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, 2010





or





 ̈
            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. (Check one):





Large
accelerated filer  ̈    Accelerated
filer  ̈





Non-accelerated
filer  ̈      Smaller
reporting company x


(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 9, 2010, 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, 2009.





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.





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, 2010 and December 31, 2009
      (unaudited)
                    4Consolidated
      Statements of Operations For The Three and Nine Months Ended September 30,
      2010 and 2009 (unaudited)
                    5Consolidated
      Statement of Stockholders' Equity For The Nine Months Ended September 30,
      2010 and 2009 (unaudited)
                    6Consolidated
      Statements of Cash Flows For The Nine Months Ended September 30, 2010 and
      2009 (unaudited)
                    7Notes
      to Consolidated Financial Statements (unaudited)
                    8Item
      2.
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    25Item
      3.
                    Quantitative
      and Qualitative Disclosure About Market Risk
                    45Item
      4.
                    Controls
      and Procedures
                    45PART
      II         OTHER
      INFORMATIONItem
      6.
                    Exhibits
                    46Signature
                    47Index
      of Exhibits
                    48


3


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollars
in Thousands)


(unaudited)





September 30,
                          2010
                        
                        
                        December 31,
                          2009ASSETSCash
      and due from banks
                        
                        $
                        4,659
                        
                        
                        $
                        5,427Interest
      bearing deposits
                        
                        
                        72,088
                        
                        
                        
                        55,376Total
      cash and cash equivalents
                        
                        
                        76,747
                        
                        
                        
                        60,803Investment
      Securities:Available-for-sale
                        
                        
                        356,557
                        
                        
                        
                        357,478Held-to-maturity,
      fair value of $322 in 2010 and $337 in 2009
                        
                        
                        324
                        
                        
                        
                        340Total
      investment securities
                        
                        
                        356,881
                        
                        
                        
                        357,818Loans,
      net of unearned income
                        
                        
                        375,923
                        
                        
                        
                        430,349Less:
      allowance for loan losses
                        
                        
                        (14,605
                        )
                        
                        
                        (11,416
                        )Net
      loans
                        
                        
                        361,318
                        
                        
                        
                        418,933Accrued
      interest receivable
                        
                        
                        3,877
                        
                        
                        
                        4,253Premises
      and equipment, net
                        
                        
                        8,296
                        
                        
                        
                        8,532Goodwill,
      net
                        
                        
                        18,549
                        
                        
                        
                        18,549Other
      assets
                        
                        
                        35,808
                        
                        
                        
                        40,379Total
      assets
                        
                        $
                        861,476
                        
                        
                        $
                        909,267LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                        
                        $
                        73,574
                        
                        
                        $
                        62,870Interest
      bearing
                        
                        
                        607,816
                        
                        
                        
                        650,574Total
      deposits
                        
                        
                        681,390
                        
                        
                        
                        713,444Securities
      sold under agreements to repurchase
                        
                        
                        50,000
                        
                        
                        
                        50,000Borrowings
                        
                        
                        11,760
                        
                        
                        
                        31,004Subordinated
      debt
                        
                        
                        22,681
                        
                        
                        
                        22,681Accrued
      interest payable
                        
                        
                        2,673
                        
                        
                        
                        3,578Other
      liabilities
                        
                        
                        4,383
                        
                        
                        
                        3,324Total
      liabilities
                        
                        
                        772,887
                        
                        
                        
                        824,031Stockholders'
      equityPreferred
      stock - $.01 Par value:Authorized  —
      2,000,000 shares Issued    —  60,000 shares
      Outstanding — September 30, 2010, 60,000 shares December 31, 2009, 60,000
      shares
                        
                        
                        1
                        
                        
                        
                        1Common
      stock - $.10 par valueAuthorized
      — 25,000,000 shares Issued   — 7,698,285 shares Outstanding
      — September 30, 2010, 7,054,183 shares December 31, 2009, 7,054,183
      shares
                        
                        
                        770
                        
                        
                        
                        770Additional
      paid-in capital
                        
                        
                        150,985
                        
                        
                        
                        150,985Accumulated
      Deficit
                        
                        
                        (47,023
                        )
                        
                        
                        (46,833
                        )Accumulated
      other comprehensive loss, net
                        
                        
                        (9,733
                        )
                        
                        
                        (13,276
                        )Treasury
      Stock at cost September 30, 2010, 644,102 shares December 31, 2009,
      644,102 shares
                        
                        
                        (6,411
                        )
                        
                        
                        (6,411
                        )Total
      stockholders' equity
                        
                        
                        88,589
                        
                        
                        
                        85,236Total
      liabilities and stockholders' equity
                        
                        $
                        861,476
                        
                        
                        $
                        909,267





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 30,2010
                
                
                2009
                
                
                2010
                
                
                2009INTEREST
      INCOMELoans,
      including related fees
                
                $
                6,295
                
                
                $
                7,290
                
                
                $
                19,301
                
                
                $
                22,510Investment
      securities
                
                
                3,542
                
                
                
                3,486
                
                
                
                11,062
                
                
                
                11,931Federal
      funds sold and interest bearing deposits
                
                
                41
                
                
                
                129
                
                
                
                157
                
                
                
                582Total
      interest income
                
                
                9,878
                
                
                
                10,905
                
                
                
                30,520
                
                
                
                35,023INTEREST
      EXPENSEDeposits
                
                
                1,748
                
                
                
                2,561
                
                
                
                5,961
                
                
                
                9,815Securities
      sold under agreements to repurchase
                
                
                507
                
                
                
                595
                
                
                
                1,507
                
                
                
                1,770Borrowings
      and subordinated debt
                
                
                283
                
                
                
                592
                
                
                
                1,222
                
                
                
                1,937Total
      interest expense
                
                
                2,538
                
                
                
                3,748
                
                
                
                8,690
                
                
                
                13,522Net
      interest income
                
                
                7,340
                
                
                
                7,157
                
                
                
                21,830
                
                
                
                21,501PROVISION
      FOR LOAN LOSSES
                
                
                1,500
                
                
                
                1,000
                
                
                
                4,250
                
                
                
                1,550Net
      interest income after provision for loan losses
                
                
                5,840
                
                
                
                6,157
                
                
                
                17,580
                
                
                
                19,951NON-INTEREST
      INCOMEService
      charges on deposit accounts
                
                
                135
                
                
                
                126
                
                
                
                391
                
                
                
                364Investment
      securities gains
                
                
                62
                
                
                
                253
                
                
                
                464
                
                
                
                440Gain
      on sale of foreclosed real estate, net
                
                
                —
                
                
                
                —
                
                
                
                229
                
                
                
                —Other
      income
                
                
                109
                
                
                
                123
                
                
                
                306
                
                
                
                475Total
      non-interest income
                
                
                306
                
                
                
                502
                
                
                
                1,390
                
                
                
                1,279NON-INTEREST
      EXPENSETotal
      other than temporary impairment ("OTTI") charges on
    securities
                
                
                —
                
                
                
                5,138
                
                
                
                1,202
                
                
                
                10,263Less
      non-credit portion of OTTI recorded in other comprehensive
      loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      OTTI recognized in earnings
                
                
                —
                
                
                
                5,138
                
                
                
                1,202
                
                
                
                10,263Salaries
      and employee benefits
                
                
                2,388
                
                
                
                2,339
                
                
                
                7,136
                
                
                
                7,011Net
      occupancy expense
                
                
                534
                
                
                
                477
                
                
                
                1,647
                
                
                
                1,529Equipment
      expense
                
                
                90
                
                
                
                92
                
                
                
                273
                
                
                
                286FDIC
      assessment
                
                
                438
                
                
                
                330
                
                
                
                1,374
                
                
                
                1,598Data
      processing expense
                
                
                124
                
                
                
                119
                
                
                
                376
                
                
                
                329Other
                
                
                2,332
                
                
                
                842
                
                
                
                4,028
                
                
                
                2,615Total
      non-interest expense
                
                
                5,906
                
                
                
                9,337
                
                
                
                16,036
                
                
                
                23,631Income
      (loss) before provision for taxes
                
                
                240
                
                
                
                (2,678
                )
                
                
                2,934
                
                
                
                (2,401
                )(Benefit)
      provision for income taxes
                
                
                (1,391
                )
                
                
                (285
                )
                
                
                (476
                )
                
                
                1,358Net
      income (loss)
                
                $
                1,631
                
                
                $
                (2,393
                )
                
                $
                3,410
                
                
                $
                (3,759
                )Dividends
      on preferred stock
                
                
                1,200
                
                
                
                1,200
                
                
                
                3,600
                
                
                
                3,600Income
      (loss) allocated to common stockholders
                
                $
                431
                
                
                $
                (3,593
                )
                
                $
                (190
                )
                
                $
                (7,359
                )Net
      income (loss) per common share:Basic
                
                $
                .06
                
                
                $
                (.51
                )
                
                $
                (.03
                )
                
                $
                (1.04
                )Diluted
                
                $
                .06
                
                
                $
                (.51
                )
                
                $
                (.03
                )
                
                $
                (1.04
                )Number
      of shares used to compute net income (loss) per common
    share:Basic
                
                
                7,054
                
                
                
                7,054
                
                
                
                7,054
                
                
                
                7,054Diluted
                
                
                7,054
                
                
                
                7,054
                
                
                
                7,054
                
                
                
                7,054





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, 2010 and 2009


(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 December 31, 2008
                
                
                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 net of 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
                )
                
                
                
                
                
                $
                77,175Balance
      at December 31, 2009
                
                
                7,698
                
                
                
                60
                
                
                $
                770
                
                
                $
                1
                
                
                $
                150,985
                
                
                $
                (13,276
                )
                
                $
                (46,833
                )
                
                $
                (6,411
                )
                
                
                
                
                
                $
                85,236Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,410
                
                
                
                
                
                
                
                3,410
                
                
                
                3,410Other
      comprehensive income net of taxes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,543
                
                
                
                
                
                
                
                
                
                
                
                3,543
                
                
                
