UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended June
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
August 5, 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 June 30, 2010 and December 31, 2009
      (unaudited)
                
                4Consolidated
      Statements of Operations For The Three and Six Months Ended June 30, 2010
      and 2009 (unaudited)
                
                5Consolidated
      Statement of Stockholders' Equity For The Six Months Ended June 30, 2010
      and 2009 (unaudited)
                
                6Consolidated
      Statements of Cash Flows For The Six Months Ended June 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
                
                24Item
      3.
                Quantitative
      and Qualitative Disclosure About Market Risk
                
                44Item
      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)





June 30,
                  2010
                
                
                December 31,
                  2009ASSETSCash
      and due from banks
                
                $
                7,350
                
                
                $
                5,427Interest
      bearing deposits
                
                
                71,555
                
                
                
                55,376Total
      cash and cash equivalents
                
                
                78,905
                
                
                
                60,803Investment
      Securities:Available-for-sale
                
                
                338,469
                
                
                
                357,478Held-to-maturity,
      fair value of $328 in 2010 and $337 in 2009
                
                
                329
                
                
                
                340Total
      investment securities
                
                
                338,798
                
                
                
                357,818Loans,
      net of unearned income
                
                
                383,273
                
                
                
                430,349Less:
      allowance for loan losses
                
                
                (13,105
                )
                
                
                (11,416
                )Net
      loans
                
                
                370,168
                
                
                
                418,933Accrued
      interest receivable
                
                
                3,823
                
                
                
                4,253Premises
      and equipment, net
                
                
                8,355
                
                
                
                8,532Goodwill,
      net
                
                
                18,549
                
                
                
                18,549Other
      assets
                
                
                38,095
                
                
                
                40,379Total
      assets
                
                $
                856,693
                
                
                $
                909,267LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                
                $
                66,008
                
                
                $
                62,870Interest
      bearing
                
                
                613,937
                
                
                
                650,574Total
      deposits
                
                
                679,945
                
                
                
                713,444Securities
      sold under agreements to repurchase
                
                
                50,000
                
                
                
                50,000Borrowings
                
                
                12,851
                
                
                
                31,004Subordinated
      debt
                
                
                22,681
                
                
                
                22,681Accrued
      interest payable
                
                
                3,464
                
                
                
                3,578Other
      liabilities
                
                
                4,191
                
                
                
                3,324Total
      liabilities
                
                
                773,132
                
                
                
                824,031Stockholders'
      equityPreferred
      stock - $.01 Par value: Authorized  — 2,000,000 shares Issued —
      60,000 shares Outstanding  — June 30, 2010, 60,000 shares
      December 31, 2009, 60,000 shares
                
                
                1
                
                
                
                1Common
      stock - $.10 par value Authorized — 25,000,000 shares Issued
      —  7,698,285 shares Outstanding — June 30, 2010, 7,054,183
      shares December 31, 2009, 7,054,183 shares
                
                
                770
                
                
                
                770Additional
      paid-in capital
                
                
                150,985
                
                
                
                150,985Accumulated
      Deficit
                
                
                (47,454
                )
                
                
                (46,833
                )Accumulated
      other comprehensive loss, net
                
                
                (14,330
                )
                
                
                (13,276
                )Treasury
      Stock at cost June 30, 2010, 644,102December
      31, 2009, 644,102 shares
                
                
                (6,411
                )
                
                
                (6,411
                )Total
      stockholders' equity
                
                
                83,561
                
                
                
                85,236Total
      liabilities and stockholders' equity
                
                $
                856,693
                
                
                $
                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
                        June 30,
                      
                      
                      For The
                        Six Months Ended
                        June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009INTEREST
      INCOMELoans,
      including related fees
                      
                      $
                      6,473
                      
                      
                      $
                      7,449
                      
                      
                      $
                      13,006
                      
                      
                      $
                      15,220Investment
      securities
                      
                      
                      3,720
                      
                      
                      
                      4,042
                      
                      
                      
                      7,520
                      
                      
                      
                      8,445Federal
      funds sold and interest bearing deposits
                      
                      
                      65
                      
                      
                      
                      182
                      
                      
                      
                      116
                      
                      
                      
                      453Total
      interest income
                      
                      
                      10,258
                      
                      
                      
                      11,673
                      
                      
                      
                      20,642
                      
                      
                      
                      24,118INTEREST
      EXPENSEDeposits
                      
                      
                      1,953
                      
                      
                      
                      3,237
                      
                      
                      
                      4,213
                      
                      
                      
                      7,254Securities
      sold under agreements to repurchase
                      
                      
                      502
                      
                      
                      
                      591
                      
                      
                      
                      1,000
                      
                      
                      
                      1,175Borrowings
      and subordinated debt
                      
                      
                      422
                      
                      
                      
                      578
                      
                      
                      
                      939
                      
                      
                      
                      1,345Total
      interest expense
                      
                      
                      2,877
                      
                      
                      
                      4,406
                      
                      
                      
                      6,152
                      
                      
                      
                      9,774Net
      interest income
                      
                      
                      7,381
                      
                      
                      
                      7,267
                      
                      
                      
                      14,490
                      
                      
                      
                      14,344PROVISION
      FOR LOAN LOSSES
                      
                      
                      1,500
                      
                      
                      
                      400
                      
                      
                      
                      2,750
                      
                      
                      
                      550Net
      interest income after provision for loan losses
                      
                      
                      5,881
                      
                      
                      
                      6,867
                      
                      
                      
                      11,740
                      
                      
                      
                      13,794NON-INTEREST
      INCOMEService
      charges on deposits accounts
                      
                      
                      130
                      
                      
                      
                      116
                      
                      
                      
                      256
                      
                      
                      
                      238Investment
      securities gains
                      
                      
                      247
                      
                      
                      
                      112
                      
                      
                      
                      402
                      
                      
                      
                      187Gain
      on sale of foreclosed real estate, net
                      
                      
                      229
                      
                      
                      
                      —
                      
                      
                      
                      229
                      
                      
                      
                      —Other
      income
                      
                      
                      95
                      
                      
                      
                      150
                      
                      
                      
                      197
                      
                      
                      
                      352Total
      non-interest income
                      
                      
                      701
                      
                      
                      
                      378
                      
                      
                      
                      1,084
                      
                      
                      
                      777NON-INTEREST
      EXPENSETotal
      other than temporary impairment ("OTTI") charges on
    securities
                      
                      
                      1,202
                      
                      
                      
                      4,100
                      
                      
                      
                      1,202
                      
                      
                      
                      5,125Less
      non-credit portion of OTTI recordedin
      other comprehensive loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      OTTI recognized in earnings
                      
                      
                      1,202
                      
                      
                      
                      4,100
                      
                      
                      
                      1,202
                      
                      
                      
                      5,125Salaries
      and employee benefits
                      
                      
                      2,407
                      
                      
                      
                      2,311
                      
                      
                      
                      4,748
                      
                      
                      
                      4,672Net
      occupancy expense
                      
                      
                      547
                      
                      
                      
                      546
                      
                      
                      
                      1,113
                      
                      
                      
                      1,052Equipment
      expense
                      
                      
                      92
                      
                      
                      
                      95
                      
                      
                      
                      183
                      
                      
                      
                      194FDIC
      assessment
                      
                      
                      468
                      
                      
                      
                      585
                      
                      
                      
                      936
                      
                      
                      
                      1,268Data
      processing expense
                      
                      
                      126
                      
                      
                      
                      116
                      
                      
                      
                      252
                      
                      
                      
