                      
                      
                      Net of tax
                        amount
                      
                      
                      Before tax
                        amount
                      
                      
                      Tax
                        (expense)
                        benefit
                      
                      
                      Net of tax
                        amount(In
      thousands)Unrealized
      gains (losses) on investment securities:Unrealized
      holding gains(losses)
      arisingduring
      period
                      
                      $
                      20,942
                      
                      
                      $
                      (8,377
                      )
                      
                      $
                      12,565
                      
                      
                      $
                      (55,388
                      )
                      
                      $
                      22,155
                      
                      
                      $
                      (33,233
                      )Less
      reclassificationadjustment
      for gains(losses)
      realized innet
      income
                      
                      
                      (9,823
                      )
                      
                      
                      3,929
                      
                      
                      
                      (5,894
                      )
                      
                      
                      (21
                      )
                      
                      
                      8
                      
                      
                      
                      (13
                      )Unrealized
      gain (loss) on investment securities
                      
                      
                      30,765
                      
                      
                      
                      (12,306
                      )
                      
                      
                      18,459
                      
                      
                      
                      (55,409
                      )
                      
                      
                      22,163
                      
                      
                      
                      (33,246
                      )Change
      in minimumpension
      liability
                      
                      
                      123
                      
                      
                      
                      —
                      
                      
                      
                      123
                      
                      
                      
                      46
                      
                      
                      
                      —
                      
                      
                      
                      46Other
      comprehensiveincome
      (loss), net
                      
                      $
                      30,888
                      
                      
                      $
                      (12,306
                      )
                      
                      $
                      18,582
                      
                      
                      $
                      (55,363
                      )
                      
                      $
                      22,163
                      
                      
                      $
                      (33,200
                      )





NOTE
9.  Accounting For Stock Based Compensation





At September 30, 2009, the Company had
one stock-based employee compensation plan. The Company accounts for the plan in
accordance with FASB ASC 718, Compensation-Stock Compensation, ("ASC
718").  Under the fair value recognition provisions of ASC 718,
share-based compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over the vesting
period.  Determining the fair value of share-based awards at the grant
date requires judgement, including estimating the Company's stock price
volatility, employee stock option exercise behaviors and employee option
forfeiture rates.





The Company did not grant stock
options, nor did any stock options vest during the nine-month periods ended
September 30, 2009 and 2008, as a result of which, no stock based compensation
expense was recorded in either of those periods.


15


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
10. Employee Benefit Plans





The Company has a Retirement Income
Plan (the "Plan"), a noncontributory defined benefit plan covering substantially
all full-time, non-union United States employees of the Company.  The
following interim-period information is being provided in accordance with FASB
ASC 715, Compensation-Retirement Benefits,


based
upon the most recent actuarial valuation dated December 31, 2008.





For
      The
                    Three
      Months Ended
                    September
      30,
                  
                  
                  For
      The
                    Nine
      Months Ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Service
      cost
                  
                  $
                  103,250
                  
                  
                  $
                  105,250
                  
                  
                  $
                  309,750
                  
                  
                  $
                  315,750Interest
      cost
                  
                  
                  64,250
                  
                  
                  
                  54,750
                  
                  
                  
                  192,750
                  
                  
                  
                  164,250Expected
      return on plan assets
                  
                  
                  (70,500
                  )
                  
                  
                  (62,250
                  )
                  
                  
                  (211,500
                  )
                  
                  
                  (186,750
                  )Amortization
      and Deferral:Prior
      service cost
                  
                  
                  4,500
                  
                  
                  
                  4,500
                  
                  
                  
                  13,500
                  
                  
                  
                  13,500Loss
                  
                  
                  36,500
                  
                  
                  
                  10,750
                  
                  
                  
                  109,500
                  
                  
                  
                  32,250Net
      periodic pension cost
                  
                  $
                  138,000
                  
                  
                  $
                  113,000
                  
                  
                  $
                  414,000
                  
                  
                  $
                  339,000





The Pension Protection Act of 2006 (the
"PPA") changes the funding rules for defined benefit pension plans, beginning in
2008.  A key element of the PPA is the introduction of benefit
restrictions on plans that are funded below 80% of the plan's target
liabilities.  In order to avoid these restrictions, during the fiscal
year ending December 31, 2009, we expect that the minimum contribution to the
Plan will be approximately $1.43 million. During the nine months ended September
30, 2009 and 2008, we contributed approximately $1.10 million and $772,000,
respectively, to the Plan.  Effective December 31, 2009, further
benefit accruals will be frozen and the Plan will be terminated.





NOTE
11.  Fair Value of Financial Instruments





The FASB issued FASB ASC 825, Financial
Instruments, ("ASC 825") to require disclosures about fair value of financial
instruments on a quarterly basis, as well as on an annual basis, for public
companies.  For the Company, as for most financial institutions, the
majority of its assets and liabilities are considered financial instruments as
defined in ASC 825.  However, many such instruments lack an available
trading market, as characterized by a willing buyer and seller engaging in an
exchange transaction.  Also, it is the Company's general practice and
intent to hold its financial instruments to maturity and not to engage in
trading or sales activities, except for certain loans.  Therefore, the
Company had to use significant estimations and present value calculations to
prepare this disclosure.





Changes in the assumptions or
methodologies used to estimate fair values may materially affect the estimated
amounts.  Also, management is concerned that there may not be
reasonable comparability between institutions due to the wide range of permitted
assumptions and methodologies in the absence of active markets.  This
lack of uniformity gives rise to a high degree of subjectivity in estimating
financial instrument fair values.





Estimated fair values have been
determined by the Company using the best available data and an estimation
methodology suitable for each category of financial instruments.  The
estimation methodologies used, the estimated fair values, and recorded book
balances at September 30, 2009 are outlined below.


16


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
11. - (continued)





For cash and cash equivalents, the
recorded book value of $49.94 million at September 30, 2009 approximates fair
value.





The estimated fair values of investment
securities are based on quoted market prices, if available.  Estimated
fair values are based on quoted market prices of comparable instruments if
quoted market prices are not available.  Estimated fair values are
also determined using unobservable inputs that are supported by little or no
market values and significant assumptions and estimates.





September
      30, 2009Carrying
                        amount
                      
                      
                      Estimated
                        fair
      value(In
      thousands)Investment
      securities
                      
                      $
                      348,532
                      
                      
                      $
                      348,538Loans,
      net of unearned income
                      
                      
                      441,449
                      
                      
                      
                      440,289Time
      Deposits
                      
                      
                      424,431
                      
                      
                      
                      425,229Repurchase
      Agreements
                      
                      
                      57,000
                      
                      
                      
                      56,809Long-term
      Debt
                      
                      
                      34,610
                      
                      
                      
                      35,444Subordinated
      Debt
                      
                      
                      22,681
                      
                      
                      
                      22,681





The net loan portfolio at September 30,
2009 has been valued using a present value discounted cash flow where market
prices were not available.  The discount rate used in these
calculations is the estimated current market rate adjusted for credit
risk.  The carrying value of accrued interest approximates fair value.
The fair value of time deposits have been valued using net present value
discounted cash flow.





The estimated fair values of demand
deposits (i.e. interest bearing checking and non-interest bearing demand
accounts, savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.
their carrying amounts).  The carrying amount of accrued interest
payable approximates its fair value.





The fair value of commitments to extend
credit is estimated based upon the amount of unamortized deferred loan
commitment fees.  The fair value of letters of credit is based upon
the amount of unearned fees plus the estimated cost to terminate letters of
credit.  Fair values of unrecognized financial instruments, including
commitments to extend credit, and the fair value of letters of credit are
considered immaterial.





The fair value of interest rate caps,
included in other assets, are based upon the estimated amount the Company would
receive or pay to terminate the contracts or agreements, taking into account
current interest rates and, when appropriate, the current creditworthiness of
the counterparties.  The aggregate fair value for the interest rate
caps were approximately $155,000 at September 30, 2009.





The fair value of the long term debt
and the subordinated debt approximates the carrying value due to the re-pricing
of the debt.


17


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
11. - (continued)





The Company adopted FASB ASC 820, Fair
Value Measurements and Disclosures, ("ASC 820") which defines fair value,
establishes a framework for measuring fair value, and expands disclosure about
fair value.  ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants on the measurement
date.  ASC 820 also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value. A financial
instrument's level within the fair value hierarchy is based on the lowest level
of input significant to the fair value measurement. There have been no material
changes in valuation techniques as a result of the adoption of ASC
820.





Level 1 -
Quoted prices (unadjusted) in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date.





Level 2 -
Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities in active markets; quoted prices in markets that are not
active for identical or similar assets or liabilities; or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.





Level 3 -
Unobservable inputs that are supported by little or no market activity and
significant to the fair value of the assets or liabilities that are developed
using the reporting entities' estimates and assumptions, which reflect those
that market participants would use.





Assets
and Liabilities Measured at Fair Value on a Recurring Basis





A description of the valuation
methodologies used for financial instruments measured at fair value on a
recurring basis, as well as the classification of the instruments pursuant to
the valuation hierarchy, are as follows:





Securities
Available for Sale





When quoted market prices are available
in an active market, securities are classified within Level 1 of the fair value
hierarchy.  If quoted market prices are not available or accessible,
then fair values are estimated using pricing models, matrix pricing, or
discounted cash flow models.  The fair values of securities estimated
using pricing models or matrix pricing are generally classified within Level 2
of the fair value hierarchy.  When discounted cash flow models are
used there is omitted activity or less transparency around inputs to the
valuation and securities are classified within Level 3 of the fair value
hierarchy.


18


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
11. - (continued)





Assets measured at fair value on a
recurring basis are summarized below.