                3,543Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                6,953Cash
      dividends - Preferred Stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,600
                )
                
                
                
                
                
                
                
                
                
                
                (3,600
                )Balance
      at September 30, 2010
                
                
                7,698
                
                
                
                60
                
                
                $
                770
                
                
                $
                1
                
                
                $
                150,985
                
                
                $
                (9,733
                )
                
                $
                (47,023
                )
                
                $
                (6,411
                )
                
                
                
                
                
                $
                88,589





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 30,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  3,410
                  
                  
                  $
                  (3,759
                  )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Realized
      gains on investment securities
                  
                  
                  (464
                  )
                  
                  
                  (440
                  )Gain
      on sale of foreclosed real estate
                  
                  
                  (229
                  )
                  
                  
                  —Other
      than temporary impairment charges on securities
                  
                  
                  1,202
                  
                  
                  
                  10,263Net
      amortization of premiums of investment securities
                  
                  
                  1,709
                  
                  
                  
                  708Depreciation
      and amortization
                  
                  
                  387
                  
                  
                  
                  402Provision
      for loan losses
                  
                  
                  4,250
                  
                  
                  
                  1,550Decrease
      in accrued interest receivable
                  
                  
                  376
                  
                  
                  
                  1,395Decrease
      in other assets
                  
                  
                  4,571
                  
                  
                  
                  25,872Increase
      (decrease) in accrued interest payable and other
    liabilities
                  
                  
                  154
                  
                  
                  
                  (16,969
                  )Net
      cash provided by operating activities
                  
                  
                  15,366
                  
                  
                  
                  19,022Cash
      flows from investing activities:Investment
      securities available for salePurchases
                  
                  
                  (187,057
                  )
                  
                  
                  (205,666
                  )Sales,
      maturities and calls
                  
                  
                  189,074
                  
                  
                  
                  164,292Investment
      securities held to maturityMaturities
                  
                  
                  16
                  
                  
                  
                  16Net
      decrease in loans
                  
                  
                  41,046
                  
                  
                  
                  25,306Proceeds
      from sale of foreclosed real estate
                  
                  
                  12,548
                  
                  
                  
                  —Acquisition
      of premises and equipment
                  
                  
                  (151
                  )
                  
                  
                  (96
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  55,476
                  
                  
                  
                  (16,148
                  )Cash
      flows from financing activities:Net
      increase in non interest bearing deposits
                  
                  
                  10,704
                  
                  
                  
                  6,466Net
      decrease in interest bearing deposits
                  
                  
                  (42,758
                  )
                  
                  
                  (45,020
                  )Decrease
      in securities sold under agreements to repurchase
                  
                  
                  —
                  
                  
                  
                  (2,504
                  )Repayment
      of borrowings
                  
                  
                  (19,244
                  )
                  
                  
                  (10,662
                  )Dividends
      paid on preferred stock
                  
                  
                  (3,600
                  )
                  
                  
                  (3,600
                  )Net
      cash (used in) financing activities
                  
                  
                  (54,898
                  )
                  
                  
                  (55,320
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  15,944
                  
                  
                  
                  (52,446
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  60,803
                  
                  
                  
                  102,387Cash
      and cash equivalents at end of period
                  
                  $
                  76,747
                  
                  
                  $
                  49,941Supplemental
      disclosure of cash flow information:Cash
      used to pay interest
                  
                  $
                  9,595
                  
                  
                  $
                  17,039Cash
      used to pay income taxes, net of refunds
                  
                  $
                  (1,080
                  )
                  
                  $
                  1,330Schedule
      of non-cash investing activities:Transfer
      from loans to real estate owned
                  
                  $
                  12,318
                  
                  
                  $
                  —





The
accompanying notes are an integral part of these statements.


7


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements


September
30, 2010 and 2009


(unaudited)





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
wholly-owned 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").





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 2010 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 2009
Annual Report on Form 10-K.


8


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
2.  Earnings (Loss) Per Share





Basic earnings (loss) per common share
is calculated by dividing income (loss) available to common stockholders by the
weighted average common stock outstanding, excluding stock options from the
calculation. In calculating diluted earnings per common 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 months ended September 30, 2010 due to the expiration of all
previously granted options.  There is no effect for dilutive shares
for the nine months ended September 30, 2010 and the three and nine months ended
September 30, 2009 due to the net loss allocated to common stockholders. The
following tables present the Company's calculation of earnings (loss) per common
share for the periods indicated:





For The Three Months EndedSeptember 30, 2010
                  
                  
                  September 30, 2009Income (Loss)
                    (numerator)
                  
                  
                  Shares
                    (denominator)
                  
                  
                  Per share
                    amount
                  
                  
                  Income
                    (numerator)
                  
                  
                  Shares
                    (denominator)
                  
                  
                  Per share
                    amount(In
      thousands, except per share data)Basic
      earnings (loss) per common shareNet
      income (loss)
                  
                  $
                  1,631
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (2,393
                  )Dividends
      paid to preferred shareholders
                  
                  
                  (1,200
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,200
                  )Net
      income (loss) available to common stockholders
                  
                  
                  431
                  
                  
                  
                  7,054
                  
                  
                  $
                  .06
                  
                  
                  
                  (3,593
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.51
                  )Effect
      of dilutive securities options
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—Diluted
      earnings (loss) per common shareNet
      income (loss) available to common stockholders plus assumed
      conversions
                  
                  $
                  431
                  
                  
                  
                  7,054
                  
                  
                  $
                  .06
                  
                  
                  $
                  (3,593
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.51
                  )





For The Nine Months EndedSeptember 30, 2010
                
                
                September 30, 2009Income
                  (Loss)
                  (numerator)
                
                
                Shares
                  (denominator)
                
                
                Per
                  share
                  amount
                
                
                Income
                  (numerator)
                
                
                Shares
                  (denominator)
                
                
                Per share
                  amount(In
      thousands, except per share data)Basic
      earnings (loss) per common shareNet
      income (loss)
                
                $
                3,410
                
                
                
                
                
                
                
                
                $
                (3,759
                )Dividends
      paid to preferred shareholders
                
                
                (3,600
                )
                
                
                
                
                
                
                
                
                (3,600
                )Net
      (loss) available to common stockholders
                
                
                (190
                )
                
                
                7,054
                
                
                $
                (.03
                )
                
                
                (7,359
                )
                
                
                7,054
                
                
                $
                (1.04
                )Effect
      of dilutive securities options
                
                
                —
                
                
                
                —
                
                
                
                .—
                
                
                
                —
                
                
                
                —
                
                
                
                .—Diluted
      earnings (loss) per common shareNet
      (loss) available to common stockholders plus assumed
      conversions
                
                $
                (190
                )
                
                
                7,054
                
                
                $
                (.03
                )
                
                $
                (7,359
                )
                
                
                7,054
                
                
                $
                (1.04
                )


9


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
3. Loan Portfolio





The following table sets forth
information concerning the Company's loan portfolio by type of loan at the dates
indicated:





September 30, 2010
                
                
                December 31, 2009Amount
                
                
                % of
                  Total
                
                
                Amount
                
                
                % of
                  Total(Dollars
      in thousands)Commercial
      and professional loans
                
                $
                22,310
                
                
                
                5.9
                %
                
                $
                50,672
                
                
                
                11.7
                %Secured
      by real estate1-4
      family
                
                
                117,159
                
                
                
                31.1
                
                
                
                129,925
                
                
                
                30.1Multi
      family
                
                
                6,174
                
                
                
                1.6
                
                
                
                7,432
                
                
                
                1.7Non-residential
      (commercial)
                
                
                230,438
                
                
                
                61.2
                
                
                
                242,927
                
                
                
                56.4Consumer
                
                
                793
                
                
                
                0.2
                
                
                
                396
                
                
                
                0.1Total
      loans
                
                
                376,874
                
                
                
                100.0
                %
                
                
                431,352
                
                
                
                100.0
                %Deferred
      loan fees
                
                
                (951
                )
                
                
                
                
                
                
                (1,003
                )Allowance
      for loan losses
                
                
                (14,605
                )
                
                
                
                
                
                
                (11,416
                )Loans,
      net
                
                $
                361,318
                
                
                
                
                
                
                $
                418,933





The Bank had $2.0 million and $13.9
million of non accrual loans as of September 30, 2010 and December 31, 2009,
respectively, and no loans delinquent more than ninety days and still accruing
interest at September 30, 2010 and December 31, 2009.  During the
three months ended March 31, 2010, the Bank foreclosed on a real estate loan in
the amount of $12.3 million.  In April 2010, the Bank sold its
interest in the real estate that had secured the loan for $12.6
million.





Average impaired loans for the nine
months ended September 30, 2010 and 2009 totalled approximately $4.9 million and
$6.9 million, respectively. Interest income that would have been recognized had
these loans performed in accordance with their contractual terms totalled
$422,000 and $1.2 million, respectively.  Average impaired loans for
the three months ended September 30, 2010 and 2009 totalled approximately $2.0
million and $13.5 million, respectively. Interest income that would have been
recognized had these loans performed in accordance with their contractual terms
totalled $62,000 and $816,000, respectively.





Impaired and non-accrual loan balances
were the same as of September
30, 2010.





Subsequent to September 30, 2010, one
of our loans totalling approximately $900,000 was brought current by the
borrower and returned to accrual status.  The other non-accrual loan
was restructured in such a way that management does not anticipate any
additional loss.


10


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
3. - (continued)





The following table sets forth
information concerning activity in the Company's allowance for loan losses for
the indicated periods.