                      210Other
                      
                      
                      876
                      
                      
                      
                      861
                      
                      
                      
                      1,696
                      
                      
                      
                      1,773Total
      non-interest expense
                      
                      
                      5,718
                      
                      
                      
                      8,614
                      
                      
                      
                      10,130
                      
                      
                      
                      14,294Income
      (loss) before provision for taxes
                      
                      
                      864
                      
                      
                      
                      (1,369
                      )
                      
                      
                      2,694
                      
                      
                      
                      277Provision
      for income taxes
                      
                      
                      239
                      
                      
                      
                      1,066
                      
                      
                      
                      915
                      
                      
                      
                      1,643Net
      income (loss)
                      
                      $
                      625
                      
                      
                      $
                      (2,435
                      )
                      
                      $
                      1,779
                      
                      
                      $
                      (1,366
                      )Dividends
      on preferred stock
                      
                      
                      1,200
                      
                      
                      
                      1,200
                      
                      
                      
                      2,400
                      
                      
                      
                      2,400(Loss)
      allocated to common stockholders
                      
                      $
                      (575
                      )
                      
                      $
                      (3,635
                      )
                      
                      $
                      (621
                      )
                      
                      $
                      (3,766
                      )Net
      (loss) per common share:Basic
                      
                      $
                      (.08
                      )
                      
                      $
                      (.52
                      )
                      
                      $
                      (.09
                      )
                      
                      $
                      (.53
                      )Diluted
                      
                      $
                      (.08
                      )
                      
                      $
                      (.52
                      )
                      
                      $
                      (.09
                      )
                      
                      $
                      (.53
                      )Number
      of shares used to compute net (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 Six Months Ended June 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)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,366
              )
              
              
              
              
              
              $
              (1,366
              )
              
              
              (1,366
              )Other
      comprehensive income netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,421
              
              
              
              
              
              
              
              
              
              
              
              8,421
              
              
              
              8,421Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              7,055Cash
      dividends - Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,400
              )
              
              
              
              
              
              
              
              
              
              
              (2,400
              )Balance
      at June 30, 2009
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (31,177
              )
              
              $
              43,561
              
              
              $
              (6,411
              )
              
              
              
              
              
              $
              70,607Balance
      at December 31, 2009
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (13,276
              )
              
              $
              (46,833
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              85,236Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,779
              
              
              
              
              
              
              $
              1,779
              
              
              
              1,779Other
      comprehensive loss netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,054
              )
              
              
              
              
              
              
              
              
              
              
              (1,054
              )
              
              
              (1,054
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              725Cash
      dividends - Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,400
              )
              
              
              
              
              
              
              
              
              
              
              (2,400
              )Balance
      at June 30, 2010
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (14,330
              )
              
              $
              (47,454
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              83,561





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 Six Months Ended
                  June 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      income (loss)
                
                $
                1,779
                
                
                $
                (1,366
                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Realized
      gains on investment securities
                
                
                (402
                )
                
                
                (187
                )Gain
      on sale of foreclosed real estate
                
                
                (229
                )
                
                
                —Other
      than temporary impairment charges on securities
                
                
                1,202
                
                
                
                5,125Net
      amortization (accretion) of premiums of investment
    securities
                
                
                1,008
                
                
                
                15Depreciation
      and amortization
                
                
                258
                
                
                
                274Provision
      for loan losses
                
                
                2,750
                
                
                
                550Decrease
      in accrued interest receivable
                
                
                430
                
                
                
                981Decrease
      in other assets
                
                
                2,056
                
                
                
                18,559Increase
      (decrease) in accrued interest payable and other
    liabilities
                
                
                753
                
                
                
                (16,274
                )Net
      cash provided by operating activities
                
                
                9,605
                
                
                
                7,677Cash
      flows from investing activities:Investment
      securities available for salePurchases
                
                
                (113,680
                )
                
                
                (138,550
                )Sales,
      maturities and calls
                
                
                130,055
                
                
                
                133,710Investment
      securities held to maturityMaturities
                
                
                11
                
                
                
                11Net
      decrease in loans
                
                
                33,696
                
                
                
                20,423Proceeds
      from sale of foreclosed real estate
                
                
                12,548
                
                
                
                —Acquisition
      of premises and equipment
                
                
                (81
                )
                
                
                (41
                )Net
      cash provided by investing activities
                
                
                62,549
                
                
                
                15,553Cash
      flows from financing activities:Net
      increase in non interest bearing deposits
                
                
                3,138
                
                
                
                4,884Net
      decrease in interest bearing deposits
                
                
                (36,637
                )
                
                
                (60,134
                )Decrease
      in securities sold under agreementsto
      repurchase
                
                
                —
                
                
                
                (2,504
                )Repayment
      of borrowings
                
                
                (18,153
                )
                
                
                (8,799
                )Dividends
      paid on preferred stock
                
                
                (2,400
                )
                
                
                (2,400
                )Net
      cash (used in) financing activities
                
                
                (54,052
                )
                
                
                (68,953
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                18,102
                
                
                
                (45,723
                )Cash
      and cash equivalents at beginning of period
                
                
                60,803
                
                
                
                102,387Cash
      and cash equivalents at end of period
                
                $
                78,905
                
                
                $
                56,664Supplemental
      disclosure of cash flow information:Cash
      used to pay interest
                
                $
                6,266
                
                
                $
                12,516Cash
      used to pay income taxes, net of refunds
                
                $
                (1,080
                )
                
                $
                930Schedule
      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


June
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 quarters 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 and six months ended June 30, 2010 and 2009 due to
the net loss allocated to common stockholders. The following tables present the
Company's calculation of loss per common share for the periods
indicated:





For
      The Three Months EndedJune
      30, 2010
                  
                  
                  June
      30, 2009Income
                    (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)
                  
                  $
                  625
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (2,435
                  )Dividends
      paid to preferred shareholders
                  
                  
                  (1,200
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,200
                  )Net
      (loss) availableto
      common stockholders
                  
                  
                  (575
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.08
                  )
                  
                  
                  (3,635
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.52
                  )Effect
      of dilutive securitiesOptions
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—Diluted
      earnings (loss) per common shareNet
      (loss) availableto
      common stockholders plus assumed conversions
                  
                  $
                  (575
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.08
                  )
                  
                  $
                  (3,635
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.52
                  )





For
      The Six Months EndedJune
      30, 2010
                  
                  
                  June
      30, 2009Income
                    (numerator)
                  
                  
                  Shares
                    (denominator)
                  
                  
                  Per
                    share
                    amount
                  
                  
                  Income
                    (numerator)
                  
                  
                  Shares
                    (denominator)
                  
                  
                  Per
                    share
                    amount(In
      thousands, except per share data)Basic
      earnings (loss) percommon
      shareNet
      income (loss)
                  
                  $
                  1,779
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,366
                  )Dividends
      paid to preferred shareholders
                  
                  
                  (2,400
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,400
                  )Net
      (loss) availableto
      common stockholders
                  
                  
                  (621
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.09
                  )
                  
                  
                  (3,766
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.53
                  )Effect
      of dilutive securitiesOptions
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  .—Diluted
      earnings (loss)common
      per shareNet
      (loss) availableto
      common stockholders plus assumed conversions
                  
                  $
                  (621
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.09
                  )
                  
                  $
                  (3,766
                  )
                  
                  
                  7,054
                  
                  
                  $
                  (.53
                  )





No options to purchase common shares
were outstanding at June 30, 2010.  Options to purchase 2,076 common
shares at a weighted average exercise price of $8.29 were not included in the
dilutive loss per common share for the three and six months ended June 30, 2009
as these options were anti-dilutive.