Fair Value Measurement UsingQuoted Prices in
                      Active Markets
                      for Identical
                      Assets/Liabilities
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)
                    
                    
                    Balance
                      September 30,
                      2009(Dollars
      in thousands)AssetsU.S.
      Treasuries
                    
                    $
                    30,332
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    30,332U.S.
      Government Agencies
                    
                    
                    
                    
                    
                    
                    55,460
                    
                    
                    
                    
                    
                    
                    
                    55,460Municipal
      obligations
                    
                    
                    2,334
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,334Mortgage-backed
      securities
                    
                    
                    
                    
                    
                    
                    153,975
                    
                    
                    
                    
                    
                    
                    
                    153,975Corporate
      notes
                    
                    
                    
                    
                    
                    
                    20,162
                    
                    
                    
                    
                    
                    
                    
                    20,162Auction
      Rate Securities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    69,321
                    
                    
                    
                    69,321Marketable
      equity securities and other
                    
                    
                    
                    
                    
                    
                    16,604
                    
                    
                    
                    
                    
                    
                    
                    16,604Investment
      securities available for sale
                    
                    $
                    32,666
                    
                    
                    $
                    246,201
                    
                    
                    $
                    69,321
                    
                    
                    $
                    348,188





The above table includes $31.52 million
in net unrealized losses on the Company's available for sale
securities.  The Company has reviewed its investment portfolio at
September 30, 2009, and has determined that the unrealized losses are temporary,
except as discussed in Note 6. Such determination was based upon an evaluation
of the creditworthiness of the issuers and/or guarantors, the underlying
collateral, if applicable, as well as the continuing performance of the
securities.  Management also evaluates other facts and circumstances
that may be indicative of an other-than-temporary impairment condition. This
includes, but is not limited to, an evaluation of the type of security and
length of time and extent to which the fair value has been less than cost, as
well as certain collateral related characteristics. In addition, management
considers the Company's ability to hold such securities to maturity, if
necessary, thereby recovering its investment.





The fair value of the interest rate
caps is approximately $155,000 and valued as a Level 3 input.  Further
disclosures are omitted as they are deemed to be
immaterial.


19





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
11. - (continued)





Assets
and Liabilities Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)





The following table presents a
reconciliation for auction rate securities, the only asset measured at fair
value on a recurring basis for which the Company has utilized significant
unobservable inputs (Level 3), all of which are auction rate securities with any
losses only included as a component of other comprehensive income.





(Dollars
      in thousands)
                
                Investment
                  Securities
                  Available
                  for
      SaleBalance,
      January 1, 2009
                
                $
                63,080Total
      gains/losses (realized/unrealized)Included
      in earnings
                
                
                —Included
      in other comprehensive income
                
                
                19,223Purchases,
      Sales, Issuances and Settlements
                
                
                18Redemptions
                
                
                (13,000
                )Interest
                
                
                —Other
      than temporary impairment expense
                
                
                —Capital
      deductions for operating expenses
                
                
                —Balance,
      September 30, 2009
                
                $
                69,321The
      amount of total gains (losses) for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at September 30, 2009
                
                $
                —





Impaired loans totalling $13.52 million
are measured for fair value using Level 3 inputs, primarily appraisals by
independent third parties.





NOTE
12.  New Accounting Pronouncements





Accounting
For Business Combinations





The FASB issued FASB ASC 805, Business
Combinations, ("ASC 805"), which


defines
the acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This code section requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions. This code section also requires that costs
incurred to complete the acquisition, including restructuring costs, are to be
recognized separately from the acquisition. This code section also requires an
acquirer to recognize assets or liabilities arising from all other contingencies
as of the acquisition date, measured at their acquisition-date fair values, only
if they meet the definition of an asset or liability in FASB ASC 210, Balance
Sheet, ("ASC 210"). This code section also provides specific guidance on the
subsequent accounting for assets and liabilities arising from contingencies
acquired or assumed in a business combination. ASC 805 is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption was not permitted. The adoption of ASC 805 on January 1, 2009 did not
have a material effect on the Company's results of operations or financial
condition.


20





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
12. - (continued)





Accounting
For Noncontrolling Interests In Consolidated Financial Statements





The FASB issued FASB ASC 810,
Consolidation, ("ASC 810"), which requires that ownership interests in
subsidiaries held by parties other than the parent company be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent's equity. This requirement
includes the amount of consolidated net income attributable to the parent
company and to the noncontrolling interest be clearly identified and presented
on the face of the consolidated statement of income. ASC 810 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption was not permitted. The adoption of ASC
810 on January 1, 2009 did not have a material effect on the Company's results
of operations or financial condition.





Accounting
For Derivative Instruments and Hedging Activities





The FASB issued FASB ASC 815,
Derivatives and Hedging, ("ASC 815"), which requires enhanced disclosures about
an entity's derivative and hedging activities, including information about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under ASC 815 and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. The requirements are effective for all financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with earlier
adoption permitted. Adoption of ASC 815 on January 1, 2009 did not have a
material impact on the Company's results of operations or financial
condition.





Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities





The FASB issued FASB ASC 260, Earnings
Per Share, ("ASC 260"), which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share ("EPS") under the two-class method described in ASC 260. ASC
260 concluded that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents are participating
securities and shall be included in the computations of EPS pursuant to the
two-class method. Our restricted stock awards are considered participating
securities under ASC 260.  This update is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented shall be adjusted retrospectively to conform
with the provisions of this ASC 260. Early application is not permitted.
Adoption of ASC 260 on January 1, 2009 did not have a material impact on our
computation of EPS.


21





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
12. - (continued)





Determining
The Fair Value Of A Financial Asset When The Market For That Asset Is Not
Active





The FASB amended FASB ASC 820, Fair
Value Measurements and Disclosures, ("ASC 820"), which applies to financial
assets within the scope of accounting pronouncements that require or permit fair
value measurements in accordance with ASC 820.  ASC 820 clarifies the
application of ASC 820 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active.  ASC 820
permits, in determining fair value for a financial asset in a dislocated market,
the use of a reporting entity's own assumptions about future cash flows and
appropriately risk-adjusted discount rates when relevant observable inputs are
not available. ASC 820 was effective upon issuance. Adoption of ASC 820 did not
have a material impact on the Company's results of operations or financial
condition.





Employer's
Disclosures about Postretirement Benefit Plan Assets





The FASB issued FASB ASC 715,
Compensation-Retirement Benefits, ("ASC 715"), which provides guidance on an
employer's disclosures about plan assets of a defined benefit pension or other
postretirement plan.  ASC 715 clarifies that the objectives of the
disclosures about plan assets in an employer's defined benefit pension or other
postretirement plan are to provide users of financial statements with an
understanding of: (1) how investment allocation decisions are made, including
the factors that are pertinent to an understanding of investment policies and
strategies; (2) the categories of plan assets; (3) the inputs and valuation
techniques used to measure the fair value of plan assets; (4) the effect of fair
value measurements using significant unobservable inputs (Level 3) on changes in
plan assets for the period; and (5) significant concentrations of risk within
plan assets.  ASC 715 also expands the disclosures related to these
objectives.  The disclosures about plan assets required by ASC 715 are
effective for fiscal years ending after December 15, 2009, or January 1, 2010 as
to the Company. Upon initial application, the provisions of ASC 715 are not
required for earlier periods that are presented for comparative purposes,
although application of the provisions of ASC 715 to prior periods is permitted.
Early adoption is not permitted. Adoption of ASC 715 is not expected to have a
material impact on the Company's results of operations or financial
condition.





FASB
ASC 325, Investments-Other, ("ASC 325")





The FASB amended ASC 325,
Investments-Other, to align the impairment guidance with that in FASB ASC 320,
Investments-Debt and Equity Securities, and related implementation guidance. ASC
325 was effective for reporting periods ending after December 15, 2008, and is
applied prospectively. Adoption of ASC 325 on January 1, 2009 did not have a
material impact on the Company's results of operations or financial
condition.





Recognition
and Presentation of Other-Than-Temporary Impairments





The FASB issued FASB ASC 320,
Investments-Debt and Equity Securities, ("ASC 320"), to make the guidance on
other-than-temporary impairments of debt securities more operational and improve
the financial statement disclosures related to other-than-temporary impairments
for debt and equity securities. ASC 320 clarifies the interaction of the factors
that should be considered when determining whether a debt security is
other-than-temporarily impaired.


22





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
12. - (continued)





To evaluate whether a debt security is
other-than-temporarily impaired, an entity must first determine whether the fair
value of the debt security is less than its amortized cost basis at the
statement of condition date.  If the fair value is less than the
amortized cost basis, then the entity must assess whether it intends to sell the
security or whether it is more likely than not that it will be required to sell
the debt security before recovery of its amortized cost basis.  If an
entity determines that it will sell a debt security or that it more likely than
not will be required to sell a debt security before recovery of its amortized
cost basis, then it must recognize the difference between the fair value and the
amortized cost basis of the debt security in earnings.  Otherwise, the
other-than-temporary impairment must be separated into two
components:  the amount related to the credit loss and the amount
related to all other factors.  The amount related to the credit loss
must be recognized in earnings, while the other component must be recognized in
other comprehensive income, net of tax.  The portion of
other-than-temporary impairment recognized in earnings would decrease the
amortized cost basis of the debt security, and subsequent recoveries in the fair
value of the debt security would not result in a write-up of the amortized cost
basis.





The Company adopted ASC 320 effective
April 1, 2009. The adoption did not have a material impact on the Company's
financial condition and results of operations.  The additional
disclosures related to ASC 320 are included in Note 6. - Investment
Securities.





Determining
Fair Value When The Volume And Level of Activity For The Asset Or Liability Have
Significantly Decreased And Identifying Transactions That Are Not
Orderly





The FASB amended FASB ASC 820 to
provide additional guidance on estimating fair value when the volume and level
of activity for an asset or liability have significantly decreased. ASC 820 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. ASC 820 emphasizes that, regardless of whether the volume and level
of activity for an asset or liability have decreased significantly and
regardless of which valuation technique was used, the objective of a fair value
measurement remains the same - to estimate the price that would be received to
sell an asset or transfer a liability in an orderly transaction between market
participants at the measurement date under current market
conditions.





The Company adopted ASC 820 effective
April 1, 2009. The adoption did not have a material impact on the Company's
financial condition and results of operations. The additional disclosures
related to ASC 820 are included in Note 11. - Fair Value of Financial
Instruments.