For The Three Months Ended
                
                
                For The Nine Months EndedSeptember 30,
                  2010
                
                
                September 30,
                  2009
                
                
                September 30,
                  2010
                
                
                September 30,
                  2009(In
      thousands)Balance
      at beginning of period
                
                $
                13,105
                
                
                $
                9,757
                
                
                $
                11,416
                
                
                $
                9,204Provision
      for loan losses
                
                
                1,500
                
                
                
                1,000
                
                
                
                4,250
                
                
                
                1,550Charge-offs
                
                
                —
                
                
                
                (1
                )
                
                
                (1,066
                )
                
                
                (104
                )Recoveries
                
                
                —
                
                
                
                —
                
                
                
                5
                
                
                
                106Balance
      at end of period
                
                $
                14,605
                
                
                $
                10,756
                
                
                $
                14,605
                
                
                $
                10,756





Note
4. Investment Securities





The following is a summary of held to
maturity investment securities:





September 30, 2010Amortized
                    Cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    value(In
      thousands)U.S.
      Government Agencies
                  
                  $
                  324
                  
                  
                  $
                  1
                  
                  
                  $
                  (3
                  )
                  
                  $
                  322





December 31, 2009Amortized
                    Cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    value(In
      thousands)U.S.
      Government Agencies
                  
                  $
                  340
                  
                  
                  $
                  —
                  
                  
                  $
                  (3
                  )
                  
                  $
                  337


11


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





The following is a summary of
available-for-sale investment securities:





September 30, 2010Amortized
                    Cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    value(In
      thousands)U.S.
      Treasury Notes
                  
                  $
                  80,112
                  
                  
                  $
                  183
                  
                  
                  $
                  —
                  
                  
                  $
                  80,295U.S.
      Government Agencies
                  
                  
                  55,416
                  
                  
                  
                  1,065
                  
                  
                  
                  (8
                  )
                  
                  
                  56,473Mortgage-backed
      securities
                  
                  
                  129,511
                  
                  
                  
                  4,134
                  
                  
                  
                  (351
                  )
                  
                  
                  133,294Corporate
      notes
                  
                  
                  17,834
                  
                  
                  
                  1,074
                  
                  
                  
                  (960
                  )
                  
                  
                  17,948Single
      Issuer Trust Preferred CDO
                  
                  
                  1,023
                  
                  
                  
                  —
                  
                  
                  
                  (363
                  )
                  
                  
                  660Pooled
      Trust Preferred CDO
                  
                  
                  6,459
                  
                  
                  
                  —
                  
                  
                  
                  (5,853
                  )
                  
                  
                  606Municipal
      securities
                  
                  
                  2,010
                  
                  
                  
                  710
                  
                  
                  
                  —
                  
                  
                  
                  2,720Auction
      rate securities
                  
                  
                  73,993
                  
                  
                  
                  48
                  
                  
                  
                  (12,500
                  )
                  
                  
                  61,541Marketable
      equity securities and other
                  
                  
                  2,870
                  
                  
                  
                  150
                  
                  
                  
                  —
                  
                  
                  
                  3,020Totals
                  
                  $
                  369,228
                  
                  
                  $
                  7,364
                  
                  
                  $
                  (20,035
                  )
                  
                  $
                  356,557





December 31, 2009Amortized
                    Cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    value(In
      thousands)U.S.
      Treasury Notes
                  
                  $
                  50,236
                  
                  
                  $
                  35
                  
                  
                  $
                  (65
                  )
                  
                  $
                  50,206U.S.
      Government Agencies
                  
                  
                  76,259
                  
                  
                  
                  59
                  
                  
                  
                  (793
                  )
                  
                  
                  75,525Mortgage-backed
      securities
                  
                  
                  134,810
                  
                  
                  
                  1,943
                  
                  
                  
                  (710
                  )
                  
                  
                  136,043Corporate
      notes
                  
                  
                  19,029
                  
                  
                  
                  1,011
                  
                  
                  
                  (2,311
                  )
                  
                  
                  17,729Single
      Issuer Trust Preferred CDO
                  
                  
                  1,021
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,021Pooled
      Trust Preferred CDO
                  
                  
                  6,463
                  
                  
                  
                  —
                  
                  
                  
                  (6,313
                  )
                  
                  
                  150Municipal
      securities
                  
                  
                  1,973
                  
                  
                  
                  198
                  
                  
                  
                  —
                  
                  
                  
                  2,171Auction
      rate securities
                  
                  
                  78,895
                  
                  
                  
                  —
                  
                  
                  
                  (11,953
                  )
                  
                  
                  66,942Marketable
      equity securities and other
                  
                  
                  7,648
                  
                  
                  
                  69
                  
                  
                  
                  (26
                  )
                  
                  
                  7,691Totals
                  
                  $
                  376,334
                  
                  
                  $
                  3,315
                  
                  
                  $
                  (22,171
                  )
                  
                  $
                  357,478





12


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





Management uses a multi-factor approach
to determine whether each investment security in an unrealized loss position is
other-than-temporarily impaired ("OTTI"). An unrealized loss position exists
when the current fair value of an investment is less than its amortized cost
basis.  The valuation factors utilized by management incorporate the
ideas and concepts outlined in relevant accounting guidance.  These
include such factors as:





*The
length of time and the extent to which the market value has been less than
cost;





*The
financial condition of the issuer of the security as well as the near and
long-term prospect for the issuer;





*The
rating of the security by a national rating agency;





*Historical
volatility and movement in the fair market value of the security;
and





*Adverse
conditions relative to the security, issuer or industry.





In accordance with ASC 320-10,
Investment - Debt and Equity Securities, Management's impairment analysis for
the corporate and auction rate securities that were in a loss position as of
September 30, 2010 began with management's determination that it had the intent
to hold these securities for sufficient time to recover the cost basis.
Management also concluded that it was unlikely that it would be required to sell
any of the securities before recovery of the cost basis.





At September 30, 2010 and December 31,
2009, the amortized cost of our auction rate securities was approximately $74.0
million and $78.9 million, respectively.  The fair value of the
auction rate securities decreased by approximately $5.4 million to $61.5 million
at September 30, 2010 from $66.9 million at December 31, 2009, primarily due to
these sale of $3.7 million of the securities.  The Bank owns two
auction rate securities which have Federal Home Loan Mortgage Corporation
("Freddie Mac") preferred shares as the underlying collateral. In June 2010,
Freddie Mac was delisted from the New York Stock Exchange resulting in a 39%
decline in the price of the shares.  Since December 31, 2009, the
value of the collateral has decreased by more than 70% with little expectation
of recovery in the near term. Accordingly, we recorded a credit related OTTI
charge of $1.2 million on the two auction rate securities at June 30, 2010 which
reduced the amortized cost of these securities to the fair value at June 30,
2010.





The fair value of the auction rate
securities is determined by management valuing the underlying
security.  The auction rate securities allow for conversion to the
underlying preferred security after two failed auctions.  As of
September 30, 2010, there have been more than two failed auctions for all
outstanding auction rate securities.  It is our intention to continue
to hold these securities and not convert to the underlying preferred
securities.  We also perform a discounted cash flow analysis, but we
considered the market value of the underlying preferred shares to be more
objective and relevant in pricing auction rate securities.


13


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





In determining whether there is OTTI,
management considers the factors noted above.  The financial
performance indicators we review include, but are not limited to, net earnings,
change in liquidity, and change in cash from operating activities, and, for
money center banks, the regulatory capital ratios and the allowance for loan
losses to the nonperforming loans.  Through September 30, 2010, the
auction rate securities have continued to pay interest at the highest rate as
stipulated in the original prospectus, except for Freddie Mac. Currently, the
interest rate paid approximates the rate paid on money market deposit
accounts.





At both September 30, 2010 and December
31, 2009, we had six auction rate securities with an aggregate fair market value
of $15.7 million and $19.4 million, respectively, which were below investment
grade.





Based upon our methodology for
determining the fair value of the auction rate securities, we concluded that
except as noted above, as of September 30, 2010, there were no other credit
related losses and the unrealized loss for the auction rate securities is due to
the market interest volatility, the continued illiquidity of the auction rate
markets, and uncertainty in the financial markets as there has not been a
deterioration in the credit quality of the issuer of the auction rate securities
or a downgrade of additional auction rate securities from investment
grade.  It is not more likely than not that the Company would be
required to sell the auction rate securities prior to recovery of the unrealized
loss, nor does the Company intend to sell the securities at the present
time.





During the year ended December 31,
2009, approximately $18.0 million of auction rate securities were redeemed with
no gain or loss recognized. During the nine months ended September 30, 2010,
$3.7 million of auction rate securities were sold at auction with no gain or
loss recognized.





At September 30, 2010 and December 31,
2009, we had one pooled trust preferred CDO ("TPCDO") with an amortized cost of
$6.5 million (after OTTI charges of $3.5 million in fiscal year 2009), and a
fair value of $606,000 and $150,000, respectively.  We own a Class B
tranche of the TPCDO, which was considered below investment grade at both
September 30, 2010 and December 31, 2009.  We obtain discounted cash
flow scenarios from independent third parties and use the most conservative
result in order to value the TPCDO, which we believe also reflects the most
likely expected cash flow.  Based upon the discounted cash flow
analysis, no additional credit related OTTI charges were recognized during the
three or nine months ended September 30, 2010.





There have been no credit rating down
grades on any of our credit securities subsequent to December 31,
2009.


14


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





At September 30, 2010 and December 31,
2009, the Company owned preferred and common stock (collectively "equity
securities").  During the nine-month period ended September 30, 2010,
we disposed of marketable equity and other securities with a cost basis of
approximately $4.8 million, realizing a gain of approximately $6,000 on the
sale. The fair value of the remaining equity securities at September 30, 2010
increased by approximately $300,000 from the fair value at December 31,
2009.