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:


June
      30, 2010
                    
                    
                    December
      31, 2009Amount
                    
                    
                    %
      of
                      Total
                    
                    
                    Amount
                    
                    
                    %
      of
                      Total(Dollars
      in thousands)Commercial
      and professional loans
                    
                    $
                    25,065
                    
                    
                    
                    6.5
                    %
                    
                    $
                    50,672
                    
                    
                    
                    11.7
                    %Secured
      by real estate1-4
      family
                    
                    
                    123,441
                    
                    
                    
                    32.1
                    
                    
                    
                    129,925
                    
                    
                    
                    30.1Multi
      family
                    
                    
                    7,595
                    
                    
                    
                    2.0
                    
                    
                    
                    7,432
                    
                    
                    
                    1.7Non-residential
      (commercial)
                    
                    
                    227,800
                    
                    
                    
                    59.3
                    
                    
                    
                    242,927
                    
                    
                    
                    56.4Consumer
                    
                    
                    324
                    
                    
                    
                    0.1
                    
                    
                    
                    396
                    
                    
                    
                    0.1Total
      loans
                    
                    
                    384,225
                    
                    
                    
                    100.0
                    %
                    
                    
                    431,352
                    
                    
                    
                    100.0
                    %Deferred
      loan fees
                    
                    
                    (952
                    )
                    
                    
                    
                    
                    
                    
                    (1,003
                    )Allowance
      for loan losses
                    
                    
                    (13,105
                    )
                    
                    
                    
                    
                    
                    
                    (11,416
                    )Loans,
      net
                    
                    $
                    370,168
                    
                    
                    
                    
                    
                    
                    $
                    418,933





The Bank had $1.1 million and $13.9
million of non accrual loans as of June 30, 2010 and December 31, 2009,
respectively, and no loans delinquent more than ninety days and still accruing
interest at June 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 six
months ended June 30, 2010 totalled approximately $7.6 million as compared to $0
for the six months ended June 30, 2009.  Interest income that would
have been recognized had these loans performed in accordance with their
contractual terms totalled $431,000 and $0, respectively.  Average
impaired loans for the three months ended June 30, 2010 totalled approximately
$1.5 million as compared to $0 for the three months ended June 30,
2009.  Interest income that would have been recognized had these loans
performed in accordance with their contractual terms totalled $41,000 and $0,
respectively.





Impaired and non-accrual loan balances
were the same for the three and six months ended June 30, 2010.





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 Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2010
                  
                  
                  June 30, 2009(In
      thousands)Balance
      at beginning of period
                  
                  $
                  11,900
                  
                  
                  $
                  9,357
                  
                  
                  $
                  11,416
                  
                  
                  $
                  9,204Provision
      for loan losses
                  
                  
                  1,500
                  
                  
                  
                  400
                  
                  
                  
                  2,750
                  
                  
                  
                  550Charge-offs
                  
                  
                  (300
                  )
                  
                  
                  —
                  
                  
                  
                  (1,066
                  )
                  
                  
                  (103
                  )Recoveries
                  
                  
                  5
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  106Balance
      at end of period
                  
                  $
                  13,105
                  
                  
                  $
                  9,757
                  
                  
                  $
                  13,105
                  
                  
                  $
                  9,757




10





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. Investment Securities





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





June
      30, 2010Amortized
      Cost
                      
                      
                      Gross
                        unrealized
                        gains
                      
                      
                      Gross
                        unrealized
                        losses
                      
                      
                      Fair
                        value(In
      thousands)U.S.
      Government Agencies
                      
                      $
                      329
                      
                      
                      $
                      1
                      
                      
                      $
                      (2
                      )
                      
                      $
                      328





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





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





June
      30, 2010Amortized
                    Cost
                  
                  
                  Gross
                    unrealized
                    gains
                  
                  
                  Gross
                    unrealized
                    losses
                  
                  
                  Fair
                    value(In
      thousands)U.S.
      Treasury Notes
                  
                  $
                  60,259
                  
                  
                  $
                  130
                  
                  
                  $
                  —
                  
                  
                  $
                  60,389U.S.
      Government Agencies
                  
                  
                  75,622
                  
                  
                  
                  874
                  
                  
                  
                  (13
                  )
                  
                  
                  76,483Mortgage-backed
      securities
                  
                  
                  115,050
                  
                  
                  
                  4,518
                  
                  
                  
                  (273
                  )
                  
                  
                  119,294Corporate
      notes
                  
                  
                  17,684
                  
                  
                  
                  947
                  
                  
                  
                  (1,451
                  )
                  
                  
                  17,180Single
      Issuer Trust Preferred CDO
                  
                  
                  1,022
                  
                  
                  
                  —
                  
                  
                  
                  (362
                  )
                  
                  
                  660Pooled
      Trust Preferred CDO
                  
                  
                  6,459
                  
                  
                  
                  —
                  
                  
                  
                  (6,003
                  )
                  
                  
                  456Municipal
      securities
                  
                  
                  1,998
                  
                  
                  
                  429
                  
                  
                  
                  —
                  
                  
                  
                  2,427Auction
      rate securities
                  
                  
                  77,693
                  
                  
                  
                  —
                  
                  
                  
                  (19,161
                  )
                  
                  
                  58,532Marketable
      equitysecurities
      and other
                  
                  
                  2,919
                  
                  
                  
                  133
                  
                  
                  
                  (5
                  )
                  
                  
                  3,048Totals
                  
                  $
                  358,706
                  
                  
                  $
                  7,031
                  
                  
                  $
                  (27,268
                  )
                  
                  $
                  338,469




11





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





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
      equitysecurities
      and other
                  
                  
                  7,648
                  
                  
                  
                  69
                  
                  
                  
                  (26
                  )
                  
                  
                  7,691Totals
                  
                  $
                  376,334
                  
                  
                  $
                  3,315
                  
                  
                  $
                  (22,171
                  )
                  
                  $
                  357,478





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
June 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.


12


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





For the six months ended June 30, 2010,
there has been no change to the composition of our auction rate
securities.  The fair value of the auction rate securities decreased
by approximately $8.4 million to $58.5 million at June 30, 2010 from $66.9
million at December 31, 2009.  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 June
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.  We also perform a discounted cash flow analysis,
but we considered the market value of the preferred shares to be more objective
and relevant in pricing auction rate securities.





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 June 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 June 30, 2010 and December 31, 2009,
we had six and six auction rate securities, respectively, with an aggregate fair
market value of $16.8 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 June 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 six months ended June 30, 2010, no
auction rate securities were redeemed.





At June 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 $456,000 and $150,000, respectively.  We own a Class B
tranche of the TPCDO, which was considered below investment grade at both June
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 flowanalysis,
no additional credit related OTTI charges were recognized during the three or
six months ended June 30, 2010.