Interim
Disclosures About Fair Value Of Financial Instruments





The FASB amended FASB ASC 825,
Financial Instruments, ("ASC 825") to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements.  ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The required
disclosures are included in Note 11. - Fair Value of Financial
Instruments.


23





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





NOTE
12. - (continued)





Subsequent
Events





The FASB issued FASB ASC 855,
Subsequent Events, ("ASC 855"), to incorporate the accounting and disclosures
requirements for subsequent events into GAAP.  ASC 855 introduces new
terminology, defines a date through which management must evaluate subsequent
events, and lists the circumstances under which an entity must recognize and
disclose events or transactions occurring after the balance-sheet
date.  The Company adopted ASC 855 as of June 30, 2009, which was the
required effective date.  The Company evaluated its September 30, 2009
financial statements for subsequent events through November 12,
2009.  The Company is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.





The
FASB Accounting Standards Codification





The FASB issued FASB ASC 105, Generally
Accepted Accounting Principles, ("ASC 105"), which has become the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission ("SEC") under authority of the federal securities laws are also
sources of authoritative GAAP for SEC registrants.  On the effective
date of ASC 105, the Codification will supersede all then-existing non-SEC
accounting and reporting standards.  All other non-grandfathered
non-SEC accounting literature not included in the Codification will become
non-authoritative.  ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15,
2009.  In the FASB's views, the issuance of ASC 105 and the
Codification does not change GAAP, except for those nonpublic nongovernmental
entities that must now apply FASB ASC 985-Software.  The Company
adopted ASC 105 as of September 30, 2009 with no material impact on the
Company's consolidated financial statements.


24


Internal
Control Over Financial Reporting





The objective of the Company's Internal
Control Program is to allow the Bank and management to comply with Part 363 of
the FDIC's regulations ("FDICIA") and to allow the Company to comply with
Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act"). In November 2005, the
FDIC amended Part 363 of its regulations by raising the asset-size threshold
from $500 million to $1 billion for internal control assessments by management
and external auditors.  The final rule was effective December 28,
2005.





Section 302 of the Act requires
the CEOs and CFOs of the Company to (i) certify that the annual and quarterly
reports filed with the Securities and Exchange Commission are accurate and (ii)
acknowledge that they are responsible for establishing, maintaining and
periodically evaluating the effectiveness of the disclosure controls and
procedures.  Section 404 of the Act requires management to (i) report
on internal control over financial reporting, (ii) assess the effectiveness of
such internal controls, and (iii) obtain an external auditor's report on
management's assessment of its internal control.  The Company is not
an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934.





On October 2, 2009, the SEC issued a
final extension of SOX 404(b) for non-accelerated filers to fiscal years ending
on or after June 15, 2010. Therefore, the Company, which was first required to
comply with Section 404 for the fiscal year ended December 31, 2007, will be
required to obtain an external auditor's report on internal control over
financial reporting for the fiscal year ending December 31, 2010.





The Committee of Sponsoring
Organizations (COSO) methodology may be used to document and test the internal
controls pertaining to the accuracy of Company issued financial statements and
related disclosures. COSO requires a review of the control environment
(including anti-fraud and audit committee effectiveness), risk assessment,
control activities, information and communication, and ongoing
monitoring.


25





ITEM 2 -
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
      OF OPERATIONS.





The following discussion and analysis
is intended to provide a better understanding of the consolidated financial
condition and results of operations of Berkshire Bancorp Inc., a Delaware
corporation, and its subsidiaries.  All references to earnings per
share, unless stated otherwise, refer to earnings per diluted
share.  References to Notes herein are references to the "Notes to
Consolidated Financial Statements" of the Company located in Item 1
herein.





Critical
Accounting Policies, Judgments and Estimates





The accounting and reporting policies
of the Company conform with accounting principles generally accepted in the
United States of America and general practices within the financial services
industry.  The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying
notes.  Actual results could differ from those estimates.





The Company considers that the
determination of the allowance for loan losses involves a higher degree of
judgment and complexity than any of its other significant accounting
policies.  The allowance for loan losses is calculated with the
objective of maintaining a reserve level believed by management to be sufficient
to absorb estimated credit losses.  Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors.  However, this evaluation is inherently
subjective as it requires material estimates, including, among others, expected
default probabilities, loss given default, the amounts and timing of expected
future cash flows on impaired loans, mortgages, and general amounts for
historical loss experience.  The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio.  All of these factors may be susceptible to significant
change.  To the extent actual outcomes differ from management
estimates, additional provisions for loan losses may be required that would
adversely impact earnings in future periods.


26


With the adoption of FASB ASC 350,
Intangibles-Goodwill and Other, the Company discontinued the amortization of
goodwill resulting from acquisitions. Goodwill is now subject to impairment
testing at least annually or when triggering events occur to determine whether
write-downs of the recorded balances are necessary.  The Company tests
for impairment based on the goodwill maintained at the Bank.  A fair
value is determined for each reporting unit based on at least one of three
various market valuation methodologies.  If the fair value of the
reporting unit exceeds the book value, no write-down of recorded goodwill is
necessary.  If the fair value of the reporting unit is less, an
expense may be required on the Company's books to write down the related
goodwill to the carrying value. As of December 31, 2008, the goodwill was
evaluated for impairment with no recognition of impairment considered
necessary.  For the nine months ended September 30, 2009, management
determined that there were no additional impairment indicators since the
December 31, 2008 evaluation.





The Company recognizes deferred tax
assets and liabilities for the future tax effects of temporary differences, net
operating loss carryforwards and tax credits.  Deferred tax assets are
subject to management's judgment based upon available evidence that future
realization is more likely than not. If management determines that the Company
may be unable to realize all or part of net deferred tax assets in the future, a
direct charge to income tax expense may be required to reduce the recorded value
of the net deferred tax asset to the expected realizable amount.





The Company conducts a periodic review
and evaluation of its securities portfolio, taking into account the severity and
duration of each unrealized loss, as well as management's intent and ability to
hold the security until the unrealized loss is substantially eliminated, in
order to determine if a decline in market value of any security below its
carrying value is either temporary or other than
temporary.  Unrealized losses on held-to-maturity securities that are
deemed temporary are disclosed but not recognized.  Unrealized losses
on debt or equity securities available-for-sale that are deemed temporary are
excluded from net income and reported net of deferred taxes as other
comprehensive income or loss.  All unrealized losses that are deemed
other than temporary on either available-for-sale or held-to-maturity securities
are recognized immediately as a reduction of the carrying amount of the
security, with a charge recorded in the Company's consolidated statements of
income.


27





The following table presents the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed in both dollars and rates.





For
      The Three Months Ended September 30,2009
                    
                    
                    2008Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate(Dollars
      in Thousands)INTEREST-EARNING
      ASSETS:Loans
      (1)
                    
                    $
                    440,146
                    
                    
                    $
                    7,290
                    
                    
                    
                    6.63
                    %
                    
                    $
                    471,103
                    
                    
                    $
                    8,296
                    
                    
                    
                    7.04
                    %Investment
      securities
                    
                    
                    315,395
                    
                    
                    
                    3,486
                    
                    
                    
                    4.42
                    
                    
                    
                    472,086
                    
                    
                    
                    5,793
                    
                    
                    
                    4.91Other
      (2)(5)
                    
                    
                    56,314
                    
                    
                    
                    129
                    
                    
                    
                    0.92
                    
                    
                    
                    68,764
                    
                    
                    
                    433
                    
                    
                    
                    2.52Total
      interest-earning assets
                    
                    
                    811,855
                    
                    
                    
                    10,905
                    
                    
                    
                    5.37
                    
                    
                    
                    1,011,953
                    
                    
                    
                    14,522
                    
                    
                    
                    5.74Noninterest-earning
      assets
                    
                    
                    55,456
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    52,130Total
      Assets
                    
                    $
                    867,311
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,064,083INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                    
                    
                    201,817
                    
                    
                    
                    533
                    
                    
                    
                    1.06
                    %
                    
                    
                    298,931
                    
                    
                    
                    1,838
                    
                    
                    
                    2.46
                    %Time
      deposits
                    
                    
                    414,620
                    
                    
                    
                    2,028
                    
                    
                    
                    1.96
                    
                    
                    
                    450,342
                    
                    
                    
                    3,785
                    
                    
                    
                    3.36Other
      borrowings
                    
                    
                    115,044
                    
                    
                    
                    1,187
                    
                    
                    
                    4.13
                    
                    
                    
                    139,042
                    
                    
                    
                    1,476
                    
                    
                    
                    4.25Total
      interest-bearingliabilities
                    
                    
                    731,481
                    
                    
                    
                    3,748
                    
                    
                    
                    2.05
                    
                    
                    
                    888,315
                    
                    
                    
                    7,099
                    
                    
                    
                    3.20Demand
      deposits
                    
                    
                    56,821
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    54,259Noninterest-bearing
      liabilities
                    
                    
                    7,611
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,217Stockholders'
      equity (5)
                    
                    
                    71,398
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    112,292Total
      liabilities andstockholders'
      equity
                    
                    $
                    867,311
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,064,083Net
      interest income
                    
                    
                    
                    
                    
                    $
                    7,157
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    7,423Interest-rate
      spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.32
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.54
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.53
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.93
                    %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                    
                    
                    1.11
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.14





(1)
              Includes
      nonaccrual loans.


(2)
              Includes
      interest-bearing deposits, federal funds sold and securities purchased
      under agreements to resell.


(3)
              Interest-rate
      spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest bearing
      liabilities.


(4)
              Net
      interest margin is net interest income as a percentage of average
      interest-earning assets.


(5)
              Average
      balances are daily average balances except for the parent company which
      have been calculated on a monthly
basis.