The Company has investments in certain
debt securities that have unrealized losses or may be otherwise impaired, but an
OTTI 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 that we consider temporarily impaired have
been in a continuous unrealized loss position at September 30, 2010 (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
                  
                  $
                  14,993
                  
                  
                  $
                  8
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  14,993
                  
                  
                  $
                  8Mortgage-backed
      securities
                  
                  
                  24,417
                  
                  
                  
                  127
                  
                  
                  
                  8,215
                  
                  
                  
                  224
                  
                  
                  
                  32,632
                  
                  
                  
                  351Corporate
      notes
                  
                  
                  8,301
                  
                  
                  
                  960
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8,301
                  
                  
                  
                  960Single
      Issuer Trust Preferred CDO
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  660
                  
                  
                  
                  363
                  
                  
                  
                  660
                  
                  
                  
                  363Pooled
      Trust Preferred CDO
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  606
                  
                  
                  
                  5,853
                  
                  
                  
                  606
                  
                  
                  
                  5,853Auction
      rate securities
                  
                  
                  4,442
                  
                  
                  
                  723
                  
                  
                  
                  54,523
                  
                  
                  
                  11,777
                  
                  
                  
                  58,965
                  
                  
                  
                  12,500Total
      temporarily impaired scurities
                  
                  $
                  52,153
                  
                  
                  $
                  1,818
                  
                  
                  $
                  64,004
                  
                  
                  $
                  18,217
                  
                  
                  $
                  116,157
                  
                  
                  $
                  20,035


15


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





The Company had a total of 39 debt
securities with a fair market value of $116.2 million which were temporarily
impaired at September 30, 2010.  The total unrealized loss on these
securities was $20.0 million, which is attributable to the market interest
volatility, the continued illiquidity of the debt markets, and uncertainty in
the financial markets.  It is not more likely than not that we would
sell these securities before maturity, and we have the intent to hold all of
these securities to maturity and will not be required to sell these securities,
due to our ratio of cash and cash equivalents of approximately 8.9% of total
assets at September 30, 2010.  Therefore, the unrealized losses
associated with these securities 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, 2010 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, 2010Available for Sale
                    
                    
                    Held to MaturityAmortized
                      Cost
                    
                    
                    Fair
                      Value
                    
                    
                    AmortizedCost
                    
                    
                    Fair
                      Value(In
      thousands)Due
      in one year or less
                    
                    $
                    55,634
                    
                    
                    $
                    55,589
                    
                    
                    $
                    —
                    
                    
                    $
                    —Due
      after one through five years
                    
                    
                    52,457
                    
                    
                    
                    52,222
                    
                    
                    
                    —
                    
                    
                    
                    —Due
      after five through ten years
                    
                    
                    44,372
                    
                    
                    
                    45,897
                    
                    
                    
                    —
                    
                    
                    
                    —Due
      after ten years
                    
                    
                    139,902
                    
                    
                    
                    138,288
                    
                    
                    
                    324
                    
                    
                    
                    322Auction
      rate securities
                    
                    
                    73,993
                    
                    
                    
                    61,541
                    
                    
                    
                    —
                    
                    
                    
                    —Marketable
      equity securities and other
                    
                    
                    2,870
                    
                    
                    
                    3,020
                    
                    
                    
                    —
                    
                    
                    
                    —Totals
                    
                    $
                    369,228
                    
                    
                    $
                    356,557
                    
                    
                    $
                    324
                    
                    
                    $
                    322





Gross gains realized on the sales of
investment securities for the three months ended September 30, 2010, and 2009
were approximately $72,000 and $253,000, respectively.  Gross losses
realized were approximately $10,000 and zero for the three months ended
September 30, 2010 and 2009, respectively.





Gross gains realized on the sales of
investment securities for the nine months ended September 30, 2010, and 2009
were approximately $516,000 and $449,000, respectively.  Gross losses
realized were approximately $52,000 and $9,000 for the nine months ended
September 30, 2010 and 2009, respectively.





At both September 30, 2010 and December
31, 2009, securities sold under agreements to repurchase with a book value of
approximately $50.0 million were outstanding.  The book value of the
securities pledged for these repurchase agreements was $55.6 million at the
respective dates.  As of September 30, 2010 and December 31, 2009, the
Company did not own investment securities of any one issuer where the carrying
value exceeded 10% of shareholders' equity.


16


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
5. Deposits





The following table summarizes the
composition of the average balances of major deposit categories:





Nine Months Ended
                    September 30, 2010
                  
                  
                  Twelve Months Ended
                    December 31, 2009Average
                    Amount
                  
                  
                  Average
                    Yield
                  
                  
                  Average
                    Amount
                  
                  
                  Average
                    Yield(Dollars in thousands)Demand
      deposits
                  
                  $
                  69,545
                  
                  
                  
                  —
                  
                  
                  $
                  56,544
                  
                  
                  
                  —NOW
      and money market
                  
                  
                  25,942
                  
                  
                  
                  0.28
                  %
                  
                  
                  23,900
                  
                  
                  
                  0.31
                  %Savings
      deposits
                  
                  
                  200,178
                  
                  
                  
                  0.78
                  
                  
                  
                  180,729
                  
                  
                  
                  1.24Time
      deposits
                  
                  
                  404,980
                  
                  
                  
                  1.56
                  
                  
                  
                  426,892
                  
                  
                  
                  2.32Total
      deposits
                  
                  $
                  700,645
                  
                  
                  
                  1.13
                  %
                  
                  $
                  688,065
                  
                  
                  
                  1.78
                  %





Note
6. 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):





For The Nine Months EndedSeptember 30, 2010
                    
                    
                    September 30, 2009Before 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) arising during period
                    
                    $
                    5,447
                    
                    
                    $
                    (2,327
                    )
                    
                    $
                    3,120
                    
                    
                    $
                    20,942
                    
                    
                    $
                    (8,377
                    )
                    
                    $
                    12,565Less
      reclassification adjustment for gains (losses) realized in net
      income
                    
                    
                    (738
                    )
                    
                    
                    315
                    
                    
                    
                    (423
                    )
                    
                    
                    (9,823
                    )
                    
                    
                    3,929
                    
                    
                    
                    (5,894
                    )Unrealized
      gain (loss) on investment securities
                    
                    
                    6,185
                    
                    
                    
                    (2,642
                    )
                    
                    
                    3,543
                    
                    
                    
                    30,765
                    
                    
                    
                    (12,306
                    )
                    
                    
                    18,459Change
      in minimum pension liability
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    123
                    
                    
                    
                    —
                    
                    
                    
                    123Other
      comprehensive income (loss), net
                    
                    $
                    6,185
                    
                    
                    $
                    (2,642
                    )
                    
                    $
                    3,543
                    
                    
                    $
                    30,888
                    
                    
                    $
                    (12,306
                    )
                    
                    $
                    18,582


17


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
7. Employee Benefit Plans





Until it was frozen and terminated on
December 31, 2009, the Company had 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, 2009.





For
      The
                      Three
      Months Ended
                      September
      30,
                    
                    
                    For
      The
                      Nine
      Months Ended
                      September
      30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Service
      cost
                    
                    $
                    —
                    
                    
                    $
                    103,250
                    
                    
                    $
                    —
                    
                    
                    $
                    309,750Interest
      cost
                    
                    
                    —
                    
                    
                    
                    64,250
                    
                    
                    
                    —
                    
                    
                    
                    192,750Expected
      return on plan assets
                    
                    
                    —
                    
                    
                    
                    (70,500
                    )
                    
                    
                    —
                    
                    
                    
                    (211,500
                    )Amortization
      and Deferral:Prior
      service cost
                    
                    
                    —
                    
                    
                    
                    4,500
                    
                    
                    
                    —
                    
                    
                    
                    13,500Loss
                    
                    
                    —
                    
                    
                    
                    36,500
                    
                    
                    
                    —
                    
                    
                    
                    109,500Net
      periodic pension cost
                    
                    $
                    —
                    
                    
                    $
                    138,000
                    
                    
                    $
                    —
                    
                    
                    $
                    414,000





During the fiscal year ending December
31, 2010 we intend to contribute the amount necessary to fund all Plan benefits
prior to their distribution under the termination of the Plan.  Our
actuary estimates the necessary contribution to be $935,000.





The Pension Protection Act of 2006 (the
"PPA") changed 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 nine
months ended September 30, 2010 and 2009, we contributed approximately $112,000
and $1.1 million, respectively, to the Plan.





Note
8.  Fair Value of Financial Instruments





The Company is required to disclose the
estimated fair value of its assets and liabilities considered to be financial
instruments.  For the Company, as for most financial institutions, the
majority of its assets and liabilities are considered financial
instruments.  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.


18


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
8. - (continued)





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, 2010 and December 31, 2009 are outlined
below.





September
      30, 2010
                    
                    
                    December
      31, 2009Carrying
                      amount
                    
                    
                    Estimated
                      fair
      value
                    
                    
                    Carrying
                      amount
                    
                    
                    Estimated
                      fair
      value(In
      thousands)Investment
      securities
                    
                    $
                    356,881
                    
                    
                    $
                    356,879
                    
                    
                    $
                    357,818
                    
                    
                    $
                    357,815Loans,
      net of unearned income
                    
                    
                    375,923
                    
                    
                    
                    383,403
                    
                    
                    
                    430,349
                    
                    
                    
                    428,990Time
      Deposits
                    
                    
                    389,978
                    
                    
                    
                    391,753
                    
                    
                    
                    427,777
                    
                    
                    
                    429,449Repurchase
      Agreements
                    
                    
                    50,000
                    
                    
                    
                    49,846
                    
                    
                    
                    50,000
                    
                    
                    
                    49,842Borrowings
                    
                    
                    11,760
                    
                    
                    
                    12,201
                    
                    
                    
                    31,004
                    
                    
                    
                    31,756Subordinated
      debt
                    
                    
                    22,681
                    
                    
                    
                    22,681
                    
                    
                    
                    22,681
                    
                    
                    
                    22,681





For cash and cash equivalents, the
recorded book value of $76.7 million and $60.8 million at September 30, 2010 and
December 31, 2009, respectively, 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.





The net loan portfolio 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 (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.


19


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
8. - (continued)





The fair value of interest rate caps,
included in borrowings, 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 was approximately $19,000 and $117,000 at September 30, 2010 and December
31, 2009, respectively.





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





The Company determines fair value under
the guidance of FASB ASC 820, Fair Value Measurements and Disclosure, ("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.