13


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





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





At June 30, 2010 and December 31, 2009,
the Company owned preferred and common stock (collectively "equity
securities").  During the six-month period ended June 30, 2010, we
disposed of equity securities with a cost basis of approximately $4.7 million,
realizing a gain of approximately $6,000.  The fair value of the
remaining equity securities at June 30, 2010 decreased by approximately $4.6
million 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 June 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
                        
                        $
                        9,985
                        
                        
                        $
                        13
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        9,985
                        
                        
                        $
                        13Mortgage-backed
      securities
                        
                        
                        2,804
                        
                        
                        
                        28
                        
                        
                        
                        8,919
                        
                        
                        
                        245
                        
                        
                        
                        11,723
                        
                        
                        
                        273Corporate
      notes
                        
                        
                        2,001
                        
                        
                        
                        144
                        
                        
                        
                        7,384
                        
                        
                        
                        1,307
                        
                        
                        
                        9,385
                        
                        
                        
                        1,451Single
      Issuer Trust Preferred CDO
                        
                        
                        660
                        
                        
                        
                        362
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        660
                        
                        
                        
                        362Pooled
      Trust Preferred CDO
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        456
                        
                        
                        
                        6,003
                        
                        
                        
                        456
                        
                        
                        
                        6,003Auction
      rate securities
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        50,838
                        
                        
                        
                        19,161
                        
                        
                        
                        50,838
                        
                        
                        
                        19,161Subtotal,
      debt securities
                        
                        
                        15,450
                        
                        
                        
                        547
                        
                        
                        
                        67,597
                        
                        
                        
                        26,716
                        
                        
                        
                        83,047
                        
                        
                        
                        27,263Marketable
      equity securities and other
                        
                        
                        44
                        
                        
                        
                        5
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        44
                        
                        
                        
                        5Total
      temporarilyimpaired
      securities
                        
                        $
                        15,494
                        
                        
                        $
                        552
                        
                        
                        $
                        67,597
                        
                        
                        $
                        26,716
                        
                        
                        $
                        83,091
                        
                        
                        $
                        27,268





The Company had a total of 13 debt
securities with a fair market value of $82.5 million which were temporarily
impaired at June 30, 2010.  The total unrealized loss on these
securities was $27.3 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 9.2% of total
assets at June 30, 2010.  Therefore, the unrealized losses associated
with these securities are not considered to be other than
temporary.


14





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
4. - (continued)





The amortized cost and fair value of
investment securities available for sale and held to maturity, by contractual
maturity, at June 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.





June 30, 2010Available for Sale
                      
                      
                      Held to MaturityAmortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value(In
      thousands)Due
      in one year or less
                      
                      $
                      45,672
                      
                      
                      $
                      45,646
                      
                      
                      $
                      —
                      
                      
                      $
                      —Due
      after one through five years
                      
                      
                      43,112
                      
                      
                      
                      42,787
                      
                      
                      
                      —
                      
                      
                      
                      —Due
      after five through ten years
                      
                      
                      32,969
                      
                      
                      
                      33,888
                      
                      
                      
                      —
                      
                      
                      
                      —Due
      after ten years
                      
                      
                      156,341
                      
                      
                      
                      154,568
                      
                      
                      
                      329
                      
                      
                      
                      328Auction
      rate securities
                      
                      
                      77,693
                      
                      
                      
                      58,532
                      
                      
                      
                      —
                      
                      
                      
                      —Marketable
      equity securities and other
                      
                      
                      2,919
                      
                      
                      
                      3,048
                      
                      
                      
                      —
                      
                      
                      
                      —Totals
                      
                      $
                      358,706
                      
                      
                      $
                      338,469
                      
                      
                      $
                      329
                      
                      
                      $
                      328





Gross gains realized on the sales of
investment securities for the three months ended June 30, 2010, and 2009 were
approximately $290,000 and $113,000, respectively. Gross losses realized were
approximately $1.25 million and $1,000 for the three months ended June 30, 2010
and 2009, respectively.





Gross gains realized on the sales of
investment securities for the six months ended June 30, 2010, and 2009 were
approximately $445,000 and $188,000, respectively. Gross losses realized were
approximately $1.25 million and $1.02 million for the six months ended June 30,
2010 and 2009, respectively.





As of June 30, 2010 and December 31,
2009, securities sold under agreements to repurchase with a book value of
approximately $50.0 million and $50.0 million, respectively, were outstanding.
The book value of the securities pledged for these repurchase agreements was
$59.5 million and $55.6 million, respectively. As of June 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.


15





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:





Six Months Ended
                    June 30, 2010
                  
                  
                  Twelve Months Ended
                    December 31, 2009Average
                    Amount
                  
                  
                  Average
                    Yield
                  
                  
                  Average
                    Amount
                  
                  
                  Average
                    Yield(Dollars in thousands)Demand
      deposits
                  
                  $
                  68,874
                  
                  
                  
                  —
                  
                  
                  $
                  56,544
                  
                  
                  
                  —NOW
      and money market
                  
                  
                  26,055
                  
                  
                  
                  0.25
                  %
                  
                  
                  23,900
                  
                  
                  
                  0.31
                  %Savings
      deposits
                  
                  
                  201,743
                  
                  
                  
                  0.86
                  
                  
                  
                  180,729
                  
                  
                  
                  1.24Time
      deposits
                  
                  
                  411,155
                  
                  
                  
                  1.61
                  
                  
                  
                  426,892
                  
                  
                  
                  2.32Total
      deposits
                  
                  $
                  707,827
                  
                  
                  
                  1.19
                  %
                  
                  $
                  688,065
                  
                  
                  
                  1.78
                  %





Note
6. Other 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 Six Months EndedJune 30, 2010
                        
                        
                        June 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
                        
                        $
                        (957
                        )
                        
                        $
                        383
                        
                        
                        $
                        (574
                        )
                        
                        $
                        8,960
                        
                        
                        $
                        (3,584
                        )
                        
                        $
                        5,376Less
      reclassificationadjustment
      for (losses) realized in net income
                        
                        
                        (800
                        )
                        
                        
                        320
                        
                        
                        
                        (480
                        )
                        
                        
                        (4,938
                        )
                        
                        
                        1,975
                        
                        
                        
                        (2,963
                        )Unrealized
      gain (loss) on investment securities
                        
                        
                        (1,757
                        )
                        
                        
                        703
                        
                        
                        
                        (1,054
                        )
                        
                        
                        13,898
                        
                        
                        
                        (5,559
                        )
                        
                        
                        8,339Change
      in minimum pension liability
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        82
                        
                        
                        
                        —
                        
                        
                        
                        82Other
      comprehensive
                          income
      (loss), net
                        
                        $
                        (1,757
                        )
                        
                        $
                        703
                        
                        
                        $
                        (1,054
                        )
                        
                        $
                        13,980
                        
                        
                        $
                        (5,559
                        )
                        
                        $
                        8,421




16





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
                        June 30,
                      
                      
                      For The
                        Six Months Ended
                        June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Service
      cost
                      
                      $
                      —
                      
                      
                      $
                      103,250
                      
                      
                      $
                      —
                      
                      
                      $
                      206,500Interest
      cost
                      
                      
                      —
                      
                      
                      
                      64,250
                      
                      
                      
                      —
                      
                      
                      
                      128,500Expected
      return on plan assets
                      
                      
                      —
                      
                      
                      
                      (70,500
                      )
                      
                      
                      —
                      
                      
                      
                      (141,000
                      )Amortization
      and Deferral:Prior
      service cost
                      
                      
                      —
                      
                      
                      
                      4,500
                      
                      
                      
                      —
                      
                      
                      
                      9,000Loss
                      
                      
                      —
                      
                      
                      
                      36,500
                      
                      
                      
                      —
                      
                      
                      
                      73,000Net
      periodic pension cost
                      
                      $
                      —
                      
                      
                      $
                      138,000
                      
                      
                      $
                      —
                      
                      
                      $
                      276,000





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 six months ended June 30, 2009, we
contributed approximately $1.21 million to the Plan. During the six months ended
June 30, 2010, we contributed approximately $112,000 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.


17





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
June 30, 2010 and December 31, 2009 are outlined below.