28





For
      The Nine Months Ended September 30,2009
                    
                    
                    2008Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate(Dollars
      in Thousands)INTEREST-EARNING
      ASSETS:Loans
      (1)
                    
                    $
                    450,176
                    
                    
                    $
                    22,510
                    
                    
                    
                    6.67
                    %
                    
                    $
                    458,166
                    
                    
                    $
                    24,597
                    
                    
                    
                    7.16
                    %Investment
      securities
                    
                    
                    303,555
                    
                    
                    
                    11,931
                    
                    
                    
                    5.24
                    
                    
                    
                    520,606
                    
                    
                    
                    20,914
                    
                    
                    
                    5.36Other
      (2)(5)
                    
                    
                    61,669
                    
                    
                    
                    582
                    
                    
                    
                    1.26
                    
                    
                    
                    43,958
                    
                    
                    
                    857
                    
                    
                    
                    2.60Total
      interest-earning assets
                    
                    
                    815,400
                    
                    
                    
                    35,023
                    
                    
                    
                    5.73
                    
                    
                    
                    1,022,730
                    
                    
                    
                    43,368
                    
                    
                    
                    6.04Noninterest-earning
      assets
                    
                    
                    62,109
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    48,594Total
      Assets
                    
                    $
                    877,509
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,071,324INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                    
                    
                    202,314
                    
                    
                    
                    1,809
                    
                    
                    
                    1.19
                    %
                    
                    
                    306,879
                    
                    
                    
                    6,408
                    
                    
                    
                    2.78
                    %Time
      deposits
                    
                    
                    426,918
                    
                    
                    
                    8,006
                    
                    
                    
                    2.50
                    
                    
                    
                    454,748
                    
                    
                    
                    13,303
                    
                    
                    
                    3.90Other
      borrowings
                    
                    
                    118,491
                    
                    
                    
                    3,707
                    
                    
                    
                    4.17
                    
                    
                    
                    126,598
                    
                    
                    
                    4,200
                    
                    
                    
                    4.42Total
      interest-bearing
                      liabilities
                    
                    
                    747,723
                    
                    
                    
                    13,522
                    
                    
                    
                    2.41
                    
                    
                    
                    888,225
                    
                    
                    
                    23,911
                    
                    
                    
                    3.59Demand
      deposits
                    
                    
                    54,825
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    54,540Noninterest-bearing
      liabilities
                    
                    
                    8,961
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,100Stockholders'
      equity (5)
                    
                    
                    66,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    118,459Total
      liabilities andstockholders'
      equity
                    
                    $
                    877,509
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,071,324Net
      interest income
                    
                    
                    
                    
                    
                    $
                    21,501
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    22,457Interest-rate
      spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.32
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.45
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.52
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.93
                    %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                    
                    
                    1.09
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.15





(1)
              Includes
      nonaccrual loans.


(2)
              Includes
      interest-bearing deposits, federal funds sold and securities purchased
      under agreements to resell.


(3)
              Interest-rate
      spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest bearing
      liabilities.


(4)
              Net
      interest margin is net interest income as a percentage of average
      interest-earning assets.


(5)
              Average
      balances are daily average balances except for the parent company which
      have been calculated on a monthly
basis.


29





Results
of Operations





Results
of Operations for the Three and Nine Months Ended September 30, 2009 Compared to
the Three and Nine Months Ended September 30, 2008.





General. Berkshire Bancorp
Inc., a bank holding company registered under the Bank Holding Company Act of
1956, has one indirect wholly-owned banking subsidiary, The Berkshire Bank, a
New York State chartered commercial bank.  The Bank is headquartered
in Manhattan and has twelve branch locations; seven branches in New York City,
four branches in Orange and Sullivan counties New York, and one branch in
Ridgefield, New Jersey.  A new branch in Teaneck, New Jersey is
scheduled to open during the fourth quarter of fiscal 2009.





Net Income (Loss) Allocated to Common
Stockholders.  Net loss for the three-month period ended
September 30, 2009 was $3.59 million, or $.51 per common share, compared to a
net loss of $88.69 million, or $12.57 per common share, for the three-month
period ended September 30, 2008.  Net loss for the nine-month period
ended September 30, 2009 was $7.36 million, or $1.04 per common share, compared
to a net loss of $83.40 million, or $11.82 per common share, for the nine-month
period ended September 30, 2008.





The net loss for the three and nine
months periods ended September 30, 2009 was due to the other than temporary
impairment charges on securities of $5.14 million and $10.26 million,
respectively, or $.73 per common share and $1.45 per common share, respectively;
and dividends on our Series A Preferred Stock of $1.20 million and $3.60
million, respectively, or $.17 per common share and $.51 per common share,
respectively.  The net loss for the three and nine months periods
ended September 30, 2008 was due to the other than temporary impairment charges
on securities of $94.35 million, or $13.37 per common share, in each
period.


30





The Company's net income is largely
dependent on interest rate levels, the demand for the Company's loan and deposit
products and the strategies employed to manage the interest rate and other risks
inherent in the banking business.





Net Interest
Income.  The Company's primary source of revenue is net
interest income, or the difference between interest income earned on
interest-earning assets, such as loans and investment securities, and interest
expense on interest-bearing liabilities such as deposits and
borrowings.  The amount of interest income is dependent upon many
factors including: (i) the amount of interest-earning assets that the Company
can maintain based upon its funding sources; (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities; and (iii) the
difference between the yields earned on those assets and the rates paid on those
liabilities.  Non-performing loans adversely affect net interest
income because they must still be funded by interest-bearing liabilities, but
they do not provide interest income.  Furthermore, when we designate
an asset as non-performing, all interest which has been accrued but not actually
received is deducted from current period income, further reducing net interest
income.





For the quarter ended September 30,
2009, net interest income decreased by $266,000 to $7.16 million from $7.42
million for the quarter ended September 30, 2008.  The decrease in net
interest income was due to the decrease in the average amounts of
interest-earning assets to $811.86 million during the 2009 quarter from
$1,011.95 million during the 2008 quarter and the decrease in the average yields
earned on such assets to 5.37% during the 2009 quarter from 5.74% during the
2008 quarter.  The decrease in net interest income was partially
offset by the decrease in the average amounts of interest-bearing liabilities to
$731.48 million during the 2009 quarter from $888.32 million during the 2008
quarter and the decrease in the average rates paid on such liabilities to 2.05%
during the 2009 quarter from 3.20% during the 2008 quarter.  The
Company's interest-rate spread, the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities,
increased by 78 basis points to 3.32% during the quarter ended September 30,
2009 from 2.54% during the quarter ended September 30, 2008.





For the nine-month period ended
September 30, 2009, net interest income decreased $956,000 to $21.50 million
from $22.46 million for the nine-month period ended September 30,
2008.  The decrease in net interest income was due to the decrease in
the average amounts of interest-earning assets to $815.40 million during the
2009 nine-month period from $1,022.73 million during the 2008 nine-month period
and the decrease in the average yields earned on such assets to 5.73% during the
2009 nine-month period from 6.04% during the 2008 nine-month
period.  The decrease in net interest income was partially offset by
the decrease in the average amounts of interest-bearing liabilities to $747.72
million during the 2009 nine-month period from $888.23 million during the
nine-month period and the decrease in the average rates paid on such liabilities
to 2.41% during the 2009 period from 3.59% during the 2008
period.  The Company's interest-rate spread increased by 87 basis
points to 3.32% during the 2009 nine-month period from 2.45% during the 2008
nine-month period.


31





Net Interest
Margin.  Net interest margin, or annualized net interest income
as a percentage of average interest-earning assets, increased by 60 basis points
to 3.53% during the quarter ended September 30, 2009 from 2.93% during the
quarter ended September 30, 2008.  Net interest margin increased by 59
basis points to 3.52% during the nine-month period ended September 30, 2009 from
2.93% during the nine-month period ended September 30, 2008.  We seek
to secure and retain customer deposits with competitive products and rates,
while making strategic use of the prevailing interest rate environment to borrow
funds at what we believe to be attractive rates.  We invest such
deposits and borrowed funds in what we believe to be a prudent mix of fixed and
adjustable rate loans, investment securities and short-term interest-earning
assets.  The increase in net interest margin during the three and six
months ended September 30, 2009 is primarily due to the increase in the average
amount of higher yielding loans as a percentage of our total mix of
interest-earning assets.





Interest Income. Total
interest income for the quarter ended September 30, 2009 decreased by $3.62
million to $10.91 million from $14.52 million for the quarter ended September
30, 2008.  Total interest income for the nine months ended September
30, 2009 decreased by $8.35 million to $35.02 million from $43.37 million for
the nine months ended September 30, 2008.  The decrease in total
interest income during the three and nine months ended September 30, 2009 was
due to the decrease in the average amounts of interest-earning assets and the
decrease in the average yields earned on such assets as discussed
above.





The following tables present the
composition of interest income for the indicated periods:





Three Months Ended September 30,2009
                          
                          
                          2008Interest
                            Income
                          
                          
                          % of
                            Total
                          
                          
                          Interest
                            Income
                          
                          
                          % of
                            Total(In
      thousands, except percentages)Loans
                          
                          $
                          7,290
                          
                          
                          
                          66.85
                          %
                          
                          $
                          8,296
                          
                          
                          
                          57.13
                          %Investment
      Securities
                          
                          
                          3,486
                          
                          
                          
                          31.97
                          
                          
                          
                          5,793
                          
                          
                          
                          39.89Other
                          
                          
                          129
                          
                          
                          
                          1.18
                          
                          
                          
                          433
                          
                          
                          
                          2.98Total
      Interest Income
                          
                          $
                          10,905
                          
                          
                          
                          100.00
                          %
                          
                          $
                          14,522
                          
                          
                          
                          100.00
                          %


32





Nine Months Ended September 30,2009
                          
                          
                          2008Interest
                            Income
                          
                          
                          % of
                            Total
                          
                          
                          Interest
                            Income
                          
                          
                          % of
                            Total(In
      thousands, except percentages)Loans
                          
                          $
                          22,510
                          
                          
                          
                          64.27
                          %
                          
                          $
                          24,597
                          
                          
                          
                          53.05
                          %Investment
      Securities
                          
                          
                          11,931
                          
                          
                          
                          34.07
                          
                          
                          
                          20,914
                          
                          
                          
                          45.10Other
                          
                          
                          582
                          
                          
                          
                          1.66
                          
                          
                          
                          857
                          
                          
                          
                          1.85Total
      Interest Income
                          
                          $
                          35,023
                          
                          
                          
                          100.00
                          %
                          
                          $
                          46,368
                          
                          
                          
                          100.00
                          %





Loans, which are inherently risky and
therefore command a higher return than our portfolio of investment securities
and other interest-earning assets, increased to 54.21% and 55.21% of total
average interest-earning assets during the three and nine months ended September
30, 2009, respectively, from 46.55% and 44.80% of total interest-earning assets
during the three and nine months ended September 30, 2008, respectively. The
average amounts of investment securities have decreased to 38.85% and 37.23% of
total average interest-earning assets during the three and nine months ended
September 30, 2009, respectively, from 46.65% and 50.90% of total
interest-earning assets during the three and nine months ended September 30,
2008, respectively.  While we actively seek to originate new loans
with qualified borrowers who meet the Bank's underwriting standards, our
strategy has been to maintain those standards, sacrificing some current income
to avoid possible large future losses in the loan portfolio.