20


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
8. - (continued)





Level 1 securities generally include
equity securities valued based on quoted market prices in active markets. Level
2 instruments include U.S. government agency obligations, state and municipal
bonds, mortgage-backed securities, collateralized mortgage obligations and
corporate bonds. For these securities, the Company obtains fair value
measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things. Level 3 securities available for sale consist of
auction rate securities and instruments that are not readily marketable and may
only be redeemed with the issuer at par, which is the stated value, such as
Federal Home Loan Bank and Federal Reserve Bank stock. The auction rate
securities are valued as described in Note 4. Investment
Securities.





Assets measured at fair value during
fiscal year 2010 and fiscal year 2009 are summarized below.





At September 30, 2010
                            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,
                            2010(Dollars
      in thousands)AssetsImpaired
      loans
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          2,000
                          
                          
                          $
                          2,000
                          (1)Investment
      securities available for sale
                          
                          
                          87,240
                          
                          
                          
                          207,776
                          
                          
                          
                          61,541
                          
                          
                          
                          356,557
                          (2)Total
                          
                          $
                          87,240
                          
                          
                          $
                          207,776
                          
                          
                          $
                          63,541
                          
                          
                          $
                          358,557





(1)
Non-recurring basis


(2)
Recurring basis





The above table includes $12.7 million
in net unrealized losses on the Company's available for sale
securities.  The Company has reviewed its investment portfolio at
September 30, 2010 and has determined that the unrealized losses are
temporary.





The fair value of the interest rate
caps is approximately $19,000 and valued as a Level 3 input.  Further
disclosures are not included because they were not deemed
material.


21


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
8. - (continued)





At December 31, 2009
                        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
                        December 31,
                        2009(Dollars in thousands)AssetsImpaired
      loans
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      15,468
                      
                      
                      $
                      15,468
                      (1)Investment
      securities available for sale
                      
                      
                      56,006
                      
                      
                      
                      235,793
                      
                      
                      
                      66,942
                      
                      
                      
                      358,741
                      (2)Total
      assets
                      
                      $
                      56,006
                      
                      
                      $
                      235,793
                      
                      
                      $
                      82,410
                      
                      
                      $
                      374,209





(1)
Non-recurring basis


(2)
Recurring basis





The above table includes $18.9 million
in net unrealized losses on the Company's available-for-sale
securities.  The Company reviewed its investment portfolio at December
31, 2009, and determined that the unrealized losses, except as discussed in
Note. 4 - Investment Securities, were temporary.





The fair value of the interest rate
caps was approximately $117,000 and valued as a Level 3
input.  Further disclosures are not included because they were not
deemed material.





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





The following table presents a
reconciliation for assets measured at fair value on a recurring basis for which
the Company has utilized significant unobservable inputs (Level 3).





(Dollars in thousands)
                  
                  Investment
                    Securities
                    Available
                    for SaleBalance,
      January 1, 2010
                  
                  $
                  66,942Total
      gains/losses (realized/unrealized)Included
      in earnings
                  
                  
                  —Included
      in other comprehensive income
                  
                  
                  (499
                  )Purchases,
      Sales, Issuances and Settlements
                  
                  
                  (3,700
                  )Redemptions
      (Transfer to Other Real Estate Owned)
                  
                  
                  —Interest
                  
                  
                  —Other
      than temporary impairment expense
                  
                  
                  (1,202
                  )Capital
      deductions for operating expenses
                  
                  
                  —Balance,
      September 30, 2010
                  
                  $
                  61,541The
      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, 2010
                  
                  $
                  —


22


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
9.  New Accounting Pronouncements





In January 2010, the FASB issued
Accounting Standards Update ("ASU") No. 2010-06, which amends the authoritative
accounting guidance under ASC Topic 820.  The update requires the
following additional disclosures: (1) separately disclose the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers; and (2) separately disclose
information about purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using Level 3.  The update
provides for amendments to existing disclosures as follows: (1)  fair
value measurement disclosures are to be made for each class of assets and
liabilities; and (2) disclosures are to be made about valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements.  The update also includes conforming amendments to
guidance on employers disclosures about postretirement benefit plan
assets.  The update is effective for interim and annual reporting
periods beginning after December 15, 2009, or January 1, 2010 as to the Company,
except for the disclosures about purchases, sales, issuances and settlements in
the roll forward of activity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. Adoption of this update did not have a material effect on the Company's
results of operations or financial condition.




In February 2010, the FASB issued ASU
No. 2010-09, which amends the authoritative accounting guidance under ASC Topic
855 Subsequent Events.  The update provides that an SEC filer is
required to evaluate subsequent events through the date financial statements are
issued.  However, an SEC filer is not required to disclose the date
through which subsequent events have been evaluated. The update was effective as
of the date of issuance.  Adoption of this update did not have a
material effect on the Company's results of operations or financial
condition.





In July 2010, the FASB issued ASU No.
2010-20 which amends the authoritative accounting guidance under topic 310,
Receivables. The guidance amends existing disclosures to provide financial
statement users with greater transparency about an entity's allowance for loan
and lease losses and the credit quality of its loan and lease portfolio. Under
the new guidelines, the allowance for loan and lease losses and fair value are
to be disclosed by portfolio segment, while credit quality information, impaired
loans and leases and non-accrual status are to be presented by class of loans
and leases. Disclosure of the nature and extent, the financial impact and
segment information of troubled debt restructurings will also be required. The
disclosures are to be presented at the level of disaggregation that management
uses when assessing and monitoring the loan and lease portfolio's risk and
performance.  This guidance is effective for interim and annual
reporting periods ending on or after December 15, 2010. Adoption of this
guidance is not expected to have a material effect on the Company's results of
operations or financial condition.





Note
10.  Subsequent Events





We evaluated subsequent events under
ASC Topic 855, Subsequent Events.  We did not identify any items which
would require disclosure in or adjustment to the interim financial
statements.


23





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
Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). 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 SOX 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 SOX 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,
which would have required them to first comply with the provisions of Section
404(b) of SOX with respect to fiscal years ending on or after June 15,
2010.  Section 404(b) of SOX requires a registrant to provide an
attestation report on management's assessment of internal controls over
financial reporting by the registrant's external auditor.  Therefore,
the Company would have been required to obtain an external auditor's attestation
report on internal control over financial reporting for the fiscal year ending
December 31, 2010.  However, on July 21, 2010, President Obama signed
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act") into law.  The Dodd-Frank Act includes a provision which
permanently exempts non-accelerated filers, including the Company, from the
requirement to obtain an external audit on the effectiveness of internal
financial reporting controls provided in Section 404(b) of
SOX.  Disclosure of management's attestations on internal control over
financial reporting under Section 404(a) of SOX is still required.





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.


24


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





Executive
Summary





We are a Delaware corporation organized
in March 1979, and a bank holding company registered under the Bank Holding
Company Act of 1956.  We acquired The Berkshire Bank (the "Bank"), our
indirect wholly-owned subsidiary in March 1999.  The Bank was
organized in 1987 as a New York State chartered commercial bank. Our principal
activity is the ownership and management of the Bank.  Our activities
are primarily funded by cash on hand, rental income, income from our portfolio
of investment securities and dividends, if any, received from the
Bank.  Our common stock is traded on the NASDAQ Stock Market under the
symbol "BERK."





The Bank's principal business consists
of gathering deposits from the general public and investing those deposits
together with funds generated from ongoing operations and borrowings, primarily
in residential and commercial loans, debt obligations issued by the U.S.
Government and its agencies, debt obligations of business corporations, and
mortgage-backed securities.  The Bank operates from seven
deposit-taking offices in New York City, four deposit-taking offices in Orange
and Sullivan Counties, New York, and two deposit-taking offices in Ridgefield
and Teaneck, New Jersey.  The Bank's revenues are derived principally
from interest on loans, and interest and dividends on investments in the
securities portfolio.  The Bank's primary regulator is the New York
State Banking Department. Deposits are insured to the maximum allowable amount
by the Federal Deposit Insurance Corporation. The Bank is a member of the
Federal Home Loan Bank system.





Our results of operations depend
primarily on net interest income, which is the difference between the income
earned on our interest-earning assets and the cost of our interest-bearing
liabilities.  Net interest income is the result of our interest rate
margin, which is the difference between the average yield earned on
interest-earning assets and the average cost of interest-bearing liabilities,
adjusted for the difference in the average balance of interest-earning assets as
compared to the average balance of interest-bearing liabilities.  We
also generate non-interest income from loan fees, service charges on deposit
accounts, mortgage servicing fees, and other fees, dividends on Federal Home
Loan Bank of New York ("FHLB-NY") stock and net gains and losses on sales of
securities and loans. Our operating expenses consist principally of employee
compensation and benefits, occupancy and equipment costs, other general and
administrative expenses and income tax expense.  Our results of
operations also can be significantly affected by our periodic provision for loan
losses and specific provision for losses on loans.





On July 21, 2010, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") was
signed into law by President Obama.  The Dodd-Frank Act represents a
comprehensive overhaul of the financial services industry within the United
States, establishes the new federal Bureau of Consumer Financial Protection (the
"BCFP"), and will require the BCFP and other federal agencies to implement many
new and significant rules and regulations.  At this time, it is
difficult to predict the extent to which the Dodd-Frank Act or the resulting
rules and regulations will impact the Company's business.  Compliance
with these new laws and regulations will likely result in additional costs, and
may adversely impact the Company's results of operations, financial condition or
liquidity.


25


Our investment policy, which is
approved by the Board of Directors, is designed primarily to manage the interest
rate sensitivity of our overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement our
lending activities and to provide and maintain liquidity.  In
establishing our investment strategies, we consider our business and growth
strategies, the economic environment, out interest rate risk exposure, our
interest rate sensitivity "gap" position, the types of securities to be held,
and other factors. We classify our investment securities as available for
sale.





We recorded a provision for loan losses
of $1.5 million and $4.3 million during the three and nine-month periods ended
September 30, 2010, respectively, compared to a provision for loan losses of
$1.0 million and $1.6 million during the three and nine-month periods ended
September 30, 2009, respectively. The increase in the provision for loan losses
was deemed necessary as a result of the regular quarterly analysis of the
allowance for loan losses. The regular quarterly analysis is based on
management's evaluation of the risk inherent in the various components of the
loan portfolio and other factors, including historical loan loss experience
(which is updated at least annually), changes in the composition and volume of
the portfolio, collection policies and experience, trends in the volume of
non-accrual loans and regional and national economic conditions. See "Provision
for Loan Losses" below in this Item 2 for further discussion of the allowance
for loan losses.