June 30, 2010
                      
                      
                      December 31, 2009Carrying
                        amount
                      
                      
                      Estimated
                        fair value
                      
                      
                      Carrying
                        amount
                      
                      
                      Estimated
                        fair value(In thousands)Investment
      securities
                      
                      $
                      338,798
                      
                      
                      $
                      338,797
                      
                      
                      $
                      357,818
                      
                      
                      $
                      357,815Loans,
      net of unearned income
                      
                      
                      383,273
                      
                      
                      
                      389,082
                      
                      
                      
                      430,349
                      
                      
                      
                      428,990Time
      Deposits
                      
                      
                      395,869
                      
                      
                      
                      397,238
                      
                      
                      
                      427,777
                      
                      
                      
                      429,449Repurchase
      Agreements
                      
                      
                      50,000
                      
                      
                      
                      49,840
                      
                      
                      
                      50,000
                      
                      
                      
                      49,842Borrowings
                      
                      
                      12,851
                      
                      
                      
                      13,327
                      
                      
                      
                      31,004
                      
                      
                      
                      31,756Subordinated
      debt
                      
                      
                      22,681
                      
                      
                      
                      22,681
                      
                      
                      
                      22,681
                      
                      
                      
                      22,681





For cash and cash equivalents, the
recorded book value of $78.9 million and $60.8 million at June 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.


18




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 $10,000 and $117,000 at June 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.


19





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 June 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
                      June 30,
                      2010(Dollars
      in thousands)AssetsImpaired
      loans
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,131
                    
                    
                    $
                    1,131
                    (1)Investment
      securities available for sale
                    
                    
                    66,771
                    
                    
                    
                    213,166
                    
                    
                    
                    58,532
                    
                    
                    
                    338,469
                    (2)Total
                    
                    $
                    66,771
                    
                    
                    $
                    213,166
                    
                    
                    $
                    59,663
                    
                    
                    $
                    339,600




(1)
Non-recurring basis


(2)
Recurring basis





The above table includes $20.2 million
in net unrealized losses on the Company's available for sale securities. The
Company has reviewed its investment portfolio at June 30, 2010 and has
determined that the unrealized losses are temporary.





The fair value of the interest rate
caps is approximately $10,000 and valued as a Level 3 input. Further disclosures
are not included because they were not deemed material.





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
                    
                    
                    $
                    15,468Investment
      securities available for sale
                    
                    
                    56,006
                    
                    
                    
                    235,793
                    
                    
                    
                    66,942
                    
                    
                    
                    358,741Total
      assets
                    
                    $
                    56,006
                    
                    
                    $
                    235,793
                    
                    
                    $
                    82,410
                    
                    
                    $
                    374,209


20





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)


(unaudited)





Note
8. - (continued)





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 real estate owned was
determined by appraisals, which is then adjusted for the costs associated with
liquidating the property. We measure real estate owned on a nonrecurring basis
with Level 3 inputs.





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
                
                
                (7,208
                )Purchases,
      Sales, Issuances and Settlements
                
                
                —Redemptions
      (Transfer to Other Real Estate Owned)
                
                
                —Interest
                
                
                —Other
      than temporary impairment expense
                
                
                (1,202
                )Capital
      deductions for operating expenses
                
                
                —Balance,
      June 30, 2010
                
                $
                58,532The
      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 June 30, 2010
                
                $
                —




21


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.


22





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.


23





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.





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.


24





We recorded a provision for loan losses
of $1.5 million and $2.8 million during the three and six-month periods ended
June 30, 2010, respectively, compared to a provision for loan losses of $400,000
and $550,000 during the three and six-month periods ended June 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).





Net income, before dividends on our
Series A Preferred Stock, for the three and six months ended June 30, 2010 was
approximately $625,000 and $1.8 million, respectively, compared to a net loss of
approximately $2.4 million and $1.4 million for the three and six months ended
June 30, 2009. Net loss allocated to common stockholders, including dividends on
our Series A Preferred Stock, was $575,000 and $621,000 for the three and six
months ended June 30, 2010, respectively, compared to a net loss allocated to
common stockholders of approximately $3.6 million and $3.8 million for the three
and six months ended June 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.


25





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.





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 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.


26




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 June 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)
                    
                    $
                    392,714
                    
                    
                    $
                    6,473
                    
                    
                    
                    6.59
                    %
                    
                    $
                    451,768
                    
                    
                    $
                    7,449
                    
                    
                    
                    6.60
                    %Investment
      securities
                    
                    
                    362,001
                    
                    
                    
                    3,720
                    
                    
                    
                    4.11
                    
                    
                    
                    292,782
                    
                    
                    
                    4,042
                    
                    
                    
                    5.52Other
      (2)(5)
                    
                    
                    80,695
                    
                    
                    
                    65
                    
                    
                    
                    0.32
                    
                    
                    
                    60,450
                    
                    
                    
                    182
                    
                    
                    
                    1.20Total
      interest-earning assets
                    
                    
                    835,410
                    
                    
                    
                    10,258
                    
                    
                    
                    4.91
                    
                    
                    
                    805,000
                    
                    
                    
                    11,673
                    
                    
                    
                    5.80Noninterest-earning
      assets
                    
                    
                    61,140
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    66,576Total
      Assets
                    
                    $
                    896,550
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    871,576INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                    
                    
                    231,187
                    
                    
                    
                    396
                    
                    
                    
                    0.68
                    %
                    
                    
                    200,642
                    
                    
                    
                    559
                    
                    
                    
                    1.11
                    %Time
      deposits
                    
                    
                    402,726
                    
                    
                    
                    1,557
                    
                    
                    
                    1.55
                    
                    
                    
                    431,037
                    
                    
                    
                    2,678
                    
                    
                    
                    2.49Other
      borrowings
                    
                    
                    94,287
                    
                    
                    
                    924
                    
                    
                    
                    3.92
                    
                    
                    
                    116,961
                    
                    
                    
                    1,169
                    
                    
                    
                    4.00Total
      interest-bearingliabilities
                    
                    
                    728,200
                    
                    
                    
                    2,877
                    
                    
                    
                    1.58
                    
                    
                    
                    748,640
                    
                    
                    
                    4,406
                    
                    
                    
                    2.35Demand
      deposits
                    
                    
                    71,398
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    53,778Noninterest-bearing
      liabilities
                    
                    
                    8,551
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,189Stockholders'
      equity (5)
                    
                    
                    88,401
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    59,969Total
      liabilities andstockholders'
      equity
                    
                    $
                    896,550
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    871,576Net
      interest income
                    
                    
                    
                    
                    
                    
                    7,381
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,267Interest-rate
      spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.33
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.45
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.53
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.61
                    %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                    
                    
                    1.15
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.08


(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.