At September 30, 2009, our portfolio of
investment securities included approximately $88.13 million at cost of auction
rate securities and approximately $34.33 million at cost of corporate notes for
which an other than temporary impairment charge has not been recorded in our
financial statements.  The fair value of these securities, presently
$69.32 million and $20.16 million, respectively, could be negatively impacted in
the future.  Were this to occur, we may be required to reflect a write
down of certain of our securities in future periods as a charge to earnings if
any of these securities are deemed to be other than temporarily
impaired.  Such impairment charge could be material to our results of
operations.





In January 2009, the Bank filed an
arbitration proceeding with the Financial Industry Regulatory Authority against
the issuing financial institution of the auction rate securities in our
investment portfolio. The outcome of the arbitration process which has been
scheduled for March 2010 and the amount we may recover, if any, is uncertain at
this time.


33


As required by FASB ASC 320,
Investments-Debt and Equity Securities, securities are classified into three
categories: trading, held-to-maturity and
available-for-sale.  Securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and losses
included in trading account activities in the statement of
income.  Securities that the Bank has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost.  All other securities are classified as available-for-sale.
Available-for-sale securities are reported at fair value with unrealized gains
and losses included, on an after-tax basis, as a separate component of net
worth.  The Company does not have a trading securities portfolio and
has no current plans to maintain such a portfolio in the future.  The
Company generally classifies all newly purchased debt securities as available
for sale in order to maintain the flexibility to sell those securities if the
need arises.  The Bank has a limited portfolio of securities
classified as held to maturity, represented principally by securities purchased
a number of years ago.





Federal Home Loan Bank
Stock.  The Bank owns stock of the FHLBNY which is necessary
for it to be a member of the FHLBNY.  Membership requires the purchase
of stock equal to 1% of the Bank's residential mortgage loans or 5% of the
outstanding borrowings, whichever is greater.  The stock is redeemable
at par, therefore, its cost is equivalent to its redemption
value.  The Bank's ability to redeem FHLBNY shares is dependent upon
the redemption practices of the FHLBNY. At September 30, 2009, the FHLBNY
neither placed restrictions on redemption of shares in excess of a member's
required investment in stock, nor stated that it will cease paying dividends.
The Bank did not consider this asset impaired at either September 30, 2009 or
2008.





Interest
Expense.  Total interest expense for the quarter ended
September 30, 2009 decreased by $3.35 million to $3.75 million from $7.10
million for the quarter ended September 30, 2008.  The decrease in
interest expense was due to the decrease in the average amounts of
interest-bearing liabilities and the decrease in the average rates paid on such
liabilities during the 2009 quarter compared to the 2008 quarter.





Total interest expense during the
nine-month period ended September 30, 2009 decreased by $10.39 million to $13.52
million from $23.91 million during the nine-month period ended September 30,
2008.  The decrease in interest expense was due to the decrease in the
average amounts of interest-bearing liabilities and the decrease in the average
rates paid on such liabilities during the 2009 period compared to the 2008
period.





The following tables present the
components of interest expense as of the dates indicated:





Three Months Ended September 30,2009
                              
                              
                              2008Interest
                                Expense
                              
                              
                              % of
                                Total
                              
                              
                              Interest
                                Expense
                              
                              
                              % of
                                Total(In thousands, except percentages)Interest-Bearing
      Deposits
                              
                              $
                              533
                              
                              
                              
                              14.22
                              %
                              
                              $
                              1,838
                              
                              
                              
                              25.89
                              %Time
      Deposits
                              
                              
                              2,028
                              
                              
                              
                              54.11
                              
                              
                              
                              3,785
                              
                              
                              
                              53.32Other
      Borrowings
                              
                              
                              1,187
                              
                              
                              
                              31.67
                              
                              
                              
                              1,476
                              
                              
                              
                              20.97Total
      Interest Expense
                              
                              $
                              3,748
                              
                              
                              
                              100.00
                              %
                              
                              $
                              7,099
                              
                              
                              
                              100.00
                              %


34





Nine Months Ended September 30,2009
                          
                          
                          2008Interest
                            Expense
                          
                          
                          % of
                            Total
                          
                          
                          Interest
                            Expense
                          
                          
                          % of
                            Total(In thousands, except percentages)Interest-Bearing
      Deposits
                          
                          $
                          1,809
                          
                          
                          
                          13.38
                          %
                          
                          $
                          6,408
                          
                          
                          
                          26.80
                          %Time
      Deposits
                          
                          
                          8,006
                          
                          
                          
                          59.21
                          
                          
                          
                          13,303
                          
                          
                          
                          55.63Other
      Borrowings
                          
                          
                          3,707
                          
                          
                          
                          27.41
                          
                          
                          
                          4,200
                          
                          
                          
                          17.57Total
      Interest Expense
                          
                          $
                          13,522
                          
                          
                          
                          100.00
                          %
                          
                          $
                          23,911
                          
                          
                          
                          100.00
                          %





Non-Interest
Income.  Non-interest income consists primarily of realized
gains on sales of investment securities and service fee income. For the three
and nine- month periods ended September 30, 2009, non-interest income amounted
to $502,000 and $1.28 million, respectively, compared to non-interest income of
$267,000 and $1.11 million for the three and nine month periods ended September
30, 2008, respectively.





Non-Interest
Expense.  Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees, OTTI
charges on investment securities and other operating expenses associated with
the day-to-day operations of the Company.  Total non-interest expense
for the quarter ended September 30, 2009 was $9.34 million compared to $98.45
million for the quarter ended September 30, 2008.  The decrease of
$89.11 million in non-interest expense was primarily due to the $89.21 million
decrease in OTTI charges during the 2009 quarter.





Non-interest expense for the nine-month
period ended September 30, 2009 was $23.63 million compared to $106.34 million
for the nine-month period ended September 30, 2008. The decrease of $82.71
million in non-interest expense was primarily due to the $84.08 million decrease
in OTTI charges during the 2009 nine-month period, partially offset by the $1.23
million increase in our FDIC assessment.





The following tables present the
components of non-interest expenses as of the dates indicated:


35





Three Months Ended September 30,2009
                            
                            
                            2008Non-Interest
                              Expense
                            
                            
                            % of
                              Total
                            
                            
                            Non-Interest
                              Expense
                            
                            
                            % of
                              Total(In thousands, except percentages)Salaries
      and Employee Benefits
                            
                            $
                            2,339
                            
                            
                            
                            25.05
                            %
                            
                            $
                            2,395
                            
                            
                            
                            2.43
                            %Net
      Occupancy Expense
                            
                            
                            477
                            
                            
                            
                            5.11
                            
                            
                            
                            521
                            
                            
                            
                            0.53Equipment
      Expense
                            
                            
                            92
                            
                            
                            
                            0.99
                            
                            
                            
                            97
                            
                            
                            
                            0.10FDIC
      Assessment
                            
                            
                            330
                            
                            
                            
                            3.53
                            
                            
                            
                            128
                            
                            
                            
                            0.13Data
      Processing Expense
                            
                            
                            119
                            
                            
                            
                            1.27
                            
                            
                            
                            118
                            
                            
                            
                            0.12Other
      than temporary impairment charge on securities
                            
                            
                            5,138
                            
                            
                            
                            55.03
                            
                            
                            
                            94,346
                            
                            
                            
                            98.83Other
                            
                            
                            842
                            
                            
                            
                            9.02
                            
                            
                            
                            847
                            
                            
                            
                            0.86Total
      Non-Interest Expense
                            
                            $
                            9,337
                            
                            
                            
                            100.00
                            %
                            
                            $
                            98,452
                            
                            
                            
                            100.00
                            %





Nine Months Ended September 30,2009
                            
                            
                            2008Non-Interest
                              Expense
                            
                            
                            % of
                              Total
                            
                            
                            Non-Interest
                              Expense
                            
                            
                            % of
                              Total(In thousands, except percentages)Salaries
      and Employee Benefits
                            
                            $
                            7,011
                            
                            
                            
                            29.67
                            %
                            
                            $
                            7,211
                            
                            
                            
                            6.78
                            %Net
      Occupancy Expense
                            
                            
                            1,529
                            
                            
                            
                            6.47
                            
                            
                            
                            1,566
                            
                            
                            
                            1.47Equipment
      Expense
                            
                            
                            286
                            
                            
                            
                            1.21
                            
                            
                            
                            289
                            
                            
                            
                            0.27FDIC
      Assessment
                            
                            
                            1,598
                            
                            
                            
                            6.76
                            
                            
                            
                            366
                            
                            
                            
                            0.34Data
      Processing Expense
                            
                            
                            329
                            
                            
                            
                            1.39
                            
                            
                            
                            339
                            
                            
                            
                            0.32Other
      than temporary impairment charge on securities
                            
                            
                            10,263
                            
                            
                            
                            43.43
                            
                            
                            
                            94,346
                            
                            
                            
                            88.73Other
                            
                            
                            2,615
                            
                            
                            
                            11.07
                            
                            
                            
                            2,222
                            
                            
                            
                            2.09Total
      Non-Interest Expense
                            
                            $
                            23,631
                            
                            
                            
                            100.00
                            %
                            
                            $
                            106,339
                            
                            
                            
                            100.00
                            %





Provision for Income
Tax.  During the three and nine-month periods ended September
30, 2009, the Company recorded an income tax benefit of $285,000 and an income
tax expense of $1.36 million, respectively, compared to an income tax benefit of
$2.22 million and $323,000 during the three and nine-month periods ended
September 30, 2008, respectively. The recorded tax provisions in 2009 do not
give benefit to the OTTI charges which are considered a capital loss for which
the Company has minimal capital gains to offset. Therefore, a valuation
allowance was recorded for the nine months ended September 30, 2009, equalling
the tax benefits of the capital loss.