In June 2010, we recorded a $1.2
million other than temporary impairment ("OTTI") charge on two auction rate
securities which have Freddie Mac preferred shares as the underlying
collateral.  The OTTI charge was deemed appropriate due to the
significant decline in the price of the Freddie Mac shares with little
expectation of recovery in the near term.  (See Note
4).


26


Net income, before dividends on our
Series A Preferred Stock, for the three and nine months ended September 30, 2010
was approximately $1.6 million and $3.4 million, respectively, compared to a net
loss of approximately $2.4 million and $3.8 million for the three and nine
months ended September 30, 2009.  Net income allocated to common
stockholders, after dividends on our Series A Preferred Stock, was $431,000 for
the three months ended September 30, 2010 and a net loss of $190,000 for the
nine months ended September 30, 2010, compared to a net loss allocated to common
stockholders of approximately $3.6 million and $7.4 million for the three and
nine months ended September 30, 2009, respectively.





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. and
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 ("GAAP") 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.  See "Provision for Loan
Losses" below in this Item 2 for further discussion of the allowance for loan
losses.


27


Goodwill is 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, the reporting
unit.  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 units exceed 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 fair value, which would then become the new carrying
value.  As of December 31, 2009, the goodwill was evaluated for
impairment with no recognition of impairment considered
necessary.  The fair value of the reporting unit was substantially
greater than the carrying value at the date of valuation.  Management
determined that there were no additional impairment indicators subsequent to the
December 31, 2009 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
operations.


28


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
      30,2010
                      
                      
                      2009Average
                        Balance
                      
                      
                      Interest
                        and
                        Dividends
                      
                      
                      Average
                        Yield/Rate
                      
                      
                      Average
                        Balance
                      
                      
                      Interest
                        and
                        Dividends
                      
                      
                      Average
                        Yield/Rate(Dollars
      in Thousands)INTEREST-EARNING
      ASSETS:Loans
      (1)
                      
                      $
                      379,983
                      
                      
                      $
                      6,295
                      
                      
                      
                      6.63
                      %
                      
                      $
                      440,146
                      
                      
                      $
                      7,290
                      
                      
                      
                      6.63
                      %Investment
      securities
                      
                      
                      354,049
                      
                      
                      
                      3,542
                      
                      
                      
                      4.00
                      
                      
                      
                      315,395
                      
                      
                      
                      3,486
                      
                      
                      
                      4.42Other
      (2)(5)
                      
                      
                      64,543
                      
                      
                      
                      41
                      
                      
                      
                      0.25
                      
                      
                      
                      56,314
                      
                      
                      
                      129
                      
                      
                      
                      0.92Total
      interest-earning assets
                      
                      
                      798,575
                      
                      
                      
                      9,878
                      
                      
                      
                      4.95
                      
                      
                      
                      811,855
                      
                      
                      
                      10,905
                      
                      
                      
                      5.37Noninterest-earning
      assets
                      
                      
                      59,125
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      55,456Total
      Assets
                      
                      $
                      857,700
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      867,311INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                      
                      
                      222,710
                      
                      
                      
                      333
                      
                      
                      
                      0.60
                      %
                      
                      
                      201,817
                      
                      
                      
                      533
                      
                      
                      
                      1.06
                      %Time
      deposits
                      
                      
                      392,832
                      
                      
                      
                      1,415
                      
                      
                      
                      1.44
                      
                      
                      
                      414,620
                      
                      
                      
                      2,028
                      
                      
                      
                      1.96Other
      borrowings
                      
                      
                      84,918
                      
                      
                      
                      790
                      
                      
                      
                      3.72
                      
                      
                      
                      115,044
                      
                      
                      
                      1,187
                      
                      
                      
                      4.13Total
      interest-bearingliabilities
                      
                      
                      700,460
                      
                      
                      
                      2,538
                      
                      
                      
                      1.45
                      
                      
                      
                      731,481
                      
                      
                      
                      3,748
                      
                      
                      
                      2.05Demand
      deposits
                      
                      
                      70,865
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      56,821Noninterest-bearing
      liabilities
                      
                      
                      7,603
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      7,611Stockholders'
      equity (5)
                      
                      
                      78,772
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      71,398Total
      liabilities andstockholders'
      equity
                      
                      $
                      857,700
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      867,311Net
      interest income
                      
                      
                      
                      
                      
                      $
                      7,340
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      7,157Interest-rate
      spread (3)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.50
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.32
                      %Net
      interest margin (4)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.68
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.53
                      %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                      
                      
                      1.14
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.11





(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





For The Nine Months Ended September
      30,2010
                    
                    
                    2009Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate(Dollars
      in Thousands)INTEREST-EARNING
      ASSETS:Loans
      (1)
                    
                    $
                    397,356
                    
                    
                    $
                    19,301
                    
                    
                    
                    6.48
                    %
                    
                    $
                    450,176
                    
                    
                    $
                    22,510
                    
                    
                    
                    6.67
                    %Investment
      securities
                    
                    
                    361,229
                    
                    
                    
                    11,062
                    
                    
                    
                    4.08
                    
                    
                    
                    303,555
                    
                    
                    
                    11,931
                    
                    
                    
                    5.24Other
      (2)(5)
                    
                    
                    68,364
                    
                    
                    
                    157
                    
                    
                    
                    0.30
                    
                    
                    
                    61,669
                    
                    
                    
                    582
                    
                    
                    
                    1.26Total
      interest-earning assets
                    
                    
                    826,949
                    
                    
                    
                    30,520
                    
                    
                    
                    4.92
                    
                    
                    
                    815,400
                    
                    
                    
                    35,023
                    
                    
                    
                    5.73Noninterest-earning
      assets
                    
                    
                    59,838
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    62,109Total
      Assets
                    
                    $
                    886,787
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    877,509INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                    
                    
                    226,120
                    
                    
                    
                    1,237
                    
                    
                    
                    0.73
                    %
                    
                    
                    202,314
                    
                    
                    
                    1,809
                    
                    
                    
                    1.19
                    %Time
      deposits
                    
                    
                    404,980
                    
                    
                    
                    4,724
                    
                    
                    
                    1.56
                    
                    
                    
                    426,918
                    
                    
                    
                    8,006
                    
                    
                    
                    2.50Other
      borrowings
                    
                    
                    93,399
                    
                    
                    
                    2,729
                    
                    
                    
                    3.90
                    
                    
                    
                    118,491
                    
                    
                    
                    3,707
                    
                    
                    
                    4.17Total
      interest-bearingliabilities
                    
                    
                    724,499
                    
                    
                    
                    8,690
                    
                    
                    
                    1.60
                    
                    
                    
                    747,723
                    
                    
                    
                    13,522
                    
                    
                    
                    2.41Demand
      deposits
                    
                    
                    69,545
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    54,825Noninterest-bearing
      liabilities
                    
                    
                    7,940
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,961Stockholders'
      equity (5)
                    
                    
                    84,803
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    66,000Total
      liabilities andstockholders'
      equity
                    
                    $
                    886,787
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    877,509Net
      interest income
                    
                    
                    
                    
                    
                    $
                    21,830
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    21,501Interest-rate
      spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.32
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.32
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.52
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.52
                    %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                    
                    
                    1.14
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.09




(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.




30




Results
of Operations





Results
of Operations for the Three and Nine Months Ended September 30, 2010 Compared to
the Three and Nine Months Ended September 30, 2009.





Net Income (Loss) Allocated to Common
Stockholders.  Net income allocated to common stockholders for
the three-month period ended September 30, 2010 was $431,000, or $.06 per common
share. Net loss allocated to common stockholders for the nine-month period ended
September 30, 2010 was $190,000 or $.03 per common share.  The net
loss allocated to common stockholders for the three and nine-month periods ended
September 30, 2009 was $3.6 million and $7.4 million, respectively, or $.51 and
$1.04 per common share, respectively.  The net income allocated to
common stockholders  reported for the three months ended September 30,
2010 includes dividends on our Series A Preferred Stock of $1.2 million, or $.17
per common share. The net loss allocated to common stockholders reported for the
nine months ended September 30, 2010 includes OTTI charges of $1.2 million and
dividends on our Series A Preferred Stock of $3.6 million, respectively, or $.17
and $.51 per common share, respectively. The net loss allocated to common
stockholders reported for the three and nine months ended September 30, 2009
includes OTTI charges $5.1 million and $10.3 million, respectively, or $.73 per
common share and $1.45 per common share, respectively, and dividends on our
Series A Preferred Stock of $1.2 million and $3.6 million, respectively, or $.17
and $.51 per common share, respectively.





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 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 three and nine months ended
September 30, 2010, net interest income was $7.3 million and $21.8 million,
respectively, compared to net interest income of $7.2 million and $21.5 million
for the three and nine months ended September 30, 2009.  The average
yields earned on interest-earning assets declined to 4.95% and 4.92% during the
three and nine months ended September 30, 2010, respectively, from 5.37% and
5.73% during the three and nine months ended September 30, 2009,
respectively.  The average rates paid on interest-bearing liabilities
declined to 1.45% and 1.60% during the three and nine months ended September 30,
2010, respectively, from 2.05% and 2.41% during the three and nine months ended
September 30, 2009, respectively.  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 18 basis points to
3.50% during the quarter ended September 30, 2010 from 3.32% during the quarter
ended September 30, 2009 and remained at 3.32% for both the nine months ended
September 30, 2010 and 2009.


31





Net Interest
Margin.  Net interest margin, or annualized net interest income
as a percentage of average interest-earning assets, was 3.68% and 3.52% for the
three and nine months ended September 30, 2010, respectively, compared to 3.53%
and 3.52% during the three and nine months ended September 30,
2009.  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 a prudent mix of
fixed and adjustable rate loans, investment securities and short-term
interest-earning assets.