27





For The Six Months Ended June 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)
                                                                                        
                                                                                        $
                                                                                        406,192
                                                                                        
                                                                                        
                                                                                        $
                                                                                        13,006
                                                                                        
                                                                                        
                                                                                        
                                                                                        6.40
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        455,275
                                                                                        
                                                                                        
                                                                                        $
                                                                                        15,220
                                                                                        
                                                                                        
                                                                                        
                                                                                        6.69
                                                                                        %Investment
      securities
                                                                                        
                                                                                        
                                                                                        362,545
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,520
                                                                                        
                                                                                        
                                                                                        
                                                                                        4.15
                                                                                        
                                                                                        
                                                                                        
                                                                                        297,537
                                                                                        
                                                                                        
                                                                                        
                                                                                        8,445
                                                                                        
                                                                                        
                                                                                        
                                                                                        5.68Other
      (2)(5)
                                                                                        
                                                                                        
                                                                                        70,291
                                                                                        
                                                                                        
                                                                                        
                                                                                        116
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.33
                                                                                        
                                                                                        
                                                                                        
                                                                                        64,388
                                                                                        
                                                                                        
                                                                                        
                                                                                        453
                                                                                        
                                                                                        
                                                                                        
                                                                                        1.41Total
      interest-earning assets
                                                                                        
                                                                                        
                                                                                        839,028
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,642
                                                                                        
                                                                                        
                                                                                        
                                                                                        4.92
                                                                                        
                                                                                        
                                                                                        
                                                                                        817,200
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,118
                                                                                        
                                                                                        
                                                                                        
                                                                                        5.90Noninterest-earning
      assets
                                                                                        
                                                                                        
                                                                                        61,836
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        65,480Total
      Assets
                                                                                        
                                                                                        $
                                                                                        900,864
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        $
                                                                                        882,680INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                                                                                        
                                                                                        
                                                                                        227,798
                                                                                        
                                                                                        
                                                                                        
                                                                                        904
                                                                                        
                                                                                        
                                                                                        
                                                                                        0.79
                                                                                        %
                                                                                        
                                                                                        
                                                                                        202,567
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,276
                                                                                        
                                                                                        
                                                                                        
                                                                                        1.26
                                                                                        %Time
      deposits
                                                                                        
                                                                                        
                                                                                        411,155
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,309
                                                                                        
                                                                                        
                                                                                        
                                                                                        1.61
                                                                                        
                                                                                        
                                                                                        
                                                                                        433,169
                                                                                        
                                                                                        
                                                                                        
                                                                                        5,978
                                                                                        
                                                                                        
                                                                                        
                                                                                        2.76Other
      borrowings
                                                                                        
                                                                                        
                                                                                        97,709
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,939
                                                                                        
                                                                                        
                                                                                        
                                                                                        3.97
                                                                                        
                                                                                        
                                                                                        
                                                                                        120,244
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,520
                                                                                        
                                                                                        
                                                                                        
                                                                                        4.19Total
      interest-bearingliabilities
                                                                                        
                                                                                        
                                                                                        736,662
                                                                                        
                                                                                        
                                                                                        
                                                                                        6,152
                                                                                        
                                                                                        
                                                                                        
                                                                                        1.67
                                                                                        
                                                                                        
                                                                                        
                                                                                        755,980
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,774
                                                                                        
                                                                                        
                                                                                        
                                                                                        2.59Demand
      deposits
                                                                                        
                                                                                        
                                                                                        68,874
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        53,811Noninterest-bearing
      liabilities
                                                                                        
                                                                                        
                                                                                        8,118
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,644Stockholders'
      equity (5)
                                                                                        
                                                                                        
                                                                                        87,210
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        63,245Total
      liabilities and stockholders' equity
                                                                                        
                                                                                        $
                                                                                        900,864
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        $
                                                                                        882,680Net
      interest income
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,490
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,344Interest-rate
      spread (3)
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        3.25
                                                                                        %
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        3.31
                                                                                        %Net
      interest margin (4)
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        3.45
                                                                                        %
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        3.51
                                                                                        %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                                                                                        
                                                                                        
                                                                                        1.14
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        1.08







(1)Includes
nonaccrual loans.


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


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


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


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


28


Results
of Operations





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





Net Income (Loss) Allocated to Common
Stockholders. Net loss allocated to common stockholders for the three and
six-month periods ended June 30, 2010 was $575,000 and $621,000, respectively,
or $.08 and $.09 per common share, respectively. The net loss allocated to
common stockholders for the three and six-month periods ended June 30, 2009 was
$3.6 million and $3.8 million, respectively, or $.52 and $.53 per common share,
respectively. The net loss reported for the three and six months ended June 30,
2010 includes OTTI charges of $1.2 million, or $.17 per common share, and
dividends on our Series A Preferred Stock of $1.2 million and $2.4 million,
respectively, or $.17 and $.34 per common share, respectively. The net loss
reported for the three and six months ended June 30, 2009 includes OTTI charges
of $4.1 million and $5.1 million, respectively, or $.58 and $.72 per common
share, respectively, and dividends on our Series A Preferred Stock of $1.2
million and $2.4 million, respectively, or $.17 and $.34 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.


29





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 six months ended June
30, 2010, net interest income was $7.4 million and $14.5 million, respectively,
compared to net interest income of $7.3 million and $14.3 million, respectively,
for the three and six months ended
June 30, 2009. The average yields earned on interest-earning assets declined to
4.91% and 4.92% during the three and six months ended June 30, 2010,
respectively, from 5.80% and 5.90% during the three and six months ended June
30, 2009, respectively. The average rates paid on interest-bearing liabilities
declined to 1.58% and 1.67% during the three and six months ended June 30, 2010,
respectively, from 2.35% and 2.59% during the three and six months ended June
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, declined to 3.33% and 3.25% during the three and
six-month periods of 2010, respectively, compared to 3.45% and 3.31% during the
three and six-month periods of 2009, respectively.





Net Interest Margin. Net
interest margin, or annualized net interest income as a percentage of average
interest-earning assets, was 3.53% and 3.45% for the three and six months ended
June 30, 2010, respectively, compared to 3.61% and 3.51% during the three and
six months ended June 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 June 30, 2010 decreased by $1.4 million to
$10.3 million from $11.7 million for the quarter ended June 30, 2009. The
decrease was due to the decrease in the average yield earned on the average
amount of interest-earning assets to 4.91% during the 2010 quarter from 5.80%
during the 2009 quarter, and the decrease in the average amount of higher
yielding loans to $392.7 million during the 2010 quarter from $451.8 million
during the 2009 quarter. The decrease in total interest income was partially
offset by the $30.4 million increase in the average amount of interest-earning
assets to $835.4 million from $805.0 million during the three months ended June
30, 2010 and 2009, respectively.


30





Total interest income for the six
months ended June 30, 2010 decreased by $3.5 million to $20.6 million from $24.1
million for the six months ended June 30, 2009. The decrease was due to the
decrease in the average yield earned on the average amount of interest-earning
assets to 4.92% during the 2010 six-month period from 5.90% during the 2009
six-month period, and the decrease in the average amount of higher yielding
loans to $406.2 million during the 2010 period from $455.3 million during the
2009 period. The decrease in total interest income was partially offset by the
$21.8 million increase in the average amount of interest-earning assets to
$839.0 million from $817.2 million during the six months ended June 30, 2010 and
2009, respectively.