36


The recorded tax benefits in 2008
relates to the OTTI charge related to the Lehman Brothers corporate note which
was treated as an ordinary loss under the current federal tax code when Lehman
Brothers filed for bankruptcy in September 2008.  The OTTI charge
related to Fannie Mae and Freddie Mac securities, both direct investments and
through auction rate securities, were considered capital losses under the
federal tax code. A valuation allowance was recorded on the amount of capital
losses in excess of available capital gains.  With the passage by the
U.S. Congress of the Emergency Economic Stabilization Act in October 2008, the
nature of the Fannie Mae and Freddie Mac capital losses were changed to ordinary
losses. Due to this change in the tax law, we have carried back as much loss as
could be utilized and recognized a deferred tax benefit for the
remainder.





Issuer
Purchases of Equity Securities





On May 15, 2003, The Company's Board of
Directors authorized the purchase of up to an additional 450,000 shares of its
Common Stock in the open market, from time to time, depending upon prevailing
market conditions, thereby increasing the maximum number of shares which may be
purchased by the Company from 1,950,000 shares of Common Stock to 2,400,000
shares of Common Stock.  Since 1990 through September 30, 2009, the
Company has purchased a total of 1,898,909 shares of its Common Stock. The
Company did not purchase shares of its Common Stock during the first three
quarters of 2009. At September 30, 2009, there were 501,091 shares of Common
Stock which may yet be purchased under our stock repurchase plan.





ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





Interest Rate
Risk.  Fluctuations in market interest rates can have a
material effect on the Company's net interest income because the yields earned
on loans and investments may not adjust to market rates of interest with the
same frequency, or with the same speed, as the rates paid by the Bank on its
deposits.





Most of the Bank's deposits are either
interest-bearing demand deposits or short term certificates of deposit and other
interest-bearing deposits with interest rates that fluctuate as market rates
change.  Management of the Bank seeks to reduce the risk of interest
rate fluctuations by concentrating on loans and securities investments with
either short terms to maturity or with adjustable rates or other features that
cause yields to adjust based upon interest rate fluctuations.  In
addition, to cushion itself against the potential adverse effects of a
substantial and sustained increase in market interest rates, the Bank has from
time to time purchased off balance sheet interest rate cap contracts which
generally provide that the Bank will be entitled to receive payments from the
other party to the contract if interest rates exceed specified
levels.  These contracts are entered into with major financial
institutions.





The Company seeks to maximize its net
interest margin within an acceptable level of interest rate
risk.  Interest rate risk can be defined as the amount of the
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates.  Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.


37





In the banking industry, a traditional
measure of interest rate sensitivity is known as "gap" analysis, which measures
the cumulative differences between the amounts of assets and liabilities
maturing or repricing at various time intervals.  The following table
sets forth the Company's interest rate repricing gaps for selected maturity
periods:





Berkshire Bancorp Inc.
                      Interest Rate Sensitivity Gap at September 30, 2009
                      (in thousands, except for percentages)3 Months
                      or Less
                    
                    
                    3 Through
                      12 Months
                    
                    
                    1 Through
                      3 Years
                    
                    
                    Over
                      3 Years
                    
                    
                    TotalFederal
      funds sold
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —(Rate)Interest
      bearing deposits in banks
                    
                    
                    41,986
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    41,986(Rate)
                    
                    
                    1.39
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.39
                    %Loans
      (1)(2)Adjustable
      rate loans
                    
                    
                    105,354
                    
                    
                    
                    7,534
                    
                    
                    
                    52,463
                    
                    
                    
                    45,456
                    
                    
                    
                    210,807(Rate)
                    
                    
                    8.20
                    %
                    
                    
                    5.49
                    %
                    
                    
                    7.03
                    %
                    
                    
                    6.64
                    %
                    
                    
                    7.47
                    %Fixed
      rate loans
                    
                    
                    18,056
                    
                    
                    
                    17,118
                    
                    
                    
                    21,489
                    
                    
                    
                    174,885
                    
                    
                    
                    231,548(Rate)
                    
                    
                    6.67
                    %
                    
                    
                    7.61
                    %
                    
                    
                    7.25
                    %
                    
                    
                    6.28
                    %
                    
                    
                    6.50
                    %Total
      loans
                    
                    
                    123,410
                    
                    
                    
                    24,652
                    
                    
                    
                    73,952
                    
                    
                    
                    220,341
                    
                    
                    
                    442,355Investments
      (3)(4)
                    
                    
                    121,534
                    
                    
                    
                    25,808
                    
                    
                    
                    29,099
                    
                    
                    
                    203,615
                    
                    
                    
                    380,056(Rate)
                    
                    
                    4.70
                    %
                    
                    
                    3.54
                    %
                    
                    
                    2.53
                    %
                    
                    
                    5.36
                    %
                    
                    
                    4.81
                    %Total
      rate-sensitive assets
                    
                    
                    286,930
                    
                    
                    
                    50,460
                    
                    
                    
                    103,051
                    
                    
                    
                    423,956
                    
                    
                    
                    864,397Deposit
      accounts (5)Savings
      and NOW
                    
                    
                    197,187
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    197,187(Rate)
                    
                    
                    1.19
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.19
                    %Money
      market
                    
                    
                    8,159
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8,159(Rate)
                    
                    
                    0.58
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    0.58
                    %Time
      Deposits
                    
                    
                    143,307
                    
                    
                    
                    242,880
                    
                    
                    
                    35,621
                    
                    
                    
                    2,623
                    
                    
                    
                    424,431(Rate)
                    
                    
                    1.70
                    %
                    
                    
                    1.85
                    %
                    
                    
                    2.36
                    %
                    
                    
                    1.92
                    %
                    
                    
                    1.84
                    %Total
      deposit accounts
                    
                    
                    348,653
                    
                    
                    
                    242,880
                    
                    
                    
                    35,621
                    
                    
                    
                    2,623
                    
                    
                    
                    629,777Repurchase
      Agreements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    57,000
                    
                    
                    
                    57,000(Rate)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.10
                    %
                    
                    
                    4.10
                    %Other
      borrowings
                    
                    
                    2,546
                    
                    
                    
                    16,000
                    
                    
                    
                    601
                    
                    
                    
                    38,144
                    
                    
                    
                    57,291(Rate)
                    
                    
                    4.80
                    %
                    
                    
                    5.97
                    %
                    
                    
                    5.68
                    %
                    
                    
                    3.32
                    %
                    
                    
                    4.15
                    %Total
      rate-sensitive liabilities
                    
                    
                    351,199
                    
                    
                    
                    258,880
                    
                    
                    
                    36,222
                    
                    
                    
                    97,767
                    
                    
                    
                    744,068Interest
      rate caps
                    
                    
                    40,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (40,000
                    )Gap
      (repricing differences)
                    
                    
                    (104,269
                    )
                    
                    
                    (208,420
                    )
                    
                    
                    66,829
                    
                    
                    
                    366,189
                    
                    
                    
                    120,329Cumulative
      Gap
                    
                    
                    (104,269
                    )
                    
                    
                    (312,689
                    )
                    
                    
                    (245,860
                    )
                    
                    
                    120,329Cumulative
      Gap to Total Rate Sensitive Assets
                    
                    
                    (12.06
                    )%
                    
                    
                    (36.17
                    )%
                    
                    
                    (28.44
                    )%
                    
                    
                    13.92
                    %


(1)Adjustable-rate
loans are included in the period in which the interest rates are next scheduled
to adjust rather than in the period in which the loans
mature.  Fixed-rate loans are scheduled according to their maturity
dates.


(2)Includes
nonaccrual loans.


(3)Investments
are scheduled according to their respective repricing (variable rate loans) and
maturity (fixed rate securities) dates.


(4)Investments
are stated at book value.


(5)NOW
accounts and savings accounts are regarded as readily accessible withdrawal
accounts.  The balances in such accounts have been allocated among
maturity/repricing periods based upon The Berkshire Bank's historical
experience. All other time accounts are scheduled according to their respective
maturity dates.





Provision for Loan Losses. The
allowance for loan losses is the estimated amount considered necessary to cover
credit losses inherent in the loan portfolio at the balance sheet date. The
allowance is established through the provision for loan losses that is charged
against income. In determining the allowance for loan losses, management makes
significant estimates and therefore has identified the allowance as a critical
accounting policy. 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.


38


The allowance for loan losses has been
determined in accordance with GAAP, principally FASB ASC 450, Contingencies,
("ASC 450") and FASB ASC 310, Receivables, ("ASC 310").  Under the
above accounting principles, we are required to maintain an allowance for
probable losses at the balance sheet date. We are responsible for the timely and
periodic determination of the amount of the allowance required. Management
believes that the allowance for loan losses is adequate to cover specifically
identifiable losses, as well as estimated losses inherent in our portfolio for
which certain losses are probable but not specifically
identifiable.





Management performs a monthly
evaluation of the adequacy of the allowance for loan losses. The analysis of the
allowance for loan losses has two components: specific and general allocations.
Specific allocations are made for loans determined to be impaired. Impairment is
measured by determining the present value of expected future cash flows or, as a
practical expedient for collateral-dependent loans, the fair value of the
collateral adjusted for market conditions and selling expenses.  The
Bank considers its investment in one-to-four family real estate loans and
consumer loans to be smaller balance homogeneous loans and therefore excluded
from separate identification for evaluation of impairment.  These
homogeneous loan groups are evaluated for impairment on a collective basis under
FASB ASC 310.