Interest Income. Total
interest income for the quarter ended September 30, 2010 decreased by $1.0
million to $9.9 million from $10.9 million for the quarter ended September 30,
2009.  The decrease in total interest income was due to the decrease
in the average yield earned on the average amount of interest-earning assets to
4.95% during the 2010 quarter from 5.37% during the 2009 quarter, and the
decrease in the average amount of interest-earning assets to $798.6 million
during the 2010 quarter from $811.9 million during the 2009 quarter, and the
decrease in the average amount of higher yielding loans to $380.0 million during
the 2010 quarter from $440.1 million during the 2009 quarter.





Total interest income for the nine
months ended September 30, 2010 decreased by $4.5 million to $30.5 million from
$35.0 million for the nine months ended September 30, 2009.  The
decrease in total interest income was due to the decrease in the average yield
earned on the average amount of interest-earning assets to 4.92% during the
nine-month period of 2010 from 5.73% during the nine-month period of 2009 and
the decrease in the average amount of higher yielding loans to $397.4 million
during the nine-month period of 2010 from $450.2 million during the nine-month
period of 2009.  The decrease in total interest income was partially
offset by the increase in the average amount of interest-earning assets to
$826.9 million during the nine-month period of 2010 from $815.4 million during
the nine-month period of 2009.





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





Three Months Ended September
      30,2010
                    
                    
                    2009Interest
                      Income
                    
                    
                    %
      of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    %
      of
                      Total(In
      thousands, except percentages)Loans
                    
                    $
                    6,295
                    
                    
                    
                    63.72
                    %
                    
                    $
                    7,290
                    
                    
                    
                    66.85
                    %Investment
      Securities
                    
                    
                    3,542
                    
                    
                    
                    35.86
                    
                    
                    
                    3,486
                    
                    
                    
                    31.97Other
                    
                    
                    41
                    
                    
                    
                    0.42
                    
                    
                    
                    129
                    
                    
                    
                    1.18Total
      Interest Income
                    
                    $
                    9,878
                    
                    
                    
                    100.00
                    %
                    
                    $
                    10,905
                    
                    
                    
                    100.00
                    %





Nine Months Ended September
    30,2010
                    
                    
                    2009Interest
                      Income
                    
                    
                    %
      of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    %
      of
                      Total(In
      thousands, except percentages)Loans
                    
                    $
                    19,301
                    
                    
                    
                    63.24
                    %
                    
                    $
                    22,510
                    
                    
                    
                    64.27
                    %Investment
      Securities
                    
                    
                    11,062
                    
                    
                    
                    36.25
                    
                    
                    
                    11,931
                    
                    
                    
                    34.07Other
                    
                    
                    157
                    
                    
                    
                    0.51
                    
                    
                    
                    582
                    
                    
                    
                    1.66Total
      Interest Income
                    
                    $
                    30,520
                    
                    
                    
                    100.00
                    %
                    
                    $
                    35,023
                    
                    
                    
                    100.00
                    %


32





Loans, which are inherently risky and
therefore command a higher return than our portfolio of investment securities
and other interest-earning assets, decreased to 47.6% and 48.1% of total average
interest-earning assets during the three and nine months ended September 30,
2010, respectively, from 54.2% and 55.2% of total interest-earning assets during
the three and nine months ended September 30, 2009, respectively. The average
amounts of investment securities increased to 44.3% and 43.7% of total average
interest-earning assets during the three and nine months ended September 30,
2010, respectively, from 38.8% and 37.2% of total interest-earning assets during
the three and nine months ended September 30, 2009,
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, 2010, total
non-performing loans were $2.0 million, all of which were non-accrual
loans.  Additions to non-performing loans, were such additions to
occur, would have an adverse effect on our results of operations.





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.


33





Federal Home Loan Bank
Stock.  The Bank owns stock of the Federal Home Loan Bank New
York ("FHLB-NY") which is necessary for it to be a member of the
FHLB-NY.  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
FHLB-NY shares is dependent upon the redemption practices of the
FHLB-NY.  At September 30, 2010, the FHLB-NY 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, 2010 or December 31,
2009.





Interest
Expense.  Total interest expense for the quarter ended
September 30, 2010 decreased by $1.2 million to $2.5 million from $3.7 million
for the quarter ended September 30, 2009.  The decrease in total
interest expense was due to the decrease in the average amounts of
interest-bearing liabilities to $700.5 million from $731.5 million during the
three months ended September 30, 2010 and 2009, respectively, and the decrease
in the average rates paid on such liabilities to 1.45% during the 2010 quarter
from 2.05% during the 2009 quarter.





Total interest expense for the
nine-month period ended September 30, 2010 decreased by $4.8 million to $8.7
million from $13.5 million for the nine-month period ended September 30,
2009.  The decrease in interest expense was due to the decrease in the
average amounts of interest-bearing liabilities to $724.5 million and $747.7
million during the nine-month periods ended September 30, 2010 and 2009,
respectively, and the decrease in the average rates paid on such liabilities to
1.60% from 2.41% during the nine-month periods ended September 30, 2010 and
2009, respectively.





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





Three Months Ended September
      30,2010
                    
                    
                    2009Interest
                      Expense
                    
                    
                    %
      of
                      Total
                    
                    
                    Interest
                      Expense
                    
                    
                    %
      of
                      Total(In
      thousands, except percentages)Interest-Bearing
      Deposits
                    
                    $
                    333
                    
                    
                    
                    13.12
                    %
                    
                    $
                    533
                    
                    
                    
                    14.22
                    %Time
      Deposits
                    
                    
                    1,415
                    
                    
                    
                    55.75
                    
                    
                    
                    2,028
                    
                    
                    
                    54.11Other
      Borrowings
                    
                    
                    790
                    
                    
                    
                    31.13
                    
                    
                    
                    1,187
                    
                    
                    
                    31.67Total
      Interest Expense
                    
                    $
                    2,538
                    
                    
                    
                    100.00
                    %
                    
                    $
                    3,748
                    
                    
                    
                    100.00
                    %





Nine Months Ended September
    30,2010
                    
                    
                    2009Interest
                      Expense
                    
                    
                    %
      of
                      Total
                    
                    
                    Interest
                      Expense
                    
                    
                    %
      of
                      Total(In
      thousands, except percentages)Interest-Bearing
      Deposits
                    
                    $
                    1,237
                    
                    
                    
                    14.23
                    %
                    
                    $
                    1,809
                    
                    
                    
                    13.38
                    %Time
      Deposits
                    
                    
                    4,724
                    
                    
                    
                    54.37
                    
                    
                    
                    8,006
                    
                    
                    
                    59.21Other
      Borrowings
                    
                    
                    2,729
                    
                    
                    
                    31.40
                    
                    
                    
                    3,707
                    
                    
                    
                    27.41Total
      Interest Expense
                    
                    $
                    8,690
                    
                    
                    
                    100.00
                    %
                    
                    $
                    13,522
                    
                    
                    
                    100.00
                    %


34


Non-Interest
Income.  Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the three
and nine months ended September 30, 2010, non-interest income amounted to
$306,000 and $1.4 million, respectively, compared to non-interest income of
$502,000 and $1.3 million for the three and nine months ended September 30,
2009, 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
decreased by $3.4 million to $5.9 million for the quarter ended September 30,
2010 from $9.3 million for the quarter ended September 30, 2009.  The
decrease was primarily due to OTTI charges of $5.1 million during the 2009
quarter which were not incurred during the 2010 quarter, partially offset by the
$1.5 million increase in other non-interest expense during the 2010
quarter.





Total non-interest expense decreased by
$7.6 million to $16.0 million for the nine months September 30, 2010 from $23.6
million for nine months ended September 30, 2009.  The decrease was
primarily due to the $9.1 million decrease in OTTI charges on investment
securities to $1.2 million from $10.3 million for the nine months ended
September 30, 2010 and 2009, respectively, partially offset by the $1.4 million
increase in other non-interest expense during the nine months ended September
30, 2010.





During the three months ended September
30, 2010, the Company decided to divest one of its bank branches.  At
this time no estimate of impairment, if any, has been recorded as the appraisal
of the value of this property is in process.  The increase in other
expense in the three and nine months ended September 30, 2010 is due to a fraud
perpetrated on the Company by unknown persons.  The Company is
pursuing all legal avenues.


35


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





Three Months Ended September
      30,2010
                      
                      
                      2009Non-Interest
                        Expense
                      
                      
                      %
      of
                        Total
                      
                      
                      Non-Interest
                        Expense
                      
                      
                      %
      of
                        Total(In
      thousands, except percentages)Salaries
      and Employee Benefits
                      
                      $
                      2,388
                      
                      
                      
                      40.43
                      %
                      
                      $
                      2,339
                      
                      
                      
                      25.05
                      %Net
      Occupancy Expense
                      
                      
                      534
                      
                      
                      
                      9.04
                      
                      
                      
                      477
                      
                      
                      
                      5.11Equipment
      Expense
                      
                      
                      90
                      
                      
                      
                      1.52
                      
                      
                      
                      92
                      
                      
                      
                      0.99FDIC
      Assessment
                      
                      
                      438
                      
                      
                      
                      7.42
                      
                      
                      
                      330
                      
                      
                      
                      3.53Data
      Processing Expense
                      
                      
                      124
                      
                      
                      
                      2.10
                      
                      
                      
                      119
                      
                      
                      
                      1.27Other
      than temporary impairment charge on securities
                      
                      
                      —
                      
                      
                      
                      0.00
                      
                      
                      
                      5,138
                      
                      
                      
                      55.03Other
                      
                      
                      2,332
                      
                      
                      
                      39.49
                      
                      
                      
                      842
                      
                      
                      
                      9.02Total
      Non-Interest Expense
                      
                      $
                      5,906
                      
                      
                      
                      100.00
                      %
                      
                      $
                      9,337
                      
                      
                      