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





Three Months Ended June 30,2010
                    
                    
                    2009Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    % of
                      Total(In thousands, except percentages)Loans
                    
                    $
                    6,473
                    
                    
                    
                    63.11
                    %
                    
                    $
                    7,449
                    
                    
                    
                    63.81
                    %Investment
      Securities
                    
                    
                    3,720
                    
                    
                    
                    36.26
                    
                    
                    
                    4,042
                    
                    
                    
                    34.63Other
                    
                    
                    65
                    
                    
                    
                    0.63
                    
                    
                    
                    182
                    
                    
                    
                    1.56Total
      Interest Income
                    
                    $
                    10,258
                    
                    
                    
                    100.00
                    %
                    
                    $
                    11,673
                    
                    
                    
                    100.00
                    %





Six Months Ended June 30,2010
                    
                    
                    2009Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    % of
                      Total(In thousands, except percentages)Loans
                    
                    $
                    13,006
                    
                    
                    
                    63.01
                    %
                    
                    $
                    15,220
                    
                    
                    
                    63.10
                    %Investment
      Securities
                    
                    
                    7,520
                    
                    
                    
                    36.43
                    
                    
                    
                    8,445
                    
                    
                    
                    35.02Other
                    
                    
                    116
                    
                    
                    
                    0.56
                    
                    
                    
                    453
                    
                    
                    
                    1.88Total
      Interest Income
                    
                    $
                    20,642
                    
                    
                    
                    100.00
                    %
                    
                    $
                    24,118
                    
                    
                    
                    100.00
                    %





Loans, which are inherently risky and
therefore command a higher return than our portfolio of investment securities
and other interest-earning assets, decreased to 47.0% and 48.4% of our total
amount of average interest-earning assets during the three and six month-periods
ended June 30, 2010, respectively, from 56.1% and 55.7% during the three and six
month-periods ended June 30, 2009, respectively. The average amounts of
investment securities increased to 43.3% and 43.2% of total average
interest-earning assets during the three and six-month periods ended June 30,
2010, respectively, from 36.4% and 36.4% during the three and six-month periods
ended June 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.


31





At June 30, 2010, total non-performing
loans were $1.1 million of 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,
Investment-Debt and Equity Securities, securities
are classified into three categories: trading, held-to-maturity and
available-for-sale.  Securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and are reported at fair value with unrealized gains and losses
included in trading account activities in the statement of income. 
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost.  All
other securities are classified as available-for-sale. Available-for-sale
securities are reported at fair value with unrealized gains and losses included,
on an after-tax basis, as a separate component of net worth.  The Company
does not have a trading securities portfolio and has no current plans to
maintain such a portfolio in the future.  The Company generally classifies
all newly purchased debt securities as available for sale in order to maintain
the flexibility to sell those securities if the need arises.  The Bank has
a limited portfolio of securities classified as held to maturity, represented
principally by securities purchased a number of years ago.





Federal Home Loan Bank
Stock.  The Bank owns stock of the 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 March 31, 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 June 30, 2010 or
December 31, 2009.





Interest Expense.  Total
interest expense for the quarter ended June 30, 2010 decreased by $1.5 million
to $2.9 million from $4.4 million for the quarter ended June 30, 2009.  The
decrease in total interest expense was due to the decrease in the average rates
paid on the average amount of interest-bearing liabilities to 1.58% in the 2010
quarter from 2.35% in the 2009 quarter, and the decrease in the average amounts
of interest-bearing liabilities to $728.2 million from $748.6 million for the
quarter ended June 30, 2009.


32


Total interest expense for the
six-month period ended June 30, 2010 decreased by $3.6 million to $6.2 million
from $9.8 million for the six-month period ended June 30, 2009.  The
decrease in total interest expense was due to the decrease in the average rates
paid on the average amount of interest-bearing liabilities to 1.67% during the
2010 six-month period from 2.59% during the 2009 six-month period, and the
decrease in the average amounts of interest-bearing liabilities to $736.7
million from $756.0 million during the six months ended June 30, 2010 and 2009,
respectively.





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





Three Months Ended June 30,2010
                      
                      
                      2009Interest
                        Expense
                      
                      
                      % of
                        Total
                      
                      
                      Interest
                        Expense
                      
                      
                      % of
                        Total(In thousands, except percentages)Interest-Bearing
      Deposits
                      
                      $
                      396
                      
                      
                      
                      13.76
                      %
                      
                      $
                      559
                      
                      
                      
                      12.69
                      %Time
      Deposits
                      
                      
                      1,557
                      
                      
                      
                      54.12
                      
                      
                      
                      2,678
                      
                      
                      
                      60.78Other
      Borrowings
                      
                      
                      924
                      
                      
                      
                      32.12
                      
                      
                      
                      1,169
                      
                      
                      
                      26.53Total
      Interest Expense
                      
                      $
                      2,877
                      
                      
                      
                      100.00
                      %
                      
                      $
                      4,406
                      
                      
                      
                      100.00
                      %





Six Months Ended June 30,2010
                      
                      
                      2009Interest
                        Expense
                      
                      
                      % of
                        Total
                      
                      
                      Interest
                        Expense
                      
                      
                      % of
                        Total(In thousands, except percentages)Interest-Bearing
      Deposits
                      
                      $
                      904
                      
                      
                      
                      14.69
                      %
                      
                      $
                      1,276
                      
                      
                      
                      13.06
                      %Time
      Deposits
                      
                      
                      3,309
                      
                      
                      
                      53.79
                      
                      
                      
                      5,978
                      
                      
                      
                      61.16Other
      Borrowings
                      
                      
                      1,939
                      
                      
                      
                      31.52
                      
                      
                      
                      2,520
                      
                      
                      
                      25.78Total
      Interest Expense
                      
                      $
                      6,152
                      
                      
                      
                      100.00
                      %
                      
                      $
                      9,774
                      
                      
                      
                      100.00
                      %





Non-Interest Income. 
Non-interest income consists primarily of realized gains on sales of marketable
securities and service fee income. For the three and six months ended June 30,
2010, non-interest income amounted to $701,000 and $1.1 million, respectively,
compared to non-interest income of $378,000 and $777,000 for the three and six
months ended June 30, 2009, respectively.


33





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 $2.9
million to $5.7 million for the three months ended June 30, 2010 from $8.6
million for the three months ended June 30, 2009.  The decrease was
primarily due to the $2.9 million decrease in OTTI charges on investment
securities.





Total non-interest expense decreased by
$4.2 million to $10.1 million for the six months ended June 30, 2010 from $14.3
million for the six months ended June 30, 2009.  The decrease was primarily
due to the $3.9 million decrease in OTTI charges on investment
securities.





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





Three Months Ended June 30,2010
                      
                      
                      2009Non-Interest
                        Expense
                      
                      
                      % of
                        Total
                      
                      
                      Non-Interest
                        Expense
                      
                      
                      % of
                        Total(In thousands, except percentages)Salaries
      and Employee Benefits
                      
                      $
                      2,407
                      
                      
                      
                      42.10
                      %
                      
                      $
                      2,311
                      
                      
                      
                      26.82
                      %Net
      Occupancy Expense
                      
                      
                      547
                      
                      
                      
                      9.57
                      
                      
                      
                      546
                      
                      
                      
                      6.34Equipment
      Expense
                      
                      
                      92
                      
                      
                      
                      1.61
                      
                      
                      
                      95
                      
                      
                      
                      1.10FDIC
      Assessment
                      
                      
                      468
                      
                      
                      
                      8.18
                      
                      
                      
                      585
                      
                      
                      
                      6.79Data
      Processing Expense
                      
                      
                      126
                      
                      
                      
                      2.20
                      
                      
                      
                      116
                      
                      
                      
                      1.35Other
      than temporary impairment charge on securities
                      
                      
                      1,202
                      
                      
                      
                      21.02
                      
                      
                      
                      4,100
                      
                      
                      
                      47.60Other
                      
                      
                      876
                      
                      
                      
                      15.32
                      
                      
                      
                      861
                      
                      
                      
                      10.00Total
      Non-Interest Expense
                      
                      $
                      5,718
                      
                      
                      
                      100.00
                      %
                      
                      $
                      8,614
                      
                      
                      
                      100.00
                      %


34





Six Months Ended June 30,2010
                      
                      
                      2009Non-Interest
                        Expense
                      
                      
                      % of
                        Total
                      
                      
                      Non-Interest
                        Expense
                      
                      
                      % of
                        Total(In thousands, except percentages)Salaries
      and Employee Benefits
                      