The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history.  Management also analyzes historical loss
experience, delinquency trends, general economic conditions, geographic
concentrations, and industry and peer comparisons. This analysis establishes
factors that are applied to the loan segments to determine the amount of the
general allocations. This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revisions based upon
changes in economic and real estate market conditions. Actual loan losses may be
significantly more than the allowance for loan losses management has established
which could have a material negative effect on the Company's financial
results.





On a monthly basis, the Bank's
management committee reviews the current status of various loan assets in order
to evaluate the adequacy of the allowance for loan losses. In this evaluation
process, specific loans are analyzed to determine their potential risk of loss.
This process includes all loans, concentrating on non-accrual and classified
loans. Each non-accrual or classified loan is evaluated for potential loss
exposure. Any shortfall results in a recommendation of a specific allowance if
the likelihood of loss is evaluated as probable. To determine the adequacy of
collateral on a particular loan, an estimate of the fair market value of the
collateral is based on the most current appraised value available. This
appraised value is then reduced to reflect estimated liquidation
expenses.


39


As a substantial amount of our loan
portfolio is collateralized by real estate, appraisals of the underlying value
of property securing loans are critical in determining the amount of the
allowance required for specific loans. Assumptions for appraisal valuations are
instrumental in determining the value of properties. Overly optimistic
assumptions or negative changes to assumptions could significantly impact the
valuation of a property securing a loan and the related allowance determined.
The assumptions supporting such appraisals are carefully reviewed by management
to determine that the resulting values reasonably reflect amounts realizable on
the related loans. Based on the composition of our loan portfolio, management
believes the primary risks are increases in interest rates, a decline in the
economy, generally, and a decline in real estate market values in the New York
metropolitan area. Any one or combination of these events may adversely affect
our loan portfolio resulting in increased delinquencies, loan losses and future
levels of loan loss provisions. Management believes the allowance for loan
losses reflects the inherent credit risk in our portfolio, the level of our
non-performing loans and our charge-off experience.





Although management believes that we
have established and maintained the allowance for loan losses at adequate
levels, additions may be necessary if future economic and other conditions
differ substantially from the current operating environment. Although management
uses what it believes is the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. In addition, the Federal Deposit Insurance
Corporation, New York State Banking Department, and other regulatory bodies, as
an integral part of their examination process, will periodically review our
allowance for loan losses. Such agencies may require us to recognize adjustments
to the allowance based on its judgments about information available to them at
the time of their examination.





The following table sets forth
information with respect to activity in the Company's allowance for loan losses
during the periods indicated (in thousands, except percentages):





Three Months Ended
                            September 30,
                          
                          
                          Nine Months Ended
                            September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Average
      loans outstanding
                          
                          $
                          440,146
                          
                          
                          $
                          471,103
                          
                          
                          $
                          450,176
                          
                          
                          $
                          458,166Allowance
      at beginning of period
                          
                          
                          9,757
                          
                          
                          
                          5,052
                          
                          
                          
                          9,204
                          
                          
                          
                          4,183Charge-offs:Commercial
      and other loans
                          
                          
                          1
                          
                          
                          
                          —
                          
                          
                          
                          104
                          
                          
                          
                          1Total
      loans charged-off
                          
                          
                          1
                          
                          
                          
                          —
                          
                          
                          
                          104
                          
                          
                          
                          1Recoveries:Commercial
      and other loans
                          
                          
                          —
                          
                          
                          
                          5
                          
                          
                          
                          106
                          
                          
                          
                          71Total
      loans recovered
                          
                          
                          —
                          
                          
                          
                          5
                          
                          
                          
                          106
                          
                          
                          
                          71Net
      recoveries (charge-offs)
                          
                          
                          (1
                          )
                          
                          
                          5
                          
                          
                          
                          2
                          
                          
                          
                          70Provision
      for loan losses charged to operating expenses
                          
                          
                          1,000
                          
                          
                          
                          150
                          
                          
                          
                          1,550
                          
                          
                          
                          954Allowance
      at end of period
                          
                          
                          10,756
                          
                          
                          
                          5,207
                          
                          
                          
                          10,756
                          
                          
                          
                          5,207Ratio
      of net recoveries (charge-offs) to average loans
    outstanding
                          
                          
                          0.00
                          %
                          
                          
                          0.00
                          %
                          
                          
                          0.00
                          %
                          
                          
                          0.02
                          %Allowance
      as a percent of total loans
                          
                          
                          2.43
                          %
                          
                          
                          1.09
                          %
                          
                          
                          2.43
                          %
                          
                          
                          1.09
                          %Total
      loans at end of period
                          
                          $
                          442,355
                          
                          
                          $
                          476,496
                          
                          
                          $
                          442,355
                          
                          
                          $
                          476,496




40




Loan
Portfolio.





Loan Portfolio
Composition.  The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral.  Most of the Company's loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made.  At September 30, 2009 and December 31, 2008, the
Company had loans, net of unearned income, of $441.45 million and $466.75
million, respectively, and allowances for loan losses of $10.76 million and
$9.20 million, respectively. From time to time, the Bank may originate
residential mortgage loans and sell them on the secondary market, normally
recognizing income in connection with the sale.





Interest rates on loans are affected by
the demand for loans, the supply of money available for lending, credit risks,
the rates offered by competitors and other conditions.  These factors
are in turn affected by, among other things, economic conditions, monetary
policies of the federal government, and legislative tax policies.





In order to manage interest rate risk,
the Bank focuses its efforts on loans with interest rates that adjust based upon
changes in the prime rate or changes in United States Treasury or similar
indices.  Generally, credit risks on adjustable-rate loans are
somewhat greater than on fixed-rate loans primarily because, as interest rates
rise, so do borrowers' payments, increasing the potential for
default.  The Bank seeks to impose appropriate loan underwriting
standards in order to protect against these and other credit related risks
associated with its lending operations.





In addition to analyzing the income and
assets of its borrowers when underwriting a loan, the Bank obtains independent
appraisals on all material real estate in which the Bank takes a
mortgage.  The Bank generally obtains title insurance in order to
protect against title defects on mortgaged property.





Commercial and Mortgage
Loans.  The Bank originates commercial mortgage loans secured
by office buildings, retail establishments, multi-family residential real estate
and other types of commercial property.  Substantially all of the
properties are located in the New York City metropolitan area.


41





The Bank generally makes commercial
mortgage loans with loan to value ratios not to exceed 75% and with terms to
maturity that do not exceed 15 years.  Loans secured by commercial
properties generally involve a greater degree of risk than one-to-four family
residential mortgage loans.  Because payments on such loans are often
dependent on successful operation or management of the properties, repayment may
be subject, to a greater extent, to adverse conditions in the real estate market
or the economy.  The Bank seeks to minimize these risks through its
underwriting policies.  The Bank evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying
property.  The factors considered by the Bank include net operating
income; the debt coverage ratio (the ratio of cash net income to debt service);
and the loan to value ratio.  When evaluating the borrower, the Bank
considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Bank's
lending experience with the borrower.  The Bank's policy requires
borrowers to present evidence of the ability to repay the loan without having to
resort to the sale of the mortgaged property.  The Bank also seeks to
focus its commercial mortgage loans on loans to companies with operating
businesses, rather than passive real estate investors.





Commercial
Loans.  The Bank makes commercial loans to businesses for
inventory financing, working capital, machinery and equipment purchases,
expansion, and other business purposes.  These loans generally have
higher yields than mortgages loans, with maturities of one year, after which the
borrower's financial condition and the terms of the loan are
re-evaluated.  At September 30, 2009 and 2008, approximately $49.41
million and $79.76 million, respectively, or 11.2% and 16.7%, respectively, of
the Company's total loan portfolio consisted of such loans.





Commercial loans tend to present
greater risks than mortgage loans because the collateral, if any, tends to be
rapidly depreciable, difficult to sell at full value and is often easier to
conceal.  In order to limit these risks, the Bank evaluates these
loans based upon the borrower's ability to repay the loan from ongoing
operations.  The Bank considers the business history of the borrower
and perceived stability of the business as important factors when considering
applications for such loans.  Occasionally, the borrower provides
commercial or residential real estate collateral for such loans, in which case
the value of the collateral may be a significant factor in the loan approval
process.





Residential Mortgage Loans (1 to 4
family loans).  The Bank makes residential mortgage loans
secured by first liens on one-to-four family owner-occupied or rental
residential real estate.  At September 30, 2009 and 2008,
approximately $131.52 million and $143.88 million, respectively, or 29.7% and
30.1%, respectively, of the Company's total loan portfolio consisted of such
loans. The Bank offers both adjustable rate mortgages ("ARMS") and fixed-rate
mortgage loans.  The relative proportion of fixed-rate loans versus
ARMs originated by the Bank depends principally upon current customer
preference, which is generally driven by economic and interest rate conditions
and the pricing offered by the Bank's competitors.  At September 30,
2009 and 2008, approximately 13.5% and 9.7%, respectively, of the Bank's
residential one-to- four
family owner-occupied first mortgage portfolio were ARMs and approximately 86.5%
and 90.3%, respectively, were fixed-rate loans.  The percentage
represented by fixed-rate loans tends to increase during periods of low interest
rates.  The ARMs generally carry annual caps and life-of-loan
ceilings, which limit interest rate adjustments.


42


The Bank's residential loan
underwriting criteria are generally comparable to those required by the Federal
National Mortgage Association ("FNMA") and other major secondary market loan
purchasers.  Generally, ARM credit risks are somewhat greater than
fixed-rate loans primarily because, as interest rates rise, the borrowers'
payments rise, increasing the potential for default. The Bank's teaser rate ARMs
(ARMs with low initial interest rates that are not based upon the index plus the
margin for determining future rate adjustments) were underwritten based on the
payment due at the fully-indexed rate.