                      100.00
                      %





Nine Months Ended September
    30,2010
                    
                    
                    2009Non-Interest
                      Expense
                    
                    
                    %
      of
                      Total
                    
                    
                    Non-Interest
                      Expense
                    
                    
                    %
      of
                      Total(In
      thousands, except percentages)Salaries
      and Employee Benefits
                    
                    $
                    7,136
                    
                    
                    
                    44.50
                    %
                    
                    $
                    7,011
                    
                    
                    
                    29.67
                    %Net
      Occupancy Expense
                    
                    
                    1,647
                    
                    
                    
                    10.27
                    
                    
                    
                    1,529
                    
                    
                    
                    6.47Equipment
      Expense
                    
                    
                    273
                    
                    
                    
                    1.70
                    
                    
                    
                    286
                    
                    
                    
                    1.21FDIC
      Assessment
                    
                    
                    1,374
                    
                    
                    
                    8.57
                    
                    
                    
                    1,598
                    
                    
                    
                    6.76Data
      Processing Expense
                    
                    
                    376
                    
                    
                    
                    2.34
                    
                    
                    
                    329
                    
                    
                    
                    1.39Other
      than temporary impairment charge on securities
                    
                    
                    1,202
                    
                    
                    
                    7.50
                    
                    
                    
                    10,263
                    
                    
                    
                    43.43Other
                    
                    
                    4,028
                    
                    
                    
                    25.12
                    
                    
                    
                    2,615
                    
                    
                    
                    11.07Total
      Non-Interest Expense
                    
                    $
                    16,036
                    
                    
                    
                    100.00
                    %
                    
                    $
                    23,631
                    
                    
                    
                    100.00
                    %





Provision for Income
Tax.  During the three and nine-month periods ended September
30, 2010, the Company recorded an income tax benefit of $1.4 million and
$476,000, respectively, compared to an income tax benefit of $285,000 and an
income tax expense of $1.4 million during the three and nine-month periods ended
September 30, 2009, respectively. During the three and nine-month periods ended
September 30, 2010, the Company recorded tax benefits related to certain
deferred tax items mainly related to provisions for loan losses which are
deferred for tax purposes.  The Company has not recorded any current
tax expenses as the Company has net operating loss carry forwards which can be
off-set against any current taxable income.  In addition, the Company
continues to have significant valuation allowances on the deferred tax assets
for previous OTTI charges and allowances for remaining net operating loss carry
forwards.  Certain components of the OTTI charge recorded in 2009 were
considered a capital loss for which the Company has no capital gains to offset.
Therefore, a valuation allowance was recorded for these components for the three
and nine months ended September 30, 2009.


36





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.  We did not repurchase shares of the Company's Common Stock
during the first three quarters of 2010. At September 30, 2010, there were
501,091 shares of Common Stock which may yet be purchased under our stock
repurchase plan.





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.





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 reserves and general
allocations. Specific reserves 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.


37





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.





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.


38





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 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Average
      loans outstanding
                  
                  $
                  379,983
                  
                  
                  $
                  440,146
                  
                  
                  $
                  397,356
                  
                  
                  $
                  450,176Allowance
      at beginning of period
                  
                  
                  13,105
                  
                  
                  
                  9,757
                  
                  
                  
                  11,416
                  
                  
                  
                  9,204Charge-offs:Commercial
      and other loans
                  
                  
                  —
                  
                  
                  
                  1
                  
                  
                  
                  300
                  
                  
                  
                  104Real
      estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  766
                  
                  
                  
                  —Total
      loans charged-off
                  
                  
                  —
                  
                  
                  
                  1
                  
                  
                  
                  1,066
                  
                  
                  
                  104Recoveries:Commercial
      and other loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  106Real
      estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      loans recovered
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  106Net
      recoveries (charge-offs)
                  
                  
                  —
                  
                  
                  
                  (1
                  )
                  
                  
                  (1,061
                  )
                  
                  
                  2Provision
      for loan lossescharged
      to operating expenses
                  
                  
                  1,500
                  
                  
                  
                  1,000
                  
                  
                  
                  4,250
                  
                  
                  
                  1,550Allowance
      at end of period
                  
                  
                  14,605
                  
                  
                  
                  10,756
                  
                  
                  
                  14,605
                  
                  
                  
                  10,756Ratio
      of net recoveries (charge-offs)to
      average loans outstanding
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  (0.27
                  )%
                  
                  
                  0.00
                  %Allowance
      as a percent of total loans
                  
                  
                  3.88
                  %
                  
                  
                  2.43
                  %
                  
                  
                  3.88
                  %
                  
                  
                  2.43
                  %Total
      loans at end of period
                  
                  $
                  376,874
                  
                  
                  $
                  442,355
                  
                  
                  $
                  376,874
                  
                  
                  $
                  442,355


39





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, 2010 and December 31, 2009, the
Company had loans, net of unearned income, of $375.9 million and $430.3 million,
respectively, and an allowance for loan losses of $14.6 million and $11.4
million, respectively. From time to time, the Bank may originate residential
mortgage loans, sell them on the secondary market, normally recognizing fee
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.


40





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, 2010 and December 31 2009,
approximately $22.3 million and $50.7 million, respectively, or 5.9% and 11.7%,
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, 2010 and December 31, 2009,
approximately $117.2 million and $129.9 million, respectively, or 31.1% 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,
2010 and December 31, 2009, approximately 13.1% and 13.9%, respectively, of the
Bank's residential one-to-four family owner-occupied first mortgage portfolio
were ARMs and approximately 87.0% and 86.1%, 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.


41





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, 2010 and December 31, 2009, the Company's
loan portfolio was comprised of $237.4 million and $250.8 million, respectively,
or 63.0% and 58.2%, respectively, of other loan products.


42





Capital
Adequacy





Quantitative measures established by
regulations 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,
2010, the Bank meets all capital adequacy requirements to which it is
subject.





As of September 30, 2010, 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 table set forth the
actual and required regulatory capital amounts and ratios of the Company and the
Bank as of September 30, 2010 (dollars in thousands):





To
      be wellcapitalized
      underFor
      capital
                              
                              
                              prompt
      correctiveActual
                              
                              
                              adequacy purposes
                              
                              
                              action provisionsAmount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              RatioSeptember
      30, 2010Total
      Capital (to Risk-Weighted Assets)Company
                              
                              $
                              106,635
                              
                              
                              
                              22.5
                              %
                              
                              $
                              38,004
                              
                              
                              
                              >8.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              94,817
                              
                              
                              
                              20.5
                              %
                              
                              
                              37,012
                              
                              
                              
                              >8.0
                              %
                              
                              $
                              46,265
                              
                              
                              
                              >10.0
                              %Tier
      I Capital (to Risk-Weighted Assets)Company
                              
                              
                              99,721
                              
                              
                              
                              21.0
                              %
                              
                              
                              19,062
                              
                              
                              
                              >4.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              88,925
                              
                              
                              
                              19.2
                              %
                              
                              
                              18,506
                              
                              
                              
                              >4.0
                              %
                              
                              
                              27,759
                              
                              
                              
                              >6.0
                              %Tier
      I Capital (to Average Assets)Company
                              
                              
                              99,721
                              
                              
                              
                              11.3
                              %
                              
                              
                              35,471
                              
                              
                              
                              >4.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              88,925
                              
                              
                              
                              10.3
                              %
                              
                              
                              34,489
                              
                              
                              
                              >4.0
                              %
                              
                              
                              43,111
                              
                              
                              
                              >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.  Additional liquidity, up to approximately $305 million is
available from the Federal Reserve Bank and the FHLB-NY.





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 intent to hold these available for sale securities to maturity, and do not
believe we will be required to sell these securities prior to
maturity.





43


At September 30, 2010, our portfolio of
investment securities included approximately $6.5 million, at cost, of TPCDO's
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
$606,000, may be negatively impacted in the future.





Based on our expected operating cash
flows, strategic contraction of our balance sheet 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.  We have cash and cash
equivalents totaling $76.7 million, or 8.9% of total assets at September 30,
2010.  In addition, we have the capacity to borrow up to approximately
$194 million from the Federal Reserve Bank and approximately $111 million from
the FHLB-NY if the need should arise.





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 it would temporarily suspend its previously
announced policy of paying a regular cash dividend on the Company's common
stock.  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, 2010, the Company had cash of approximately $1.0 million and investment
securities with a fair market value of $6.9 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 $6.6 million at September 30, 2010, 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, 2010, the Bank had
outstanding commitments of approximately $403.7 million; including $11.8 million
of borrowings, $1.9 million of operating leases, and $390.0 million of time
deposits.  These commitments include $291.4 million that mature or
renew within one year, $111.8 million that mature or renew after one year and
within three years, $379,000 that mature or renew after three years and within
five years and $130,000 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.





44


ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





Interest Rate
Risk.  Fluctuations in market interest rates can have a
material effect on the Bank'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.





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) under the Securities
Exchange Act of 1934, as amended ("Disclosure Controls").  The
Disclosure Controls are designed to allow the Company to reach 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 information relating to the Company is
accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required
disclosure.  The evaluation of the Disclosure Controls ("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 and
subsequent discussions and actions by the Company as described in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 ("Form 10-K"),
the CEO/CFO has concluded that as of September 30, 2010, due to the remediation
described in the Form 10-K, along with the commencement of a more rigorous
review of the investment portfolio for securities with OTTI indicators, the
enhancement of the related documentation, and the refinement of the cash flow
analysis, the Company's Disclosure Controls are effective at the reasonable
assurance level.


45





Changes
in Internal Control over Financial Reporting.





In
accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended September 30, 2010, other than the remediation noted above and as
described in the Form 10-K, no changes in the Company's "internal control over
financial reporting", as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934, as amended ("Internal Control") 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 will prevent all errors 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.





PART
II.  OTHER INFORMATION





Item
6.  Exhibits





ExhibitNumber
                    
                    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.


46





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 10, 2010
                        
                        By:
                        /s/ Steven RosenbergSteven
      RosenbergPresident
      and ChiefFinancial
      Officer


47





EXHIBIT
INDEX





ExhibitNumber
                  
                  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