                      $
                      4,748
                      
                      
                      
                      46.86
                      %
                      
                      $
                      4,672
                      
                      
                      
                      32.69
                      %Net
      Occupancy Expense
                      
                      
                      1,113
                      
                      
                      
                      10.99
                      
                      
                      
                      1,052
                      
                      
                      
                      7.36Equipment
      Expense
                      
                      
                      183
                      
                      
                      
                      1.81
                      
                      
                      
                      194
                      
                      
                      
                      1.36FDIC
      Assessment
                      
                      
                      936
                      
                      
                      
                      9.24
                      
                      
                      
                      1,268
                      
                      
                      
                      8.87Data
      Processing Expense
                      
                      
                      252
                      
                      
                      
                      2.49
                      
                      
                      
                      210
                      
                      
                      
                      1.47Other
      than temporary impairment charge on securities
                      
                      
                      1,202
                      
                      
                      
                      11.87
                      
                      
                      
                      5,125
                      
                      
                      
                      35.85Other
                      
                      
                      1,696
                      
                      
                      
                      16.74
                      
                      
                      
                      1,773
                      
                      
                      
                      12.40Total
      Non-Interest Expense
                      
                      $
                      10,130
                      
                      
                      
                      100.00
                      %
                      
                      $
                      14,294
                      
                      
                      
                      100.00
                      %





Provision for Income
Tax.  During the three and six months ended June 30, 2010, the
Company recorded income tax expense of $239,000 and $915,000, respectively,
compared to income tax expense of $1.07 million and $1.64 million, respectively,
for the three and six months ended June 30, 2009.  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 of the OTTI charge for the three and six months
ended June 30, 2009.





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 June 30, 2010, 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 and second
quarters of 2010. At June 30, 2010, there were 501,091 shares of Common Stock
which may yet be purchased under our stock repurchase plan.


35





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





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


36


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.


37





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
                    June 30,
                  
                  
                  Six Months Ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Average
      loans outstanding
                  
                  $
                  392,714
                  
                  
                  $
                  451,768
                  
                  
                  $
                  406,192
                  
                  
                  $
                  455,275Allowance
      at beginning of period
                  
                  
                  11,900
                  
                  
                  
                  9,357
                  
                  
                  
                  11,416
                  
                  
                  
                  9,204Charge-offs:Commercial
      and other loans
                  
                  
                  300
                  
                  
                  
                  —
                  
                  
                  
                  300
                  
                  
                  
                  103Real
      estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  766
                  
                  
                  
                  —Total
      loans charged-off
                  
                  
                  300
                  
                  
                  
                  —
                  
                  
                  
                  1,066
                  
                  
                  
                  103Recoveries:Commercial
      and other loans
                  
                  
                  5
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  106Real
      estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      loans recovered
                  
                  
                  5
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  106Net
      recoveries (charge-offs)
                  
                  
                  (295
                  )
                  
                  
                  —
                  
                  
                  
                  (1,061
                  )
                  
                  
                  3Provision
      for loan losses charged to operating expenses
                  
                  
                  1,500
                  
                  
                  
                  400
                  
                  
                  
                  2,750
                  
                  
                  
                  550Allowance
      at end of period
                  
                  
                  13,105
                  
                  
                  
                  9,757
                  
                  
                  
                  13,105
                  
                  
                  
                  9,757Ratio
      of net recoveries (charge-offs) to average loans
    outstanding
                  
                  
                  (0.08
                  )%
                  
                  
                  0.00
                  %
                  
                  
                  (0.26
                  )%
                  
                  
                  0.00
                  %Allowance
      as a percent of total loans
                  
                  
                  3.41
                  %
                  
                  
                  2.18
                  %
                  
                  
                  3.41
                  %
                  
                  
                  2.18
                  %Total
      loans at end of period
                  
                  $
                  384,225
                  
                  
                  $
                  447,343
                  
                  
                  $
                  384,225
                  
                  
                  $
                  447,343


38


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 June 30, 2010 and December 31, 2009, the Company had loans, net
of unearned income, of $383.3 million and $430.3 million, respectively, and an
allowance for loan losses of $13.1 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.





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.


39





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 June 30, 2010 and December 31
2009, approximately $25.1 million and $50.7 million, respectively, or 6.5% 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 June 30, 2010 and December 31, 2009, approximately $123.4
million and $129.9 million, respectively, or 32.1% 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 June 30, 2010 and December 31, 2009, approximately 14.2%
and 13.9%, respectively, of the Bank's residential one-to-four family
owner-occupied first mortgage portfolio were ARMs and approximately 85.8% 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.





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.


40





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 June 30, 2010 and December 31, 2009, the Company's loan
portfolio was comprised of $235.7 million and $250.8 million, respectively, or
61.4% and 58.2%, respectively, of other loan products.


41





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 June 30, 2010, the Bank
meets all capital adequacy requirements to which it is subject.





As of June 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 June 30, 2010 (dollars in
thousands):





To be wellcapitalized underFor capital
                              
                              
                              prompt correctiveActual
                              
                              
                              adequacy purposes
                              
                              
                              action provisionsAmount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              RatioJune
      30, 2010Total
      Capital (to Risk-Weighted Assets)Company
                              
                              $
                              106,092
                              
                              
                              
                              21.6
                              %
                              
                              $
                              39,390
                              
                              
                              
                              ≥8.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              92,262
                              
                              
                              
                              19.2
                              %
                              
                              
                              38,402
                              
                              
                              
                              ≥8.0
                              %
                              
                              $
                              48,002
                              
                              
                              
                              ≥10.0
                              %Tier
      I Capital (to Risk-Weighted Assets)Company
                              
                              
                              99,178
                              
                              
                              
                              20.1
                              %
                              
                              
                              19,695
                              
                              
                              
                              ≥4.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              86,174
                              
                              
                              
                              18.0
                              %
                              
                              
                              19,201
                              
                              
                              
                              ≥4.0
                              %
                              
                              
                              28,801
                              
                              
                              
                              ≥6.0
                              %Tier
      I Capital (to Average Assets)Company
                              
                              
                              99,178
                              
                              
                              
                              11.0
                              %
                              
                              
                              36,035
                              
                              
                              
                              ≥4.0
                              %
                              
                              
                              —
                              
                              
                              
                              N/ABank
                              
                              
                              86,174
                              
                              
                              
                              10.0
                              %
                              
                              
                              34,489
                              
                              
                              
                              ≥4.0
                              %
                              
                              
                              43,111
                              
                              
                              
                              ≥5.0
                              %


42


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 $291 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.





At June 30, 2010, our portfolio of
investment securities included approximately $10.8 million, at cost, of
corporate notes and 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 $9.4 million and
$295,000, respectively, 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 $78.9 million, or 9.2% of total assets at June 30,
2010.  In addition, we have the capacity to borrow up to approximately
$188 million from the Federal Reserve Bank and approximately $115 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 June 30,
2010, the Company had cash of approximately $3.5 million and investment
securities with a fair market value of $6.4 million.


43





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 $9.1 million at June 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 June 30, 2010, the Bank had
outstanding commitments of approximately $412.4 million; including $12.8 million
of borrowings, $3.8 million of operating leases, and $395.9 million of time
deposits.  These commitments include $324.3 million that mature or
renew within one year, $87.0 million that mature or renew after one year and
within three years, $986,000 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.





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.


44





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 June 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.





Changes
in Internal Control over Financial Reporting.





In
accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended June 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.


45





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:      August 5,
      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