In addition to verifying income and
assets of borrowers, the Bank obtains independent appraisals on all residential
first mortgage loans and title insurance is required at
closing.  Private mortgage insurance is required on all loans with a
loan-to-value ratio in excess of 80% and the Bank requires real estate tax
escrows on such loans.  Real estate tax escrows are voluntary on
residential mortgage loans with loan-to-value ratios of 80% or
less.





Fixed-rate residential mortgage loans
are generally originated by the Bank for terms of 15 to 30
years.  Although 30 year fixed-rate mortgage loans may adversely
affect our net interest income in periods of rising interest rates, the Bank
originates such loans to satisfy customer demand.  Such loans are
generally originated at initial interest rates which exceed the fully indexed
rate on ARMs offered at the same time.  Fixed-rate residential
mortgage loans originated by the Bank generally include due-on-sale clauses,
which permit the Bank to demand payment in full if the borrower sells the
property without the Bank's consent.





Due-on-sale clauses are an important
means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio,
and the Bank will generally exercise its rights under these clauses if necessary
to maintain market yields.





ARMs originated in recent years have
interest rates that adjust annually based upon the movement of the one year
treasury bill constant maturity index, plus a margin of 2.00% to
2.75%.  These loans generally have a maximum interest rate adjustment
of 2% per year, with a lifetime maximum interest rate adjustment, measured from
the initial interest rate, of 5.5% or 6.0%.





The Bank offers a variety of other loan
products including residential single family construction loans to persons who
intend to occupy the property upon completion of construction, home equity loans
secured by junior mortgages on one-to-four family owner-occupied residences, and
short-term fixed-rate consumer loans either unsecured or secured by monetary
assets such as bank deposits and marketable securities or personal
property.  At September 30, 2009 and 2008, the Company's loan
portfolio was comprised of $261.42 million and $261.98 million, respectively, or
59.10% and 54.8%, respectively, of other loan products.


43





Capital
Adequacy





Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets, and of Tier I capital
to average assets.  Management believes that, as of September 30,
2009, the Bank meets all capital adequacy requirements to which it is
subject.





As of September 30, 2009, the Bank met
all regulatory requirements for classification as "well capitalized" under the
regulatory framework for prompt corrective action.  To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the following
table.  There are no conditions or events since that date that
management believes have changed the Bank's category.





The following tables set forth
the actual and required regulatory capital amounts and ratios of the Company and
the Bank as of September 30, 2009 (dollars in thousands):





Actual
                
                
                For Capital
                  Adequacy Purposes
                
                To be well
                  capitalized under
                  prompt corrective
                  action provisionsAmount
                
                
                Ratio
                
                
                Amount
                
                Ratio
                
                Amount
                
                
                RatioSeptember
      30, 2009Total
      Capital (to Risk-Weighted Assets)Company
                
                $
                110,309
                
                
                
                19.2
                %
                
                $
                45,978
                
                ≥8.0
                %
                
                —
                
                
                
                N/ABank
                
                
                87,035
                
                
                
                15.6
                %
                
                
                44,702
                
                ≥8.0
                %
                $
                55,878
                
                
                ≥10.0
                %Tier
      I Capital (to Risk-Weighted Assets)Company
                
                
                99,553
                
                
                
                17.3
                %
                
                
                22,989
                
                ≥4.0
                %
                
                —
                
                
                
                N/ABank
                
                
                80,004
                
                
                
                14.3
                %
                
                
                22,351
                
                ≥4.0
                %
                
                33,527
                
                
                ≥6.0%Tier
      I Capital (to Average Assets)Company
                
                
                99,553
                
                
                
                11.3
                %
                
                
                35,100
                
                ≥4.0
                %
                
                —
                
                
                
                N/ABank
                
                
                80,004
                
                
                
                9.6
                %
                
                
                33,346
                
                ≥4.0
                %
                
                41,683
                
                
                ≥5.0
                %





Liquidity





The management of the Company's
liquidity focuses on ensuring that sufficient funds are available to meet loan
funding commitments, withdrawals from deposit accounts, the repayment of
borrowed funds, and ensuring that the Bank and the Company comply with
regulatory liquidity requirements.  Liquidity needs of the Bank have
historically been met by deposits, investments in federal funds sold, principal
and interest payments on loans, and maturities of investment
securities.


44


At September 30, 2009, our portfolio of
investment securities included approximately $88.13 million, at cost, of auction
rate securities for which an OTTI charge has not been recorded in our financial
statements. Auction rate securities are generally long-term debt instruments
that provided liquidity through a Dutch auction process that reset the
applicable interest rate at pre-determined calendar intervals, generally every
28 days. As a result of the auction failures beginning in February 2008, the
fair value of these auction rate securities, presently $69.32 million, may be
negatively impacted in the future.





The current uncertainties in the credit
markets have negatively impacted our ability to liquidate, if necessary,
investments in auction rate securities. We are not certain as to when the
liquidity issues relating to these investments will improve; however, we have
the ability to hold these available for sale securities to maturity,
(predominately 19 years after December 31, 2008) thereby recovering our
investment.  We may be required to reflect a write-down of certain of
our auction rate securities in future periods as a charge to earnings if any of
our auction rate securities are deemed to be other-than-temporarily impaired.
Such impairment charge would be recorded as other expense and could be material
to our results of operations. The auction rate securities in our investment
portfolio, except for approximately $6.0 million at cost of Fannie Mae and
Freddie Mac securities which are on non-accrual status, are currently paying
interest with rates ranging from 0.255% to 8.891%. The weighted average rate is
currently 4.815%





Approximately $13.0 million principal
amount of auction rate securities that came due during the six months ended June
30, 2009 were paid. No auction rate securities came due or where paid off during
the three months ended September 30, 2009.





At September 30, 2009, our portfolio of
investment securities included approximately $34.33 million, at cost, of
corporate notes for which an OTTI charge has not been recorded in our financial
statements. Due primarily to liquidity issues, the fair value of these
securities, presently $20.16 million, may be negatively impacted in the
future.





Based on our expected operating cash
flows, and our other sources of cash, we do not expect the potential lack of
liquidity in these auction rate securities and corporate notes to affect our
capital, liquidity or our ability to execute our current business
plan.


45


For the parent company, Berkshire
Bancorp Inc., liquidity means having cash available to fund its operating
expenses and to pay stockholder dividends on its preferred and common stock,
when and if declared by the Company's Board of Directors.  On March
31, 2009, the Company announced that its Board of Directors had temporarily
suspended its previously announced policy of paying a regular cash dividend of
$.20 per common share (payable in semi-annual installments during April and
October) and would not declare or pay a semi-annual dividend in April
2009.  The Board of Directors deemed it appropriate to continue the
suspension and did not declare or pay a cash dividend on common shares in
October 2009.  We are current as to dividend payments on our preferred
stock.





The ability of the Company to meet
these obligations, including the payment of dividends on its preferred and
common stock when and if declared by the Board of Directors, is not currently
dependent upon the receipt of dividends from the Bank.  At September
30, 2009, the Company had cash of approximately $8.41 million and investment
securities with a fair market value of $4.73 million.





The Bank maintains financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers.  These financial instruments,
approximately $18.06 million at September 30, 2009, include commitments to
extend credit, stand-by letters of credit and loan commitments. The Bank also
had interest rate caps with a notional amount of $40.0 million.





At September 30, 2009, the Bank had
outstanding commitments of approximately $463.58 million; including $34.61
million of long-term debt, $4.54 million of operating leases, and $424.30
million of time deposits.  These commitments include $406.06 million
that mature or renew within one year, $38.38 million that mature or renew after
one year and within three years, $18.87 million that mature or renew after three
years and within five years and $273,000 that mature or renew after five
years.





Impact
of Inflation and Changing Prices





The Company's financial statements
measure financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation.  The impact of inflation is reflected in the
increasing cost of the Company's operations.  The assets and
liabilities of the Company are largely monetary.  As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation.  In addition, interest rates
do not necessarily move in the direction, or to the same extent, as the price of
goods and services.  However, in general, high inflation rates are
accompanied by higher interest rates, and vice versa.




46




ITEM
4 - CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures.




As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 ("Disclosure Controls").  This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO"), who is also
the Chief Financial Officer ("CFO"). Based upon the Controls Evaluation, the
CEO/CFO has concluded that the Disclosure Controls are effective in reaching a
reasonable level of assurance that information required to be disclosed by the
Company is recorded, processed, summarized and reported within the time period
specified in the SEC's rules and forms and that any material information
relating to the Company is accumulated and communicated with management,
including its principal executive/financial officer to allow timely decisions
regarding required disclosure.





Changes
in Internal Control over Financial Reporting.





In
accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended September 30, 2009, no changes in the Company's Internal Control
(as defined below) have occurred that have materially affected or are reasonably
likely to materially affect the Company's Internal Control.





Limitations
on the Effectiveness of Controls.





The
Company's management, including the CEO/CFO, does not expect that its Disclosure
Controls and/or its "internal control over financial reporting", as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended (the "Internal
Control"), will prevent all error and all fraud.  A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.  Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.





Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.


47


PART
II.  OTHER INFORMATION





Item
6.  Exhibits





Exhibit
                                  Number
                                
                                Description31
                                
                                Certification of
      Principal Executive and
      Financial Officer pursuant to Section
      302 Of The Sarbanes-Oxley Act of
      2002.32
                                
                                Certification of
      Principal Executive and
      Financial Officer pursuant to Section
      906 Of The Sarbanes-Oxley Act of
      2002.


48




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





BERKSHIRE BANCORP INC.(Registrant)





Date:
      November 12,
      2009
                    By:
                    /s/ Steven RosenbergSteven
      RosenbergChief
      Executive Officer,President
      and ChiefFinancial
      Officer




49




EXHIBIT
INDEX





Exhibit
                                Number
                              
                              Description31
                              
                              Certification
      of Principal
      Executive and
      Financial Officer pursuant to Section
      302 Of The Sarbanes-Oxley Act of
      2002.32
                              
                              Certification of
      Principal Executive and
      Financial Officer pursuant to Section
      906 Of The Sarbanes-Oxley Act of
      2002.




50